Small & Mighty

CHRISTINA VEIDERS

For the independent grocery sector, it is usually the best of times or the worst of times.

Using that Dickensian analogy, Burt Flickinger, managing director of Strategic Resource Group, New York, said he believes it is now the best of times for independents.“Chains that were bundling businesses in the '80s and '90s are now unbundling and selling stores. There is a great opportunity for independents for the next decade,” he predicted.

A few examples of independents that have picked up stores through chain-store rationalization last year include: Save Mart Supermarkets, Modesto, Calif., which acquired 132 stores that had made up Albertsons' Northern California division; Midwest retailers Strack & Van Til, Garden Fresh Markets and MS Grand Mart, which in Chicago added Cub Foods stores formerly owned by Supervalu; K-VA-T Food Stores, Abingdon, Va., which acquired eight stores from C&S Wholesale Grocers' sale of some of its Bi-Lo and Southern Family Market stores; and in northeast Ohio, Giant Eagle, Heinen's Fine Foods, Dave's Supermarkets and Rego's Fresh Market, which added Tops Market stores sold when Ahold exited the market.

Industry watchers expect this trend to continue as independents slowly strengthen their presence within their communities and the big chains leave locations that aren't meeting their performance objectives.

Bill Bishop, president of Barrington, Ill.-based Willard Bishop, refers to it as the “hermit crab” approach to store growth. “It's like crawling into someone else's shell,” he explained, noting the big cost advantage by gaining below-market real estate locations.

Independents can transform these locations with their own personalization, Bishop added, by “authentically being a part of the community in which the managers and owners can connect with on the sales floor. True personal attention really stands out in a world that has less personalization.”

Bishop cited Caputo's Fresh Markets, Pete's Fresh Market and Eurofresh — a new generation of independents in Chicago — as examples of retailers that have created a distinctive, successful niche.

“Success has a lot to do with independents using their own personality and personal charisma,” added David Livingston, an independent consultant in Pewaukee, Wis.

Most independents will bemoan not having a level playing field to do business, but Livingston said independents have to develop their own playing field where the big chains can't compete. “You have to create your own new level,” he said. Independents have the advantage of being flexible in making split-second business decisions and quickly implementing them. The chains, meanwhile, can't be as responsive to market shifts and have to cut through their bureaucratic layers, Livingston noted.

The shrinking middle and middle class are trends independents should keep an eye on, he said.

“We've got a solid economy where the conventional store business is shrinking and going to Wal-Mart as a low-price operator at one end, and Trader Joe's and Whole Foods at the higher end. The middle class is shrinking. As those with less income grow, there will be growth in the low-end segment, and as people get wealthier, there will be growth in the high-end segment.”

The successful independent will have to move with the changing demographics, Livingston said.

Wal-Mart Stores remains the independents' nemesis, even though many say they have learned to live with the low-price discounter, which has shown some sales vulnerability and plans to slow its domestic store expansion.

Flickinger warned that when Wal-Mart and its supply chain are publicly supported with tax dollars, it results in an uncompetitive situation for independents. “It becomes untenable and can lead to commercial catastrophe,” he stated.

Today's economics may be an advantage for independents as publicly traded chains come under pressure to generate profit performance. As a result, independents may not be facing the degree of price pressure that they have in the past, as chains back off price to increase profits. In this environment, independents are willing to be aggressive on their prices while satisfied with their own profitability, Bishop said.

Wholesalers can also be a big factor in helping their independents succeed by assisting with pricing and promotions week in and week out in every major power category, Flickinger said.

Even in the best of times, support from wholesalers and manufacturers is critical. Bishop said maintaining a strong connection with the consumer packaged goods companies is a real challenge for independents, especially in a consolidating market.

As the National Grocers Association, which represents the independent sector, gets ready to converge on Las Vegas later this month for its annual convention, SN asked 10 of its members to assess their businesses, and discuss level-playing field issues and future challenges. The retailers range from one- and two-store operators to multistore retailers with as many as 31 locations. Many retailers' longevity in business has far exceeded that of the NGA, which celebrates its 25th anniversary this year. Here is what they had to say:

Felpausch Food Centers
Hastings, Mich.

In business 74 years, the retailer has witnessed the clearing out of independents as Wal-Mart supercenters have rolled into its small, largely rural towns.

“We've learned to be price-competitive,” said Mark Feldpausch, chairman and chief executive officer of the company that operates 19 supermarkets, two Save-A-Lots and five convenience stores.

While refusing to carp about Wal-Mart, he is testing new revenue sources. The retailer opened an Ace Hardware store and added a pharmacy operation. “It's a new way of operating, meeting the needs of the customer, and you still have your grocery stores,” he said.

Felpausch stores are in remote agrarian communities, and towns with populations of 60,000-70,000. “You have a segment of larger communities that are looking for natural, organic products, different styles of hearth-baked breads and fresh food offerings out of the deli,” Feldpausch said. “We're looking at each store and what the market needs there are. If people just want meat and ‘taters’ in a community, that's what we'll have. There are other communities where they want organic red delicious apples. So we'll have those on hand.”

It is important to have “a close working relationship with our business partners,” he said. “We're aligned with Spartan Stores. They're very retail-focused, very concerned about the health and growth of their retailers.”

Besides aggressive pricing, Feldpausch said his stores offer variety and easy-to-shop, convenient locations. “Our mission, which we work on daily, is that Felpausch is committed to fresh products, friendly and clean stores, efficient checkouts, and being a great place to work,” he said.

Another factor is working closely with store-level employees. “We're out there nights and weekends when they're working. We know that if we all work together, we can do a better job.”

Feldpausch doesn't believe a true level playing field is possible for independents. However, he said, “There's no room for complacency in this business. That's the challenge we've accepted. We don't complain about Wal-Mart. We spend that time and effort working towards giving our customers better, different offerings.”

Going forward, Feldpausch said he will focus on the market compression, and “continue to change and evolve, to keep our business model dynamic, and to remain competitive in the market.”

Village Market,
Wilton, Conn.

While Village Market has been around for 71 years, Peter Keating, president, bought the one-store operation 17 years ago after working in the store as a part-timer. Wal-Mart supercenters do not have a presence in Keating's market. Instead, he faces aggressive conventional chains like Ahold's Stop & Shop and strong independents like Stew Leonard's.

Keating said he is concerned about the impact of Stop & Shop's new EDLP policy on his business. “We're in an affluent community, but people don't ignore price altogether, so it's a concern.” However, Village Market enjoys great community support that can be attributed to the retailer's outreach. “We've really supported the community, and the community has supported us. It's been a great relationship. We spend a lot more money on community involvement rather than on advertising. Almost 3 to 1, we're putting money into the community and things that are important to our customers as opposed to another circular that falls out of their Sunday paper.”

Unique products set Village Market apart from the competition. “We have a lot of food here that we manufacture on-site. We have three kitchens, and that's a distinction for us — a competitive advantage.” The deli represents over 20% of Village Market's business. The retailer's store-made chicken pot pies and salads are sought after.

As a one-store operator, Keating said, when it comes to buying on a level field, it is very uneven. “Vendors are giving much better pricing to our large competitors on a small range of products, and we're the folks that have been carrying the full line for years.”

As an example, he cites a major carbonated beverage company that sells its highest-volume packages to retailers like Costco at “tremendous pricing,” while Village Market merchandises the full line and pays higher prices. Keating said the same supplier now wants the retailer to sell based upon a reward system that requires incremental volume increases “as they supply the local market area with cheap product on their best movers.” Such practices have caused independents to go out of business in New England, Keating said.

Convenience is a top priority for Village Market customers. “We've reacted by giving our customers the same quality they've always enjoyed, but in a more convenient format. Everything from orange juice to Dinner Tonight — it's ready for them to grab and go. When I started here we used to have 8 feet of frozen orange juice, and now the kids come in and they don't even know what frozen orange juice is. I give tours to the kids here, and this one kid was amazed that you could actually make Jello at home.”

Tom's Food Center
Portland, Mich.

Squeezed by a Wal-Mart supercenter and a Meijer within a 15-mile radius, this retailer has proved that a one-store operator can go up against bigger retailers if it is unique enough.

And Tom's Food Center is unique. It could be considered a mini-supercenter with a food offering. It has a 60,000-square-foot store that includes a Do It Best hardware, which the retailer bought in 1992, a video rental store, a pharmacy, a full-service Little Caesar's pizza franchise and a Beaner's Coffee franchise — all under one roof.

“You can buy a gallon of milk, a cordless drill and a cup of coffee,” said Steve Antaya, vice president, whose family has been in business 25 years.

In competing against the big chains, Antaya said, “We try to put ourselves out there with everyone else. We have self-checkouts. To my knowledge, we were the first single-store independent to add self-checkouts, which we installed in 2003. It's about making those investments and having that variety.”

Tom's is quick to respond to changing market conditions and add new items. It recently installed a gourmet cheese island to expand the section.

The resources available to the big chains do make the competitive situation a challenge for single-store operators, Antaya admits. However, investments need to be made to stay abreast of the competition. The retailer recently invested in a financial-auditing software package called Balance Innovations that it worked with its wholesaler, Spartan Stores, to put in.

“I firmly believe you have to compete on your merit and not necessarily just because you're an independent. That goes only so far in this day and age. You get a few people who want to shop with you because you're independent, and you're family, and you're locally owned. But that only takes you so far. You still have to put up those products against the Wal-Marts, Meijers, Krogers and whomever else.”

Antaya's concern going forward is to make sure that “we can be heard, and that our customers are aware of what we're doing.” He also is monitoring the cost of labor and an increase in the state's minimum wage.

Ken's Supermarkets
Aberdeen, S.D.

Ken Fiedler, president of the six-store grocery operation, is always on the floor with his employees. A service-oriented and friendly staff is one advantage the retailer said he has over the chains he contends with, including Wal-Mart supercenters. Fiedler said the company is holding its own against this competition.

The retailer, which has been in business 35 years, has concentrated on its perishable departments and sells only U.S. Choice meat.

“We continually update. We just went through a remodeling with one of our stores — new equipment and new ideas,” Fiedler said.

In response to its customers, Ken's added salad bars and natural foods to its stores.

Fiedler would like to see Congress enforce anti-competitive laws that keep the playing field level. He said the credit card interchange fees have been a huge expense for independents. “We know that some companies process their own and save that money. We kind of get gouged, though. When you start giving up 2% of your sales, that's huge. And a lot of supermarkets don't even have a bottom line of 2%. ”

Carlisle Foods
Carlisle, Iowa

Situated near Des Moines, Carlisle Foods competes with a Hy-Vee, Dahl's Foods and Wal-Mart. Bill Scholl, president of the one-store operation, said customers really want to shop his store because they literally drive by competition to do so. “I carried out a gal's groceries one day, and she said, ‘You know, I drove by six supermarkets on my way here. I appreciate it,’” commented Scholl, who has been in business for 26 years.

The retailer caters to an older clientele who Scholl said are comfortable shopping the store.

“It just comes right back to that personal touch,” he added.

Carlisle can't compete on its store size or variety, but Scholl said it boils down to having a ‘can we help you?’ mentality. He encourages his employees to get to know customers by name. “People like to be recognized.”

Carlisle attempted to compete on price but it didn't work and only lowered the store's bottom line. Now the retailer is concentrating on its service meat department. Scholl said it's going back to the old-fashioned way of doing things. Prepackaged meats are not in demand at Carlisle.

Fresh Encounter
Findlay, Ohio

Michael S. Needler, president and CEO of the 31-store company, doesn't like to discuss his company's operational strategies so he quotes the stores' motto: “conveniently located neighborhood markets, easy in, easy out.” The stores average about 24,000 square feet.

“I'll just say that we do our best every day at taking care of our customer,” said Needler, who has been in business 20 years. He said he likes to stay close to his customers and make changes according to what the customer demands. Organics is a growth department for the retailer.

Needler said he is concerned about industry consolidation in the coming year. “The grocery industry is still under a huge weight of consolidation, both from the supply side and even from the manufacturing side. It's difficult for independents, and frankly anyone in our industry, to continue to operate as this consolidation process continues on.”

Other concerns are the cost of regulation and an 85-cent increase in the state's minimum wage.

Hannibal Village Market IGA,
Hannibal, N.Y.

This one-store retailer considers location, customer service and the meat department as its strengths.

Jim Mirabito, president, who has been doing business for 35 years, said it is important not to get tired or frustrated, but to concentrate on merchandising the store for the customers.

He is particularly concerned about the impact of EDLP operators. “It's tough for an independent, no matter what wholesaler we are with. We have a one-, two- and some of the guys are lucky to get a three-week buy around an ad. But it's tough to be able to run your store with retail price points that are within 10 percentage points of the low-cost guys.”

According to Mirabito, everyone used to be a high-low operator. “Today, if your wholesaler is taking those merchandising funds, then the retail price on, say, Betty Crocker cake mix — there's as much as a dollar spread on that between the independent and an EDLP chain. And that's huge. In my market, Wegmans' is 89 cents. I'm $1.89 every day. We're not getting rich at $1.89, but that's a dollar difference, and the customer doesn't understand that,” he said.

Mirabito also said the high cost of credit card processing has a big impact on his business.

Gerland's Food Fair
Houston, Texas

Kevin Doris, president of the 15-store chain, said the 40-year-old company has been able to continue to grow its business by keeping costs under control, and at the same time being price-competitive.

“We've been able to use automation to keep the cost of running our business down. We've become very price-oriented, and in doing so, we have become very competitive in the marketplace,” he explained.

With rising health care and utility costs, Doris said Gerland's are doing everything it can to keep those costs under control. “If we can lower turnover with our employees, and get good customer service and stay competitive price-wise by keeping the cost of doing business down, then I think we can still continue to grow on an annual basis.”

The chain has kept up with customer demand by stocking ethnic products. Doris mentioned that Hispanics comprise 30% of the population in some store areas. “We're constantly measuring the results on products, and bringing in products to complement the successful ones. I think it's mainly keeping our eye on the ball and making sure we're supplying what customers need on an everyday basis. In our particular case, we have a lot of ethnic customers.”

Mollie Stone's Market
Mill Valley, Calif.

In its mission statement, the eight-store Mollie Stone's said it serves both convenience shoppers and those foodies who seek out unusual products. The retailer also merchandises a large variety of natural and organic foods.

Co-owner David Bennett declined to talk about company positioning, but said escalating real estate values are the biggest challenge his company faces. “Larger national companies are willing to pay more and more for leases and rents. That's clearly our No. 1 challenge to overcome as we look to expand.”

He said the company, which has been in business 22 years, is concentrating on fill-in real estate in areas where the competition already exists. “We're opposed to trailblazing new areas.”

The retailer is unionized, which puts it at a cost disadvantage with those who are not, Bennett added. Its two main competitors are Whole Foods and Trader Joe's, both non-union.

“With Kroger leaving and Albertsons leaving, we're the unionized company right now. And right there is where the level playing field issue comes in.”

CNW Foods,
Joplin, Mo.

Both of CNW Foods' excellent locations are part of why it has survived 15 years in food retailing, said Dick Casey, president.

“We have one store in Joplin, one in Springfield. The stores are both modern, and have been remodeled. We keep our prices low and we're substantially cheaper than everyone,” Casey said.

CNW, a warehouse concept, goes head-to-head with Wal-Mart on price.

“This is a store that's over 55,000 square feet, where customers sack their own groceries, and so our concept is to be cheap every day on every item,” Casey noted. “That's what we have to do to keep customers coming in. We have never lost our base.

“When Wal-Mart came in with their supercenters, they came in after we were already established, so our volume didn't go down the way conventional store volume might go down. We've held our own pretty well.”

Casey says it isn't possible to have a fair competitive field with companies like Wal-Mart, Kroger or Safeway. He is leery of Wal-Mart trying to get into the banking business through a Utah charter as an industry loan company. “If they get involved in the banking business, they could create 1% cheaper fees [for themselves] through credit cards. The other thing they could do is come into these small towns and take over the banks — then the local grocery stores will have to go to Wal-Mart to do their banking,” he said.

On the supplier end, Casey said the cost of goods, especially on national deals, is often not equitable for all, and not easy to figure out. “Like pop prices — if we go out at a $4.98 price and we're losing money, and the guy down the street is making 10% on that $4.98, that is a big difference.”

CNW is a member of Associated Wholesale Grocers, which Casey said has been excellent in helping family businesses.

Casey's market has gone through some rationalization and is back to a good balance of retail stores, he added. “The Wal-Mart supercenter is not a novelty anymore. When they first opened up people would stand in line to get in. But everyone has been in one. And around here, where there are so many of them, it's just not a novelty any longer. People will shop other stores.”
Additional reporting: Jeff Wells