On the Attack

MARK HAMSTRA

Has the battle just begun?

Traditional supermarkets appeared to gain some traffic at the expense of other channels of food retailing in 2009, but recent indications suggest Wal-Mart might be loading its guns for the next salvo in the war for a share of grocery spending.

Family Dollar has reported six consecutive quarters increases in shopper traffic.

“Wal-Mart is lacing up the gloves as it prepares to step back into the ring and win the modern-day price war in food retail,” said Deborah Weinswig, an analyst with Citigroup, New York, in a report issued last week. Bentonville, Ark.-based Wal-Mart Stores posted a rare dip in comparable-store sales for the fourth quarter — an event that served as “a wake-up call for management,” she said.

“The company is now recommitted to doing rollbacks the right way,” Weinswig explained. “With the peak of technology spending behind it and the productivity loop kicked into high gear, Wal-Mart has the ability to step up its price investments without having to sacrifice margins.”

She said she believes Wal-Mart will increase the dollar value of its price rollbacks in 2010, compared with 2009, and will also return to previous practices concerning rollbacks, including adopting a minimum percentage for price reductions and a 90-day rollback period. They will also receive more support in ad circulars, online and in-store.

“Price points will also be clearer and more compelling,” she said, “such as rolling back an item to $1 from $1.50 instead of to $1.30 from $1.50. The $1 price point and 50-cent price reduction clearly communicate Wal-Mart's low-price message to the consumer.”

Jim Hertel, managing partner at Barrington, Ill.-based consulting firm Willard Bishop, said many of the large regional supermarket operators have taken notice of Wal-Mart's increasingly aggressive pricing, which he said appears selectively driven by the company's Project Impact and its “win, play, show” strategy, in which certain categories are singled out for more aggressive promotions.

“It's not across all categories, but a lot of it is driven by the category role,” he said. “I think they have been a little longer in margin in those categories where they just want to ‘show,’ as opposed to those where they want to ‘win.’ Certainly in those categories where they have chosen to make a stand, they have been very aggressive.”

Wal-Mart's renewed aggression comes as the company reported a 2% decline in comparable-store sales for its fourth fiscal quarter, and said traffic declined slightly for the period. It also cited a lower ticket, noting deflation in food and consumer electronics.

At a recent Bank of America conference, William S. Simon, executive vice president and chief operating officer, Walmart U.S., said the company saw traffic begin to decline as gasoline prices rose in mid-October, a trend that was particularly evident at the chain's rural locations.

“We do believe we've kept most of our customers,” he said, referring to the gains the company had reported in the year-ago period when the recession was peaking. “The reason I say that is that comp traffic in urban and suburban markets has been relatively stable. The comp decline we saw in the fourth quarter was in rural markets, in large part related to gas prices.”

He also noted that although high unemployment is a detriment to sales, it is not the only factor at work and often works hand in hand with gas prices.

“We have 87% of Americans who shop at Wal-Mart, so almost everybody has access to us,” Simon explained. “We do skew slightly lower than the average household income, but interestingly enough, in markets like Detroit, where you have very high unemployment, our business is very robust.

“So it's not directly related to unemployment. Unemployment is a piece of it. In some markets where unemployment is high, we do well because the customer needs us. And markets where unemployment might be high and driving distances might be long, we may not do quite as well.”

Weinswig of Citigroup estimated that Wal-Mart had a 20.5% share of the grocery market in 2009, and could improve that to 21.6% this year with its renewed focus. In the longer term, she said she believes Wal-Mart could account for a third of all food retailing dollars. Cincinnati-based Kroger Co., the largest traditional supermarket operator, will garner about 10.2% of the food retail market in 2010, according to the Citigroup analysis.

Wal-Mart lost a bit of traction against traditional supermarkets as the recession wore on, Weinswig explained, but the company has improved its presentations and added back products that it had removed from shelves, in addition to reasserting itself as an aggressive price predator.

“Customers are finding it easier to navigate the store, which is leading to larger basket sizes and higher tickets,” she said of Wal-Mart's efforts. “We believe the improved experience will draw customers back to Wal-Mart from the supermarkets, and could also draw a higher-income customer.”

As previously reported, Wal-Mart's aggressive editing of product selection might have driven away some customers, but the company is backtracking — returning about 300 items to the shelves — and will exercise more caution in the future, Weinswig said. Most of the items are grocery and cleaning products, she said.

“As management peeled out layers of underperforming SKUs, it cut too far and too deep on certain high-visibility branded products, especially in grocery,” Weinswig wrote. “While the items that Wal-Mart removed were low volume, these items were also responsible for driving trips. Instead of losing a $1 sale on the item that was removed, Wal-Mart found that it lost a $60-$80 basket as customers who couldn't find their brand at Wal-Mart chose to shop elsewhere.”

Sandy Skrovan, senior vice president at Columbus, Ohio-based Retail Forward, part of Kantar Retail, agreed that some customers appeared to abandon the supercenter giant when they could not find some of their favorite products.

“Some shoppers have been saying they can no longer find some things that they can typically find in typical supermarkets,” she told SN.

Consumer polling by Retail Forward indicated that shoppers were more inclined to visit supermarkets in 2009 than they were in 2008, which Skrovan attributed to aggressive pricing and promotion on the part of the traditional supermarkets, as well as the overall shift by consumers away from discretionary spending and toward basic staples.

Retail Forward's survey data showed that 43.5% of shoppers said they were making weekly trips to supermarkets in 2009, compared with 41.1% who said they were doing so in 2008.

The increase in supermarket traffic last year, however, came amid an overall longer-term consumer shift toward the supercenter format in the last four to five years, she explained.

“The big shifts take a long time to transpire, but supercenters have been picking up some share of shopper preference,” Skrovan explained, citing the metric Retail Forward uses to gauge consumer interest in purchasing certain categories in different retail channels.

Retail Forward's “February Shopper Update” report divided food and drug retailers into winners, losers and those in between, based on change in consumer shopping incidents, year over year.

Interestingly, traditional supermarkets were among the biggest winners. Others included dollar stores and club stores, both of which attracted customers with their increasing emphases on fresh and dry-grocery items and, for club stores, their ability to supply stock-up trips.

“Warehouse clubs also had a significant change to the positive, both weekly and monthly,” she said. “More shoppers were going to clubs on a more frequent basis.”

Those formats that were in a holding pattern in 2009 included supercenter operators Wal-Mart and Target, as well as niche supermarket operators, such as natural and organic specialists.

Among those losing traffic were drug stores and convenience stores, the latter of which were significantly impacted by the increasing availability of low-priced gasoline at discounters and supermarkets.

“Supermarkets are able to cross-promote a lot of in-store merchandise with gasoline, and we saw a lot of that this last year,” Skrovan explained.

Dollar Stores Win

Hertel of Willard Bishop agreed that dollar stores were big winners in the battle for grocery market share in 2009.

The firm is currently in the midst of an analysis of retail sales data from the past year, but Hertel said he expects the figures to reveal that limited-assortment stores and dollar stores are “on fire as it relates to same-store sales and overall sales.”

Preliminary data from Goodlettsville, Tenn.-based Dollar General, for example, demonstrate that the chain — under the leadership of Safeway veteran Rick Dreiling — has been growing consumables sales in double digits.

“The share from consumables sales has gone from under 70% to more than 72% of sales,” Hertel said. “We think the dollar channel is going to turn out to be significantly up, and limited-assortment stores as well, both in their same-store sales and from their new stores.”

In addition to the food retailing success of Dollar General, other dollar-store chains reported victories as well in the 2009 battle for retail food spending.

Family Dollar Stores, for example, saw significant gains in sales of consumables in 2009, and actually revamped its store layouts to accommodate more of those products during the downturn.

“The space realignment, as we call it, is really a function of our customers' shopping behaviors,” said Kenneth Smith, senior vice president and chief financial officer at the Matthews, N.C.-based company, at a recent investor conference. “The business skewed to more consumables, and we adjusted from a space perspective. We actually moved on 3,500 stores fairly quickly, and executed well.”

In addition to ramping up the space available to consumables, Family Dollar also has been taking other steps to further leverage its ability to attract budget-stressed consumers, including ramping up the acceptance of food stamps, adjusting its advertising strategy, expanding operating hours and increasing the selection of private label.

Private-label sales at the chain rose in double digits in 2009, and the company has high hopes of ramping up penetration into the 20%-plus range in the near future, Family Dollar executives have told analysts and investors in recent conference calls.

The company also projected comp-store sales growth in the mid-single digits for 2010.

“While general economic conditions appear to be stabilizing, the pressures on low- and middle-income customers continue to be challenging,” said Howard R. Levine, chairman and chief executive officer, in a recent presentation. “For customers with limited or no financial safety net, saving money continues to be a key driver of shopping trips. And our strategy of providing value and a convenient shopping experience has resulted in growth in both customers and shopping trips.”

The chain's recently ended first fiscal quarter, he pointed out, was the sixth in a row in which customer traffic increased.

Aldi and Save-A-Lot

Hertel of Willard Bishop also cited the ongoing growth plans at both Aldi, the Batavia, Ill.-based limited-assortment banner and Save-A-Lot, owned by Minneapolis-based Supervalu, as likely winners in the battle to capture increasing food spending dollars.

“We see it as a thinning out of the middle, with a strong resurgence of dollar stores at one end, and at the other end, it looks like there is a resurgence in Whole Foods' vitality, if you put some credence in the last couple of quarters,” Hertel said, referring to recent positive same-store sales results from Austin, Texas-based Whole Foods Market. “It seems like the middle is getting squeezed again — I think it is going to be a very interesting dynamic going forward.”

He singled out in particular the PriceRite chain, owned by Keasbey, N.J.-based Wakefern Food Corp., parent of the ShopRite banner, as an operating format that seems especially well-positioned going forward.

“Based on anecdotal evidence, it would seem to be significantly more productive in terms of sales per square foot [at about 25,000-28,000 square feet] than some other stores out there,” Hertel explained. “It's a combination of strong private-label or store-brand presentation, a lot of orientation toward price brands, meat and produce departments that are very much tailored towards local demographics — such as the Hispanic community — that just seem to be the right combination for at least certain neighborhoods.”

In addition, traditional supermarkets — ShopRite included — that excel at communicating their value messages also appear well-positioned to continue grabbing a share of the food-dollar pie, he said.

“Those that really understand the way price image is built and the way value is promoted — people who are known as being really aggressive and strong promoters” are poised to do well, he said.

Trading Down

Although supermarkets around the country tended to report increased foot traffic throughout much of the recession, average basket sizes were down for the most part.

While the chains themselves often attributed this in part to price deflation, Hertel said he believes much of the top-line pressure can be chalked up to consumers trading down.

“People are talking about the deflationary environment, but many prices have not actually come down,” he explained. “How do you account for that? What we are seeing is a huge trading down in terms of what people are spending in price per unit, either trading down to lower-priced brands, or trading down from steak to hamburger, or to poultry.

“What we are seeing is that prices are not coming down inside the store, but that people are making economic decisions within the store,” he said.

Eventually, people trade down enough within a store that they reach a “critical mass,” Hertel said, when they may decide to abandon the channel altogether and trade out of supermarkets into alternative formats like limited-assortment stores or dollar stores.

“As you are trading down, if you are buying store brands, you might look at an Aldi or a Save-A-Lot as the next step in that process,” he said.

“There is no doubt, in our assessment, that is what is going on. The real question is what happens when we get out of the recession? Recent data has cut both ways. What I suspect will happen is that store brands will continue to grow, perhaps at a declining rate.”

One of the key differences between the recent recession and other major economic downturns in the 1970s and 1980s has been the improvements that have taken place in private-label quality and packaging, he pointed out.

“I think people will have a lot less incentive to switch back [to name brands],” he noted.

Whether or not they agree with Citigroup's predictions about a new price war emerging because of Wal-Mart's stance, analysts and observers seem to agree that Wal-Mart may be the most battle-ready of all the competitors in the war for food retail market share.

“At least from what we are seeing, it appears that the tide is going Wal-Mart's way, and they are going to continue rowing hard in that direction,” said Hertel.

SUPERMARKETS WIN TRAFFIC

SOURCE: Retail Forward ShopperScape (survey of 4,000 consumers who are primary shoppers for their households)