ECONOMISTS SEE SUPERMARKETS LOSING SHARE

DAVID GHITELMAN

COLUMBUS, Ohio -- Economists here predicted that supermarkets will continue to lose market share to supercenters, warehouse clubs and other channels as the overall U.S. economy emerges slowly from its recent recession.

During a conference call late last month, Steve Spiwak, an economist with Retail Forward here, said, "While supercenters and warehouse clubs have gained market share in the past five years, supermarkets have actually lost share. That decline is expected to continue as consumers shift their spending to these mass retailers."

Spiwak's prognosis for various retail channels followed presentations by Ira Kalish and Frank Badillo, two other Retail Forward economists, on what they termed the "New Recession."

As the economy emerges from this "New Recession," Spiwak said there will be "an intensifying battle for market share."

He observed that supermarkets were unlikely to be the winners of this battle. "Most of the growth in supermarkets over the past five years was the result of climbing food prices," he said. "We expect any growth in food inflation to put further pressure on this channel moving forward."

However, Spiwak noted that supermarkets are not surrendering share without a struggle. "In response to this somewhat negative environment, supermarkets are adding products and services to bolster growth," he said. "The addition of gas pumps and more general merchandise reflects efforts by retailers like Kroger and Safeway to stave off competition" from supercenters and warehouse clubs.

Spiwak was bullish about the potential for supercenters and warehouse clubs to grow share.

"Supercenters have been the stronger-performing retail segment in recent years," he said. "New stores and broad consumer preference for value and one-stop-shopping convenience will continue to drive double-digit growth in this channel.

"Also, supercenter operators, particularly Wal-Mart and Meijer, are installing gas pumps at more locations, which will be a key driver of future growth."

Spiwak observed that the warehouse club segment appears strong as well, despite a slowdown in store openings and weaker consumer spending on food. "To boost growth, clubs are expanding their ancillary service offering along with adding more gas pumps, like supercenters. Clubs are also continuing to expand their private-label programs and add more upscale and higher-margin merchandise, such as diamonds, wine and even art work."

Badillo focused on how the recent recession differed from previous downturns and how the current recovery has differed as well. "Relying on past experience has not necessarily been a good way to anticipate what's going to happen in this economy," he said.

Noting the strong likelihood of growing inflation and the continuing obstacles to increased business investment, Badillo observed that the outlook is not completely bleak. "The good news is that we're not on a completely downward spiral, but the disappointment is that we're not returning to the high growth rates we saw during the boom years" of the late 1990s.

Badillo added, "We do expect a rebound to emerge, even if it does so in an uneven way."

Kalish discussed potential threats to the rebound. One threat, he noted, is the possible inflationary effects of a weakened dollar. "If the dollar starts to fall very rapidly, it could create expectations of drastically rising inflation," he said. "If that's the case, I think Mr. Greenspan may feel the necessity of raising short-term rates, and if that happens, we could have a slowdown in the recovery or even a double-dip recession."

Other threats to recovery Kalish cited included the lingering effects of overinvestment by business in the 1990s, particularly in information technology and telecommunications equipment; the post-Enron distrust by investors of the equity market; and a potential increase in the price of oil.

"Although the outlook in general looks pretty decent, not great but decent, there are some risks that could throw a monkey wrench into that outlook and create problems, particularly for the consumer sector of the U.S. economy."