UN-CONVENTIONAL THINKING

DAVID MERREFIELD

WASHINGTON -- The supermarket industry stands at the beginning of a long road that will lead to more and more business consolidation, and consolidation is a force that has the potential to change how the industry looks at formats and their management.

That's part of the outlook of Timothy M. Hammonds, president and chief executive officer of the Food Marketing Institute here. Hammonds was interviewed by SN prior to this year's FMI convention, to be May 3 to 6 at Chicago's McCormick Place. The convention is the industry's largest event.

Hammonds also outlined a number of changes planned for this year's convention, in addition to discussing several other important industry trends.

As for consolidation, Hammonds said there are several reasons that suggest that the consolidation of both retailers and manufacturers is only beginning. He also pointed out that the consolidation trend will pose both challenges and opportunities to independent retailers.

There can be little doubt that consolidation is one of the major forces in the industry today and, as has been reported in previous issues of SN, executives of many major supermarket retailers aren't reticent about publicly stating they are actively looking for more acquisitions.

"The industry has shifted out of the earlier mode of Efficient Consumer Response and into a growth mode," Hammonds said. "But growth today is accomplished by acquiring additional firms, which means there isn't much real growth in store numbers."

He said the drive to acquire is fueled by the fact that many markets in the nation are approaching saturation and there is simply not much need for more stores.

An additional force, though, comes from outside this nation: "We are finding still that the social cost of an employee in Europe is so high that the cost of expanding an existing business in Europe is prohibitive. That makes the United States a very attractive investment market, especially for the Europeans, and I think that will continue." Moreover, the consolidation of European retailers continues, with many European nations seemingly moving toward conglomerating virtually all market share into two or three operators. In the United Kingdom alone, a merger between Somerfield and Kwik Save has been approved by shareholders in recent weeks, there has been talk about a merger between Asda and Safeway, as well as speculation that J. Sainsbury may acquire Morrisons.

In a way, that scope of activity may be a harbinger of the degree of consolidation that could occur on these shores: "We're seeing the emergence of true global players on both the retailing and manufacturing side that we've never seen before. This suggests we have a lot more consolidation yet to come in this nation too," Hammonds said.

"We're not even in the middle of the consolidation trend. We're still toward the beginning of it, so there's a long way to go, in terms of consolidation of retailing and manufacturing." One question the trend toward aggregated retailing poses concerns the future of independent retailers, an issue that Hammonds acknowledged to be worrisome.

"I worry a lot as I look at the industry. I see a lot of independent operators in various regions who tend to be nonparticipants in industry meetings and who don't actively seek out information about how the industry is changing. These may be the same operators who yet aren't even scanning. They may think they have a niche and can exist in their niche without the need for change. Those are the operators who just aren't going to be here in the future.

"But this is not to say the really good independent operators can't survive. I think they will survive quite well. The ones that survive are those who say, 'We need to recognize who the world-class players are and commit to being every bit as good as they are.' "

The matter of retailer consolidation also has the potential to impinge on alternate formats -- formats ranging from limited assortment to supercenter -- and their management, Hammonds said.

"These formats are in the marketplace to stay," he said. "But no one format will do well everywhere. That tells me it's important for companies to learn to manage a portfolio of stores. That may be part of what's happening as the industry continues to go through consolidation. We'll add different kinds of formats all under one management."

But any move toward managing multiple formats under the aegis of a single company won't be easy for supermarket retailers, he said.

"The supermarket industry tends to feel that multiple formats are very hard to manage. But the Europeans seem to do it well. Also, other industry groups in this country -- such as restaurants and department stores -- are capable of different formats.

"Maybe supermarket retailers will find it necessary to organize different management teams for the oversight of different formats, but the ability to manage a portfolio of stores will be very important to the future of our industry. Industry players increasingly will have to learn abilities in those areas.

"Of course, driving any consideration of formats and management is the matter of what customers of the future will want and where they will want to buy the food they eat. When you answer those two questions, you can become flexible enough to create an organization that's responsive. And, the answer will change over time, and lines that have already blurred will re-blur again in the future."

Another industry phenomenon that will blur traditional lines of activity and demand increased flexibility from supermarket management is that of meal solutions -- the issue of how to cater to consumers' desire for prepared meals. Hammonds said an ability to execute some type of meal-solutions strategy will be incumbent upon at least some portion of retailers: "Everyone doesn't have to be in it, but the industry as a whole needs to do a good job, or our total sales base will continue to erode."

Moving toward meal-solutions offerings, though, will require both supermarkets and their suppliers to think much differently about how they do business, Hammonds said.

"Vendors who sell traditional lines to supermarkets don't want their supermarket customers talking to their own food-service people within the same supplier company. They view that as competition. The chief executives of those companies must say, 'This is insanity; it has to stop.'

"And supermarket retailers must do something similar: Our people have to find ways to organize across department boundaries so they don't force their own meal-solutions people to outside vendors in order to source product that's right in the store. Part of the strength of a supermarket is to be able to provide that product internally."

These considerations also contain a broader implication for the future, Hammonds said.

"There are major changes needed to make this all work and they are coming," he said. "We need to commit to the idea that there will be a breakdown of the tradition of a business proposition that's pure retailer and pure supplier.

"There are lots of areas I see developing now and in the future where there will be meaningful partnerships. Strategic alliances can be developed that will do very interesting things on the economics of meal solutions, banking and so on. We need to be able to think about hybrid relationships."

Perhaps there's no arena that will require more of hybrid relationships than electronic commerce.

"The nature of electronic commerce is changing in America," Hammonds said. "The way to see that most directly is to realize that if a supermarket shopper today pays for purchases with a credit card, the bank or financial institution makes more money on that transaction than does the supermarket. This is true of some kinds of debit transactions too."

Electronic commerce will change the way supermarkets buy product too: "We are close, at least on direct-store delivered product, to a pay-on-scan environment. This is one of the more important things electronic commerce will do.

"And, on the customer side, is the whole issue of what we will do with Web sites: Will people order groceries that way? Another issue has to do with how we will handle customer-specific marketing with cards. These matters are in their infancy, but will be important. And there are a lot of issues to solve, not the least of which has to do with privacy."

It's also possible that developments concerning electronic marketing will unleash forces that will lead to the supermarket industry's loss of control over its own electronic destiny, Hammonds said.

"One way to think about this is to see that Microsoft is writing a lot of the rules about how things are done," he observed.

"I think we are in substantial danger that our Uniform Code Council is completely obsolete; that someone like a Microsoft could invent a way of how computer-to-computer transactions are done. That could make the Uniform Communications Standard that we've developed through the code council obsolete overnight.

"More than that, Microsoft could introduce software to set communication-protocol standards not just for the grocery industry, but for all industries. If that were the case, it could replace the rules we have now. This is not to say that such a change would necessarily be bad, but it clearly could become a new way of setting standards of how a business does business with other businesses that could fall completely outside our control.

"It is increasingly true that we have to look at what's happening in the information-systems world and make sure we see what is going on there and what it will mean for us."

Meanwhile, in keeping with a world of industry changes, the FMI supermarket convention is changing too, Hammonds said.

One element of convention planning has centered on how to best use the hall configuration at McCormick Place. A major addition to the gigantic convention hall in Chicago was opened last year and used for the first time by the FMI convention of last May.

One effect of the new space was to spread the booth show across two convention halls. That resulted in categorizing exhibits with non-consumer-products vendors in one hall, and consumer-products vendors in the other. The effect was also to divide food suppliers from nonfood suppliers.

That division had an effect on traffic flow: The food side had much more traffic than the other. Hammonds said numerous vendors didn't mind the traffic disparity since it seemed to produce the most interested people in both cases. Also, it made it easier for some buying companies to send a team for the consumer-products show and a team for the other side, increasing show efficiency.

Nonetheless, Hammonds explained, steps have been taken to equalize traffic flow between the two halls for this year's show.

One change involves moving the registration area to a floor below the exhibit halls. Last year, registration stood in front of the nonfood hall, blocking sight lines into that area and discouraging traffic. Also, the nonfood side of the exhibit will open a half hour before the other side, giving an opportunity for traffic to build in the nonfood area.

The question of where to eat in the nonfood side is getting some work too: "We have been able to recruit some of our supplier friends to give away food and drinks on the back side of that floor as well, so there will be no need to leave that area to get something to eat."

And, a few mini-workshops will be staged there in a bid to improve attendance.

The trams used to transport attendees within halls and between them will also be in use this year. One difference is that they will be operated by FMI employees who will be able to answer attendees' questions. Last year, the first year the trams were used, they were staffed by college interns.

Another difference will be seen in the makeup of exhibitors, Hammonds said.

"Probably the one change this year that we're really proud of is the minority-vendor presence that will be on the exhibit floor. FMI has done a lot in the diversity area in helping our members find and recruit people from different backgrounds. We also provide training materials to store managers that show them how to cultivate and grow diversity among their employees," he said.

"The area we're tackling now has taken us a little longer to figure out. It has to do with minority suppliers and vendors. The industry needs an easy source of identifying qualified minority vendors, so we've committed to developing a major presence on the exhibit floor this year by making exhibit space available to qualified vendors at our cost."

It's anticipated that this year's convention will feature more than 20 minority- and women-business enterprises that will exhibit a variety of new products and services. They will be spread throughout the halls, but readily identifiable.

As for social events at the convention, there will be a formal dinner Monday night. Previous conventions featured a dinner Sunday and another Tuesday.

Hammonds said it was decided to reduce the number of dinner events because of the availability of sufficient space to seat attendees at one event.