Wal-Mart at 50: Catalyst for Change

SLOW RESPONSE

Basically, the response by supermarkets to Wal-Mart was slow, observers said.

“Wal-Mart was creating competition during the years it was growing discount stores into supercenters, but other retailers didn’t always recognize it or they were slow to react,” Rand pointed out. “And by the time supermarkets recognized the competitive threat the supercenters posed, there were a lot of them.”

Though Wal-Mart has been around for a half-century, its impact grew slowly during its first 20 years, with only a few discount stores in operation by the early 1980s, Hertel pointed out. That’s when it began approaching vendors, he said.

“Wal-Mart went to its major suppliers and asked how it could get their best prices, telling them it was willing to take costs out of its systems if it could get better pricing that it could reflect on the shelves. And that’s the model it followed through the 1980s and into the 1990s, before most traditional supermarket chains took note of it as a major competitor,” Hertel explained.

“By the time they did recognize Wal-Mart as a direct competitor, it was doing $30 billion or $40 billion in grocery sales. And even five years ago, when Wal-Mart took a hiatus from releasing sales information to syndicated data suppliers, some supermarket companies opted to ignore it because they didn’t have a basis for evaluating its business performance.”

One of the industry’s first significant moves to blunt the competitive impact of Wal-Mart came in the mid-1990s, when Cincinnati-based Kroger Co. sought to take costs out of the system and pass those savings along to its customers in lower pricing, Hertel pointed out.

“Once Kroger acknowledged that it accepted Wal-Mart as its No. 1 competitor, it got costs in line, and since then it has done a pretty good job of staying roughly within 8% of Wal-Mart on price, which is about as far as it can go and still maximize its profitability.

“Kroger is able to compete at that level on groceries by making up the price differential with its fresh offerings and a strong private-label program, including some up-market premium brands, which has proved to be a winning combination,” Hertel said.

Wolf noted that before Wal-Mart began rolling out supercenters in the 1990s, supermarket chains tended to raise prices when they needed to make more profits, “and as long as they weren’t competing directly with Wal-Mart, that proved to be an effective approach.”

“Kroger changed all that,” he said. “Kroger was one of the few chains that went toe-to-toe with Wal-Mart in most markets, and in the mid-1990s it acknowledged that price matters.

“Kroger said if its prices weren’t relevant, then it would keep losing share to Wal-Mart. So it launched the strategy it’s been pursuing, and that’s pretty much when everyone else got in line trying to be more relevant on price.”

Gary Giblen, an industry analyst, agreed that Wal-Mart was “very incidental” to most of the supermarket industry until the 1990s, “which was when Wal-Mart began accelerating the expansion of supercenters and began using food as a strategic weapon by putting in significant amounts of additional items,” he said.

Wal-Mart also deliberately opened supercenters in locations that would hurt independents and their wholesalers, Giblen added. “I once talked with a Wal-Mart executive who showed me a ’war map’ that targeted every Fleming independent in a given area. Because the independents generally had less ability to compete with Wal-Mart in terms of size, assortment or operating hours, the company decided that was an easy way to pick up more business.”

By the same token, Wal-Mart avoided going up aggressively against certain companies, including San Antonio-based H.E. Butt Grocery Co., “because, as a private company, H-E-B was extremely motivated and determined to succeed,” Giblen said.

According to Cerankosky, supermarkets were certainly aware of Wal-Mart and the potential competitive threat it posed, “but prior to the mid-1990s, employment was high and people were trading up, so most of the industry generally ignored Wal-Mart.

“But when the 2001 recession hit, customer visits to Wal-Mart rose and the amount they spent there also went up, and that’s when traditional retailers began to pay closer attention,” Cerankosky said.

“Before 2001, the industry was probably pricing sharper and promoting deeper because of Wal-Mart. But Wal-Mart’s stores were concentrated primarily in the Southeast quadrant of the U.S. and beginning to creep into the Midwest at that time, so its presence was easier to downplay while the economy was strong.

“But once the recession began, retailers reacted more aggressively toward the competitive threat Wal-Mart posed. Some cut back on remodeling plans to concentrate on pricing, and several began to focus more on point-of-sale analytics to identify loyal customers and to target specific households. They also began addressing distribution and private label.”