December, 2002

Fruits of Thought

Customers First

Wal-Mart recently announced sales of $1.43 billion. Not for the year, nor the quarter, not even the month. That was $1.43 billion for Friday, the day after Thanksgiving, and only counting stores in the United States. To put that number into perspective, if Wal-Mart only was open for that one day, its annual sales would exceed that of all but about 35 supermarket chains.

Ok, I’m being excessive: Most of those $1.43 billion in sales are not food. Still, numbers like these have been on the minds of supermarket executives for years. Indeed the need to compete with Wal-Mart made consolidation a priority. The idea was to roll up regional operators and create a chain large enough to gain operational efficiencies, buy at preferential prices and, in general, compete with Wal-Mart.

Safeway has been a leader in this roll-up strategy and management has claimed great progress. But recent events indicate big trouble down the road.

First, Safeway took a $111 million charge to write down its acquisition of Randall’s, the Houston-based upscale market, known for pristine stores and fine deli and prepared foods operations.

Second, Safeway felt compelled to issue a public apology to the customers at its Genuardi’s division basically for trying to shove a Safeway – and private label Safeway products – down the throats of customers who liked an upscale family grocer with its own private label products.

Third, to add insult to injury, Safeway announced it is going to sell the Dominick’s chain in Chicago in the aftermath of a bitter battle with unions as Safeway sought to reduce what it claims is a substantial advantage in labor costs Jewel/Osco holds in the marketplace. Analysts predict Safeway will lose hundreds of millions of dollars unloading Dominick’s.

Finally, while beset with problems like these in the outlying areas of the Safeway empire, Wal-Mart is now moving into California, thus threatening the cash cow divisions that are the jewels of the crown.

There are some instructive points about Safeway’s experience that should be considered, and I think the most important one is this: You can’t be efficient without high sales.

Wal-Mart is often admired for its efficiency and, indeed, MIS, logistics and all sorts of technology help Wal-Mart win its place in the world. But all too often we look at efficiency as solely a matter of driving costs out of the system.

The truth is more complicated though. It is virtually impossible to cut costs to prosperity if the price of the cutbacks is reduced appeal to consumers and reduced sales.

In the case of Randall’s, Genuardi’s and Dominick’s, Safeway came in and paid premium prices because it was buying local brand equity away, eliminating the private label brands that many consumers were fiercely loyal to, de-emphasizing formats, including Dominick’s vaunted Fresh Store format that focused on perishables and prepared foods and generally, turning three premier chains into a bunch of Safeway boxes.

The significant thing here is to remember that none of these changes were taken because executives at Safeway thought they would produce more satisfied customers. Instead of being driven by marketing and merchandising, the whole process was driven by a desire to obtain operational efficiencies.

But the basic plan was flawed because every penny gained in operational efficiencies and better buying was lost ten times over by declining sales, particularly declining sales on high margin items.

In building Wal-Mart, technology was used not simply to reduce costs but to better serve customers. So the most famous Wal-Mart innovation was the use of sophisticated demand-forecasting software that enabled Wal-Mart to know which items were hot. In General Merchandise, where you are talking about importing clothes and toys from Asia, this technology can mean the difference between having enough of a hot doll for Christmas Eve and having an empty bin with angry shoppers cursing.

K-Mart is on its last legs. The initial store shutdown doesn’t seem to have worked. Although the company closed what were, allegedly, K-Mart’s worst performing 13 percent of stores, sales seem to have declined by almost 13 percent as well.

It is important to remember that whatever its efficiencies, Wal-Mart did not beat out K-Mart because it bought T-shirts a nickel cheaper. It won because, consistently, Wal-Mart realized a far higher sales-per-square-foot than K-Mart. These higher sales levels fed into a virtuous circle, whereby higher sales-per-square-foot translated into lower percentage operating costs, which let Wal-Mart lower prices, which led to higher sales per square foot, etc.

But Wal-Mart first had to satisfy customers. It had to buy the right goods and market and merchandise effectively. No technology, no organizational system, could possibly save enough to compensate if these systems didn’t produce satisfied customers.

It will not be easy to beat out Wal-Mart in California. But this much is clear. Whether the competition is Wal-Mart or the next big thing, we have to put satisfying the customer ahead of production efficiencies.

Dominick DiMatteo knew this when Dominick’s was a family-owned business. How many MBA’s does it take to forget it?  pb