VIEWPOINTS : Merger Madness Among Supermarkets : When the Dust Settles, Look for Higher Prices and Poorer Service
What is happening to the supermarket business in Southern California?
Vons agreed in December to acquire Safeway’s 172 Southern California stores. Earlier this month, Highland Park-based Boys Markets accepted a buyout bid from a Mexican investor. And Ralphs Grocery is up for sale.
In short, the buying and selling of supermarkets here has become a hot game, one that the free-market-minded antitrust regulators in the Reagan Administration are loath to stop. The playing is destined to continue until the Southern California marketplace is dominated by as few as three chains, each of whose stores will be nearly indistinguishable from competitors’ outlets.
For consumers, the immediate results will be sad--prices will go back up while selection shrinks and service worsens.
Many analysts believe that the origin of a supermarket war can be traced to the fall five years ago of a state regulation called Fair Trade.
Fair Trade sheltered supermarkets by limiting competition. It set uniform prices on such products as alcoholic beverages and milk. When it was rescinded, the event was akin to the first day of hunting season. The grocery chains came out blasting--at each other. The ensuing competition brought down one grocer after another, the likes of Smiths Food King and Thriftimart.
But Southern California supermarkets--driven by unfettered competition and the growing hunger for profits--keep clubbing each other with discount pricing in the form of double coupons. This has gone on for so long that profit margins have been driven below 1% of sales. That’s time to get nervous.
Double couponing was conceived as a tool to selectively stimulate the market, a way to occasionally jump ahead of competitors that were not offering the same deal. Before long, everyone got locked into unlimited double coupons and no one (as Ralphs can attest) could back out without losing major business.
The chains have decided that only growth and reaching a “critical mass” will lead them out of the darkness. If a supermarket chain is bigger, it can out-price, out-promote and generally beat up on its competition. If a chain puts on enough muscle, enough stores and market share, at its discretion it can turn ploys like double coupons on and off. Competitors must follow suit.
Since the local market is relatively saturated, growth cannot come from building more stores. It must come from taking control of existing stores, from buying out competitors.
One of the costs of this sort of trend, however, is the erosion of carefully constructed marketing images. The different priorities that supermarket chains set for themselves in pricing, product promotion, service and good will no longer seem adequate.
Stores decide that they cannot simply emphasize low prices, or the finest product selection, or whatever else they had chosen as their key indicators, their special way of relating to the public. Instead, to withstand voracious competitors, stores feel compelled to try to be all things to all consumers.
If an opposing chain tries to corner a “theme,” the surest way to silence it and its message is to buy it out. For example, Hughes Markets, known for its high-quality products and affluent customers, appears to be a prime takeover target.
Unfortunately, when the number of chains dwindles and all of the survivors strive to be the “complete” store, the result is a stultifying lack of differentiation.
Chains take fewer risks. They stock essentially the same standard commercial brands, those that “sell.” They use the same basic design formats and styles, the ones that “work.” One baked goods section is virtually identical to every other baked goods section. Chains become as homogenized as the milk they sell.
Given the Reagan Administration’s laissez-faire attitude toward mergers, the Federal Trade Commission appears certain to let acquisitions continue. At this late stage, the only way to slow the consolidation process would be to block the sale of Safeway stores to Vons.
That sale, because of its scale, represents a point of no return. If it goes through, refusing to permit other deals would be untenable. Alpha Beta, Lucky and Ralphs must be allowed to compete against Vons, with all of its newly added outlets.
In Southern California, the get-him-before-he-gets-me syndrome probably will not cease until the money has run out, the product of heavy debt combined with bleak profit projections.
And what will the consumer face when the market finally has settled, when we are left with only a handful of chains? The winning chains will have regained control of the market. Without serious competitors, they will be free to raise prices and otherwise do business in a way that fattens their now-anemic profit margins.
Perhaps there is a silver lining. Those of us who devise market strategies are accustomed to the cyclical nature of markets.
When a market solidifies, as Southern California’s grocery market has, it is only a matter of time before a new trend begins. Specialty chains, filling niches that are overlooked or ignored by the giants, are born.
Some of these chains--Irvine Ranch Markets, Bristol Farms and Trader Joe’s, for instance--already are thriving. Consumers recognize the value of these stores and patronize them. The industry-leading chains are too busy or complacent to respond and adapt.
So the new challengers grow. The giant supermarket chains try to buy out the interlopers, but they no longer have the leverage and fail. Eventually, the new companies, wielding ever more power, charge and take the hill. The once-mighty fall like Humpty Dumpty.
And then, the cycle begins all over again.
