May, 2002

Fruits of Thought

Quitting At The Start

Will conventional supermarkets continue to be the dominant retail food distribution venue in the United States or are they likely to find themselves marginalized in the years to come?

To some extent it is with this question that we are wrestling in our cover story this month. In this issue, we begin an ongoing process in which PRODUCE BUSINESS travels to various markets in which conventional supermarkets find themselves competing against Wal-Mart Supercenters. In each of these markets, we will compare prices at Wal-Mart against the local competition.

In our first market, we found that the conventional supermarkets had chosen to allow Wal-Mart to consistently under-price them on produce.

Now price isn’t everything – when it comes to convenience, obviously a large supercenter cannot be replicated as frequently in a given marketplace as a conventional supermarket. It is also true that some consumers might not enjoy a large-store shopping experience. And there is no question that the assortment offered by the Wal-Mart Supercenter is more limited. So conventional supermarkets can and do compete.

But when it came to quality, we found that any claims that Wal-Mart is buying cheap stuff is competitive smoke. In fact, on an item-by-item basis, we found the quality of what Wal-Mart sells in produce to be slightly superior to what the conventional supermarkets were selling.

There was a heavy emphasis on buying the best brands at Wal-Mart. Wal-Mart executives have recognized that the Wal-Mart name has no brand equity in fresh produce, so they are leveraging the power of other top names – Chiquita, Dole, Del Monte, etc.

Produce is unique. Regardless of how quality-conscious a produce company may be about its brand, no company refuses to sell based on the upscale, mid-market or downscale image of the retailer. The very worst store in America can buy the very best brands. So consumers walk into Wal-Mart, and they are immediately reassured by the brands that this is a quality produce operation.

For the moment, conventional supermarkets may compete based solely on location and assortment, but these don’t strike me as promising long term strategies. Wal-Mart’s Neighborhood Market concept is specifically designed to allow Wal-Mart to build more stores in each market and locate them more conveniently than would be possible solely with the supercenter concept.

It doesn’t mean the supermarket chains will go out of business, but if they can’t make their operations competitive on price, supermarket chains will become more marginalized as an enterprise. They’ll be more like Whole Foods or Sutton Place Gourmet – certainly they can be successful, but they won’t be mainstream choice for buying volume.

Perhaps the most astounding finding of our review is how unwilling local supermarket operators are to face the music. If you had asked me before we did the study, I would have figured that conventional chains would try to leverage their long established reputations for selling fine food by attempting to get extra margin on those products that consumers cannot easily compare. So I expected the area supermarket chains to be higher on items such as unbranded peaches. The implicit argument: you get what you pay for, and our peaches are more delicious than the ones Wal-Mart sells.

But it turns out that even on branded product where consumers can make direct comparisons – say Del Monte Gold pineapples – the supermarkets were willing to charge significantly more. When Wal-Mart sells the pineapple at $2.79, the supermarkets found it acceptable to charge $3.99 and $4.49 for the same thing. On jarred fruit, a product absolutely identical from one store to another, the supermarkets in our analysis thought it acceptable to allow Wal-Mart to be more than a dollar a jar cheaper than any of the supermarkets.

Now the interesting question is why? Why are supermarkets just allowing Wal-Mart to develop a reputation for delivering the best value in fresh produce? The people who run produce in these supermarkets have to know that letting Wal-Mart under-price their stores on such easily comparable products is like putting a sign in front of one’s own store – “High prices here.”

There are only three possibilities – either the expense structure of conventional supermarkets is so high that they simply can’t be competitive and have to overcharge, or the CEO’s are unwilling to reduce margin requirements so that an item like jarred fruit is carried as a margin enhancer and the produce teams don’t want to miss their margin requirement or, third, supermarkets may really think it doesn’t matter, that location and shopping experience will always give them an edge.

It has always seemed peculiar that as supercenters marched across America, no supermarket chain has felt the need to compete by building a similar venue. Kroger did acquire Fred Meyer, a kind of supercenter, but has shown no interest in rolling the concept out nationwide.

Unlike in the fast food industry, no Burger King or Wendy’s has risen to challenge this McDonald’s. No supermarket demanded that its branded vendors not sell to Wal-Mart, and now our indications are that supermarkets are not going to compete on price.

In building the Supercenter chain, Wal-Mart also built a distribution system to support it…and future concepts. Perhaps, in the short term, supermarket chain profits are higher by ignoring Wal-Mart Supercenters. But when a Neighborhood Market opens nearby and the fight is no longer avoidable, those chains that sit complacently by today will wish they had fought harder, sooner, against a more vulnerable competitor.  pb