ANALYST SEES POTENTIAL IN LIMITED-ASSORTMENT STORES 2004-09-20 (1)

MARK HAMSTRA

NEW YORK -- Limited-assortment supermarkets have significant growth potential in the United States, based on the penetration levels and sales success they have had in Europe, according to a presentation at the Goldman Sachs Retail Conference here.

John Heinbockel, an analyst in Goldman Sachs' New York office, said "hard discount," or limited-assortment, food retailers like Save-A-Lot and Aldi, accounted for less than 2% of the nation's food-at-home sales in 2003, compared with the 33% share they captured in Germany. He estimated that there are about 144,000 people in the United States for each such store, with some large states like California, Texas and New York even more thinly populated by these types of food retailers.

"When you look at the population per store, it is by most standards underpenetrated," he said.

American consumers' stated preference for stores that offer convenience and low prices also weigh in favor of these limited-assortment stores, which are less than half the size of traditional supermarkets and offer prices that are even lower than those of Wal-Mart Stores, Bentonville, Ark.

Among the reasons Heinbockel gave for the relative underdevelopment of the hard-discount format in the United States: Americans are more affluent than people in other countries where the format has had more success. He also said there are fewer restrictions against opening big-box stores in the United States than there are in Europe. U.S. retailers have preferred to open larger stores.

Another reason the format hasn't caught on as much in the United States as it has in Europe, he said, could be that little is known about the actual performance of these operators.

"Save-A-Lot is buried within Supervalu, and Aldi is private, so few people know how well the format is doing," he stated.

Save-A-Lot, based in St. Louis, is owned by wholesaler Supervalu, Minneapolis, which does not disclose the operating income of its individual retail chains. Aldi, which has a U.S. base in Batavia, Ill., is owned by investors in Germany.

Heinbockel predicted that the hard-discount market in the United States will more than triple in size by 2013, growing from about $11.7 billion in sales in 2003 to about $36 billion in that 10-year span.

In the United Kingdom, where the format faces obstacles in the form of established price-oriented competitors and high real-estate costs, hard discounters have managed to capture 5% of the grocery market, according to Heinbockel.

"There's probably more of an opportunity in the U.S. than there is in the U.K."

The barriers to more widespread U.S. adoption of hard-discount retailing include slow consumer adoption; insufficient real-estate availability; rapid over-storing of the market; an aggressive price response from traditional supermarkets; and pressure on labor costs.

"There are risks here, but they are manageable," he said.

Hard Discount Market Share By Country

Country: Penetration

Germany: 33%

Spain: 14%

Belgium: 12%

France: 11%

Netherlands: 9%

Ireland: 6%

United Kingdom.: 5%

United States.: 2%

Source: Goldman Sachs

Hard Discount Market Share In the Most Populous States

State: No. of Stores; Population*; Population Per Store

California: 18; 33,871; 1,8881,700

Texas: 28; 20,851; 744,600

New York: 98; 18,976; 193,600

Florida: 87; 15,982; 183,700

Illinois: 206; 12,419; 60,300

Top 5 Total: 437; 102,099; 233,600

U.S. Total: 1,954; 281,421; 144,000

* In thousands

Source: Goldman Sachs