WHEN SUPERCENTERS COLLIDE 2004-11-22 (2)

Jon Springer

Wal-Mart's supercenter expansion has reached Meijer's home turf. Has it also met its match?

The answer will play out in towns and cities throughout Michigan in the coming months and years as Meijer, the Grand Rapids-based retailer that pioneered the food and general merchandise hybrid store, defends its home state against an invasion from the mass merchant from Bentonville, Ark., whose supercenter, observers said, owes much to Meijer's innovation.

Though Wal-Mart Stores has frequently encountered strong regional and national supermarket competitors, and has consistently met and overcome public and union scrutiny, only in isolated cases has it squared off against a retailer that operates stores in a similar format. Rarer still have those competitors been as dominant in their trade area as Meijer is in its home state of Michigan. Though the battle is just beginning, merchants and others in the Great Lake State have already begun to feel the effects or, at the very least, are bracing for them, sources said.

"It's going to be arguably the toughest food fight in modern supermarket history," Burt Flickinger III, managing director of Strategic Marketing Group, a New York-based consultant, told SN.

The similar formats of Wal-Mart and Meijer turned against one another offer a unique test of longstanding beliefs about what makes a successful food retail offering, observers said. With each store able to offer a similar level of one-stop convenience, the battle could turn on Meijer's reputation for its service and local community ties against Wal-Mart's advantage in price.

"Meijer is a more pragmatic merchandiser, representing itself more on qualitative issues: their excellence in produce, how well they handle apples," Stan Eichelbaum, president of Marketing Developments, a Cincinnati-based retail consultant, told SN. "Wal-Mart's strength is obviously its prices."

In Michigan, however, "price leader" was an advantage Meijer enjoyed over other food operators until Wal-Mart came along. It is not, observers said, a title it's prepared give up easily.

Christian Haub, president and chief executive officer of Montvale, N.J.-based A&P, recently remarked in a conference call that sharp pricing from Meijer was squeezing margins at A&P's Farmer Jack units in the Detroit area. David J. Livingston, managing partner, DJL Research, Pewaukee, Wis., told SN his research indicated Wal-Mart maintains a pricing spread of around 10% against Meijer, vs. 15% to 27% against other food retailers.

"Before Wal-Mart, Meijer was the guy you had to be at or close to on price on the key items," said Steve Antaya, vice president of Tom's Food Center, a family-run store in Portland, Mich. "Now it's a different game."

Antaya said he believes Meijer is preparing to fight the pricing spread by actually raising some prices in areas where a new or converted Wal-Mart supercenter was due to arrive. "They can raise [prices] up before Wal-Mart gets there because they know when Wal-Mart comes in, they're going to look at Meijer's pricing and lower their retails," Antaya said. "But if Meijer's pricing is artificially high, it can then lower prices down to where Wal-Mart is priced."

Meijer, whose officials were not available for comment for this story, has made significant adjustments in its own costs as it braced for a Wal-Mart invasion. Last December, it eliminated 350 positions and followed that with a 1,900-employee cutback in late January. Meijer also made a move to wring value from some real-estate holdings, selling outparcels at some store locations, sources said.

John Zimmerman, a Meijer spokesman, told SN in February the belt-tightening helped bring Meijer's costs more in line with competitors like Wal-Mart and Target that had emulated its supercenter format. "We've got some pretty tough competitors coming into our format and coming into our area. We're competing against 50 supercenters now. We think that by 2007, we'll be competing against 350 supercenters."

Cutbacks in staff accompanied a new aggressiveness in Meijer's store development program, with much of that targeted toward Michigan. Meijer has opened five new stores this year and has nine new stores planned in 2005. It also has plans for 84 store remodels in Michigan, reports said. By contrast, Meijer opened just one new store in 2002 and two in 2003. Half of the 14 stores slated to open this year and next are in Michigan. Meijer overall operates 163 stores in five states, almost half of those in Michigan.

"Meijer had really devoted their resources toward Chicago for a long while," noted Shawn O'Brien, vice president of retail for commercial real-estate broker CB Richard Ellis, Lansing, Mich. "But there's a lot more attention in Michigan now."

Its newest store is a 207,000-square-foot former Kmart location in the Lincoln Park section of Detroit designed by New York-based architecture firm Rockwell Group. The store, which opened earlier this month, was designed with wider aisles, a warmer color palette, and expanded general merchandise offerings than typical Meijer stores. Merchandise displays are intended to stimulate traffic between the food and general merchandise departments, reports said.

Wal-Mart currently operates 30 supercenters in Michigan, but is prepared to increase that total by expanding any number of existing discount stores. Wal-Mart officials could not confirm a projected number of Michigan supercenters in 2005.

"It seems like Wal-Mart has gone to predatory siting in areas where a town can only support one supermarket and one supercenter. They will open against an existing, money-making Meijer so both stores lose money," Flickinger said. "From talking to Wal-Mart's people, they feel Meijer is their finest competitor anywhere, and anything Wal-Mart can do to slow down Meijer, they'll do."

Flickinger added he felt that Meijer "will be as tough as it needs to be to win this war," but that, as in Columbus, Ohio, where Big Bear bowed out of a market in which Meijer, Wal-Mart and Kroger were battling, there will be some victims.

"Meijer really had to get less paternalistic and become more of a lean, mean, fighting machine than they used to be," said Gary Giblen, director of research for C L King & Associates, New York. "I think they recognized this would be a harder era to operate stores in."

That's a realization coming to a lot of operators in Michigan these days. Particularly vulnerable, observers said, are independent operators and small chains caught between the warring supercenters.

"There should be lots of friendly-fire casualties as the Meijer-Wal-Mart battles continue," Livingston predicted. "It's been going on for a

long time with several small cities already having these two elephants competing. Ludington, Cadillac, Big Rapids, Muskegon, Jackson, Howell, Adrian, Charlotte: These cities are littered with closed supermarkets."

INDEPENDENTS UNDER PRESSURE

According to O'Brien, one of his Michigan-based independent supermarket clients has begun negotiating five-year leases rather than the 15-, 20- or 30-year deals that food retailers frequently strike. This will buy time while the operator observes the changing market and decides upon its best long-term strategy. "They figure they've got five years left for their existing format, but it's not like they're going to throw in the towel after that," O'Brien said. "They realize they have to be creative in how they renegotiate their leases and extensions. For now, they have to sharpen their pencils and rely on cheaper rental rates and lower overhead."

Antaya, who with his family runs the single-store Tom's Food Center store in Portland, agreed the supercenter wars have brought uncertainty to the landscape and is delaying a decision to add a new location for his business. "It affects what you can do and what you can't do because you're not sure how the pieces are going to fall," he said.

Independents in the direct path of the Michigan supercenter wars "are going to go away," O'Brien said. Those in the vicinity of a supercenter can survive, but must sharpen their focus on either a higher-end shopping experience or on smaller stores focused on price and convenience.

Hastings, Mich.-based Felpausch this summer attempted the former, converting a former Felpausch Food Center in Battle Creek to a new banner called Zucca's, which features an upscale mix of natural and organic products, specialty items, and expanded fresh and prepared-foods departments. The conversion was unveiled just months after Wal-Mart converted a discount store into a supercenter less than half a mile away. It was unclear whether Felpausch had plans for additional Zucca's locations, but a company spokeswoman told SN in July that particular site worked well because it was located in an area with attractive demographics.

"Felpausch admits the store is about 20,000 square feet too big. If they were to copy it, they'd probably try it in a smaller format," O'Brien said. "In demographic markets where there's a valid range of middle- to upper-income people, they can look to stores like that for value and convenience."

Landlords in central Michigan, O'Brien said, are most desirous of Whole Foods Market, the Austin, Texas-based natural grocery chain that hasn't reached Lansing yet. In the meantime, they are concerned over the addition of commercial square footage far outpacing demographic growth. "The biggest problem we have in Lansing is that these community shopping centers were built as the commercial hub within a suburb at 100,000 square feet, with half of that filled up by a grocer. Now this grocer may be only three or four miles from the nearest Meijer or Wal-Mart supercenter, and the landlords need a backup plan. Often it means splitting the [grocery] space in half for a reduced-size grocer and maybe a dollar store."

Added Eichelbaum, "The superstore is the new community shopping center. It's the new generation of the mall."

FIGHTING BACK

Retailers like L&L Foods in Lansing are meeting supercenter competition with a smaller, value-focused format. Carter's Food Centers, Charlotte, is struggling partly as the result of a rapid expansion just prior to the Wal-Mart-Meijer war, sources said. A&P's Farmer Jack banner tried expansion outside of the Interstate-75 corridor in Eastern Michigan, but pulled out quickly. Farmer Jack is currently focused on revamping remaining Michigan stores to its fresh market concept, while converting others to the extreme-value Food Basics concept. Cincinnati-based Kroger, which has experience battling both Wal-Mart and Meijer in other markets and operates more than 120 stores in Michigan, has been remodeling its locations in anticipation of supercenter openings, said O'Brien.

"When it's all said and done, Wal-Mart and Meijer are going to be here. And Kroger will be here, too," O'Brien said.

Antaya, whose business has been affected by supercenter openings in Lansing in the east and Ionia to the north, has created a supercenter with amenities he said are equal or superior to larger competitors. The 60,000-square-foot building includes a 38,000-square-foot grocery store, a full-service Do It hardware store, as well as a video store, an in-store Little Caesar's pizza carryout franchise, and self-checkout lanes. Antaya said he believes he operates the only single-store operator in the country with self-checkout and is the only one with a Little Caesar's.

"Like a supercenter, we're convenient because we have a lot under one roof. But we're actually more convenient for things like hardware because we have good, qualified help, and you don't need to wander all the way into the back of the building to find it," he explained. "All of the things we do we look at thinking, 'What can we offer and still be convenient for our customers and bring them [through] our doors?"'

"This isn't something every independent supermarket can do, but the theory should be the same: Look to make your store more convenient," Antaya added. "Maybe it's adding a broader selection in your deli or a UPS counter. We didn't add self-checkout because we're an independent. We did it because that's what people have come to expect. If you can't hack that, you might not be around in five years whether Wal-Mart's here or not."

Grand Rapids-based Spartan Stores, a retailer-distributor that operates 54 stores and supplies 330 others in Michigan, is building its offering around what it calls a "consumer-centric" business model based on market research data, Jeanne Norcross, a Spartan spokeswoman, told SN. According to Norcross, data from ACNielsen indicating consumer needs has driven Spartan's plans for store remodeling, merchandise resets and product offerings. These strategies are implemented in Spartan's corporate stores, but also demonstrated to independent customers as part of store model programs.

"We believe the conventional supermarket has a place. As we continue to refine our offering based on consumer information we receive, we feel we can continue to be strong competitors in Michigan," Norcross said.

Spartan Stores compete with Meijer, D&W Food Centers, independents and a few Wal-Mart stores in Western Michigan. In Northern Michigan, Spartan's Glen's Market banner fights Carter's, numerous independents, and an increasing number of Wal-Mart supercenters. "The expectation generally is that consolidation will continue to occur in both retail and distribution," Norcross said. "Our key strategy is to be the surviving supermarket retailer and distributor as consolidation occurs."

Top Detroit Retailers

Rank, Food Retailer: All Adults; Under $25,000; $25,000 to $34,999; $35,000 to $49,999; $50,000 to $74,999; $75,000 to $99,999; $100,000

1) Kroger: 44.7; 39.9; 40.5; 47.5; 42.0; 48.5; 49.1

2) Farmer Jack: 35.6; 34.2; 39.8; 38.7; 36.4; 31.2; 33.9

3) Meijer: 31.9; 26.3; 35.3; 29.7; 30.1; 35.9; 40.7

4) Save-A-Lot: 5.9; 13.1; 13.2; 5.6; 1.9; 1.8; 0.0

5) Costco: 4.5; 3.6; 1.4; 2.3; 4.0; 8.4; 11.4

6) Wal-Mart: 4.5; 1.6; 4.3; 5.2; 3.6; 5.9; 6.7

7) Kmart: 3.8; 7.1; 6.2; 3.4; 1.1; 3.0; 1.4

8) Food Basics: 3.3; 3.5; 3.2; 6.1; 1.9; 1.8; 2.7

9) Sam's Club: 2.6; 3.1; 3.1; 1.6; 3.1; 2.5; 0.0

Data is based on a random sample of adults age 18 in the Detroit metro market area during July and August. Respondents were asked which stores they shopped in the last week.

Source: International Demographics, Houston.

The Battle for Michigan

Meijer and Wal-Mart are going head-to-head in this Great Lake state with their supercenter formats. As these discounters square off, the independents are feeling the heat.

Supercenter: Current No. of Stores; Growth Plans; Total No. of Supercenters

in U.S.

Meijer: 80 (est.); 7 stores (est.); 163

Wal-Mart: 30; May expand any number of existing discount stores; 1,650*

* As of October 2004.

Superstore Strikes

The above Michigan locations have experienced fallout of smaller operators due to supercenter competition, according to industry observers -- and they say the battles are far from over.

What Makes a Loyal Shopper?

EAST LANSING, Mich. -- While some believe the Wal-Mart-Meijer battle in Michigan will put low prices to the test, price is only a small part of the overall battle for customer loyalty, researchers at Michigan State University here have found.

Preliminary results of MSU studies on consumer loyalty at grocery stores found there are four levels of consumer loyalty, with loyalty based on price being less able to withstand competition than other, deeper bases of loyalty, Judy Whipple, associate professor and faculty director of the Food Industry Management Program at MSU, told SN. "Many researchers would regard [loyalty to price] as a tentative or spurious loyalty because it's very easy for a competitor to match that strategy. So where there's a lot of competitors focusing on price, it becomes a little harder to differentiate the store. As a result, it becomes easier for consumers to switch," she said.

According to Whipple, stores can also evoke affective loyalty (loyalty based on feelings about the store); conative loyalty (loyalty based on the intention to keep shopping at a preferred store); or action loyalty (the feeling that one would shop at her preferred store no matter what). In a study based on 500 questionnaires gathered in nine states, those identifying themselves as specialty store shoppers (those who shopped at Whole Foods or Trader Joe's) felt more loyalty to their stores on all four levels than conventional grocery store shoppers.

Loyal customers are likely to spend 32% more than other customers, the survey found, and are likely to create positive endorsements about their favorite stores through word-of-mouth advertising. In a focus group study, MSU researchers further found that certain attributes of a store can be viewed both positively and negatively by shoppers in forming their opinions. For instance, shoppers like loyalty cards for discounts and promotions, but dislike them based on privacy issues.

The following chart details likes and dislikes of consumers studied in a focus group on supermarket loyalty conducted by MSU:

What influences shopping?

Promotion

Likes:

Sunday advertisements

Loyalty cards

Dislikes:

Out-of-stock merchandise from advertisements

Loyalty cards (privacy issues)

Convenience

Likes:

Store location

Familiarity with layout

One-stop shopping

Self-scan checkout

Close to home or en route

Dislikes:

(none)

Product

Likes:

Wide variety

Consistent freshness of produce and meat

Availability of bulk items

Carrying general merchandise

Dislikes:

High-priced brand names

Bad produce and meats

Lack of ethnic foods

Lack of small packages for single people

Environment

Likes:

Cleanliness

Aisle width

Layout

Friendly clientele

Dislikes:

Noise from music and announcements

Extreme temperatures (too hot or too cold)

Bad odors from bottle returns

A store that's too big

Too busy or crowded

Layout changes

Service

Likes:

Friendly store personnel

Dislikes:

Long checkout lines

Out-of-stock merchandise

Lack of employees/rude employees

Inconvenient hours

Source: Michigan State University study on supermarket loyalty