October, 2014

Fruits of Thought

The Cost Of Change

Retailers are a fiercely competitive group, monitoring competitors’ prices and promotions on a daily basis, carefully measuring market share statistics and demanding vendors offer prices that enable the retailer to win in the marketplace. Yet, retail supermarket companies are often very narrow in their perception of the market.

For decades, I would travel around the country and retailers would show me their market share statistics but, more often than not, the market they monitored was just other supermarkets. For many years, Wal-Mart was not counted; even today, I rarely see internal market share numbers with Costco counted, much less Walgreens or any of the other vendors of food. Just this week, one chain showed me their numbers, proud they were inching up in share, but they didn’t include a very rapidly growing online service that is competing in the same market.

This is not an exclusively American characteristic. Recent news reports in the UK have detailed that the so-called “big four” supermarket chains, or multiples as they would phrase it, are suffering while upscale retailers such as Waitrose and deep discount retailers such as Aldi have been gaining market share. Interesting enough, it has been common for many years for executives at the Big Four to judge how well they were doing by looking at market share numbers that only included these four competitors.

This mindset has had significant impact on the competitive landscape. In the US, when Wal-Mart rolled out across North America, no major supermarket did the seemingly obvious: note that supercenters were doing well and roll out a competitive format. So the Safeway supercenter remains a figment of the imagination. Even Kroger, which bought Fred Meyer back in 1999, presumably in no small part to acquire expertise with general merchandise, never rolled out supercenters across the country.

In the United Kingdom, one sees a similar pattern. As Aldi and Lidl have rolled across the British Isles, no major supermarket chain has launched a small format discount division, nor have they launched an upscale competitor to Waitrose.

Even when they seem to respond, the effort is often feeble. For example, lots of retailers have online operations, either on their own or with partners, but few of these online entities operate as independent businesses with the goal of driving out of business the brick-and-mortar sister company, although only that sort of freedom is likely to win out as enterprises such as AmazonFresh and FreshDirect spread their wings.

Though there are exceptions — H.E. Butt, for example, launched its upscale Central Market division and invested heavily in it to help it succeed — many family-owned supermarket chains are stifled by the unwillingness of owners to abandon the “one size fits all” operating strategies of a much more homogeneous country of days gone by. These owners remember how their stores were once hubs of the whole community and don’t like the idea of segmenting stores into discount banners or epicurean banners or health-oriented banners.

So the little guys struggle with stores that have the wrong products on ad because the owners refuse to segment, and giants announce to Wall Street or the City in London that they are going to make “price investments” to compete with discounters – a euphemism for having to cut prices. But the business model of the stores doesn’t allow for profitable operation of the stores at Aldi prices, so the price “investments” are typically insufficient to compete effectively with the discounters.

What is required is a redefinition and a recognition that self-defining as being in the “supermarket business” means competing for growing share in a shrinking market. Sure one can improvise. Many of Tesco’s problems in the UK, for example, are self-inflicted. One reason discounters have boomed is because Tesco, in an effort to enhance margins, has de-emphasized the value range that former chairman Sir Terry Leahy introduced long before he dreamt of bringing Fresh & Easy to America.

In the end, though, certain formats have advantages, and retailers that want to be effective need to cannibalize their own operations. A&P failed to build new large and modern stores for decades, Sears refused to embrace fashion trends and never found an upscale alternative as the country became more affluent and fashion-forward. Now Wal-Mart attempts to move a behemoth into some slightly more upscale “sweet spot” in the market while allowing Aldi to snatch its reputation as the low price leader, while Tesco tries to down shift its pricing a bit, but not enough to make itself the low price leader.

Of the supermarkets, who is doing best? In the US, it is companies such as H.E. Butt, Publix and Wegmans, and in the UK, Wal-Mart’s subsidiary ASDA seems to be handling the situation with equanimity. The reason why these chains succeed? They are privately-held or a subsidiary of a public company and thus don’t have to announce quarterly earnings, so are able to design and execute a long-term strategy.

The stock market hates to see adoption of new business models, especially those with lower profit margins, but striving to maintain antiquated business models guarantees failure, while those who strategize and execute may suffer margin reductions but wind up with the winning business model. Perhaps the most interesting lesson is that the key to success is a willingness to accept the cost of change.  pb