Retailers Eye Alternative Ways to Monetize Assets

AL HELLER

Supermarkets seeking profitable new revenue streams are gazing beyond their traditional shopper bases at other supermarket, foodservice and big-box channels as potential customers.

By selling their private-label products, delivery services, nutrition research, marketing expertise or other proprietary consumer intelligence to both competitors and non-competitors, public chains can better appease the growth demands of Wall Street, and private operators can benefit financially and expand their sphere of industry influence.

While retailers have diverted deal merchandise out the back door for seemingly forever, that differs from today's new kinds of inter-chain commerce, which are largely measured components of strategic growth plans.

The industry effect of this rising trend could be far-reaching in time, suggested Bill Bishop, chairman, Willard Bishop Consulting, Barrington, Ill. “There's potential going out five years to scramble the tight vertical orientation of the retail food business. If you're a CPG company counting on vertical distribution, and then those in the vertical system start to cooperate with each other, that strengthens large retailers and medium-to-large regionals that become more independent.”

In the highest-profile example, industry titans and rivals Kroger and Safeway have an agreement to distribute nearly 300 different third-party gift cards from the latter's Blackhawk Network division through Kroger's 2,491 grocery, multi-department and convenience stores in 31 states. Blackhawk also has deals to sell the cards in stores operated by Ahold, Food Lion, Ukrop's and Stater Bros.

Moreover, Sysco, the largest foodservice supplier in the United States, has begun marketing 25 foods from Safeway's 300-item O Organics line in Northern California — precisely the same versions as the recognized brand in Safeway stores there. And Carrefour, the second-largest retailer in the world, is selling organic foods in Taiwan that are supplied by Safeway.

Perhaps more intriguing, chief executive officer Steve Burd has twice noted possible plans for Safeway to monetize what the company has learned from reducing its health insurance costs by 13% annually. Components of its savings program include: incentivizing employees who agree to lose weight or stop smoking; promoting exercise; and advising employees and their families regarding treatment selections.

Said Burd, on the company's Investors' Day in December and at FMI Midwinter in January: “We think that we should capitalize on the knowledge, experience and credibility that we have established. We will be forming a new health care services venture that will leverage our knowledge and relationships, and, of course, it requires virtually no capital.”

At the other end of the size spectrum, one-store operator Green Hills Farms, in Syracuse, N.Y., sells its loyalty expertise to retailers “on specific projects, some educational in nature … [or] engagements over years of time,” said CEO Gary Hawkins.

“We refuse to be a ‘commodity’ service provider,” he said. “Instead, the area continues to evolve, and we use Green Hills to stay on the leading edge of that evolution. Today that means putting the technologies and business practices in place to shift away from mass marketing to personalized marketing.”

There are other signs of the trend.

Wakefern Food Corp., Edison, N.J., the largest retailer-owned cooperative in the United States, with sales of over $9.5 billion in 200 member-owner stores, has recently expanded its wholesale division and named Dave Baer its director. Calling sales beyond its members “a viable growth opportunity for Wakefern, because it allows us to utilize the capacity we have to service other customers,” he said, “we provide a value proposition that's a win for the smaller and larger operator.”

Wakefern is “accustomed to serving independent customers, because our members own between one and 30 stores. Helping independent grocers compete in a marketplace generally dominated by large retailers and multinationals is something we do to give them competitive advantage,” added Karen Meleta, director of corporate communications and media relations.

For example, since last spring, Wakefern has made 3,000 ShopRite food stockkeeping units available as a private label to 17-store Heinens in Ohio. And since autumn, Gristedes' 40 stores in metropolitan New York have brought ShopRite items into their stores, along with branded nonfood and health and beauty items.

“Not only can we provide wholesaling services that include private label, we can also sell our advertising support and other marketing programs,” said Meleta. “Capacity is there to offer those sorts of insights. We're making a concerted effort. Wholesale sales are an important part of our overall growth plan.”

Topco Associates, Skokie, Ill., the grocery distribution and services cooperative for about 13,000 stores, has announced a new at-a-glance system for rating nutritional quality in foods. A panel of 12 health and nutrition experts under lead scientist Dr. David Katz, director of the Yale University-Griffin Hospital Prevention Research Center, developed the Overall Nutritional Quality Index. This proprietary comparison tool will likely roll out nationally through grocers, food manufacturers, restaurants and online in the second half of 2008.

“Topco knows their power is in their network of stores, not in being a vertical seller of products,” observed Bishop.

In some older examples, Byerly's, Minneapolis, distributed its wild rice soup nationally back in the 1980s, and Bashas', Chandler, Ariz., committed in 2003 to supply groceries to 32 IGA supermarkets in Arizona and New Mexico that had previously been supplied by Fleming Cos. Though Bashas' did not return phone calls requesting comment for this story, at the time, company president Wayne C. Manning appeared to have territorial protection against big-chain encroachment in mind when he said, “We are very glad to step up to this opportunity to maintain a consistent supply to these stores in our area. By meeting supply needs within our own area, we strengthen the regional food retailing network. It's a winning resolution for vendors and suppliers, as well as customers in each neighborhood served by an IGA store.”

The walls of traditional competitiveness aren't barriers to today's inter-chain selling.

“It hugely changes relations between operators — it makes them more fluid,” said Bishop. “How many operators thought they'd ever buy gift cards from Safeway, enhancing their profitability even while competing against them? Idiosyncratic notions fall by the wayside when retailers realize they need gift cards, and Safeway may be the best provider.

“Because a lot of professional managers are interested in maximizing EBITDA rather than traditional market share or market dominance measures, the innate competitiveness gets moderated back,” he added. “In some respects, it is evolution from primal entrepreneurial competition to financial competition.”

If a retail company “is able to create value or monetize its assets — physical goods, assets or intellectual property — then it should almost be expected that a company do so,” said Hawkins. “The value proposition must stand on its own. In the case of Blackhawk, there would be huge expense for another retailer to try and build the technology and solution that Safeway has created. More relative to intellectual property of strategic importance, this is up to each retailer to decide.”

On his own selling of intellectual property, Hawkins said, “as Green Hills is a single store, I do not have, nor do my clients have, any issue with possible competition. While I believe Green Hills' competitors keep track of what we are doing at Green Hills, I think they also seek to learn, which I have no issue with. While other retailers have adopted loyalty marketing, it is much more difficult to duplicate the culture of loyalty marketing.”

Regarding the gift card arrangement between Kroger and Safeway, Brian Dowling, corporate vice president, public affairs, at Safeway, told SN, “there was no issue [of competitiveness] with Kroger and our arrangement with Blackhawk.”

Similarly, Kroger spokesperson Meghan Glynn expressed to SN in December that “we are seeing a growing interest in gift cards, and this agreement allows us to present a wider array of choices for our customers.”

It remains unclear how significant to Safeway's fiscal performance the three alternative growth initiatives — gift cards, organics and health care — will be cumulatively, because, Dowling said, “we have not provided any guidance on these various current and potential revenue streams. We have made investors aware of them, but we have not quantified them.”

Burd did, however, pro-ject on Investors' Day that Blackhawk would account for 25% to 30% of Safeway's earnings over the next five years. An Argus Research report dated Dec. 28, 2007, noted that distribution points for Blackhawk cards are expected to exceed 100,000 by 2011, about double what that number was at the start of 2007.

Deborah Weinswig, an analyst with Citigroup Global Markets, New York, told SN recently that “many CEOs of Fortune 500 companies have contacted Safeway to learn how to implement health care programs to reduce overall expenditures, and Safeway is likely to be generating some consulting fees in sharing its knowledge and experience in lowering costs.”

What's the next big thing in chain-to-chain selling? Retailers will develop shared short-shelf-life refrigerated prepared foods, predicted Bishop. “They have the systems, the motivation and the distribution,” he said. “Once they develop commissaries that others will buy into, this will grow.”

Reacting to the idea, Hawkins noted: “It certainly makes sense to pursue an opportunity around decreasing shrink by selling short-shelf-life prepared foods to other retailers, providing the branding isn't a problem. This type of activity can help all parties.”