Sunday, August 1, 2004

Kroger has never been on this track before

Grocery Wars: Kroger, Wal-Mart face off

By Randy Tucker
Enquirer staff writer

Dick Tillman of Memphis got his start at a Kroger near Columbus, and now is president of Kroger's Memphis-based Delta Division.
Photo prvided
MEMPHIS, Tenn. - The competition here between Cincinnati-based Kroger and grocery rival Wal-Mart Supercenters is hotter than Rick's Ragin' Blazin' Hot BBQ Sauce - a local favorite among barbecue-crazed Memphians.

But you won't find Kroger officials pouring sweat over the smoldering market conditions in which Wal-Mart Supercenters are almost as ubiquitous as Elvis impersonators in the rock legend's adopted hometown.

"We're still No. 1," said Dick Tillman, president of Kroger's Memphis-based Delta Division, as he kicked back in his chair during a recent interview.

Tillman, who got his start bagging groceries at a Kroger store near Columbus, said his confidence stems from Kroger's continued success as Memphis' market-share leader despite the encroachment of Wal-Mart, which opened the first of 10 supercenters in the Memphis area in 1995.

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The supercenters, which sell everything from tires to prime meats, are considered the biggest threat to traditional supermarket chains and were largely responsible for pushing Wal-Mart past Kroger in 2000 to become the nation's top grocer.

While the competition in Greater Cincinnati hasn't reached the fever pitch that it has in Memphis, it's certainly heating up as Wal-Mart prepares to open at least 10 more Greater Cincinnati supercenters over the next 18 months, joining existing supercenters in Dry Ridge and Aurora.

But Kroger points to Memphis as an example of the Bentonville, Ark.-based retail giant's vulnerabilities and as a model for Kroger's strategy to retain its dominant position in the market here.

"We've been able to shift our focus to where the competitive pressures are by improving our operating efficiencies and doing the things our customers want us to do," Tillman said. "We don't look at Wal-Mart today any differently than any other food store."

The Memphis model

Wal-Mart hammers away at grocery market share in Memphis and across the country with its Sam's Club warehouse clubs and Wal-Mart Neighborhood Groceries, which, combined with the supercenters, generated $138 billion in total food sales last year - dwarfing all other conventional food sellers.

And that's just for food. Wal-Mart's total sales topped $256 billion last year, making it the largest retailer of any kind in America.

By comparison, Kroger, the nation's largest conventional supermarket chain, generated about $54 billion in total sales last year.

The key to fighting such a formidable opponent, Tillman said, has been finding ways to cut costs out of the system while maintaining a "superior shopping experience," including high-quality produce, superior service, broader selections, extensive specialty items and full-service meat departments.

For example, Kroger stores in Memphis now sell ground beef in "case ready" packages, which look better and have a longer shelf life, Tillman said.

Wal-Mart sells the same product. But unlike Wal-Mart and most other retailers, Kroger stores maintain full-service meat departments, where butchers can cut meat to specifications - a feature considered "very" or "somewhat" important by more than 70 percent of grocery shoppers, according to a recent survey titled "Trends in the United States: Consumer Attitudes & the Supermarket."

The survey, commissioned by the Washington-based Food Marketing Institute, was based on telephone interviews with 500 shoppers conducted in January and has a margin of error of plus or minus 4.4 percentage points.

Kroger also has expanded its cost-cutting strategies to its produce departments in Memphis, where instead of spending hundreds of hours a week restocking bins with fruits and vegetables, workers now put staples such as apples, potatoes and melons on the floor on pallets in the same containers in which they were shipped.

By taking these steps, Tillman said, Kroger has cut labor costs, allowing the company to reduce prices and narrow the price gap with Wal-Mart, which sells food at prices 15 percent to 30 percent less than conventional supermarkets, according to most industry estimates.

Kroger may be winning the fight in Memphis, but it has taken some hard shots since Wal-Mart arrived.

Since 1998, Kroger has seen its share of the Memphis market decline from about 37 percent to about 34 percent last year, according to Trade Dimensions International Inc., which tracks market share for supermarkets and other retailers.

That means Kroger has lost control of nearly 9 percent of total food spending in the market, despite an aggressive plan over the past five years in which Kroger has opened 10 new stores in Memphis, replaced another, expanded two more and gobbled up several stores from competitors who couldn't withstand the Wal-Mart onslaught.

Kroger has 34 stores in the Memphis area that compete with the Wal-Mart Supercenters, four Wal-Mart Neighborhood Grocerys and five Sam's Clubs, as well as 11 Sav-A-Lots, four Super Kmarts, two Costcos, one SuperTarget and at least 36 other locations of various supermarket chains.

That's in a city with a metro-area population of 650,000, compared with 2.05 million in the 15-county Greater Cincinnati area, where Kroger operates 74 groceries and faces less competition.

Outside of Wal-Mart, the only other threats to Kroger in Cincinnati are superstore operators bigg's and Meijer, which each have 11 stores in the area. Meijer is the No. 2 grocer in the area with control of about 14 percent of the market, while bigg's ranks No. 3 with market share of just over 10 percent.

Those stores will no doubt feel the pinch on pricing once all the Wal-Mart Supercenters are up and running in the Cincinnati area, said Mark Hugh Sam, a grocery analyst at Morningstar Inc. in Chicago.

"The price competition in Cincinnati will be intense with the arrival of Wal-Mart. That will almost certainly result in share loss, even for the market leaders."

Strategy to keep shoppers

So why don't Kroger and other grocers in the area simply lower their prices to match Wal-Mart's?

They can't. Their costs are too high, particularly for labor.

For example, while nonmanagement union workers at Kroger and other traditional supermarket chains average between $11 and $14 an hour, Wal-Mart said it will pay its nonsalaried employees in Cincinnati $10.57 an hour, which is slightly higher than Wal-Mart's national average of $9.64 an hour.

Health care costs, or lack thereof, are another advantage for Wal-Mart. Kroger spent more than $1 billion last year to provide health benefits for more than 80 percent of its 290,000 employees - more than three times the company's earnings of $314.6 million last year.

By comparison, less than half of Wal-Mart's roughly 1 million employees are even enrolled in a company health plan, though the company won't say how much it spends on health benefits.

Besides lower costs, Wal-Mart's size allows it to bargain for lower prices from suppliers and pass those savings on to consumers.

Wal-Mart can even afford to sell some food items at a loss because it can make up the loss on the more profitable general merchandise sold at its supercenters.

Despite operating at a decided disadvantage, Kroger officials in Memphis and Cincinnati say they're not conceding they'll lose ground in the market.

"There's no way Wal-Mart will run us out of town," said Bob Hodge, president of Kroger's Cincinnati/Dayton marketing division. "Wal-Mart is a pure price player, but we won't compete with them on price."

Instead, Hodge said, Kroger stores in Greater Cincinnati will emphasize cleaner stores, better selection and full service.

And Kroger is well prepared to face the Wal-Mart onslaught after more than a decade of going toe to toe with Meijer and bigg's.

"Between Dayton and Cincinnati, we compete all around this marketplace with more than 45 supercenters, and from our position we're doing quite well," said Hodge, referring to Kroger's position atop the local grocery market.

But Kroger continues to face challenges in an increasingly competitive marketplace in which even loyal shoppers find themselves spending more of their food dollars at Wal-Mart Supercenters and other nontraditional grocers.

"I shop at Kroger 99 percent of the time because I know where everything is, and I think they have better variety and quality," said 55-year-old Anne Pratt, from the Memphis suburb of Cordova. "But I do shop at Wal-Mart for certain things that they have for less, especially when I'm buying in bulk."

If you can't beat 'em ...

Kroger officials, realizing there's no silver bullet for dealing with Wal-Mart and other competitors, are also testing new store formats in a multipronged approach to protecting their market share.

Kroger, which already has bolstered its supermarket selection of nonfood items, such as lawn furniture, electronics and sporting goods, recently expanded its standalone Marketplace supercenter concept to Columbus after successful trials in Arizona and Utah.

Kroger said it plans to open six Kroger Marketplace stores in Columbus by the end of this year, offering more general merchandise than traditional Krogers in stores about double the size of the average Kroger supermarket.

And while company officials would not comment on possible future locations, industry watchers say they wouldn't be surprised to see Marketplace stores emerge in Cincinnati, Memphis and other markets where Kroger faces heavy supercenter competition.

"The Marketplace stores are a great format that would do very well against supercenter competitors in Cincinnati and other markets," said Sheila McNeely, an industry analyst at Fitch Ratings in Chicago. "Supercenters are by far the most difficult competitive threat to Kroger and other supermarket chains because they offer everything in one place. The Marketplace stores are Kroger's format for one-stop shopping."

Kroger also picked Columbus for its most recent expansion of its Fresh Fare concept, a higher-end supermarket with greater emphasis on prepared and gourmet foods to compete with the likes of Wild Oats and Whole Food Markets.

The first Fresh Fare in Ohio will open later this year, featuring everything from fresh organic produce and dried beans to slabs of hormone-free beef.


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