A Strikingly Different Future for Grocers
Are supermarket chains about to check out?
The question arises as the bitter strike and lockouts at major grocery stores in Southern California reach a possible turning point, with the two sides sitting down with a federal mediator Monday.
The answer is that chains definitely have a future, just one that looks different. Your favorite market may be smaller and more focused as its corporate parent learns how to operate with a lower cost structure. But one way or another, the supermarket industry will continue to grow, as it steadily has for the last decade.
In fact, there are more supermarkets in the U.S. today (32,981) than five years ago (30,700) and 10 years ago (29,800). By the way, a supermarket is defined by the trade publication Progressive Grocer magazine as a store with at least $2 million in annual sales.
The statistics may come as a surprise because of all the chains’ loudly expressed assertions that Wal-Mart Stores Inc. has swooped in to conquer the grocery business and steal chains’ customers with the mammoth super stores it keeps opening across the U.S. To be sure, Wal-Mart has built up the food side of its retailing empire in the last decade and shows no intention of slowing down: It aims to open 40 or more so-called Supercenters in California in the next few years. As it is, the Bentonville, Ark.-based giant and other retailers that sell from warehouse-like outlets, including Costco Wholesale Corp. and BJ’s Wholesale Club Inc., account for more than 25% of U.S. grocery sales.
The national supermarket chains of Safeway Inc., Kroger Co., which owns Ralphs, and Albertsons Inc. -- the companies involved in the Southern and Central California strike -- fear the big-box competitors because their largely nonunion outlets’ operating costs are 10% to 15% lower than those of the chains. So, unsurprisingly, the chains cite the generous health and pension benefits in the last contract with the United Food and Commercial Workers union as unsustainable competitive disadvantages. The union, too, points an accusing finger at Wal-Mart, saying its tightfistedness when it comes to wages and benefits threatens all laborers. That’s why both sides in the strike here are so determined to get their way.
The truth is that union benefits aren’t the only reasons for the supermarket firms’ recent declines in profit and stock prices. They may not even be the main reasons.
In the last decade, Safeway, Kroger and Albertsons have grown fat with acquisitions of local grocery companies in many parts of the country. The chains made the deals in the belief that bulking up would help them compete with Wal-Mart, but size did not bring success -- mainly because the chains forgot the local ties and customer service that made their stores strong in the first place. They goofed by centralizing operations at headquarters, sending out commands and “allowing little autonomy to local managers,” explains veteran grocer Lawrence Del Santo, the retired chairman of Vons Stores, which is now a division of Safeway.
That was another turn in the 73-year evolution of supermarkets, a retailing form that began in 1930 in the New York borough of Queens. Now the evolution needs to be tweaked again: Del Santo knows what the big chains should, and probably will, do: “They need to stay big but think small, think locally and entrepreneurially.”
As it happens, new and successful models in food retailing are doing just that.
A prominent example is SuperValu Inc. of Minneapolis, which has more than 1,400 stores in the Midwest and Southeast and about $20 billion in annual sales. SuperValu’s stores, including Cub Foods, Shop & Save and Save-A-Lot, range from conventional supermarkets to a sort of discount mini-mart. But they have one thing in common. In every store, says Chairman and Chief Executive Jeffrey Noddle, local managers have authority over “anything that touches the customer, from product stocking and pricing to types of produce and meat.”
Back at headquarters, Noddle adds, “we handle the back office, the accounting and computer systems -- stuff the customer doesn’t see.”
One SuperValu innovation is a limited-menu kind of market. Its 1,000 Save-A-Lot stores carry 1,250 items, compared with the 25,000 on the shelves at typical supermarkets. “We chose the most commonly purchased items, and we stock 25 types of meat and a comparable selection of produce,” Noddle says.
What’s more, a Save-A-Lot is typically 15,000 square feet, while a supermarket is usually in the neighborhood of 50,000 square feet. The Save-A-Lot target is the true mass market -- families with incomes of $35,000 or less -- which, Noddle points out, “is 50% of all the families in the country.”
It seems there’s something of a fewer-items, fewer-square-feet trend in the country: Colton-based Stater Bros. Holdings Inc. holds its markets to 33,000 square feet and focuses on fresh meat, fish and produce.
But reductions in store size, or in cost control for that matter, are not so much a response to competition from Wal-Mart as attempts to serve customers efficiently and inexpensively. The fact that the warehouse stores have attracted so much patronage just underscores a long-standing message to labor and management in the $680-billion U.S. food retailing sector: Change and compromise are necessary for survival.
Yes, that goes for labor too. Membership in the UFCW has declined in the last decade, despite an increase in food-store openings. Union leaders are prone to blame “unscrupulous employers,” but that kind of talk doesn’t register much with people who, when they go to warehouse stores, are just looking for bargains. Adaptability and compromise will be necessary if workers as well as owners are to meet the competition.
A UFCW strike against supermarket chains in St. Louis -- which ended after 25 days -- offers an example. Although the union retained full health benefits with no co-insurance payments from employees, says UFCW spokesman Ed Finkelstein, the UFCW agreed to a co-payment for health-care treatments and to different wage tiers for newly hired employees. That is what employers have demanded of striking grocery workers in Southern California.
Does your supermarket have a future? Sure. Will it change? It had better.
James Flanigan can be reached at jim.flanigan @latimes.com
