April, 1994

Fruits of Thought

Beware The Supercenter

Just as the assault from wholesale clubs seems to have been turned back, a new and potentially much more threatening competitor is looming. And once again, produce and the perishable departments may very well be the battleground for a bloody war.

The glaring message of a study recently released by Cornell University is: supermarkets beware, here comes some real competition. Though the study — entitled “SUPERCENTERS: The Emerging Force in Food Retailing” — specifically deals with the New York and New Jersey area, the message applies throughout the country.

Warehouse clubs were perceived as a major threat to supermarkets precisely because their cost structure could allow for better prices. But as it turned out, the clubs were so different from supermarkets that they attracted fewer visits from consumers. Various studies show that people go to warehouse clubs from one third to one fifth as frequently as they go to supermarkets to use against warehouse clubs.

But a supercenter is a supermarket that just happens to have a large general merchandise store, such as a Wal-Mart or a Kmart, attached. In this sense, a supercenter is a continuation of a 20-year trend where supermarkets, recognizing that food shoppers are frequent visitors who will buy other goods, have been increasing their non-food merchandise.

Though several chains have started supercenters in their regions, it is the decision of Wal-Mart and Kmart to roll out the supercenter concept that has brought the idea front and center in the industry’s consciousness. These companies have what the supermarket industry doesn’t really have, namely, truly national operations. If the concept succeeds, you can expect Wal-Mart and Kmart to expand it to every market in the country, thus competing with every supermarket chain.

And the numbers are huge. The Cornell study quotes industry sources saying that Wal-Mart will have 500 supercenters by 1997, and Kmart will have 300 by 1996. If these predictions are realized, they would rank with some of the top supermarket chains in the country.

Part of the Cornell report consisted of separate survey conducted with food manufacturers and consumers. In this data you see that the threat supercenters pose is caused by their similarity to supermarkets. In fact, the manufacturers were asked to rank various retail formats, such as supermarkets, supercenters, wholesale clubs, etc. Supermarkets came in first place in four of the five categories ranked: variety, service level, fresh food department, well-trained employees. But in every one of these categories, supercenters came in second place, beating out all other formats. And on the fifth category, price, supercenters beat out supermarkets, although both fell below wholesale clubs.

These numbers do not bode well for supermarkets. There is no reason why supercenters can’t compete on all these areas where they are currently coming in number two. Wal-Mart and Kmart certainly know how to train employees and provide variety and service. And with experience and hiring of the right people, they can certainly become experts in fresh foods.

The consumer segment also shows some interesting numbers. Surveying people in areas where there are well-established supercenters and warehouse clubs as well as supermarkets, the average number of shopping trips a consumer made to a wholesale club is about one trip per month. Supercenters, on the other hand, were visited 3.5 times per month. With a visit of almost once a week, supercenters can really compete for the perishable dollar. And if they do well in perishables, they will increase the visits per month to a higher level.

So why are Wal-Mart and Kmart getting into the supercenter business anyway? If they run the food operation in supercenters as a profit center, supermarkets probably don’t have all that much to fear, because even though supercenters can improve and be more competitive, there is nothing inherent in their organizations to give them an edge over supermarkets. The cost of their food operation’s labor, capital, cost of goods, etc., should be similar.

The other possibility is that Wal-Mart and Kmart are adding supermarkets to their general merchandise stores, not so much to make profits on food, but simply to attract more frequent visits to their general merchandise stores even if they never make a penny on food. Because Wal-Mart knows that every customer who comes into the store will buy a few dollars of profitable general merchandise.

If Wal-Mart and Kmart take this attitude, they will be formidable competition indeed. It is even possible they could do this just with perishables or just with produce, making it difficult for supermarket produce retailers to compete on price.

Already produce is shaping up as one of the prime battlefields in the wars between supercenters and supermarkets. In the communities where both exist, the Cornell study shows that 72 percent of consumers typically purchase produce at the supermarket and 42 percent purchase produce at the supercenter. The same study also says that 47 percent of these consumers rate their supermarket as having excellent produce, while only 27 percent rate their supercenter as having excellent produce, with 26 percent saying they were the same or they were indifferent. Good numbers for supermarkets, but the danger is clear—the majority of consumers in these areas rate supercenters to have the same or better produce quality than supermarkets.

With supercenters certain to improve, supermarket produce departments better start looking at ways to improve quality and service. If you have a few supercenters moving into your territory, look forward to some real excitement.  pb