Is the Supermarket Model Broken?

- Advertisement -

RETAIL VIEW: Is the supermarket model broken?

January 10, 2006

Albertsons put itself on the block. Marsh Supermarkets has announced it is looking for a buyer after posting large third-quarter losses. The Great Atlantic & Pacific Tea Co. has once again shrunk, going from over 1,000 stores to 350. Many Food Lion and Winn Dixie stores have been offered for sale and have not reopened as supermarkets. Ahold has announced losses.

The produce industry has long complained that supermarket prices are way too high and don't reflect farmgate prices. Yet even with significant markup on produce and other perishables, the majority of supermarkets chains don't seem to be making money or are operating on very low margins. Even Wal-Mart has seen smaller profits than in the past.

Is the supermarket model still viable?

For an answer, or at least a couple of knowledgeable opinions, The Produce News recently turned to two supermarket experts based in Southern California.

Jack Brown is entering his 30th year as the chief executive of a supermarket, 26 of those years with his current employer, Stater Bros. Markets. Mr. Brown has spent 50 years in the supermarket business running two other chains and working for a number of chains throughout the country.

Equally qualified to discuss the state of the supermarket industry is the produce industry's own Dick Spezzano of Spezzano Consulting Services, who spent many years with the Vons Cos. in Southern California and for the last seven years has been consulting for retailers throughout the nation.

Both believe the supermarket model is still viable, though it may need some tweaking. Mr. Spezzano said that there are companies in the business making money and doing a great job proving that the concept works. "My [supermarket] role models are Wal-Mart, Whole Foods, Wegman's and Costco.

1 / 3

They are different, but each of them are doing a very good job."

Mr. Brown rattled off what he called a "baker's dozen" of successful supermarket enterprises. His list, which didn't quite reach a baker's dozen, included his own Stater Bros. as well as Raley's, Bashas' Inc., H.E. Butt Grocery Co., Schnuck's, Hyvee, Giant Eagle, Price Chopper, Wegman's and Publix. What all have in common is that they are regional chains.

The Stater Bros. executive does believe that there is a cycle in the supermarket business with large, national chains coming in and out of favor over the years. He believes that it is currently a down cycle for the national retailers. "It used to be that the larger the chain, the more secure your job. That's not true today. What we are seeing right now is the revival of the regional chain."

He said that the regionals are doing better than the nationals because they are closer to their customers. Speaking of the Southern California marketplace, he said that it is very difficult for a buyer in Cincinnati (Kroger), Boise (Albertsons) or Oakland (Safeway) to know the local customer as well as he does. "We know our market area. We grew up here. I was born and raised here."

Mr. Brown said that he runs 162 stores. The average distance from headquarters is 40 miles with no store further than 100 miles. The national chains obviously cannot say the same thing. "This isn't a criticism of the nationals, it is just a fact of life."

Mr. Spezzano said that supermarkets today have many more competitors than they used to, and so they have to compete on many levels. Besides other supermarkets, he said that everything from the dollar stores to convenience stores to general merchandise stores such as Target can take away business. And they can offer products often at a lower price.

Mr. Spezzano said that the new Target stores, for example, are now offering about eight aisles of food as well as a frozen section. They use these aisles and their food offerings to build traffic in their stores, knowing that increased traffic means increased sales of their general merchandise. It's a win for the general merchandise store and a loss for the local supermarket.

Mr. Brown said that each of these stores can take a "little bite" of a chain's business, but in aggregate it can be a big chunk. Again, he believes a store with local owners can react quicker and better to this type of competition.

Mr. Spezzano echoed those thoughts as he surveyed what Safeway is doing with its new "lifestyle" stores. These stores are devoting more space to the better-selling perishables and in general cutting down on center-store products and choices, while giving the customer more perishables and a more pleasing environment in which to shop. But he said that while the lifestyle stores are doing great, Safeway and the other supermarkets better be thinking further down the road at the next change coming down the pike. Lifestyle 2 if you will. He said that change is constant in the supermarket business and the progressive retailers have to be one step ahead of the consumer, and their competition, wherever it comes from.

While Mr. Spezzano believes that Wal-Mart and Whole Foods are shining examples of successful retailers, Mr. Brown is not too sure. With regard to Whole Foods, he said that the chain has beautiful stores and displays and does a great job, but is labor-intensive.

"The entire concept revolves around remaining non-union," he said, indicating that Whole Foods could not compete in the same fashion if it were paying the union wages that he and other retailers

2 / 3

are paying.

Mr. Spezzano has the same criticism of Wal-Mart. In the long run, he does not believe that Wal-Mart can continue to grow if it does so on the back of the communities it enters.

"Six years ago, they said there were going to open 40 [supercenter] stores in California. They have only opened five." He said that California towns are not giving Wal- Mart the tax incentives it wants to open up there. And he also does not believe it is not paying its workers a livable wage, which also doesn't cut the mustard in California.

Mr. Spezzano believes the retail industry is also largely missing the boat with the ethnic communities, especially the Hispanics, which is the major growth demographic in the United States. He said that the country is "over-stored" but not in the inner cities where there is population growth. "When a chain opens a store in the inner city, they usually do it with great fanfare. But if you look at the numbers, they are closing 10 for every one they open."

He said that there are a few exceptions, but the large chains are not catering to the Hispanic community as well as they could. Consequently, there is good growth of the eight- to 10-store ethnic chains. The Los Angeles market has a number of them, and they are also sprouting up in other communities.

If they truly want growth, Mr. Spezzano said that these larger chains should come into these cities, buy an ethnic chain and keep the management and employees in place. And not only that, but also open many more stores in those communities and let the ethnic operators run them. He said that these smaller chains are doing a much better job of catering to the local community.

Mr. Brown also believes that to be a successful retailer in today's environment requires a hands-on approach, which starts with the people being hired.

"The key is people. They make the difference. You have to wake your store up in the morning and put it to bed at night," Mr. Brown quipped. "That is what I have learned during my 26 years here."

Finally, he believes in the old-fashioned concept that the customer is king. "We still have a dress code. We are a white shirt/white blouse company," he said proudly.