Rocky Road Continues For Most Retailers As Competition, Format Diversity Stifle Growth
Despite conditions that were even more challenging than a year ago, there were some “winners” in this year’s annual market study. It’s a brief list, and the companies included on it have been mentioned favorably (and recently) in this column before. Those ‘winners’ (in no particular order) are: Kroger, Harris (“Who’s Your Daddy”) Teeter, Wegmans, Whole Foods and Trader Joe’s.
That’s not to say that everybody else did poorly (although there were a growing number of merchants whose sales declines were noteworthy). Our research found that operating in “The Great Recession” which hit the economy in 2008, is getting more challenging every year for most operators.
Competition remains the biggest reason for the difficulties retailers are facing in the $45.2 billion Mid-Atlantic market. When you think the region is already so oversaturated that a new store (typically entering at a premium real estate cost) couldn’t possibly open in a given neighborhood or marketing territory, you’d better think again. There’s a strong likelihood that a new retailer will be opening across the street from you nine months later; it could be a Costco, Wegmans, Walgreens or a Dollar Tree. Whether the damage comes from carpet bombing or a paper cut, it all has an adverse impact on the existing retailer, which usually is a supermarket operator.
Deep pockets? Virtually all the “growth merchants” possess those. The days of scaring off a group of independents or a small regional chain are over. Today, the competition is truly a heavyweight “mano a mano” battle. That may extend the surrender time for the losing retailer, but it doesn’t blunt the impact of the damage done. With so many styles of retailing now in play, it also makes defending against so much diversity an even more difficult task. That’s especially true for many conventional supermarket retailers.
Above all, the measurable reasons that business is so difficult comes the financial mumbo jumbo that we’re forced to absorb. “Unemployment is on the consistent decline and job growth has significantly improved” are typical of the headlines we’ve seen over the 18 months. Really? And how is this manifesting itself in real sales growth in the overall economy? Unemployment numbers truthfully are somewhat irrelevant when you consider that many of the people who have re-entered the job market have done so at lower level jobs than they had previously held, so many people remain underemployed despite the fact that actual unemployment is on the decline. While Wegmans, Whole Foods and Harris Teeter may not be feeling the sting of many people’s individual financial challenges, the still rocky, fluctuating economy is one of the primary reasons Wal-Mart has posted negative IDs for five consecutive quarters, and even the once “beloved” (by Wall Street) dollar store channel has flattened out. Damage was also created by last year’s 11 percent reduction in public assistance (“SNAP”) benefits, which affected those retailers that typically serve consumers in the lower middle and low economic brackets.
While there will be market shakeout or corrections eventually, don’t expect major external changes in the next 2-3 years. The internal maneuverings – acquisitions and leadership changes – are already occurring.
So without further ado, here’s my annual take on the retailers operating in Food World’s largest marketing area, Baltimore-Washington, based on the year in review and what they may face in the near future.
Giant/Landover - Based on its proud and successful 78-year history, it was a poor performance for the overall Mid-Atlantic leader. ID sales fell significantly and only one new unit opened during the past 12 months (the beautiful replacement store at 8th & O Streets in Washington, DC). Giant also underwent a leadership change for the fourth time in five years (Gordon Reid replaced Anthony Hucker as president) and the stores now seem impersonal and sterile. New Ahold USA COO James McCann wants the company to become “famous” in several areas, but my perception is that the Giant current shopping experience is more mediocre than being anywhere near the cusp of “fame.” With additional Wegmans, Whole Foods and Harris Teeter stores on the way, Giant’s great locations are only going to protect it for so long. Measurable change won’t occur without improved sales, which will only be gained through better execution. The clock is ticking.
Safeway – It was another challenging year for the company’s Eastern division. However, there’s good news to report for private equity firm Cerberus Capital Management. They got a near steal in acquiring Safeway for $9.4 billion. Whether it becomes a great deal for anyone beyond a small group of Safeway executives and its shareholders remains to be seen. Cerberus and its AB Acquisition subsidiary will certainly put their imprimatur on its potential newest and biggest prize. Led by industry veteran Bob Miller and former Cerberus executive Justin Dye (now Albertsons’ chief strategy officer), expect Safeway to become more “Albertsonsized” when it gains control of the 1,335-unit chain. With that control likely will follow more decentralization (how much is not yet known), which is a good thing compared to Safeway’s intractable “red-headed stepchild” treatment of the Eastern division for many years. Now that the company’s Baltimore-Washington stores have been moved from Cerberus/AB Acquisition’s Albertsons LLC unit to its New Albertsons, Inc. division (read about this $659 million deal later in this column), a better regional alignment (Acme, Shaw’s, Jewel/Osco) has been created. Based on its track record (and also that of other PE companies), don’t expect a lot of cap-expenditures on broadening the real estate pipeline. However, if the new owners really want to improve their connection with their current and potential future shoppers, they need to achieve a significant image change (especially against new competitors). An injection of pizzazz is necessary to enhance its long-standing perception as a risk-averse “vanilla” retailer. Safeway also needs to add more labor in its stores and adjust its everyday retails, given that Giant is beginning to lower some prices, Harris Teeter just announcing a price impact program and Wegmans enjoying great success with its CLP (Consistent Low Prices) strategy. Within a year, we’ll get to witness if significant changes are made to improve the Safeway shopping experience or whether this entire Cerberus-led acquisition was driven by a desire to roll up the entire Albertsons fleet and go public.
Shoppers Food & Pharmacy – After seven nomadic years in the desert, there is a sighting of an oasis. Thanks to the more enlightened new management team at parent company Supervalu, the discount retailer is finally showing some forward progress as ID sales improved for the first time in ages and the company installed the knowledgeable and experienced Bob Gleeson as Shoppers’ president last year. Gleeson has worked for all six of Shoppers’ previous leaders, including the late, great Ken Herman, founder of the discount operator. His skill set and temperament have restored morale at the regional chain that suffered greatly under the sheer ineptitude of past Supervalu CEOs Jeff Noddle and Craig Herkert. Also helping the Bowie, MD-based retailer is a commitment to return to the days when price was the catalyst of Shoppers’ success. But there are long-term issues that bear watching. Externally, Shoppers has been hurt by the new wave of competition. The competitive assault has not come from the higher visibility competitors – Wegmans, Harris Teeter or Whole Foods – but rather from similarly niched price and ethnic merchants such as PriceRite, Save-A-Lot, Aldi, International Markets and the myriad of dollar stores that have opened in recent years. Internally, the issues are different, but also could be game changers. During the past six months, speculation has been fairly pervasive that SVU is considering selling its second largest regional chain. But, if Supervalu decides it wants to hold on to Shoppers, will it provide enough cap-ex (especially to invest in new stores or replacements) to keep pace with its rivals who have demonstrated that they will make the needed investment to open new stores to grow their market shares?
Harris Teeter – Still ranking eighth among all B-W food and drug retailers, Harris Teeter has a long way to go to challenge Giant and Safeway for market share dominance. But in the one-on-one battles, HT is winning a lot of matches and clearly outpaces the big two in attracting millennials and other categories of new shoppers (as did Wegmans, Whole Foods and Trader Joe’s). Now with Kroger’s $100 billion muscle behind them, Harris Teeter just fired its first post-Kroger salvo: a 15 percent price reduction in its Baltimore-Washington area stores. Prior to the Kroger acquisition, HT had been opening approximately four stores a year in the B-W area. Expect that rate to increase slightly. What I don’t expect to change is the investment in training, strong customer service and high level of retail execution that’s been a hallmark of the Matthews, NC merchant for many years. Imagine what Harris Teeter might look like by 2017 if it can continue to execute at its present levels: approximately 55 stores in the B-W market (far more than Whole Foods or Wegmans would have), a strong consumer image and a pricing program that would play better than either Giant’s or Safeway’s (at least by current comparison). That would be a powerful proposition to bring to the market.
Wal-Mart – It was not a particularly good year for the Bentonville Behemoth. The past 12 months in the B-W market represented the slowest period of new store growth for the planet’s largest retailer since the mid-1990s. ID sales in this area were generally flat (which slightly bettered the chain’s national results) and, other than the excitement of opening the two stores in Washington, DC (which are doing very well; three more are planned for the District), Wal-Mart was shifting internal gears by opening more smaller units (Neighborhood Markets, Wal-Mart Express) in markets other than B-W or points north. Wal-Mart’s other pressing challenge will be repairing the horrific out-of stock situation at its stores (a $3 billion opportunity, according to new Wal-Mart CEO Doug McMillon). However, viewing the big picture, Wal-Mart is still a very formidable force to reckon with and, by every measurable metric – average per store volume, customer count, sales per square foot, etc. – Wal-Mart truly remains a Behemoth. Company executives have acknowledged that their corporate pride has been hurt and that there have been too many scandals and distractions that have affected the company’s momentum. But they’ve never lost their desire to be the “cheapest guy in town” and like all retailers who want to sell more stuff, Wal-Mart will always have my respect. Competitors, too, should respect, but not fear the Behemoth, especially when wounded.
Wegmans – With only one new B-W store this year – in Germantown, MD – it wasn’t an especially explosive year for the Rochester, NY-based regional chain. But, that’s not the point. With each new 125,000 square foot store drawing from a legitimate shopping range of up to 15 miles, Wegmans can have an impact on a local market more than any other retailer in the Northeast. With its first Montgomery County, MD stores now open for nine months, customers are coming from the extremely affluent southern parts of the county (Bethesda, Rockville, Potomac), from Washington, DC and from Frederick County (where Wegmans also operates a store). With new units slated for Owings Mills, MD and Alexandria, VA, Wegmans will continue to gain steady market share growth without the quantity of stores typical of other retailers. With the recent opening of its new smaller (80,000 square foot) prototype in tony Chestnut Hill, MA, the uber-retailer has proven it can get most of its package in a store that’s 40 percent smaller than its larger models. That reduced footprint potentially gives the family-owned merchant markedly better opportunities to penetrate more demographically favorable areas that were not possible before due to real estate challenges. A Wegmans in downtown DC, or in Baltimore? Perhaps an 80,000 square footer near Tyson’s Corner or in Annapolis? It’s certainly more plausible than a year ago. And one more thing about Wegmans: Over the past 18 months, I’ve heard several industry executives comment that the retailer’s in-store execution has slipped a bit and they’re not as sharp as they were five years ago. My response: pure fiction. Sure, every day might not appear like a grand opening celebration and, by 6:00 p.m., their stores might look a little beaten up. But by comparative standards, Wegmans continues to execute at the highest industry levels. Just check their customer loyalty scores, their average basket size and sales rings against all comers.