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FIGHTING BACK

Grocers fine-tune their strategies to compete with superstores

By Paul Gereffi

Grocery stores say they, too, can be super, by offering convenience and personal service.

When Wal-Mart Stores opened one of its supercenters just a quarter of a mile from an existing Giant Food supermarket in Allentown, Pa., the latter didn’t flinch. Instead, it responded by upgrading its store. The unit switched to staying open 24 hours, improved its price points and began to stock new items, such as health food, premium offerings and an array of ethnic and prepared foods.

“After an initial impact, Wal-Mart is now looked at as just more competition,” said Ted Kraus of TKO/Real Estate Advisory Group, Mercerville, N.J. TKO manages 200 shopping centers in 36 states, including the one in Allentown where Giant Food is located. “Now both stores are doing gangbusters,” he said.

Kraus estimates that, initially, some existing stores may see sales drop as much as 25 percent when one of the new supercenters comes into an area. It is little wonder, given that these stores feature a formidable combination of general merchandise and groceries under one roof, averaging about 170,000 square feet and carrying 25,000 items. But after the novelty wears off, customers often go back to shopping at both stores.

“Some people don’t want to commit the time to shop at a humongous supercenter,” said Kraus. “Others may go to both, depending on price or availability of upscale items. Both superstores and traditional grocers find a niche in the market.”

Market share for traditional grocers —including conventional stores enlarged superstores and food and drug combo stores — was 69 percent in 1980, according to retail and brand consulting firm Willard Bishop Consulting, based in Barrington, Ill. That dropped to 60 percent by 2000 as warehouse outlets, convenience stores, gas station markets and other outlets have taken business away.

Supercenters, which didn’t exist in 1980, had 9.3 percent of the grocery business by 2000. Projections to 2005 predict that the supercenters will further increase their share by more than half, to nearly 16 percent; traditional grocers will lose yet another 5 percent of market share.

South Florida: A case study
The supercenters have moved into south Florida, with Wal-Mart opening stores in Boynton Beach, Florida City and Hialeah; several others are in the planning stages. SuperTarget’s first opening in south Florida was in Lauderhill, where it built a 174,000-square-foot store.

For the supercenters, the incursion into south Florida is a chance to parlay customer loyalty at traditional stores into a potential crossover that will translate into higher sales and an opportunity to carve out a major niche in the $570 billion national grocery market.

“This is bad for grocers,” said Daniel Baumgard, CEO of Miami-based Investment Management Associates, which manages 15 shopping centers from Miami to Jacksonville. “The pie is only so big, and these superstores are category killers. This is going to be dangerous to existing grocery stores. They’re going to take business away — period.”

But some are putting their best foot forward. Large grocery chains, such as Publix and Winn-Dixie, have seen this coming and are scrambling to revamp their current stores and build new ones to preserve their customer base. Some stores will be smaller, stay open longer and carry an array of specialty items specifically suited to the surrounding demographics.

Consumers may view the emergence of the supercenters as simply another choice. Some will take advantage of the vast choices they offer, while others may opt to stay on familiar ground and shop at traditional grocers in which they know exactly where foods are located and can get in and out more quickly.

Grocery sales at Wal-Mart, which operates nearly 900 of the more than 1,300 supercenters in the United States, have reached $17.1 billion and translate into 30 percent of total store sales, according to Willard Bishop.

This makes Wal-Mart the country’s fourth-largest food retailer. The company, which wasn’t even among the top 10 grocers a decade ago, set up an additional 178 units last year.

Target Corp., the Minneapolis-based discount chain, operates more than 1,300 Target stores in 44 states, along with several other retail concepts. Its latest offering of SuperTarget contains the grocery mart Archer Farms and its own brand of groceries, in addition to a variety of other items in the discount store section. By 2010, Target anticipates opening more than 200 SuperTarget locations nationwide, according to the company.

“We’re looking into potential opportunities throughout the area,” said Joy Manasek, manager of the SuperTarget in Lauderhill. “This is all about convenience for our customers who like to shop at traditional Target stores and want to pick up some groceries at the same time.”

Manasek, who has been with Target for 10 years, said that the company began stocking a few grocery items, such as milk and cereal, in response to customer requests.

“As we brought in more items, we realized there’s a need for groceries for our customers who may stop in late at night or on the way home from work,” she said. “Most customers don’t come in just for groceries, but may buy some when they come to Target for other things they need.”

But Manasek said she doesn’t see her company driving the competition into extinction. “I think people are still going to clip coupons and go to other grocery stores, too,” she said. “There’s a need for both.”

Just how much of a difference the supercenters will ultimately make to the bottom line of existing retailers is unclear. Publix still claims nearly 60 percent of the south Florida grocery market at its 187 units there, according to The Shelby Report, a Gainesville, Ga., supermarket industry newsletter that tracks grocery market shares. Winn-Dixie has about 23 percent with 148 stores and Albertson’s almost 5 percent with 21 area stores.

However, in March Albertson’s closed 116 stores and pulled out of the Memphis and Nashville, Tenn., and Houston and San Antonio markets. The move was seen as a response to competition from Wal-Mart.

“The supercenter explosion is the single greatest threat to existing grocery retailers,” said Jon Hauptman, vice president of Willard Bishop. “There’s a large amount of consumer spending in these stores. It’s a big threat everywhere they go.”

Hauptman says that for existing grocers to meet the challenge, they must promote what they can do better than large retailers. They can do well with such items as specialty, gourmet and ethnic foods, and the key is to tailor their product mix to meet the needs of the surrounding population.

“The chains need to present a stronger offering to customers and make their stores attractive, friendly and ‘shoppable,’” said Hauptman. “They’ll figure out a way to survive.”

But that doesn’t go for everyone. Those stores that aren’t currently meeting the needs of their customers are most in danger of being eliminated.

“The marginal players are going to see points knocked off their scoreboard,” said Greg Masin, a Miami-based associate director of retail services at Cushman & Wakefield, a commercial real estate firm.

Some grocers are opting not to build larger units, but instead to surround the supercenters with smaller units to nibble away at their business, according to Masin. The size of these stores ranges anywhere from 20,000 to 60,000 square feet, with a greater emphasis on time-saving and convenience.

“For those consumers that can commit megatime and don’t mind walking across a huge parking lot, the supercenters offer the best choice,” he said. “For others, closer parking to the store and the ability to go in, get what you need and maybe hit the express checkout lane are more important.”

Certainly, the supercenters are not getting it all their own way. Masin says that in the eastern parts of south Florida, lack of suitable land for the 20 to 30 acres needed for a superstore is a substantial barrier to entry.

The most successful units are those in rural or semirural areas of the country, where consumers are used to driving longer distances and making fewer trips to the market.

“I don’t think they will make as big an impact here as in those other kinds of areas,” said Bill Chalmers, vice president of retail services at the Miami office of Trammell Crow Co. “But they’ve been hugely successful there. If the existing grocers have allowed their units to deteriorate, the supercenters could catch them flat-footed. For the rest, it should settle into a peaceful coexistence.”

Beth Azor, president of Terranova Corp., a Miami-based real estate brokerage and consulting firm, thinks that after an initial effect, the superstores won’t have a major impact.

“Working customers don’t have time to go into a 150,000-square-foot store for a gallon of milk,” she said.

Others see the superstores as traffic generators that will benefit most retailers in shopping centers throughout an area, even as they cannibalize sales at other grocery stores.

In Oldsmar, Fla., between Tampa and Clearwater, ALBA Consulting Corp. manages the 30,000-square-foot Village Center. Built in 1984, the center has undergone a face-lift and contains a dozen retailers, mostly mom-and-pop operations. A Wal-Mart Supercenter is to open later this year a quarter mile from Village Center.

“We welcome them,” said John Atanasio, president of Clearwater, Fla.-based ALBA, which manages, leases and redevelops existing shopping centers and manages 14 centers containing almost 1 million square feet of retail space in the Tampa Bay area. “They have no tremendous impact on our centers, because the supercenters cater to a different kind of shopper.”

According to Atanasio, the typical supercenter customer is likely to be a senior citizen with the time to walk around or look to save money on specific items, or those with large families who find it worthwhile to load up on certain items, such as dry goods, that are cheaper than in regular grocery stores.

“Our centers are neighborhood retail establishments that contain mom-and-pop-type stores in a pedestrian-friendly atmosphere,” he said. “I think the supercenters are too big and have too many items and [too] few employees to guide shoppers. Our store owners know most of the shoppers, because they come from a one- or two-mile radius. We’ve been successful with that concept because we’re about 90 percent leased.”

As the population continues to grow in the area, the impact of increased competition could be lessened.

“Most should find a niche and survive,” said TKO’s Kraus, “but if your sales drop 15 percent, and that’s your profit margin, you’re going to be in trouble.”

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