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Deals Hurt Suppliers

April 03, 1988

Tom Pirko's March 20 Viewpoints column, "Merger Madness Among Supermarkets," demonstrated a misunderstanding of the dynamics and economics of the recent merger activity among Southern California supermarket chains. Contrary to the author's hypothesis, facts and experience suggest that suppliers to the grocery chains will be the big losers, not consumers. In fact, consumers are likely to benefit from this merger activity, or at least be no worse off than they were before (and by all accounts, including the author's, conditions for consumers have been pretty good in Southern California).

As supermarket competitors grow stronger and more sophisticated (and yes, fewer), there will be more experimentation with format, products and service. In fact, the emerging dominant chains will recognize that pricing alone does not lead to a sustainable competitive advantage, and they will experiment with a number of the elements of their businesses to secure a strong competitive position.

Further, there is no reason to believe that grocery chains in a market with fewer competitors will simply raise prices. The larger chains will be able to use increased leverage with their suppliers to pressure them into more competitive pricing. If retailers stopped providing attractive products at the right prices to consumers, it would, as always, push them into competitors' stores.

Finally, the column predicted that the big chains in time would overlook or ignore various market niches being addressed by specialty chains. I find this observation hard to reconcile with the facts. Vons in Southern California has to be considered a leading innovator by any measure. As a result, Vons has introduced "neighborhood merchandising," Vons Pavilion, Tianguis and Pantry stores.

Pirko wrote of cycles in this industry. I prefer to think of it in terms of eras of progress. Through it all, consumers continue to be served more effectively and efficiently by the supermarkets. The real question is: How will the manufacturers and suppliers fare?


Los Angeles

The writer is a consultant with McKinsey & Co.

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