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Cornered Grocers May Have to Be What Wal-Mart Isn't

October 27, 2003|Melinda Fulmer and Abigail Goldman | Times Staff Writers

Wal-Mart's move into the grocery business has been likened to a plague that afflicts rivals across the country. Not everyone dies, but most suffer.

California will be no exception, analysts say.

Early next year, Wal-Mart plans to begin opening giant so-called Supercenters here that would sell groceries along with discount merchandise. The success of Supercenters elsewhere has made Wal-Mart Stores Inc. the nation's largest food retailer.

It is nearly impossible to beat the Bentonville, Ark.-based retailer on price, industry experts say, because it does almost everything -- from paying employees to managing inventory -- more cheaply than its competitors. And that low cost structure is a key reason that 70,000 supermarket clerks are on picket lines in Southern and Central California.

Citing the threat from Wal-Mart and other nonunion retailers, the Vons, Ralphs and Albertsons grocery chains are pushing for cutbacks in health coverage and wage freezes in their new contract with the United Food and Commercial Workers union. That stance triggered a strike by Vons workers that started Oct. 11, with Ralphs and Albertsons locking out their employees the next day in a show of corporate solidarity.

But as important as cost cutting is, industry analysts say, supermarkets can't survive by trying to match Wal-Mart on price. Rather, staying in business will hinge on their being what Wal-Mart is not.

"They can talk about lowering wages and lowering prices, but that doesn't do anything to help them better compete with Wal-Mart," said Sandra Skrovan, author of a report on Wal-Mart's food business for Columbus, Ohio-based consulting firm Retail Forward. "They need to compete with Wal-Mart on something other than price."

Fresher produce, better service, a wider variety of brands and more convenient locations will be key to these chains' survival, industry observers say. Lowering costs is part of the equation but not the entire solution, they say.

"Not everyone perceives value the same way," said Karen Brown, senior vice president of the Food Marketing Institute, a group representing grocery retailers. "For some, value means higher levels of service."

For example, she said, stores can stock special items that can't be found in discount stores, such as natural and organic foods, ingredients for low-carbohydrate diets, and grab-and-go prepared meals.

"Supermarkets are just trying to determine what their niche is going to be," Brown said. "They are asking, 'How can I be different than my competitors?' "

Traditional supermarkets are typically much closer to people's homes than the Supercenters -- which serve a wider geographic area -- and offer more brands. Some supermarkets carry as many as 500 different types of produce, about double what Wal-Mart stocks, said Merrill Lynch & Co. analyst Mark Husson, who first made the comparison between Wal-Mart and the plague.

Supermarkets also can offer more popular regional brands and gourmet products in addition to the name-brand goods carried by Wal-Mart.

Gary Rhodes said the difference was obvious during a recent trip to Memphis, Tenn.

"Memphis is a huge barbecue city," said Rhodes, a spokesman for Ralphs' parent company, Cincinnati-based Kroger Co. "In Wal-Mart in Memphis, you may find two or three different types of barbecue sauce. You go in our stores and you'll find two or three dozen, including some well-known local brands."

Even as supermarkets strive to reduce labor costs, most believe that they still will be able to offer more service than Wal-Mart, keeping clerks on hand to answer questions about produce and providing staff in the meat and seafood department to cut and package items to order.

Service, analysts say, has never been Wal-Mart's strong suit. Its draw is price.

In surveys last year at stores in Las Vegas, Dallas and Tampa, Fla., financial analysts at investment bank UBS Warburg found that a shopping cart of groceries was 17% to 39% cheaper at a Wal-Mart Supercenter than at a traditional supermarket with a union workforce.

The retailing giant can offer these lower prices in part because it pays workers less than its unionized rivals, Skrovan said. Supermarkets pay an average hourly wage of about $10.35, Retail Forward reported, compared with about $8 an hour on average at Wal-Mart.

But the chain also possesses a sophisticated distribution and replenishment system and huge economies of scale, given its 3,412 stores around the globe. Retail Forward estimates that about $82 billion of Wal-Mart's $245 billion in sales last year came from food and drugs, enough to make it the nation's largest food retailer.

Wal-Mart got its start in 1962 selling discount merchandise in rural Arkansas. It grew rapidly in the decades that followed, expanding into the grocery business in 1988. In the next few years, analysts expect the company to nearly double its number of U.S. Supercenters to 2,250 -- in many cases converting existing stores to the larger Supercenter format.

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