WESTERN FOOD INDUSTRY EXPOSITION

DAVID MERREFIELD

LAS VEGAS -- The fundamental challenge facing food-retailing behemoths newly minted from the recent spate of acquisitions is whether they can simultaneously take advantage of the operational benefits large scale can confer, but remain nimble enough to cater to nuanced consumer demands.

That observation was made by Warren Bryant, executive vice president, western division, Kroger Co., at last week's opening session of the Western Food Industry Exposition here. Kroger is the nation's largest food retailer.

"The facts are the facts," Bryant asserted. "Big does have advantages in scale and scope. But the real challenge for the big companies is to see if they can be both big -- and use that to capture economies of scale -- and nimble enough to serve the customer." The Portland, Ore.-based Kroger executive's comments on the upside and downside of large-scale retailing came in reaction to a presentation at the session by Peter J. Gertler, principal, Deloitte Consulting. Gertler sketched a stark picture of the future of retailing as one dominated by a handful of successful, large-scale companies, with all others scrambling in one way or another to survive.

A panel of four industry experts, including Bryant, reacted to Gertler's outlook on the future. The other panelists were Rich Parkinson, president and chief executive, Associated Food Stores; Tim Hammonds, president and CEO, Food Marketing Institute; and Manly Molpus, president and CEO, Grocery Manufacturers of America.

In the main, the panelists sought to soften the lines of Gertler's thesis about the power of market concentration. The main features of Gertler's analysis of food retailing include these:

Food retailing is hobbled by low growth, indeed, virtually no internal growth. Whatever real growth that's extant is flowing to big companies, which means "growth matters, size matters and the game is changing.The big are doing better while the small are doing poorer. The market consists of very large companies, a series of niche players at the other end and a large middle, which is the 'valley of death."'

The basic driver behind low growth and change is that "everyone is in everyone's channel," meaning that seemingly every trade style endeavors to sell food. * Notwithstanding the factors of low growth and the need for change, though, the industry persists in adding capacity: "We're adding square footage at a far greater rate than a saturated market can absorb. Sales per square foot have been on a straight decline for 10 years."

And, if anything, these trends may accelerate soon since -- to this day -- food retailing remains highly fragmented relative to other forms of business in this country:

"Food retailing remains among the least consolidated businesses in the United States." And that strongly suggests that more consolidation and market concentration is in the offing for food retailing.

In his reaction to Gertler's observations about food retailing, Kroger's Bryant asserted that there remains room in the industry for smaller retailers.

"There's no question that small, nimble, differentiated and competitive retailers can do very well in this consolidated environment," he said.

But, he asserted, the supermarket portion of this industry is under siege from outside entrants.

That's the case in large part because barriers to entry are falling and consumers' outlook on the nature of food and its preparation are changing.

"There is ready availability now of the technology of procurement and distribution, so a number of channels are now selling consumer-packaged goods and they are obtaining growth rates higher than our own," he said.

Next, he said, consumer actions favor such a trend: "The type of food preparation that remains at home now is really assembly, not preparation. Consumers put meals together; they don't prepare. Putting meals together is an action that favors the CPG side of the business, and that is the business that's available to any channel."

Those two trends conspire to promote consolidation and market-share acquisition, he said.

"Those are the trends that compel the industry to consolidate, but that has happened at the same time we expanded capacity into this flat sales environment. There is growth, but it's coming through the development of other businesses, such as pharmacy."

Associated's Parkinson made similar observations about the incursion of other retailing channels into the space traditionally occupied by chains and independents, but he also said there may be a way out for the wholesale-supplied sector. Moreover, if action isn't taken, "we will die."

"We represent a channel of distribution that's so small we don't show up on the charts," Parkinson said. "But the larger situation is that a lot of the growth in this industry has come by acquisition. We [as a wholesaler to independents] try to look at that and we try to decide what it means to us and why it's happening. A lot of it has come about because of the introduction of new players in the industry. Many traditional companies -- ours included -- are encumbered by past practices, by market strategies, by sell plans and by practices we've refined over the years, but which we haven't really revolutionized. "Meanwhile, the alternative formats are not encumbered by past practices. They truly are using technology. They are using different market strategies and are doing this from the base of a solid business foundation. A lot of what we see in the traditional supermarket industry is a reaction to that. It's the traditional companies trying to get the same scale and efficiencies.

"There's an opportunity for [wholesale-supplied independents] if we can come together as [an integrated] channel of wholesale and independents.

"We now have very pervasive reasons to do so: If we don't we'll die. There's nothing like a crisis to prompt action," he said.

FMI's Hammonds pointed out that whatever may be happening on the macro-economic level, there remains a solid base of smaller companies that have developed ways to continue to prosper.

"This country is filled with innovative family-owned companies that fly below the radar. They have the ability to change the rules in their search for growth."

Also, he said, there are many challenges facing retailing, whether big or small, some of which may lend themselves more readily to solution by smaller players. These include the labor shortage, which compels many companies to run "labor-light," food safety, an issue that "has the ability to put us out of business," and changing consumer demographics.

GMA's Molpus, speaking mostly about the manufacturer side of the business, observed that, "We have a number of small- and mid-sized companies that are doing very well in this environment, so we need to be a little bit careful about the generalization that big is betterThere clearly are advantages to scale and size. But there are unique companies that have strategies that make them successful regardless of size."

Last week's WFIE convention here is a function of the California Grocers Association, Sacramento. Numerous grocer associations in several Western states partnered with CGA to host the event. This year marks the second show held under the regional umbrella. Next year's WFIE is to be coordinated by the FMI, Washington, D.C., under the auspices of CGA. There's a related news article about the situation on Page 16.