NEWS & SOLUTIONS COMPETING WITH SUPERCENTERS

RUSSELL REDMAN ELLIOT ZWIEBACH

The supercenter, a mighty retail animal, may be losing its menacing roar.

Though alarmed when the format began proliferating several years ago, a rising number of supermarket operators are gaining confidence in competing with the retail giants.

Chains are curbing supercenters' effect on their business by focusing on fortifying perishable and prepared-meal offerings, stepping up customer service and frequent-shopper programs, adding more store departments, honing pricing, expanding private labels and slicing operating costs, among other initiatives. However, the supercenter remains the supermarket sector's biggest competitive threat, executives noted, pointing to its continued expansion. Randall Onstead, president and chief executive officer of Randalls Food Markets, Houston, said supermarkets are realizing how to coexist with supercenters and compete effectively. "Instead of spending so much time worrying about competing on a cost-of-goods basis, we'd better spend our time out-operating supercenters," he said.

"For one thing, we've had to adjust pricing to make sure we don't give people a reason to go to a supercenter; you have to be somewhat close in retail. We've improved service in our stores in and around supercenter competition. From a variety standpoint -- getting people what they want and having product on the shelf -- we think that's a strength of ours and a weakness of supercenters. So we've focused on both variety and out-of-stocks. We've also put a lot of emphasis on our perishables: quality perishables, fresh products and knowledgeable associates to sell them."

Food Giant Supermarkets, Sikeston, Mo., which operates 100 stores (mostly Piggly Wigglys) in eight states, has seen a spate of supercenter openings in Missouri, Tennessee and Kentucky in the past year, according to Kenneth Storey, owner and president. Despite the competitive surge, the operator has held its own, he said.

"We have a lot of them in our trade area, and they are a large competitive factor. But we're still able to operate [successfully] with those stores here. They're not going to put the independents out of business," Storey explained.

"As people see supercenters come in and shop in them, they are finding that they are not as cheap as they thought they would be. And I think the novelty has kind of worn off. We're not experiencing the decline in sales when one of those comes in as we did in the beginning."

That, in part, is because Food Giant is becoming a sharper supermarket retailer, he said. "We're continually looking for ways that we can sell cheaper. Also, we're improving our customer service and our perishable departments. We're trying to run a better store all the way around. We're trying to remodel and enlarge stores, give a better store for the customer."

Though not downplaying the stiff challenge supercenters pose, other industry executives said supermarket operators' growth plans increasingly reflect the tactics needed to combat the format. Here are some of their comments:

"In pure numbers, supercenters are certainly as big a threat as they were a year ago because they continue to open, and when they do they have an impact on the retail base that competes against them," said Robert E. Stauth, chairman and CEO, Fleming Cos., Oklahoma City.

"However, in the last year, both chains and independents have learned how to compete with supercenters. And they are getting better at protecting their business than they were a year ago."

To aid its retailers in-store, Fleming is testing and plans to roll out several new fresh concepts: Baker's Boulevard, a limited-assortment bakery; Italian Specialties, an Italian food shop; The Chicken Store, a cooked-chicken and side-dish section, and Souper Salad Sandwich Shop, a prepared-food deli.

Supercenters "are still as significant a threat as they were a year ago," Roger P. Friou, president of Jitney Jungle Stores of America, Jackson, Miss., told SN.

"We have another year of experience under our belts, and we're doing a better job of competing against them. But supercenters are still a threat, and they will probably continue to be one for a while."

About a dozen Wal-Mart supercenters are slated to open this year in Mississippi, Louisiana and Tennessee, a big chunk of Jitney's trade area. But, with more capital from a leveraged buyout, Jitney is propelling its growth by adding more service departments to its conventional stores, boosting product variety, expanding its warehouse format and focusing on larger units, notably its Jitney Super Center multidepartment format.

"The entry of Wal-Mart into the supermarket business has spurred [supermarket retailers] to get more aggressive in upgrading facilities and building new ones," said David Morrow, chairman of Delchamps, Mobile, Ala.

The chain has rebounded via an everyday-low-price marketing blitz -- "Delchamps. The Low Price Leader Overall" -- and an aggressive store-upgrade program, which have helped it compete better with supercenters and rival supermarket chains.

"Since May 1994, 14 stores -- mostly superstores of more than 200,000 square feet -- have opened in direct competition with us. In spite of this intensely competitive environment, like-store sales have continued to increase, and our market share has consistently improved," Don E. Marsh, chairman, president and CEO of Marsh Supermarkets, Indianapolis, said in the company's annual report.

Marsh, he explained, has protected its food retail dollar share from supercenters via such efforts as its "Fresh Express" home delivery service, "What's For Dinner" takeout food program, expanding fresh areas in its traditional stores and boosting usage of its Fresh IDEA frequent-shopper card.

Supercenters' effect on sales and customer traffic varies greatly by region -- the South and Midwest see the most competition from the format -- and by locale, with rural and suburban supermarkets feeling the sting more than those in urban and heavily populated metro areas, executives said.

While supercenters have led many operators to re-examine their operations, their effect on the industry may be overblown, according to several analysts who follow a wide range of supermarket companies.

"There's been a hit from supercenters, and it's wrong to minimize the threat from supercenters. They're for real. And they're good news for consumers, in general," said Mark Husson of J.P. Morgan Securities, New York. However, he noted, "The threat is probably overemphasized," explaining that square-footage growth by big supermarket chains like Kroger and Albertson's likely exceeds supercenter growth levels.

According to Ed Comeau of Donaldson, Lufkin & Jenrette, "I don't think anyone's dismissed the supercenter threat, the viability of the format or even its impact on the market. But there have been more success stories of chains competing against supercenters. Also, [supercenters] have yet to be tested in the metro markets in any major way."

Supercenter operators like Wal-Mart, Kmart and Target lag well behind leading supermarket chains in food retailing skills, said Gary Giblen of Smith Barney. "The actual execution levels in supercenters are very poor," he said.

"The format itself doesn't carry any particular strength. Any CEO in the industry will tell you it's just like any other [competing] supermarket opening: It's no better and sometimes not as bad a threat," Giblen added.

Still, the format may be siphoning sales growth. Nationwide, the total grocery dollar volume of supermarkets, mass merchandisers and drug stores last year was $184 billion, up 3.8%, reported Information Resources Inc., Chicago, which tracked 173 food and nonfood categories. Supermarkets had 69.6% of the volume at $128.1 billion, up 2.2%, but mass merchandisers -- including supercenters -- saw their sales jump 14.8% to $32.6 billion, a 17.7% share. Drug stores' portion of grocery volume dipped 1% to $23.3 billion, a 12.6% share.

Such shifts in grocery dollar share are why supermarket retailers continue to name supercenters as the industry's chief retail threat.

"Clearly, it's supercenters -- the additional square footage that they bring into our markets, the significantly lower margins than our industry is used to working with and the significant cost advantage they have to most supermarket retailers," said Herbert Dotterer, senior vice president and chief financial officer at Eagle Food Centers, Milan, Ill.

"For every supercenter that brings 30,000 or 40,000 square feet of additional grocery space into a market, it splits up the pie that much more because the pie doesn't get any bigger."

The leading discount chains are using supercenters as a growth vehicle. Wal-Mart, with 299 Wal-Mart Supercenters as of Aug. 1, began an expansion plan in February calling for 110 more supercenters up to Jan. 31, 1997 -- about 95 of which are relocations or conversions of discount stores. Kmart has 93 Super Kmart Centers, has opened six so far this year and expects to add three more by year-end. Target Stores has seven SuperTargets and plans to open another this year.

"The reason Kmart and Wal-Mart are potential threats is because they have said they don't expect to make a return on the food side. If they don't have to make a return, it's pretty hard to compete," said Robert Piccinini, chairman, president and CEO of Save Mart Supermarkets, Modesto, Calif.

Robert Mariano, president and CEO of Dominick's Finer Foods, Northlake, Ill., agreed. "They continue to be a major threat in terms of their ability to deliver groceries at the lowest possible price," he said.

Yet a lot of companies in the supermarket sector have responded to the price challenge from supercenters.

K-VA-T Food Stores, Grundy, Va., which operates Food City supermarkets, is among the chains not letting supercenters get the upper hand, said Steven Smith, president and chief operating officer.

"We just tackled the bear head-on on price because we felt that was an issue you had to face up to sooner or later," he said. "We came out with some aggressive marketing, touting the quality of our perishables, the services we offer and just telling people that our prices are as good as anybody's -- what we call our F.C.L.P. program, Food City Low Prices." Food City also has promoted its proximity, closer parking and easier-to-shop stores. "Those are some of the things we've tried to get across to our consumers to shop us instead of the supercenter," Smith said. "We're not naive to think people aren't going to shop a supercenter. We just want to make them loyal Food City customers by giving them the quality and service and not making them go somewhere else for price."

Several years ago, Farm Fresh, Norfolk, Va., began honing its operations and format to bolster its price appeal, according to Michael Julian, chairman, president and CEO.

"To compete with supercenters, we have become a more aggressive, more efficient, lower-cost operation, which allows us to be more competitive on the price side," he said. In some stores, Farm Fresh also has added "super bars" offering a wide selection of prepared foods, he added.

Cincinnati-based Kroger Co. competes with about 200 supercenters but is heading them off via combination store expansion, Chairman and CEO Joseph Pichler said at an industry conference earlier this year. "Our goal is, in any city of any size, if you want to get to a supercenter -- they have to draw from 10 to 15 miles -- you're going to have to drive past two or three first-class Kroger combination stores," Pichler said. "We can get a very substantial return in our cities by drawing from a 2-square-mile radius."

Additional reporting:

Supercenter Expansion

Operator Units 1996 Plans

110 total openings during year, about 95 of which will be conversions of discount stores. Figures on 1996 openings

Wal-Mart 299 to date were unavailable.

Kmart 93 3 more by year-end. 6 opened so far this year.

Target 7 1 more by year-end. 2 opened last month.

Meijer 105 2 more slated to open last week. Would not disclose further plans.

Fred Meyer* 101 1 more to open in fall.

*Fred Meyer operates a total of 213 stores, 101 of which are "one-stop shopping" stores with food and nonfood departments.