Wal-Mart Food Fight Leaves Big Rivals Standing
Wal-Mart Stores Inc.’s move into the grocery business isn’t shaping up to be quite the supermarket killer that competitors and analysts originally envisioned.
Although the discounter has become the country’s fifth-largest food seller with $6 billion in supermarket-type sales, it hasn’t yet taken significant market share from the country’s largest grocery chains in markets where they both have stores, according to a report by Merrill Lynch.
In Dallas, for example, where Wal-Mart has 10 stores--its largest presence in any market--the combined market share of the top three supermarket chains actually increased in the last year from 56% to 59%, while that of Wal-Mart, which had opened two new stores during that time, was stagnant at 5%, according to data from Progressive Grocer Marketscope.
Wal-Mart’s push into food in the last three years has, however, ravaged the nation’s independent supermarket chains, which make up 68% of the food retailing business. As Wal-Mart has rolled into new markets in the South and Southeast, many smaller chains with higher operating overhead and prices have been forced to sell stores, and two--New Orleans-based Schwegmann Giant Supermarkets and Jackson, Miss.-based Jitney Jungle Stores of America--have sought Chapter 11 bankruptcy protection.
“Wal-Mart has been called the black plague on supermarkets,” says Merrill Lynch analyst Mark Husson. “When the plague comes, everyone gets sick . . . but only the weak and the old die, the healthy get over it.”
Indeed, in Louisville, Ky., when another independent discounter, Grand Rapids, Mich.-based Meijer Thrifty Acres, which has long sold food along with general merchandise, moved into the market, Wal-Mart lost market share and has not built any new stores there.
In California, Wal-Mart’s effect should be minimal, analysts say, given the state’s heavily unionized environment, which can be tapped to build political opposition to new Wal-Mart stores in many communities, and the difficulty of finding 19-acre sites within a short drive of major residential areas.
While the big four retailers have 75% of their sales in markets of more than half a million, Wal-Mart only does about a quarter of its business in these areas, Husson says. The Arkansas giant doesn’t operate any of its 650 Supercenters in California and has no immediate plans to open any, company officials say.
But Wal-Mart spokesman John Bisio says the company isn’t ruling out expansion in California, especially as it moves into nearby markets such as Las Vegas.
California supermarket industry lobbyists this fall tried to block the expansion of discounters such as Wal-Mart and Costco by rushing Assembly Bill 84 through the Legislature. The bill sought to bar food and drug sales in new stores that are larger than 100,000 square feet. The bill sailed through the Legislature before being quickly vetoed by Gov. Gray Davis.
The move was symbolic of the fierce battle being waged between the country’s largest supermarkets and Wal-Mart, which is now opening 150 Supercenters a year, putting it on track to become the nation’s No. 4 food retailer in 2005.
Although analysts such as Husson believe Wal-Mart’s portrayal as the Grim Reaper of the supermarket business has been overstated, others say Wal-Mart will affect supermarkets at every level.
“If you’re not looking at them directly, you’re looking at them in your rearview mirror,” says Patrick Schumann, a food industry analyst with Edward D. Jones & Co. in St. Louis. “It’s a fragmented market and they’re going to continue to take sales and market share.”
However, officials at Kroger Co., which now gets half of its sales from stores in areas with various Wal-Mart Supercenters, says Wal-Mart is no different from any other large competitor. Same-store sales at Kroger have continued to rise, edging up 2.6% overall in its second quarter ending Aug. 14, the company said.
“They’re tough operators, but I think we can compete very effectively against them,” says Kroger spokesman Gary Rhodes. “We only need to draw people from two miles away,” and he says, “I would argue we’re more convenient.”
The perceived threat of a Wal-Mart invasion has, however, helped depress the share prices of the country’s top three supermarket chains--Kroger, Safeway Inc., and Albertson’s Inc. All are trading at 20-year lows, relative to earnings, at a time when their earnings per share are expected to increase 16% or more next year, Husson said.
