December, 1998

From the Editor

Consolidation And Delis

Let’s cut to the chase: In 1975, the top ten supermarket chains had a market share of approximately 25%. In 1999, based on the assumption that all announced deals will close, the top ten supermarket chains will account for 50% of the business. That is retail consolidation.

What drives this consolidation? Several factors: Slowing U.S. population growth makes traditional growth harder to obtain. From 1970 to 1990, the U.S. population grew by 22%. From 1990 to 2010, the projection is that the population will grow by only 13%. If a company wants more business, it may have to expand geographically.

The moderation of inflation has made it increasingly difficult for retailers to grow their sales and profits. Retailers hold substantial inventories; if prices are going up fast enough because of inflation, the retailer can boost sales and profits just by changing the price on the shelf. This party is over though. From 1970 to 1979, inflation for food at home averaged 8.1% per year; the final number for 1998 will come in below 2%. This actually overstates food inflation, and many retailers believe we are already in a deflationary environment.

The statistics overstate inflation because consumers rotate their buying practices to buy more economically. If beef goes up, consumers cut back and buy more chicken. So today’s consumers are experiencing little if any inflation in their costs for foods at home.

Foreign – particularly European – buying has driven much of the consolidation, and that is a function of low-growth opportunities in Europe. Partly this is a matter of Europe experiencing even lower population growth than the U.S. It also is a result of laws that impede business expansion. Throughout Europe, it has become difficult to build large supermarkets without special permissions required for stores over a certain threshold in size.

Very often, these permissions have to come from small local retailers who simply won’t give permission. Perhaps even more of a hindrance is that in many cases a store is forever. Some nations make it exceedingly difficult to close a store, even an unprofitable one, so this raises the risk of a store opening substantially as if one makes, the mistake may be forever. To European companies, this makes expansion in the U.S. extremely appealing.

Of course we have factors of our own that impede expansion. Local zoning rules and concurrency requirements make the prospect of building new stores a nightmare. Shortages of prime locations make if difficult to build winning stores in built-up areas. What’s more, labor is tight. Even if one could build 100 new stores in an area, finding enough employees would, in some parts of the country, be an almost insurmountable problem.

So we have lots of merger-and-acquisition activity; what’s the impact?

Well, if you want to know the nightmare that keeps supermarket CEO’s up late at night, it is this: Imagine if these transcontinental behemoths could convince major manufacturers to create a new class-of-trade discount structure based on global volume. Then these retail giants could leverage their global buying discounts. This means they could sell for less yet be more profitable. Smaller chains and independents would come under severe pressure, and there would be even more consolidation.

Doubtless, on the procurement side, large chains would like delis to join in these mass procurement efforts, and on some products it will work.

Still, it strikes me that deli is less amendable to this type of mass purchasing than is dry grocery and, indeed, attempts to obtain these kinds of massive procurement efficiencies in the deli can do a chain real harm.

It is still the case that in one city, people demand a white potato salad, and in another, they won’t eat one that isn’t yellow. One town knows that potato salads should be made of sliced potatoes, and one knows it should be made of cubes. If top management becomes procurement-driven and starts demanding standardization in the hope of leveraging purchasing power, the chain runs the real risk of opening market opportunity for smaller chains and independents more driven by merchandising than procurement.

This is the rub: To a substantial point, the advantages of consolidation are cost savings that can be created by insuring uniformity in product selection. Yet, a store’s comparative advantage increasingly depends on those departments – deli, bakery, produce, specialty foods, etc. – that draw their strength from differentiation.

Micromarketing isn’t just a slogan for deli. Creating something unique in a store, offering products that enchant a community, is the raison d’ etre for the deli.

Being big can certainly help. Having resources available to do marketing research, to buy new equipment, etc. is an invaluable edge. But success is not preordained.

The odds are good that these mega chains, working hand in hand with global brands, will wind up selling apace to the highest bidders, restricting SKUs to gain operational and procurement efficiencies. This will leave a clear playing field for operators who think not so much of where the deal is or what works best for the warehouse but, instead, remember that we are in this business to serve the customer.  DB