SUPERCENTER BATTLE PLANS DISCUSSED

ELLIOT ZWIEBACH

CHICAGO -- A successful proactive competitive stance against a Super Kmart Center has prompted Farm Fresh, Norfolk, Va., to commit to a more aggressive position against supercenters, Michael E. Julian, the chain's chairman, president and chief executive officer, told an industry audience at Food Marketing Institute's annual convention here. After testing separate strategies at three conventional stores affected by a Super Kmart that opened in Tabb, Va., 16 months ago, Farm Fresh is moving ahead with plans to open a new combination store directly across the street from the supercenter that will put a greater emphasis on perishables and drug-related merchandise, Julian said. Of the three conventional Farm Fresh stores affected by the Super Kmart, the company decided to leave one store unchanged, to take a proactive competitive stance at one store and to let a third store, whose lease is up later this year, "simply run out of steam," Julian said. He said Farm Fresh took its inspiration from Sam Walton, the late founder of Wal-Mart Stores, Bentonville, Ark. "Sam understood that, long before you seek to gain efficiency, you have to know how to sell. "We decided we had to focus on our business, not on what Kmart was doing, because while supply-side efficiencies are beneficial, consumer demand truly drives supply, so our goal was to build sales first and cut costs later." The results were as follows:

Sales levels at a 43,000-square-foot store in Newport News, Va., where Farm Fresh did nothing, "are now getting back to where they were before the [Tabb] Super Kmart opened," Julian said. The company maintained the same systems and standards at that store as it did throughout its conventional store group, he explained, "and sales are beginning to improve, though they're not quite back to where they were before the supercenter opened."

At a 38,500-square-foot store, also in Newport News, where Farm Fresh took a proactive stance, sales are 11.5% above the baseline the chain established before the Super Kmart opened, Julian said. "Sales fell 7% during the first few four-week periods after the [Tabb] supercenter opened, but they began moving up again by the eighth period to their current levels. However, cash flow is down 2% from where it was prior to [Super] Kmart's opening because of the money we spent there, but that will come back as sales continue to grow." A 46,000-square-foot store in Hampton, Va., will close when its lease expires later this year, Julian said. However, a replacement store will be built close by, he added. "When [Super] Kmart opened, that store's sales dropped almost 17% in some early four-week periods, though things have picked up a bit and sales were down only 3.5% from the pre-opening baseline during the last four periods," he explained. However, based on its success taking a proactive position against the supercenter, Farm Fresh plans to open a 53,000-square-foot replacement store on June 24 across the street from the Tabb Super Kmart, he noted. "We'll concentrate on perishables on one side of the store and drug items on the other," Julian said. In adopting a proactive position, Farm Fresh took the following actions at the test store: · It lowered prices on 500 key items and began promoting weekly specials more aggressively. · It made a stronger commitment to in-store service that involved retraining the entire staff.

It placed more emphasis on perishables, including more aggressive pricing, more variety and more promotion of its Angus beef program "and a promise to make customers happy by getting whatever they asked us for," Julian said.

It made a renewed commitment to local community involvement.

It began using category management as a weapon. "We couldn't beat [Super] Kmart on health and beauty care prices, but we picked which categories we wanted to emphasize and built our market share in those areas," Julian said.

It sought to create excitement through merchandising events and the use of a frequent shopper card to reward loyal shoppers.

It invested $200,000 in a store upgrade "to freshen the store's look," Julian said, including new equipment and decor.

Appearing on the podium with Julian was Bill Lancaster, vice president of sales for Associated Wholesale Grocers, Kansas City, Kan., who said AWG has 275 retail customers whose stores compete with supercenters. What those operators must do to compete, Lancaster said, is to reinvest money in their stores, with a particular emphasis on perishables. "We have converted 44 small stores that hadn't been remodeled in years to a new format called Apple Markets that emphasize perishables, and we've seen their sales increase 16% as a result," Lancaster said. He said AWG hopes to convert 22 more stores to the Apple Market format this year. "If a supercenter is already in your market, remodel your store anyway," he advised, citing as an example a Harp's store in Arkansas -- in the heart of Wal-Mart supercenter territory. According to Lancaster, that store expanded to 65,000 square feet from 30,000 square feet, "and it's doing very well" by showcasing perishables, emphasizing quality products and neutralizing Wal-Mart's price advertising. Nancy Karch, director of the Chicago office of McKinsey & Co., a research firm, said many retailers who are not currently competing with supercenters are not preparing themselves for the day when they will. "There's still too much complacency in markets that supercenters have not yet entered," she said, "and some of those retailers could benefit from doing more in advance of the supercenters' arrival." In her formal remarks Karch said supercenters are economically sensitive to revenue levels. "They work well at a volume of $65 million, but if sales drop to $45 million, supercenters lose their efficiency and find it tough to make it work," she said. "Supermarkets were able to push volumes down at warehouse clubs and hurt them, so a strong competitive response can blunt a supercenter's impact." When supercenters open, she said, they typically price themselves 15% below the markets they enter and stabilize at levels 9% below the market. In the case of Target, the industry's newest supercenter operator, "the supercenter it opened in Omaha has more upscale appeal, but prices are just as sharp," Karch said. "Target carries a slightly more upscale offering than some of its supercenter competitors, and it may price less aggressively on some items, but it's priced aggressively on the most competitive items." Karch said battles between supermarkets and supercenters will be waged on a market-by-market basis, rather than on a national basis, "so the strengths and weaknesses of each player are key," she said. To be effective against supermarkets, Karch said, supercenter operators must improve their perishables offerings, offer a lot of prepared foods, speed up their front-ends, develop micromerchandising skills to meet the needs of local trading areas and develop more cross-shopping in a more consumer-friendly atmosphere. To compete better against supercenters, Karch said, supermarket operators must prepare for supercenters in advance of their arrival by securing their customer base with loyalty programs, enhanced store activities like sampling and special events and a greater stress on perishables. Once a supercenter opens, she said, supermarket operators must expand their offerings of fresh, prepared and takeout foods, tailor product assortments to micromarket needs, select items to feature at aggressive price points, pass through all promotional price reductions, stress the "shopability" and convenience of a smaller store, and know their customers better. Tom Rubel, managing partner in Management Horizons, Columbus, Ohio, said supercenters offer customers "a strong value proposition by delivering more for less. And they are more than a flash-in-the-pan," he added. "They will stand the test of time as an enduring competitive threat."