FIGHTING GM EROSION

MARK HAMSTRA

SAN DIEGO -- It's fitting that the General Merchandise Distributors Council Marketing Conference is taking place here in this military hub.

Supermarket buyers convening June 1 to 5 are seeking to arm themselves with the latest general merchandise products and promotions that will help them do battle against their mass-merchandiser and drug store rivals.

"The state of the general merchandise categories in the independent retailers is generally not good at all," said Jeff Manning, this year's chairman of the GMDC and vice president of general merchandise, Fleming, Dallas. "The state of general merchandise in the country is wonderful, but of course it's shifting to mass. Grocery and drug continue to lose share to mass, and unless we make a strong stance, that erosion will continue."

Although some of the larger grocery chains -- like Albertson's, Boise, Idaho, and Kroger, Cincinnati -- have waged an all-out assault to increase their market share in general merchandise, some smaller chains are using guerrilla tactics. They're attacking with well-timed seasonal sections, strategic product placements and aggressive price promotions that put their margins on the front lines.

Supermarkets have long leveraged the high profit margins of general merchandise to compensate for lower margins in the center store, but grocers have to be prepared to sacrifice some of their profit margins on general merchandise in order to compete, Manning said.

"The supermarket industry for too long expected unreasonably high grosses on [health and beauty care] and GM," he said. "They can still get good grosses, better than they can out of grocery, but they can't be unreasonable about it."

A general merchandise buyer for one regional retailer in the South who asked not to be identified said his company's stores do well with some general merchandise categories, if the stores pay close attention to product placement and if the price is right. Single-use cameras have been particularly hot items for supermarkets, he said.

"Disposable cameras just seem to grow daily," he said. "They are coming out with more clip strips on the items, and we're placing them all over the store. We're placing them not just on the checkstand, but we're hanging them from the checkstand lights, down the seasonal aisle, the Coke aisle."

He's concerned about higher-priced products coming to the market, however. He said he wasn't sure yet if the new Kodak Max disposable camera would do well because of its relatively high price, which he expected to be in the $12 to $13 range.

"Fuji's our No. 1 flash camera, and if we run it at $6.99 or $7.99, it just blows out," he said.

Low prices don't necessarily pinch margins, however. He also said that while his chain's sales of books and magazines are down 8% this year compared with last year, the stores have had some success with deep-discount promotions on closeout books. The chain's magazine wholesaler delivers pallets of closeout books to the stores, which sell them at a fraction of the cover prices but still reap 40% profit margins.

"We've done it twice in 2001, and we've had about a 70% to 80% sell-through," he said.

The company also does some continuity promotions with general merchandise, which draw consumers back for repeat visits by offering four-piece place settings at a discount price week after week.

Associated Foods, a cooperative that purchases products for about 350 full-line supermarkets and another 300 convenience stores, also has seen its stores realize decent margins with price promotions of tabletop items.

Rodney Rich, nonfood buyer at the Amarillo, Texas-based company, said the stores it supplies have been placing gondolas near the front of the store with bargains on various general merchandise items.

"One of our biggest movers has been stoneware plates, bowls and mugs that are kind of fashionable colors," he said. "Most of it is $1, and plasticware is two for $1, or two for $3."

He said many of the stores have been advertising a select few of the items on a weekly basis, and margins range from 20% to 45%. Other items include three-piece frying-pan sets and tortilla warmers.

In school supplies, Rich said there have been a couple of new products that have caught his attention, both from Avon, Ohio-based Manco. One is an erasable highlighter, which retails for an average of about $2.39, and the other is a tape dispenser with suction cups on the bottom that can be mounted in a variety of places, for $3.49.

"When they introduce those types of things, it's a little extra pop," he said. "A $3 or $4 ring to the register is nice for our stores. You have to sell a lot of three-for-$1 canned corn to do that."

Batteries are one of supermarkets' strongest general merchandise categories, but retailers said consumers need a strong incentive to trade up. Recent innovations, they said, have not convinced consumers to spend more than the spare change in their pockets.

"The cheaper that we can buy a battery that our customers still consider a good value, the better off we are," said the buyer from the Southern chain. He said it was still too soon to tell whether consumers would dig into their wallets for the new, longer-lasting Energizer E2 and Duracell Ultra batteries.

Lou Martire, vice president of trade development for St. Louis-based Energizer, says supermarket customers are ready to pay more for batteries.

"For years, [supermarkets] have put too much emphasis on satisfying the value shopper, and they now recognize that has deflated the battery category," he said. "Now they are putting more emphasis on the premium and the super-premium, which is E2, to capture that consumer and hold them there."

Placement may be even more important than pricing in the battery category, both retailers and suppliers said. Martire said Albertson's for many years positioned batteries at the photo counter, which consumers didn't pass until after they went through the checkouts.

In the past 18 months, however, the chain has added battery displays inside its stores and "their battery sales have just skyrocketed," Martire said.

Housewares manufacturers say their products can still generate good profits for supermarket retailers. The International Housewares Association, Rosemont, Ill., reported that supermarkets sold about $4.3 billion of housewares products, or 7.2% of the total housewares sales, in 1999. That's up from 6% of total sales five years ago, according to Perry Reynolds, director of marketing and development for the trade group. Totals for 2000 will be available in August, he said.

"There are many supermarkets that have a notable general merchandise component that drives significantly more than the 5% to 5.5% of the business that supermarkets are accustomed to from general merchandise. They've made a stand, and the advantage to supermarkets -- in housewares in particular -- is the additional gross margins."