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Grocers Try Fresh Ideas to Win Back Shoppers

Retail: Supermarkets are launching price wars and stocking non-food items to lure customers from big discounters.


Under pressure from Wal-Mart Stores Inc., Costco Wholesale Corp. and other discounters, supermarkets are launching the kind of war consumers love--a price war.

Kroger Co., owner of Southern California's Ralphs grocery chain, fired the first round Dec. 11, announcing it will slash prices on selected items to defend its declining market share.

Safeway Inc., the parent of Vons, seconded the motion, saying it had lowered profit projections and earmarked a large pool of funds for discounts and promotions to keep shoppers from defecting to the big discounters.

The news highlights the squeeze supermarkets are feeling from discounters, membership clubs and even drugstores as consumers search for the best values.

Double coupons, it seems, just aren't enough for some shoppers.

"They never add up to much, and they are for things we don't use," said Jessica Garcia, with her two young sons in tow at a Los Angeles Costco.

Kroger and Safeway executives declined to be specific about which prices on everyday items will come down and by how much. However, analysts expect lower prices on stock-up items such as cereal and detergent.

They also forecast more coupons, perhaps even quadruple coupon specials, and two-for-one deals in coming months to win back more shoppers such as Garcia.

And expect to see some nontraditional supermarket merchandise too. During the holiday season, for instance, Safeway boosted its bottom line by offering gift certificates to Nordstrom Inc. stores, cheap DVD players and a selection of toys.

Safeway declined to comment on the profitability of its holiday merchandise, other than saying the items were "well received" by its customers.

Wal-Mart officials, meanwhile, seemed unperturbed by Kroger's announcement and said the 2,700-store chain is willing and able to defend the "We sell for less" claim that is written across its giant stores.

"We won't let ourselves be beat," Wal-Mart spokesman Tom Williams said, even if that means sacrificing some of its profit margin.

In its fiscal third quarter ended Oct. 31, Wal-Mart's gross profit margin declined a third of a percentage point, after dipping slightly in its second quarter, mainly because of price-cutting in its grocery aisles.

However, with more people coming into the stores, sales for the quarter jumped 15.5% to $52.7 billion and net income rose 8.2% to a record $1.5 billion.


Smaller Retailers Caught in Middle of Price War

Wal-Mart can afford to win a price war, analysts said. And although supermarket executives said they are trying to win back sales lost to Wal-Mart, it's the weaker discounters, such as Kmart Corp. and regional supermarket chains, that will suffer.

"Smaller retailers are getting demolished," Mark Husson, analyst with Merrill Lynch Global Securities, said in a recent report on the battle between Wal-Mart and supermarkets.

The reality is, Husson said, the top three supermarket chains--Kroger, Safeway and Albertson's Inc.--have seen only minute dips in market share since Wal-Mart moved into their business in the mid-1990s. Despite its low prices, Wal-Mart commands just a 6.7% share of retail grocery sales in the top 100 U.S. markets in which it operates, compared with a combined 68% share for the top three supermarket chains.

In Southern California, Ralphs, Vons and Albertson's control 66% of the market, according to supermarket data firm Trade Dimensions. Safeway officials think that share could grow, much as it has in Europe.

Nearby supermarkets lost market share when a new Wal-Mart opened, but most of the loss was regained a year later, when the novelty had worn off and shoppers retreated to familiar shopping patterns, said Melissa Plaisance, Safeway's vice president of finance.


Supermarkets Dealing With More Competition

Indeed, for all the talk about Wal-Mart encroaching on their turf, these chains are adding more food retailing space than Wal-mart, Kmart and Target Corp. combined, Husson said.

They are expanding at double the growth rate of the industry's typical 1% to 1.5%, forcing out smaller chains with older stores and stealing customers from one another.

Still, there's no question that the competitive pressure has been turned up on supermarkets as more types of retailers, from Target to drug chain Rite Aid Corp., are using cheap food to draw more customers into their stores.

"Our food business has grown significantly over the last year and we expect it to continue to grow," Rite Aid spokeswoman Sarah Datz said. Shoppers can pick up milk, eggs, soda, bread, cereal, frozen dinners, canned goods and pet food at most Rite Aid stores.

Costco, which didn't sell fresh food until 14 years ago, counts food as a $4-billion business, or about 11% of its sales.

"Food is actually leading the pack now," said Richard Galanti, Costco's chief financial officer.

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