A PIVOTAL YEAR IN A NEW ERA

GLEN A. BERES

WASHINGTON -- The coming year promises to be one of stiff challenges and golden opportunities for the supermarket industry.

With sluggish growth anticipated, increased competition from nontraditional formats and a vastly altered political landscape, operators will certainly have their work cut out for them. But the good news is that the industry has already shown signs it can turn such challenges to its advantage, said Timothy M. Hammonds, president and chief executive officer of the Food Marketing Institute here.

In an interview with SN conducted here in advance of this week's FMI Midwinter Convention in Orlando, Fla., Hammonds addressed many of the front-burner issues for retail and wholesale executives. He stressed that operators have already begun to adapt to a low-growth environment, and will have to continue that discipline for the long term, based on economic forecasts.

Hammonds also noted that executives have made big strides in improving responsiveness to consumer demands -- both through improved in-store merchandising execution and in dealings with trading partners. But responding to the consumer continues to be an area to spotlight, and the momentum needs to continue if creative merchandising is to attract new customers, he said.

Another challenge has been the intra-industry feuding over the attributes of private labels vs. brands. Hammonds said it's time to call a truce and focus on developing the optimal mix to improve the bottom line.

Perhaps the most singular challenge of 1995 will be on the political front, as the industry attempts to roll back regulation and make legislative gains. However, Hammonds said these efforts will be resisted by a White House that may turn activist in protecting its turf on regulatory issues -- which means that industry players need to be that much more adamant.

Here's a summary of Hammonds' interview with SN: SN: Where should retailers and wholesalers put their resources right now to improve performance in the new year?

Hammonds: I think there are two different levels there: an operational level and a public affairs or political level.

I think the operational level focuses on the consumer. From the farm gate all the way through to the retail checkout counter, everyone is re-examining what and how they bring value to the customer.

That means in some areas we're focused on cost-cutting -- taking out things we've done because of tradition that shoppers no longer feel are value-added. But it also means new opportunities on the merchandising and promotional side to excite customers and bring people into the store. You really have to develop both sides of that equation.

SN: Is the grocery industry cooperating in building product lines that are more on target with consumer needs?

Hammonds: Yes, I think they are. A lot of it is happening between trading partners, so you don't necessarily hear about it because it's not always things people will share on a platform. But I'm finding much more of a willingness from the trading partners to sit down together to talk about growing whole categories, as opposed to each company focusing on their own product line.

SN: Can you give some recent examples that illustrate how individual operators are showing increased responsiveness to the consumer? Hammonds: You're seeing companies like Wegmans and Ukrop's that have chefs in the store. They have food to go, making it very easy for customers to move to total meals that are ready to eat or ready to eat with a minimal amount of preparation at home.

In that same regard, what started as in-store delis and carryout product for H-E-B moved into full-scale restaurants where people come to eat and get some entertainment in the process.

We have a very good chance of taking some of the volume back from the fast food portion of the restaurant industry that we lost in the 1960s and early 1970s. And there are enough cutting-edge companies with success stories for operators to look at and figure out how to apply what they've done to their own markets.

SN: Certainly, regulatory issues will play a major part during the next two years with a new Congress. What opportunities do you see there for the industry?

Hammonds: You are going to see a White House that finds its scope of initiatives narrowed.

Right now, the White House is beginning to embrace some of the Republican agenda. But the administration's ability to drive many of the issues it felt were important, even two months ago, is curtailed now. So I think you'll see a group of regulatory agency people who believe they can drive their agenda on the regulatory side more quickly and forcefully than they can on the legislative side.

We're going to have to do an effective job working with the oversight committees to counter what could be a very active group of regulators over the next 12 months.

SN: Is it just a defensive opportunity?

Hammonds: I wouldn't say our focus there had to be purely defensive. Working through the new oversight committees, there should be ample opportunity to get rid of programs that are out of date and no longer work for the industry.

Part of what we've been doing with our board of directors is putting together a proactive agenda so we can be on the Hill early with our priorities ready to go.

SN: Do you see this as an unprecedented opportunity for the industry to make gains in Washington?

Hammonds: I think there is a brand new mood in Washington -- and the mood is to rethink the way government operates. Even as administrations changed before, the staff people on the committees were the same. So you always started from current baseline and were doing marginal adjustments.

Now, not only have we turned over the elected representatives; control of the House and the Senate has turned over too. That means if we are able to identify our own priorities and present them forcefully, we have a major opportunity to shape the way government functions and the way our industry is regulated.

SN: How do you see the economy affecting the industry in 1995?

Hammonds: We see good, solid growth all across the country now. But it's also clear that the Federal Reserve is quite prepared to choke off this economy rather than let inflation return. That means the inflation level will stay low, which will continue to put a lot of pressure on cost control. So I think we are going to have a slow rate of growth. We also see customers all over the country beginning to spend a little more freely, but they are still very value-conscious, very cost-conscious. It is important that companies that learned how to survive in the environment of the early 1990s continue that experience in the last half of this decade.

SN: The private-label and national-brand sectors have been at odds for some time. Where do you stand on the issue of product mix between the two categories?

Hammonds: I think the important message for the industry and for suppliers in particular is: let's stop fighting about national brands vs. private label. Enough is enough. The issue is the mix of products for the customer.

Customers are value-conscious; they do want some private-label product, but the mix is going to change from market to market. SN: It seems like private label has increased to 25% to 30% of the product mix in some markets. Do you think it will continue to grow?

Hammonds: Yes, I think it will grow. One of the exciting developments now is that more and more national-brand suppliers are moving into private-label product. As that happens, it brings a more upscale, high-quality product; it also brings some of their insight about how to position, package and merchandise their product. So I think that's a very strong partnership developing in the private-label arena.

SN: What did you think of your last 18 months? Tell us about your most satisfying moments, your most disappointing moments and any surprises that came about.

Hammonds: There really haven't been any major disappointments. It's been a great experience, I think in part, because the staff here is a crew I've worked with for 20 years. I was also the staff officer for our strategic planning process, which became the document FMI 2000 immediately prior to the transition. So those two factors really let me hit the ground running.

The obvious surprise for everyone has been what happened here at the mid-term elections. The nature of the political landscape has really changed. One of the things that has been very satisfying to me is to see the responsiveness of our independent operators. I think we've come a long way in moving away from the attitude that FMI is only for the big chains. We're building a closer relationship with our independent operator constituency, which is three-quarters of our membership.

I've also been pleased with our ability to build a new, much more cooperative relationship with the National Grocers Association. We're looking forward to finding more ways to cooperate with them in helping operators.

SN: Is FMI more focused on the independent operator now than in the past? Hammonds: FMI has always tried to develop programs to help that sector of our membership. But we're telling our story a little more effectively and focusing our regional directors very clearly on independent operators around the country.

In this rapidly changing environment, we're finding that independent operators -- lacking the staff resources that might be available to the big chains -- are looking to an organization like FMI to keep up with the changes, benchmark the way other companies are doing things and build share groups.

SN: Tell us about FMI's new family business center program.

Hammonds: One of the key projects there will be a succession plan program that we intend to offer primarily through wholesalers. It is our intent to create an ongoing support network that can return to a company or a family time and time again as they move through the various stages of succession planning.

SN: How do you see the Efficient Consumer Response effort shaping up over the coming year?

Hammonds: It's important for the project and committees to dedicate themselves -- as FMI will in 1995 -- to helping the industry understand, digest and implement what has been produced over the last two years.

Part of our challenge will be to say to the industry that this is not a slowing down of our commitment to ECR. It's just a recognition that the committees have done a tremendous amount of work over the last two years, and the right thing to do now is to help companies actually bring that inside their own operations before we move into a new stage of development.

SN: With the Midwinter show coming up, what themes do you expect it to produce?

Hammonds: Supercenters will be a major theme: what they are and where they're going. We'll talk about how the format has really grown from within the industry, not from outside as the club stores did.

The potential growth rate for that format is very great because a lot of the existing mass merchant stores could add the grocery component and be converted into supercenters very quickly.

We're also going to have a major presentation on logistics and distribution. Part of the point here is that this is not just a world of forklifts and semitrailers anymore. It is more a world of using technology to apply the lessons of ECR. We're going to have a major presentation on diversity in the industry. By that, we mean giving senior executives some practical, hands-on strategies on how to bring more women and people of color into management positions. We'll need to do a good job with both these segments to continue to grow this business.

And we'll be talking about the food safety area. We're not going to announce anything before the platform, but this is clearly a major issue for the industry.

Then we're going to talk about the new political affairs environment. I think in the new world of 1995 and beyond, more and more will get pushed to the states; therefore, the industry has to do a better job than it has at working issues at the state and local level.