During the past several years, it has become accepted wisdom that traditional supermarket companies can't compete on price with mass-heritage supercenter food retailers, but must seek other means to do so.
No less an industry figure than Kroger's David Dillon repeated the mantra in recent days when he told a Merrill Lynch conference that if the company aimed to "fight this solely on price, we wouldn't win -- and we're not attempting to [win on price]." (This was reported in last week's SN.) Certainly, if the nation's largest conventional supermarket operator has thrown in the towel on price competition, there's little hope for other operators -- or is there? Let's take a closer look.
To be sure, retail price points are a critical feature on the competitive landscape. Large-scale operators are at a disadvantage when it comes to price competition for two central reasons. The main reason is that product acquisition costs are higher owing to convoluted relationships with manufacturers that require the passing of dollars back and forth under the rubric of promotional funds and the like. Conventional operators tend to be locked into this inefficient and costly product-acquisition mode because of long-standing practices imbedded in the culture, and which are multiplied and idiosyncratically practiced across numerous buying and distribution points. Secondarily, these companies have costlier wage rates and benefits packages than does, say, Wal-Mart Stores.
So, while much of this looks discouraging on its face, it doesn't follow that a solution to the chief problem is totally out of grasp. Indeed, one company may have struck on a formula that could have much utility. That company is Supervalu. As was described in detail in a front-page news article in last week's SN, Supervalu intends to consolidate produce buying and distribution from five distribution centers in the Midwest into a single, newly built facility to open in August. The article was based on an exclusive interview conducted by SN editors with Supervalu's Gary Gionnette. He is to head the new operation, to be under the name W. Newell & Co. He made no claim that the new produce-distribution method was a means to compete with alternative formats. Yet, it sets out a model for doing just that. Here's how: Uniting buying and shipping into a single, regional facility reduces complexity and distribution time. The latter offers a particularly dramatic advantage, since it's anticipated that two to four days can be subtracted from the supply chain. The upshot should be retailers' ability to offer consumers lower price points and fresher product -- the very essence of a successful competitive strategy.
Now, let's move the concept one step further because it may contain the germ of an idea that could be used by other large-scale, food-distribution companies, and in a variety of ways. Perhaps a number of categories or related category product groups that move in large volume could be identified, including those hobbled by hard-to-change, inefficient buying practices. Those products could be plowed into verticillate buying and shipment facilities under a different corporate name. What better way to facilitate much-needed change to practices and culture?