VALUE CHANNEL, ITS FUTURE AND SUPERMARKETS' RESPONSE

David Merrefield

The better part of a year ago, we took a look, in this space, at the burgeoning phenomenon of value retailing.

At that time, we considered predictions that such retailers -- including one-price and closeout -- would continue to grow store numbers at a fast pace, perhaps in excess of 6% for a period of years.

Conversely, several securities analysts predicted at that time that the value channel would start to falter as soon as the economy picked up. One said the channel was destined to "fall mightily" on the strength of the fact that "they are not good merchants, they are not good at product acquisition and the stores are unpleasant." Well.

That prediction of a year ago may have been prescient up to a point. It might be argued that the economy has improved a bit, but not much. Countering much of the uptick in the economy is the fact that the increasing cost of fuel has plucked enough disposable income out of consumers' pockets to give the channel some added viability. Notwithstanding that, it seems that the rollout of value-driven stores may have slowed some, in accordance with that prediction.

Indeed, there is an instance of a small value-channel operator overreaching to the extent that it was driven into bankruptcy and substantial liquidation. That situation was set in motion when the 14-store operator Amazing Savings acquired the struggling Odd Job outlets in 2003. That established a chain of about 85 stores. Earlier this year, Amazing Savings filed for bankruptcy and is liquidating most locations.

Be that as it may, value retailing isn't the worst competitive threat that has arisen against supermarkets in recent years, but it's one that has attracted some attention, because at first it seemed to be fairly impervious to supermarkets' defensive strategies. But efforts were made.

Some supermarkets weighed in with value sections of their own. At first those sections lacked credibility; they were too little and too late. Moreover, in supermarkets that trade to the upmarket end, value sections seemed jarring and possibly promoted trading down from higher-margin product to lower-margin product.

To some extent, those concerns remain, but as time has passed, many supermarket operators have gained expertise about in-store value sections and are seeing useful returns. That was the topic of a news feature in SN two weeks ago. We can mine from that feature three quotes that together suggest the future of the value channel and competitive responses from supermarkets.

- Near-term future: "There's a reason that dollar stores are building a store on every corner. [With the cost of fuel,] customers just don't have the money, so [they] are going to continue to be a factor and something we'll have to contend with every day."

- Retailers' reaction now: "We're getting more requests every day from retailers we serve [as a wholesaler] to add more items and more products to the section. It's my job to give our retailers the weapons they need to win."

- Long-term future: "I think dollar [stores] might run [to the end of a] cycle, although it may last a little longer. The growth can't continue as it has. You are going to see a lot of dollar stores shutting down."