SUPERMARKETS & SUPERCENTERS: CAN THEY REALLY COEXIST?

Occasionally, competition in food retailing is symbolized as a clash between Kroger and Wal-Mart—the traditional supermarket giant and the alternative juggernaut; the
food specialist and the retail specialist. Yet, what if Kroger really aspires to be Wal-Mart’s partner?
Kroger’s strategy for several years now has been to position itself in relationship to Wal-Mart and plow through the marketplace in formation with its sometimes adversary.

Similarities between the retailers are telling. Each
is the biggest kid in its trade channel, for one, and
they both are data driven.Wal-Mart, famously, develops
and applies its own data, conspicuously, through
its ‘store of the community’ program, among others.
Kroger’s most conspicuous initiative in recent years
has been its development of a format portfolio that includes
standard supermarkets, but also Marketplace
stores. Marketplace units can be regarded
as reduced-scale supercenters, devoting
considerable space to general merchandise,
but largely avoiding apparel and limiting
selection in other nonfood categories.
Other principle formats include Food and
Drug—almost as devoted to general merchandise
as Marketplace stores, but with
even more nonfood consumables—and
Food4Less, a value supermarket format.
“I don’t know how you can go the portfolio
approach without data on who you’re
serving,” said Stacy Janiak, vice chairman
and U.S. retail leader at Deloitte LLP. She
noted that putting the right format in a
location that is appropriate for community
demographics and that doesn’t cannibalize
other company stores or concepts,
isn’t an art, but a data-driven science.
Getting the dynamics right is critical
for Kroger.Wal-Mart also has multiple
formats, with more coming, but they
serve different shopping occasions and
occupy different channels. Kroger’s various
formats, with the exception of geographically isolated
Fred Meyer, are all variations on the traditional
supermarket.
Combine Kroger’s format strategy with its decision
to set pricing within a defined consumer tolerance using
Wal-Mart’s price as a base, and an interesting picture
emerges. It’s possible to imagine Kroger’s formats
as cruising in orbit around Wal-Mart supercenters.
With their combination of presentations and assortments,
they offer an alternative to the supercenter for
various shoppers. Yet, they don’t directly challenge
Wal-Mart for its core price-driven one-stop shopper.
Rather, Kroger offers a somewhat more convenienceand
service-oriented alternative that could be attractive
on some occasions. In other words, Kroger seems
content to share shoppers with Wal-Mart.
The strategy makes sense if two factors are
taken into consideration. The first is that Wal-Mart
supercenters aren’t set up to satisfy the average
consumer on all occasions.Wal-Mart limits food assortments
to the highest volume items, virtually
driving consumers to supplementary supermarket
trips to seek favorites that don’t have broad enough
popularity to interest Wal-Mart. The second factor
involves other supermarket competitors. By positioning
its formats in close competitive proximity to
Wal-Mart supercenters, Kroger leaves little room
for anyone else at the market core.
Lehman Bros. analyst Meredith Adler observed
in a research note that, at a recent seminar sponsored
by the research firm, Kroger placed an emphasis
on the fact that it competes with Wal-Mart in
28 of its 44 core markets, and that it achieved a 40
basis point share improvement last year in those
very markets. Kroger highlighted the fact that 50%
of the share in those 44 markets is held by smaller
players that lack effective economies of scale, thus
representing a market share opportunity. In other
words, Kroger expects itself and Wal-Mart to
squeeze the smaller players.
While Kroger’s strategy includes cost cutting, it
also involves another factor. Adler stated, “Earnings
growth will come through identical-store sales growth
and deleveraging, while the operating margin is projected
to be held flat or to improve slightly.”
Identical-store sales gains, in a mature
market, have to come from somewhere.
In Kroger’s fourth-quarter conference
call, chairman and ceo David Dillion
noted, “Our market share in the markets
where Wal-Mart has gained a one, two or
three share for the last several years has
increased. What’s happening in those
markets is that we’re gaining at Kroger,
Wal-Mart continues to gain in share ...
and that both Wal-Mart and Kroger are
taking that share from other sources.”
Just a couple of weeks ago, Kroger expanded
its generic drug discount program
to match a Wal-Mart move in the same
vein. Kroger said it also complements
budget-stretching consumer programs
such as a tax relief gift card initiative, a
fuel rewards program and the expansion
of the company’s private label assortment.
Sometimes people forget that the rapid
expansion of Kroger in the 1980s and
1990s occurred before the warehouse club
and supercenter boom and that it helped begin the
food retail reordering that continues today.The expansion
of the major supermarket chains from regionals
to multiregionals, with Kroger as the foremost example,
prompted the development of Save-A-Lot, for example.
Warehouse clubs and supercenters only added
pressure to a wave of consolidation and repositioning.
Today, many of the best and biggest operators in
American food retailing, including Target, Meijer, Supervalu,
Safeway and Tesco,have shied away from the
market center and focused considerable attention on
more peripheral deep discount, convenience and upscale
formats. The center, after all, is where Wal-Mart
and Kroger roam.

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