Winter, 2002

From the Editor

Saving Supermarkets With Specialty Foods

The world has not been moving in the manner favorable to the specialty food trade. So much of the business, and certainly the highest margin components, has been upscale and imported during a time when the focus is back to basics and domestic. Sure, post September 11 there is a little bit of joie de vivre and an “eat, drink and be merry for tomorrow we may die” philosophy, but it seems muted and mostly seems to express itself in purchases of jazzy sports cars at zero percent financing.

But the winds of war are temporary and zeitgeists ever-changing. The specialty food industry will endure and prevail over these momentary interruptions. What might just do it in, however, at least on a mass scale, is the attitude of major supermarket chains. When Kroger announced its quarterly earnings, the company caused stock prices to drop throughout the supermarket industry.

It really had little to do with Kroger’s performance but more with its assessment of the industry…and its plans for the future.

The gist of it was that Kroger said the market was becoming more competitive as retailers lowered prices to avoid losing market share to supercenters. Kroger intends to grow market share and would accept lower profit margins to do so.

To enable it to be price-competitive, Kroger will try to leverage its size to get better prices and to operate more efficiently, particularly by emphasizing centralized buying out of Cincinnati.

Nobody can fault Kroger executives for trying to be more efficient or for using its size to operate efficiently or to get food deals.

Surely, however, someone must realize that this plan is not a solution to the problem in the long-term. Perhaps in the short-term Kroger can still squeeze a little business by edging out independents and alternative food sources such as drugstores. Maybe Kroger will be more aggressive than Safeway and Albertson’s and a get a little share – although that seems unlikely.

But long-term this program is bound to fail because it doesn’t articulate a strategy with a chance of beating supercenters. And, although other companies operate the format, the big growth in supercenters has come from one company, so when we talk about searching for a strategy to beat supercenters, we really mean a strategy to defeat Wal-Mart.

Yet all of the Kroger proposals play to Wal-Mart’s strengths. Use size to leverage better deals and operating efficiencies? Wal-Mart is bigger than Kroger, so the advantage goes to Wal-Mart. Utilize centralized buying to better negotiate with vendors? Another Wal-Mart strength.

It is a truism in business that one can rarely win by copying another player’s game plan. Success depends on developing plays that work to one’s own strengths and capitalize on one’s opponent’s weaknesses.

That is where specialty food comes in, of course. If Kroger follows the playbook it has laid out, the company will look to centralize as much buying in Cincinnati as possible. Kroger will use the carrot of distribution in all its stores to pry the best prices and promotional deals out of suppliers. And when they are all done, Kroger will have drained its stores of life and still be ill prepared to defeat Wal-Mart.

Is there an alternative? Absolutely! The option is to use mass buying and leveraging of assets where it makes sense – but allow a kind of creative exceptionalism to bloom in each division and, indeed, each store.

Wal-Mart has the money, the technology, the system – it specializes in the mass market. But supermarkets all over the country, including Kroger, have deeper roots in their regions, a proud regional history, and should be able to offer a better, more appealing product mix – a mix that will attract high value shoppers.

The path that Kroger has laid out leads to a kind of Armageddon. Safeway and Albertson’s, plus loads of smaller players, all will fight for market share. They will beat each other up with price (and beat up the whole manufacturing segment at the same time), and when only a few are left standing, Wal-Mart will roll over them with its greater efficiency.

The only solution is to think about how to attract the most valuable customers – the ones willing to leave coupons at home and buy high-margin items.

The answer is to emphasize specialty foods.

You need regional buyers, you need store level personnel with the option to take in a few items not handled by the warehouse, you need to stop category managers from looking single-mindedly at a category and instead need customer managers looking out for how to attract whole classes of customer.

It is not enough to be efficient. For the supermarket chain to survive, it must accept that it has to attract customers because of how it is different than Wal-Mart, not how it is cheaper. Specialty foods are the obvious path.  FDM