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RETAIL VIEW: Marketplace exploding with options

PALM SPRINGS, CA -- Competition for the consumer's retail food dollar is still intensifying as the lines continue to blur between various retail sectors.

At least that is the view of retail expert Ed McLaughlin, director of food industry management at Cornell University, who gave the keynote address at the United Fresh Produce Association's FreshTech conference, held here April 25-28.

Dr. McLaughlin set the stage for his talk by comparing the U.S. retail food sector with food retailing in other countries. While food retailing is increasingly becoming international as the giant retailers ignore borders in their quest for expansion, the supermarket sector is much different in the United States than in most developed countries.

In fact, in most of Europe, a handful of chains dominate sales in most countries. Sweden tops the list, where just four supermarket chains account for more than 99 percent of retail food sales. In most countries, the top five food chains account for 50-75 percent of food sales. In the United States, the top five garner only about a 40 percent share -- but that is changing.

Dr. McLaughlin noted that in 1929, the top eight chains in the United States controlled 27 percent of the consumer's supermarket dollar. Sixty-five years later, the top eight supermarket chains had changed quite a bit, but they still controlled only about 27 percent of the market.

The last 10 years, however, have yielded significant growth. In 2006, the top eight chains controlled a 50 percent market share, which represents almost a doubling of market share in just a decade after no growth in terms of market share for more than six decades.

The advent and expansion of Wal-Mart is the main reason that the top tier of supermarkets has realized significant market-share growth. In the first place, Wal-Mart by itself has accounted for much of the gain. And in the second place, Wal-Mart's presence has caused other chains to get larger just to compete.

Dr. McLaughlin said that consolidation saw a number of established supermarket chains -- most notably Kroger, Safeway and Albertson's -- grow through acquisitions and mergers in the late 1990s. While those acquisitions and mergers did not always work as expected, the result was a greater market share for fewer firms. After a hiatus of a few years, consolidation again appears to be in favor judging by the acquisition of Albertsons by Supervalu and Wild Oats by Whole Foods. A number of other chains have also been bought or are currently on the market.

The Cornell expert said that by far the largest factor in the retail business today and for the past decade has been Wal-Mart, and it will continue to play that role. Wal-Mart's growth has been the driving force behind many trends including both consolidation and the blurring of lines among various retail sectors.

Dr. McLaughlin said that nowadays seemingly "everyone sells food." From the corner gas station to the giant general merchandise store, the consuming public can - and does - fill at least part of its weekly food cart without stepping foot in a traditional supermarket.

Wal-Mart, of course, began as a general merchandise retailer and was quite successful by 1990, when it decided to jump into supermarket retailing in a big way. Dr. McLaughlin noted that Wal-Mart had $20 billion in sales in 1990. Today that number stands at $350 billion, fueled largely by the opening of thousands of supercenters in the United States and around the world.

As Wal-Mart shifted its focus to supercenters and expanded from a regional operator to a national one, virtually every other food retailer in the country was affected.

Dr. McLaughlin said that the existence of Wal-Mart has many retailers focusing on their image and going "upscale" in an effort to compete. Using a four-squared graph to illustrate traditional retail positioning, he said that the very top-end retailers tend to be in the upper right-hand quadrant, signaling high prices but also a very high level of service and quality. The lower left-hand of the quadrant represents deep discounters that have very low prices but with low service and quality to match.

Dr. McLaughlin believes that through much of its early years, Wal-Mart resided in the lower left-hand quadrant near center. It represented low prices, low quality and service that was a bit below the traditional supermarkets, which were just on the other side of center in the upper right-hand quadrant.

But Dr. McLaughlin said that Wal-Mart has taken over center stage, as it still represents low prices, but the other factors, including quality and service, have pushed it into the territory of the traditional supermarkets.

To compete, he suggested that the traditional supermarkets have had to move further up in the upper right-hand quadrant, again signaling better quality and no doubt higher prices.

Dr. McLaughlin sees evidences all over the place that this is happening. He pointed to Safeway's Lifestyle stores and Kroger's Marketplace venues as prime examples. Publix, Ahold and H.E.B. have also added upscale elements to their new stores, but he said that even lower-end stores are finding that they have to go upscale to compete.

Aldi's, which Dr. McLaughlin said traditionally operated with very low prices and very limited offerings, is also upgrading its image and trying to move closer to Wal-Mart.

Even top-notch chains like Wegman's are not immune to the Wal-Mart effect. Wegman's has long been noted for high-quality merchandising and product presentation. Low prices, however, were not one of its promotional strengths. "Wegman's has adopted a lower-price strategy," said Dr. McLaughlin, obviously seeing this as a strategy to compete with traditional supermarkets being pushed into the upscale category by Wal-Mart.

Dr. McLaughlin said that this upscale trend is perfect for Wal-Mart, as it is allowing the nation's and the world's largest retailer a larger space from which to operate. Wal-Mart, once considered a shopping option on the lower end of the economic scale, has become mainstream.

To further battle Wal-Mart, Dr. McLaughlin said that supermarkets are also adopting other strategies, including branding. Branding once was confined to individual products, but now it can represent much more.

Dr. McLaughlin said that Starbuck's is the perfect example, as that firm has promoted the Starbuck's brand and attached it to many different items. He said that supermarket retailers are moving in that same direction, with virtually every retailer he has interviewed admitting that the development of its store brand is a high priority.

Store brands used to be a low-cost alternative, but retailers now look at their private label as a way to boost their image as well as sales.

To compete successfully for these 21st century retail buyers, Dr. McLaughlin has a checklist of ideas for suppliers to adopt.

High on the list is cutting costs. He said suppliers must become low-cost producers and take whatever costs they can out of the supply chain. He also recommended doing both product and market research because retailers just do not have that knowledge anymore.

Of course, he said that delivering a consistent, high-quality product is a necessity, but more than that, suppliers must innovate.

He also recommended developing niche markets and customizing for smaller customers. Although the top eight chains might have a 50 percent market share, it means the other 50 percent is spread among literally thousands of retailers.