Are Conventional Grocers ‘Doing Just Fine’?

Discussion
Apr 29, 2013

According to Mike Schlotman, Kroger Co.’s CFO, the "full-service grocery industry in the United States is very healthy."

Speaking in early April at a Morgan Stanley investor conference, Mr. Schlotman was addressing perceptions around conventional supermarkets on Wall Street and elsewhere. Specifically, he was asked, after 37 straight quarters of comp-store gains, had the "gap closed enough to Walmart" to enable Kroger to ease up on the pricing investments that continually compress gross margins.

The CFO answered that while Wall Street focuses on gross margin rate, Kroger focuses on "gross margin dollar generation." He said Kroger is going to have a "permanently lower gross margin rate." However, as long as comps are improving enough, it serves Kroger’s goal of lifting gross margin dollars.

And he claims the formula works. Wall Street’s perception that the traditional supermarket "industry is dying" is partly due to publicly held companies that are struggling or have left the marketplace. On the private side, however, "Publix, H.E.B, Hy-Vee, Wegmans, WinCo, all of these companies are great full-service grocery operators doing just fine like we are."

He noted the low-end isn’t the "automatic ticket for a success," pointing to the struggles at Save-A-Lot. Conversely, the high-end isn’t always a winner, pointing to Wild Oat’s sale to Whole Foods. Mr. Schlotman added, "The fact of the matter is, the high end is doing just fine, the low end is doing just fine and where we operate is doing just fine."

The "formula for success," across each channel positioning, is pleasing customers each time they walk through the door to make sure they come back. As such, Kroger isn’t responding directly with lower prices to Walmart, but to shoppers’ needs.

"I think where people have fallen by the wayside is they focus on numeric results rather than satisfying the customer," said Mr. Schlotman. "If you have a whole bunch of satisfied customers, the numeric results will follow."

Around the similar theme, Safeway’s stock lost 12.2 percent last week after first-quarter earnings missed expectations due to higher-than-expected gross margin erosion. Price inflation was lower than expected and rival traditional supermarkets or discounters didn’t pass on those costs. Said Steven Burd, Safeway’s CEO, on a conference call, "You have to react."

But Mr. Burd believes the overall competitive landscape has been "pretty rational" over the last 20 years, and downplayed any signs of it heating up.

"What I would say is, relative to the fourth quarter, it’s like the temperature in your living room. In the fourth quarter, it was 70, and in the first quarter it was 71," he said.

Is the threat of big boxes on traditional grocers over-exaggerated? Are conventional grocers overly obsessed with price reductions? How would you rate the health of the conventional grocery channel? How would you assess the competitive pricing landscape across food channels?

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16 Comments on "Are Conventional Grocers ‘Doing Just Fine’?"


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Ben Sprecher
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Ben Sprecher
9 years 18 days ago
The big box threat is real, just like the high-end threat is real, and the dollar store threat is real, and the chain drug thread is real; but savvy conventional grocers can still find room to operate a (moderately) profitable business in between those other channels. To do so, however, the grocery chain has to thread the needle. Prices need to be low enough to keep shoppers from switching to Whole Foods, while staying high enough to cover their higher-than-Walmart cost structure. Locations need to be large enough to have a better grocery selection than CVS while being small enough to be located more conveniently than a warehouse club. In the end, the conventional grocers who win will be those who, like Kroger, keep a maniacal focus on their best customers, and who communicate with those customers in a relevant, personalized way that reflects what each customer values from their relationship with that retailer. But if you only offer a ho-hum experience, with middling prices, fine selection, decent quality, and a one-size-fits-all communication strategy, don’t… Read more »
J. Peter Deeb
Guest
9 years 18 days ago

A complex question! You can answer either way depending on the retailers that you analyze. In many ways, the traditional grocer has done just fine over the past 10 years. This country has been overstored in many places and there has been a weeding out process that has led to the survival of the fittest.

The pricing landscape will always have an ebb and flow by market and by economic conditions. The conventional grocers that are standing today are healthier than they were 5 years ago.

Mark Heckman
Guest
9 years 18 days ago
To steal a phrase from author, Tom Clancy, price is the “clear and present danger” facing traditional supermarkets as most are not equipped to operate at the profit margins that larger price formats do. Many traditional grocers are doing some interesting things with digital promotions, store events, etc., to keep customers engaged, but as long as the economy continues to struggle, the deck is stacked against them as shoppers seek the best deal. Moreover, Whole Foods, Fresh Market, Trader Joe’s and others are making significant dents in the fresh side of the traditional grocer’s business. Further, as fresh departments become more branded and commoditized with pre-packaged, case-ready product, the larger price formats are becoming a more viable alternative for produce, meat and deli items. To say the traditional grocers are “doing just fine” is only true when you are talking about Kroger, HEB, Wegmans, Publix, and a few others that have invested in price and promotion, while keeping their facilities, service levels and fresh presentation alluring. As for the many of the other traditional grocers,… Read more »
Gene Hoffman
Guest
Gene Hoffman
9 years 18 days ago

The threat of big boxes on traditional grocers aren’t over-exaggerated—but Kroger, Publix, H.E.B. and Wegmans aren’t traditional grocers today. They are the successful grocers who survived the impact of the big new entrants by upgrading and innovating.

When Walmart entered the grocery world, those grocers named adapted to the change and did the many things beyond pure price reductions that made them be more dynamic and inviting to a huge number of customers.

Meanwhile those remaining grocers who are still trying to live on yesterday’s standards and practices are like old solders that are are fading away.

Tomorrow: There is plenty of room on the landscape for superior grocers to evolve and thrive in the future. We haven’t seen everything that is possible in the food channel yet.

Richard J. George, Ph.D.
Guest
9 years 18 days ago
The threat is not simply from big box. It is every other retailer selling food including big box, club stores, dollar stores, drug, and convenience stores. Kroger and the noted private side companies continue to prosper by offering a positive difference beyond merely price. Safeway and in particular, the former Supervalu banners, struggled with differentiation and lacked funds for capital expenditures and people development. Save-A-Lot was caught in the Supervalu implosion. The rest of the extreme value retailers like Aldi and the dollar stores have done quite well, taking share from the more traditional food retailers. Few would classify the sale of Wild Oats to Whole Foods as a Wild Oats failure. Unless you have a functional cost advantage, price alone is not a sustainable strategy. The challenge for conventional retailers is not to wind up like Sears, where America used to shop. Remember the words of Jerry Garcia, “It is no longer good enough to be the best of the best. You need to be the only people who do what you do.” What… Read more »
John Boccuzzi, Jr.
Guest
John Boccuzzi, Jr.
9 years 18 days ago

Kroger has it right. Traditional grocers are fine, especially the private groups like Hy-Vee, H.E.B, Publix and WinCo. Wall Street forces grocers to make short-term moves for short term gains and that can hurt long-term success.

There’s no question being competitive on price is here to stay. That said, delivering an amazing customer experience is more important and will help build the top and bottom line long term. Kroger understands this and their use of loyalty data through dunnhumby is helping to create that great customer experience. Hy-Vee’s Store Manager approach is extremely unique and plays a huge role in that chains continued success. If you have not toured a Hy-Vee, you are missing out on an amazing grocery retail experience.

I also believe that Private label focus will continue to impact a retailers long term success. Develop great PL and loyal customers will follow.

Kevin Graff
Guest
9 years 18 days ago

The view from the far North (Canada), where big box grocery is relatively new, but growing fast. It’s a crazy competitive category for anyone in grocery. What’s important to note is that it’s not just competitive for the low price players, it’s also competitive for the higher-priced, experience-based grocers as well.

We can get so caught up looking at the price game that often we forget that price is just one of the many playing fields for grocers and others. Consumers aren’t all cut from the same cloth…and neither are retailers.

Bill Clarke
Guest
9 years 18 days ago
Just speaking from a consumer point of view, the problem with being “in the middle,” where Kroger is positioning itself, is that you may end up pleasing neither the price-conscious shopper nor the shopper who wants to pay for better quality and a more pleasant shopping experience. Whatever its strengths, Kroger does not have the rabid fan base of a Publix or a Whole Foods. And trying to compete with Walmart on price, at the expense of the fans that it does have, could prove problematic. Kroger just announced the other day that it will be doing away with double coupons in yet another region, in order to invest in “new lower prices” instead. Yes, some may say that double coupons, fuel rewards, etc. are gimmicks. But they do help differentiate Kroger from a place like Walmart. By offering lower prices, that still won’t be as low as Walmart, Kroger ends up offering nothing special. One commenter said the change means they’re “no better than Food Lion now.” As many have commented here before, there… Read more »
W. Frank Dell II, CMC
Guest
9 years 18 days ago

Fact: the traditional supermarket segment has not grown for years. Food sales are directly related to population. All the population growth in the last 30 years has gone to eating away from home and alternative channels. Wholesale and independent retailer volume has been taken by chains.

Today, the supermarket segment handles the same tonnage as we did years ago. The problem is there is not real tonnage growth. The pricing perspective is related to the economy. Unemployment is up, number working is down and wages have not kept up with inflation. The Great Recession is having as lingering an effect on prices as the Great Depression did. This will continue for some time, but remember, price never ranked as the number reason a consumer selected a store to shop in. Price is important, but clean always wins out, as does convenience for the middle class and above.

Li McClelland
Guest
Li McClelland
9 years 18 days ago

Particularly in suburban areas of most large cities the traditional mid-price grocer is facing a slow losing battle. It’s partly due to the highly visible high-rent locations, many of them staked out decades ago.

It seems to me that these grocers are also dealing with the vast numbers of families in which at least one adult is unemployed and the increasing numbers of the baby boom generation who have already retired. That’s another way of saying that many, many people currently have a lot more time to comparison shop using flyers and online, as well as having the time to drive a little farther for deals and perhaps to “stock up” (rather than just run into whatever store they happen to drive by to grab a few items for dinner on their way home from work).

Craig Sundstrom
Guest
9 years 18 days ago

Was the threat exaggerated? To the extent that ten years ago we were told “(traditional) supermarkets will be gone in ten years” then, obviously, yes, it was exaggerated. But that was never a very thoughtful prediction anyway, since there are huge areas of the country—cities and older suburbs—where the traditional supermarket model still works (although even here there has been a reduction in store count and a replacement of smaller stores with larger ones, a decades-old phenomenon).

As for the broader claim that the grocery industry is “very healthy,” I guess that is a question of how much one wishes to excuse away problems. To say the industry is doing great, just as long as you ignore all the companies that aren’t, doesn’t strike me as very insightful.

Brian Numainville
Guest
9 years 18 days ago

There are many factors that make it especially difficult for those conventional supermarkets that are “caught in the middle.” And it is more than just price or a large store size that threatens them. They are in the middle on differentiation, on price, on services, on freshness and so on. Relatively vanilla.

But at the same time, those supermarkets who find a clear point of difference, communicate it well, and stay close to their best customers and their communities, will survive in the long run.

Roger Saunders
Guest
9 years 18 days ago

Kroger’s CFO, Mike Schlotman is calling the ball in the right manner—put the consumer, your customer in the center of the equation, and the numbers will follow. The Dave Dillon-lead Kroger has demonstrated 37 quarters of growth by design, not by luck or happenstance. It goes well beyond strategy, execution, and structure—it involves a cultural commitment. Not every grocer is capable of pulling this off type of performance, hence the list of winners and losers will continue to baffle Wall Street.

A similar pattern exists in virtually all discretionary and non-discretionary retail spaces. Rally around the merchants who appreciate and lust to better understand their customers. That wily consumer, like money, will go where they are welcomed, and stay where they are appreciated.

David Livingston
Guest
9 years 18 days ago

Conventional grocers are not threatened by big-box and specialty grocers. Their biggest enemy is themselves. Financially stressed plain vanilla publicly held chains really have gone nowhere in the past 20-30 years. Pricing is a big problem because its hard to be competitive when you are burdened with debt, rent, union labor, credit card fees, and overly greedy high-end management.

Mike B
Guest
Mike B
9 years 17 days ago
A few of them are doing fine but many are struggling badly. As a result of so many struggling conventional grocers that run a poor store, it is creating a new generation of consumers that do not use these stores as more than a convenience store, or in some cases, not even as a convenience store. They are used to getting their groceries from a supercenter, a Trader Joe’s, a Whole Foods… what do they think of the Safeway or Albertsons by their house that they usually drive past to get to one of these other places? Dark. Poor quality. Expensive. Slow service. Few people shop there. In the case of Safeway, gas pumps that won’t work properly with corporate produced stickers saying you must “hold the yes button for 5 seconds…” and “you are responsible for any damage you cause to our pumps.” Some of these people like Hy-Vee and some of the Kroger divisions are really fighting hard to keep the format relevant, but it is an uphill battle when there are so… Read more »
William Passodelis
Guest
9 years 10 days ago

“If you have a whole bunch of satisfied customers, the numeric results will follow.” AMEN Mr. Schlotman! Some of the “traditional” grocers are doing REALLY great jobs at customer satisfaction and service. Congratulations to them. They are working really hard in a difficult environment and finding ways to make it work. They deserve, and have earned, HUGE respect!

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