New formats, pricing strategies attract shoppers, broaden appeal

Supermarkets fight back: new formats, pricing strategies attract shoppers, broaden appeal

Jack Engle of Fultonville, N.Y., recently purchased his Easter ham at the local Super Kmart Center in Amsterdam, N.Y. He not only received a free chicken breast with his purchase, but picked up a pair of sweat pants, too.

“I like being able to get a bunch of things I need and just go to one checkout,” Engle said.

He’s not alone in his appreciation of the one-stop shopping world of supercenters. Supercenters, such as the one he visited, are ringing up sales in the $40 million to $70 million per unit range, about half of that in food. By the year 2000, supercenter sales will total $81.8 billion, according to industry consultant James Degen of James M. Degen & Co., up from $26.3 billion in 1995. Store counts in that period should rise from 592 units in 1995 to 1,635 units by decade’s end.

Obviously, those numbers pale in comparison to the mammoth supermarket industry. However, the composition of a supercenter’s merchandise mix, hard lines and soft lines including apparel, is a formidable competitive weapon. These departments attract shoppers and help the discounters ring up 30% to 50% more sales in general merchandise categories–their profit centers–than they do at their traditional discount stores. Customers, too, are attracted to the many shopping opportunities afforded in a supercenter since convenience wins out in their time-pressed schedules.

In many rural communities in which Wal-Mart has planted its supercenter, weak supermarket operators have gone out of business due to their inability to change and compete against the market-savvy retail giant. Currently, sources estimate that each supercenter affects about five supermarkets in its operating area. Approximately 10% of the nation’s nearly 30,000 supermarkets are impacted by a supercenter.

The nation’s supermarkets, a market-savvy bunch, too, especially with the industry’s do-or-die category, fresh foods, aren’t going to let supercenters steal their shoppers without a fight. In response, many supermarket chains are using tactics such as slashing prices, enriching service departments, upgrading private labels, taking a market niche position or incorporating frequent-shopper programs to keep customers coming to their doors. They also are working hard at keeping their market dominance in fresh food, the bellwether area in food retailing.

“You just have to learn how to do a better job of running the business. There’s life after a supercenter comes to town,” said Robert Smith, chairman of Fleming Cos., Oklahoma City. “Those who close do so because of an inability to change.”

David Rogers, president of DSR Marketing Systems, agreed there are actions to take. “There are strategies food stores can adopt, such as upgrading or expanding stores. Supercenters are not going to dominate the industry,” he said. “They can pick their best shots.”

Tom Rubel, a managing partner with Management Horizons, Columbus, Ohio, added, “Supermarkets are finding that they don’t have to be all things to all people. They can focus on exactly what kind of consumers they want.”

Many supermarkets have enacted plans to shore up their position in the market in light of supercenter encroachment or as a preemptive strike before the behemoths come to town.

In Amsterdam, N.Y., where Engle shops, for example, local supermarket chain Price Chopper opened a large, 65,000-sq.-ft. combination unit near the Super K, replacing a smaller, older unit.

Realizing it can’t always fight Wal-Mart with a new store, however, Price Chopper has started upgrading and accentuating its service departments, according to Joanne Gage, spokeswoman for the Schnectady, N.Y.-based chain. “We’re stressing our produce, deli and seafood to name a few areas, and it has worked well,” she said, adding that those departments have not been Kmart’s or Wal-Mart’s areas of expertise. When appropriate, Price Chopper adds home delivery. Initially, said Gage, stores see a dip in sales when the supercenters debut, “but customers come back after initial curiosity.”

Industry watchers agree that Price Chopper has been successful in halting Super K from taking a large chunk of its business in markets such as Amsterdam and Rome, N.Y., where it also clashes with a Wal-Mart Supercenter. Wal-Mart has gone to great lengths to position itself as a local, hometown operator with its 1-year-old micro-marketing program.

Another competitor, Hannaford Bros., estimated that its own efforts to lower margins in competing markets, coupled with Price Chopper’s actions, dampened Super K’s debut. At a Food Marketing Institute Meeting last summer, Hannaford’s Ron Hodge, senior vp, operations for the Albany, N.Y., area, said, “The chain is upgrading our stores, building new ones, and we haven’t backed away from a price fight. We significantly lowered margins in Amsterdam long before Kmart entered the marketplace at higher gross margin levels than we had established before they arrived. This probably blunted their impact.”

At Ukrop’s Super Markets, Richmond, Va., ready-to-cook seafood entrees are making a splash and providing the chain with a competitive edge against supercenter operators. Supercenters, however, are offering prepared-meal options, following the lead of the supermarkets. Many of the offerings, however, are not as elaborate as those forwarded by the grocery chains. Ukrop’s offers such entrees as salmon in dill sauce and flounder in cheese sauce, priced $6.99 and $8.99, respectively.

While supermarkets’ strength in fresh is keeping them out in front of the supercenters, many experts feel that these same operators should learn how to sell non-foods better to more effectively compete with the discounters and to help with store-wide gross margins and profitability. That’s been a goal of Wegmans in upstate New York. Known for its aggressive sampling programs in grocery, Wegmans newest store in DeWitt, N.Y., also plays up cosmetics with a line usually found only in department stores called Color Me Beautiful. There’s also a bath department that complements a store loaded with service departments–even a sushi bar.

Wegmans isn’t alone. Some supermarket chains are trying to make their stores so unique that shoppers seek them out. Vic’s World Class Market in Novi, Mich., for example, has musicians who serenade customers while they shop. In addition, owner Victor Ventimiglia has created a European-style market in his 88,000-sq.-ft. store that he calls the antithesis of supercenters. “We saw our competition, including Meijer’s, and looked at what we could do better,” he said. From a design standpoint, each department at Vic’s resembles an outdoor food market.

King Kullen subsidiary Wild By Nature has taken a similar tack. Located in East Setauket, N.Y., on Long Island, the single store sells all-natural foods and health & beauty care items. There’s a cafe in the center of the 18,000-sq.-ft. store that sizzles with healthy choices. According to Bruce and Graysha Perlstein, known as King Kullen’s development team, the idea is catching on despite the fact that there is an Edwards in the same shopping center, and within the next few years a nearby Wal-Mart will be converted into a supercenter.

“People are finding they can buy natural and healthy foods without sacrificing quality,” said Graysha Perlstein, the store’s director of non-foods. “And we don’t compete head-to-head with supermarkets, although you can buy everything you need here.”

Certainly the store’s decor is unlike other supermarkets, with its glass fixtures in cosmetics and terra cotta planters at the checkout. The merchandise assortment includes fresh, all-natural ingredient breads baked on the premises, free-range poultry and natural, low-fat snacks and homeopathic remedies, but not pharmacy. The store even hosts lectures on topics such as beating stress through aroma therapy.

The Wild By Nature store is the first of what the company feels will be a national chain. King Kullen, a 50-unit, $1 billion supermarket retailer headquartered in Westbury, N.Y., already is scouting for a second Wild By Nature store on Long Island. The company could operate as many as 10 such units by the end of 1997. Wild By Nature estimates that sales for the first store could hit $12 million in its first year.

Although Wal-Mart and Kmart don’t usually make as big of a dent in the business of large chains such as Kroger or Safeway as they do with the smaller ones, even these food giants are implementing programs to keep customers from straying. Kroger, for example, has formats such as its larger Signature stores, which are 64,000 sq. ft. vs. the average from 1994 of 52,000 sq. ft. Newer Kroger units play up produce, seafood and floral departments. Kroger is also experimenting with interactive kiosks where shoppers can view merchandise and order non-grocery items from non-competing stores without risk of maintaining such inventory.

For some, getting big to keep up with the giants is the solution. Competing against supercenters was a major goal, industry analysts said, behind Ahold’s purchase of Stop & Shop in April. “Stop & Shop thought it could compete more effectively with Wal-Mart with the power of Ahold behind it,” said one analyst who follows the industry.

While many supermarkets are concentrating on keeping their fresh food programs superior to the supercenters, upgrading the quality, look and merchandising programs in packaged foods also get priority status.

Rubel at Management Horizons sees supermarkets improving their house brands as a way to keep loyal customers. President’s Choice, the Loblaw’s brand now available in the United States, has had a big impact in supermarkets, spurring many chains to upgrade the quality of their private label programs.

Another loyalty-building concept is rewarding frequent customers with perks such as coupons and free merchandise.

Perhaps the biggest advantage supermarkets have over supercenters is the relatively diminutive size of the stores. Supercenters have grown to more than 200,000 sq. ft. in some cases, more than double the size of the largest supermarket. Such a mammoth size calls into question the convenience factor, something the supercenter operators must solve. But again, Wal-Mart is out in front with its new smaller prototype stores, some as small as 110,000 sq. ft., suitable to very small markets. And here, too, the unit combines food and general merchandise in a footprint that is easily navigated by shoppers.

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