April, 2004

Fruits of Thought

Retail Shake Up

Much as it is said that Generals are always fighting the last war, so businesspeople have to be prepared for the possibility that the future will not be a mere extrapolation of the recent past.

For example, the current expectation is for consolidation as far as the eye can see. Driven on the retail side by the growth of Wal-Mart and supermarket chains looking to obtain the mass they believe necessary to remain competitive, the volume needs of the chains are expected to reverberate through the marketing channel and encourage consolidation at the wholesale and shipper levels.

It seems so obvious, so certain...and yet there are countervailing trends that indicate we may have reached the peak of consolidation frenzy and point to the possibility that the industry will turn the other way.

First we are starting to see the beginnings of a change in the real estate situation. Ralphs, the Kroger division in Los Angeles, has announced it will close stores. Dominick’s, the Safeway division in Chicago, is doing the same, as is Kash N’ Karry, the Delhaize division in Florida.

Although retailers sometimes fight any attempt to put other supermarkets in these locations, ultimately many of these locations will become independent grocers.

Real estate in the supermarket business is the primary obstacle to independents thriving. Most new supermarket centers are built with credit granted on the basis of a lease to a large chain with a recognized credit rating. The average independent, however, can’t get a prime new location, even though the company can afford to pay the rent, because the company’s credit is not strong enough for a bank to give a construction loan based on it.

Independents do better in urban high rise areas because the real estate in a high rise is usually funded based on the offices or apartments in the tower — the ground floor retail space is incidental and available to any desirable tenant. Most of the time, however, independents have to use existing real estate. When A&P closed thousands of small urban stores, for example, ethnic grocers in the inner cities reopened many.

The dynamics that led Safeway, Kroger and Delhaize to close these stores will lead them to do the same in other places and for other chains to close stores as well. This will translate into substantial opportunity for independent retailers.

Indeed, there are certain signs that supermarkets are making strategic decisions that could lead to an acceleration of store closings. Ever since Wal-Mart proved the supercenter concept viable, the competition between Wal-Mart and supermarkets has been odd.

When the department store concept was developed, many merchants recognized it would be a popular format and established their own version. Equally, when supermarkets were first established, many companies set up comparable operations. Oddly, though Wal-Mart has certainly proven that the supercenter is a very appealing concept to many people, efforts by the supermarket industry to compete have not really included the obvious: Offering a comparable store.

Once again, however, things are starting to shake up a bit. Kroger announced plans to build much larger stores in the Atlanta area that will feature much more general merchandise. Out west some Fred Meyer units are being converted into a more competitive format. In fact, many chains are beginning to recognize that they need a larger footprint concept to offer the one-stop-shopping convenience of supercenters.

What this means, of course, is that older stores will be made obsolete more quickly —or at least obsolete to that chain. It all means more stores will be available to be picked up by independents.

Even the collapse of the domestic marketing functions of many of the commodity promotion groups, due to unfavorable court decisions, may rebound in favor of independent retailers.

Although those commodity groups spent money on mass marketing, such as commercials on TV and radio, a lot of funds were spent on promotions and merchandising efforts at chain stores. It had long been a sore spot with wholesalers who felt that their customers, whether small supermarket chains, ethnic markets or produce stands, did not get the same support.

Whatever the reason, these programs that helped big chains are less common today.

Even the wholesalers themselves seem on the verge of reinvigorating themselves. First we had large wholesalers in places like Pittsburgh building new facilities off the markets, then in Chicago the new market is open and a level of service and efficiency inconceivable a short time ago are now commonplace. And in the mother of all markets, Hunts Point in New York, plans are advancing briskly for a new market.

It is not a slam dunk, it may not happen at all, but business and life are a seamless web, and currents are in the air pointing to a future with a vibrant independent sector focused on certain ethnic groups, high-end demographics, and organic/health-oriented psychographics all being served by a wholesale sector operating out of state-of-the-art facilities.

Wal-Mart may seem invincible, but Gulliver was routed not by a single giant but by the Lilliputians.  pb