KROGER MARKETPLACE

Jon Springer

CINCINNATI -- Kroger is proceeding into the supercenter arena, but it's proceeding with caution.

The retailer's rollout of Marketplace stores -- the food and general merchandise hybrid stores based on the Fred Meyer concept -- has been especially deliberate. Kroger is preferring remodels to new construction, making special arrangements with labor in markets where the stores can open, and adding stores only where an existing strong brand can give a boost.

Kroger's caution stems not only from the newness of the concept, but also from fiscal constraints the retailer will need if becoming a serious competitor in the supercenter business is to be realized.

"If you're going to compete in the expanded general merchandise business, you have to be cost-competitive with the other players in that business," Don McGeorge, Kroger's president and chief operating officer, said of Marketplace stores in an interview with SN last year.

"We're in no hurry to get it out there and get it wrong," he added. "So we continue to fine-tune it, and gain comfort that we've got many parts of it right."

Kroger opened its first Marketplace units under the Fry's Marketplace banner in Arizona five years ago. It now operates 17 stores in that market. Discussion about the stores as an expansion vehicle for Kroger has continued since then. Only recently, however, has the retailer acted on it: Last year, it converted five former Fred Meyer stores in Utah to the Smith's Marketplace name. It also opened the first Kroger Marketplace store in Columbus, Ohio. Additional Kroger Marketplace stores are expected to open around Columbus this year.

While Kroger declined comment on details of the Marketplace financial model, evidence suggests the retailer has approached the concept focused on the bottom line. It seems aware that the stores may take longer to mature than a typical food-and-drug combo unit. Generally, observers said, the size of the stores (which range between 100,000 and 125,000 square feet) and the extra labor they require need balance from a general merchandise selection that generates better margins. Ultimately, they need volume and traffic as well.

"I don't think they can afford to do a Kroger Marketplace store that does $400,000 a week," Richard Kochensperger, a professor of food marketing at St. Joseph's University, Philadelphia, told SN. "With a store that size, if you can't do $750,000 a week, you're in trouble. So I think they're going to be careful."

In Arizona, the first Fry's Marketplace stores were originally an early supercenter concept known as Smitty's. Those stores were acquired by Fred Meyer and came under Kroger's wing when Kroger merged with Fred Meyer. When it came time to develop a ground-up Marketplace, Kroger took the low-cost approach of a supercenter, but with an eye on differentiating the experience inside. It challenged design firm Shook Kelley to create an original, 98,000-square-foot store, but on a budget more appropriate for 50,000 square feet.

"It was by far the lowest budget per foot for a design I've ever had in my career," recalled Kevin Kelley, principal and co-founder of Shook Kelley, Los Angeles. "The challenge was to spend what we'd spend on a typical store, but give it a lot more of a designed environment -- more like classic retail than a supermarket.

"We didn't want people to walk in and say, 'This is a cheap, bargain-basement store.' We wanted it to be aspirational," he said. "We wanted to give it a great resourceful sense, as if an early Martha Stewart put it together. It doesn't read 'giant, human-less corporation."'

According to Kelley, although Kroger approached the project cautiously -- "they tried it out in the desert like the government did with the Manhattan Project" -- company executives were impressed with the finished project. Tentative plans to build additional locations were put on hold when Kroger was distracted by the Southern California labor dispute, Kelley added.

Burt P. Flickinger III, managing director of Strategic Resource Group, New York, said he expects to see Kroger become more aggressive in its rollout of Marketplace stores once it addresses its cost structure through new labor agreements.

"Marketplace stores require more than $10 million in capital to develop, and it takes the stores around five years to fully mature," Flickinger said. "That's a long, up-front investment curve. If labor costs are higher on a per-store basis, the economics are unaffordable."

In Columbus, Kroger made an agreement with Local 1059 of the United Food and Commercial Workers union to restructure the contract allowing the retailer to redevelop former Big Bear stores it acquired in the market into Kroger Marketplace stores. The special contract for Marketplace stores includes changes in job classifications and wage rates, making the store more affordable for Kroger, sources said. The union agreed to the changes because, as new entries in the market, they brought more jobs to its members.

With the right contracts in place, Flickinger said he believes the Marketplace format can be an effective and profitable weapon for Kroger. "The global strategic sourcing that builds on the Fred Meyer model gives Kroger a great competitive advantage in lowering the cost of goods and increasing margins," Flickinger said. "Another advantage is that the general merchandise is localized, which is something Wal-Mart and Target often miss out on.

"When the [labor] contracts are signed and Kroger is more cost-competitive, they have the financial foundation to roll out hundreds of these," he added. "They just have to be hand-grenade close [on costs], rather than howitzer close, to Wal-Mart."

In Utah, as in Arizona, Marketplace stores are in a third iteration. Many were originally general merchandise stores called Grand Central. They were bought and re-bannered as Fred Meyer stores before Kroger began changing them to the Smith's Marketplace banner last year. As a result, their growth has been slow, said Wade Williams, director of real estate for developer The Boyer Co., Salt Lake City, and a former real-estate executive at Smith's.

"Smith's has a great name and a great reputation in this area, so it makes sense to take the brand," Williams told SN. "One of the challenges is that a lot of the stores were nonfood conversions from Grand Central stores. So by adding food, they asked customers to change their historical shopping habits."

Williams said he believes additional large-format stores in the region could benefit Kroger, whose Smith division is struggling to fight off an onslaught of new Wal-Mart supercenters and Neighborhood Markets. "What will be interesting to watch is whether Kroger builds any of these stores. I hear they've looked at some opportunities, but haven't committed to anything yet," Williams said. "I think it will be a good opportunity for them."