Adler: And Safeway has talked about studying demand. It's just at the stage of studying what the demand is.
-- certainly in hooking in frequent-shopper card programs and certainly going to vendors and talking to each other -- so it's going to be a communication tool that will make the industry more efficient. Then the question becomes, is the supermarket going to be big enough to do home delivery, or do the logistics cost too high? Webvan seems to have a well-conceived strategy for making it work, but we don't know. Execution is everything.
Husson: The challenge is this: if you think back to the Waltons, you had Jim Bob cycling down to the village with a shopping list and dropping it off at the general store, whose owner would eventually drive up in the truck and deliver it. Mrs. Walton worked at home, so it was relatively straightforward for her to be there to receive the delivery. And there wasn't much in the way of perishables that she didn't grow in her own backyard anyway. The point is, that model is not with us anymore, and to a certain extent, with the Internet, what home delivery is trying to do is to replicate that model. Think about why that model died -- it died because of what a supermarket now is. A supermarket is actually a distribution center, but it's so conveniently located that you can tempt the consumer to come in and pick her own order and deliver it to herself at a time that is convenient for her. For free. And the labor that the customer actually puts into that whole process has got to be replicated by the "dotcoms" and the delivery guys in a way that doesn't make the overall shopping cost prohibitively expensive.
Webvan's view is that it will do that by taking the labor out of it. If it works the way it says it's going to work, that seems to be the way around -- just exclude all the labor from the entire process, and the little guy with the delivery van is the only piece of labor you have to figure into the process.
Adler: Streamline also has an interesting business model that's very clearly targeted to the customer that spends the most money in the supermarket, and it has developed a method for unattended delivery, eliminating the need for you having to be there. It's also getting a surprising amount of loyalty. I'm not sure it knew that was going to happen, but when you get people to put something in their garage and you get them to pay a monthly fee, it's surprising how much a part of their lives you become.
What I think is really the question for the Internet is whether the supermarket's convenient positioning -- and this goes for drug stores too -- gives it some kind of an advantage and whether the Internet will be used more generally for other kinds of product. Is there some way to leverage that positioning, whether you're talking about great big lockers on the side of the supermarket and you go and pick the products up yourself?
Supermarkets have already got what a lot of people want because they're close by, and maybe that's the way for them to leverage what they already are. But if you look at the Internet, until you get to virtual fulfillment, being close to people is meaningful.
Ziegler: What about vendors going directly to customers, bypassing the retail channel completely? Is that a possibility retailers are going to have to deal with, that vendors will just go direct to the consumer as opposed to dealing with the Mickey Mouse that the retail channel puts up?
Levin: Have we seen any signs of that yet?
Ziegler: Yes, the outlet malls were a start, and the Internet is going to be another possibility.
Levin: Yes, but if vendors do use the Internet, is the consumer going to buy all her P&G products from P&G? I would think it would almost be easier to use whatever Internet server has the whole gamut of products as opposed to just one manufacturer.
Ziegler: You're going to have some of these smaller vendors get squeezed with category management. What do they do? Do they make private label? Do they close down? Or do they develop some other option for going to the consumer?
Adler: I do think that targeting -- whether it's targeting neighborhoods or targeting the customer using the Internet as a vehicle -- is going to happen. It's very, very early, but the Internet is really going to revolutionize the marketing and merchandising side of the business, in my view.
Comeau: I don't disagree, but there's a point where you're almost overloaded. I mean, if you're on PlanetRx, you just get inundated. I spend all my time deleting e-mails from DrugStore.Com trying to cross merchandise and cross market other things. I think consumers reach a point where they probably gravitate towards the companies or the offerings that don't infringe upon them with what they're trying to sell them, or privacy issues. All these Internet companies have exactly the same model of building the brand, spending all this money and then trying to attach it to 1,200 other things to sell. I would think there's some backlash that would come sooner rather than later on all the cross-marketing efforts everywhere.
Adler: I agree with that, but I don't think any of them have figured that out because the level of marketing skill with that kind of data is nonexistent. That will grow over time. You've got to find a way to hook the people, and just getting you to buy rub because you have a knee pad just doesn't do it.
THE EVE OF Y2K
SN: Regarding Y2K, is crisis looming just off the horizon? Will consumers be hoarding merchandise come the fourth quarter, or do you think that things are pretty much under control by the supermarkets, from a technological point of view?
Levin: It really depends on the media. I keep thinking of Y2K more like a snowstorm and not the apocalypse in terms of how it should impact the supermarkets. Yes, markets prepare for snowstorms and people do shop the shelves fairly aggressively, but I don't think Y2K is going to be a crisis.
However, I don't think anybody's going to know for sure until December, and the question is, if you get whipped up into a media frenzy, that can become an issue -- and it can be sort of a big issue on the pharmacy side because some of the groups like AARP that are already suggesting to people they get some extra medication. If you look at it, there's not enough medication in the system if everyone were to follow their advice.
Husson: There are two aspects to Y2K: there's the party and the panic. The party bit is that it's going to be the biggest party the planet has ever seen, and although it's fashionable to talk about going down to the South Seas islands and watching the sun glinting over the horizon for the first time over a new millennium, the reality is most of us will be at Uncle Frank's house in Peoria eating too much fat food and drinking too much Budweiser. The party is a one-time event and an almighty binge.
As far as the panic bit is concerned, you talk to the guys at Publix about what it's like before a hurricane -- because the year 2000 is a bit more dramatic than a snowstorm -- and they will tell you the week before hurricanes, comp-store sales go up 25% and the week after, as long as they don't lose too many stores, it goes down 15%. I don't think comp-store sales in the week before New Year's 2000 are going to go up 25%, but over December, there will be dramatically good comp-store sales, and if the retailers are sensible, they'll spend December executing and not bothering to promote aggressively. Giblen: Y2K does have some impact on the acquisition and integration front. It probably slows things down a little bit -- along the lines of Safeway's remark that it normally would integrate the Randall's systems right into its own, but it's going to wait till after Y2K on that.
So I think there will be a little bit of a residual impact -- even after the party is over at Uncle Frank's house, that's when the work begins to integrate systems that otherwise would have happened faster, but that should be pretty manageable in the scheme of things.
Comeau: I don't know if anyone really knows what to expect. Your business could be fine and you can test everything properly, but everything is so contingent on power companies and phone companies and suppliers and government and banking systems that really, as a retailer, you just don't know. You could have basically done everything you need to do, including having generators ready, but until the clock turns, you really won't know. Bernstein: It's such a logistics-dependent business for the most part. I think it's the whole supply chain and the distributors that are probably most concerned, because I have no doubt the chains will have done what they can do internally, and that goes from store systems to bookkeeping systems and the like. But I think it's the logistics part -- making sure the supply chain keeps running -- that's a greater concern.
SN: Does the Kmart deal for Fleming and Supervalu to supply its stores mean good news for wholesalers in general, or is this just an isolated case?
Levin: It's a positive for Supervalu and Fleming because both companies want to expand their retail businesses. They both see that as the opportunity for more growth -- and more profitable growth -- because wholesale is just a very tough business.
Bernstein: Any wholesaler, unless it has a fundamentally unique reason for being, has to go more towards retail because 10 years from now, there's not going to be a reason for wholesalers to exist.
Husson: I think wholesaling needs to be redefined. A wholesaler in the old-fashioned sense -- a full-service wholesaler that did everything for a retailer from shelf layout to promotional planning and so forth -- no longer exists, and maybe Kmart is almost the last chain left that actually needs that kind of service because it just doesn't have it in-house. It hasn't grown up with it in that business.
I think what's going to happen to wholesaling is what Supervalu is trying to do now, and that's to become an outsourcing player on logistics -- slim down the offer and concentrate on the one thing you do really well, and that's logistics and distribution. Forget all the rest of it -- those are essentially marketing functions that the retailer ought to be doing. Outsource your warehouses and your trucks. If you're a retailer, you're a food marketing company. Get somebody who's an expert distributor to do those other things for you.
Ziegler: Supervalu seems to be moving toward creating a virtual supermarket chain just by how it's restructured its business. But beyond that, there's been erosion among independents, and the independents are going to need a Supervalu to stay in business. There may be great opportunities there -- at least a plateau if not moderate growth in the distribution business. So wholesalers still have to get into retail, and that's what they're doing.
Adler: I want to be a little bit of a cynic about two things that have been said. First, I think most people believe that Kmart tried to buy a supermarket but more realistically put itself on the block, hoping a supermarket would buy it. I think Kmart approached everybody, and when it became obvious that something wasn't going to happen, it had to find a distribution solution, and I think it knew it didn't have the expertise.
On outsourcing, again speaking cynically, Supervalu has talked about doing this secondary supply or logistics outsourcing. But when you look at what steps Kroger has taken, it's working with Supervalu at only one distribution center, and I'm not hearing Kroger say that it's thrilled with that partnership, so theoretically it's right, but it's just not quite clear that it's playing out the way it began.
Giblen: At the end of the day, the Kmart deal just widens the gap between Fleming and Supervalu vs. the other wholesalers, because the two of them have significantly more buying power, and it leaves Nash Finch and others even further back.
SN: What happens to those other wholesalers as a group?
Giblen: They'll either get forced into merging into Supervalu or Fleming or really just shrink over time.
Levin: You've seen huge consolidation in wholesalers over time -- Richfood being absorbed into Supervalu is just the latest. And it's likely, given the intense operating pressures there, that you'll see more of it.
SN: So we're going to end up with just two wholesalers who are primarily retailers?
Adler: Actually, you can make an argument for C&S as an exception to that rule.
Bernstein: There's a whole world of private companies out there that are not insignificant. C&S Wholesale Grocers is a force to be reckoned with on the East Coast.
Giblen: And Spartan in Michigan.
Husson: The question is, are they a profitable force to be reckoned with?
Bernstein: I think undeniably they are a force to be reckoned with. Look at the expansion, for instance, that C&S has undergone over the last several years. So there's more to the picture than I think we're at least initially tackling here. But be that as it may, ultimately I still believe that, with the possible exception of outsourcing and the pure logistics -- the pure warehousing and trucking -- that Mark makes a persuasive argument.
But there's no reason for these companies to be looking out to the future to exist as they have existed over time. They have to do something else.
SN: Including C&S?
Husson: C&S is a slimline version of a traditional wholesaler, and right now it's little more than an outsourcing arm for Ahold.
SN: Will wholesale co-ops survive to serve the remaining companies that are unaffiliated?
Bernstein: I think life is pretty tough for the co-ops.
SN: But isn't that part of the reason why Certified and United Grocers are merging and hoping to have other co-ops join with them, so they can become a bigger entity, at least in the West? Is that a solution for the independent operators who remain?
Bernstein: It's either a solution or another step to oblivion.
Husson: It's a defensive tactic, isn't it?
Comeau: What the co-ops like Wakefern have in common right now with C&S is that nobody is looking at any sort of financial return that business generates or anything like that. So you can look at Wakefern, and I don't know what their numbers look like, but would you make the case that anything changes there, at least in the next five years? Maybe something will, but most likely not. So they'll be a low returning, ridiculously competitive company for a long time to come. It doesn't really make any sense with everything we're talking about here in the big picture because of the ownership structure and a lot of unique aspects to that company, and the same may be true of C&S and maybe United and Certified.
SN: Is wholesaling all over in five or 10 years?
Husson: Well, there's no growth, let's put it that way.
Comeau: I'm sure there will still be wholesalers, but they'll be smaller businesses over time.
Ziegler: That depends how creative they are. There may be some stability created in these markets, too. We've gone through a dynamic of change in ownership among the chains on the West Coast with Certified and UG and on the East Coast with Wakefern, and obviously there are some changes with the ownership of Pathmark and I guess A&P is getting better, but you may have some stability created around them that they can keep on plugging away, doing what they do, buying technology, with the co-op members taking maybe a smaller dividend, but they might be able to stick around for a while, because there's stability in those markets.
SN: What's happening with Fleming? Is the company on the right track?
Bernstein: The good news from Fleming is it is on a track because Fleming, for years, was on no track. If you look at the steps that Fleming has taken, it's encouraging that it's attempting to make this move into retail in a more deliberate and intelligent fashion. Does it ultimately succeed? I think the jury's still out on that. I think these initial steps do look positive, but it has a tough row to hoe.
Levin: You talk about these initial steps, but Fleming's been restructuring for about six years or so. You might discount the earlier efforts, but the point is that it's been under pressure for a long time, and that's why it's so difficult.
Bernstein: I completely discount its earlier efforts because that was under a different management, when it was attempting to do a hundred different things and doing them all poorly. At least now it seems to have a cohesive sort of way of thinking about things. Whether it's executable or not, I still don't know. Fleming has been under pressure, just like all the wholesalers have, for the reasons we've been discussing.