DISCOUNTERS NO HOLIDAY THREAT: ANALYSTS

NEW YORK -- Discounters across the country had a strong holiday season this year, but not at the expense of most supermarkets, according to analysts.That's because much of the fourth-quarter gains by discounters came from general merchandise, a category still not heavily emphasized at supermarkets, except for those supermarkets that operate supercenter formats.Deborah Weinswig, associate director

NEW YORK -- Discounters across the country had a strong holiday season this year, but not at the expense of most supermarkets, according to analysts.

That's because much of the fourth-quarter gains by discounters came from general merchandise, a category still not heavily emphasized at supermarkets, except for those supermarkets that operate supercenter formats.

Deborah Weinswig, associate director at Bear Stearns here, said that Wal-Mart Stores, Bentonville, Ark., saw a 4% to 6% increase in same-store sales, while Target, Minneapolis, and Kmart, Troy, Mich., saw only a slight upturn in sales. However, both saw a marked increase in store traffic closer to the holidays, Weinswig said.

Wal-Mart, in a sales report for the week ending Dec. 26, noted that the strongest categories for the period included electronics, toys, ladies apparel, and seasonal categories such as wrapping, trees, lights and other decorations. Tom Williams, spokesman for the company, said food sales were "above average" but not a top-selling category.

Jonathan Ziegler, managing director with Deutsche Banc Alex. Brown here, said that the sales growth at discounters like Wal-Mart is nothing for supermarkets to be alarmed about.

"These discounters are doing the same thing they do every year, pushing general merchandise," Ziegler said. "Sure, these guys are adding a lot of square footage and are selling food, but the fourth quarter always gets distorted because of the big general-merchandise push during the holidays. On the whole, these numbers do not necessarily represent any warning signs that discounters will be taking any additional food share from supermarkets."

Weinswig said that the numbers indicate consumers are beginning to catch on to discount buying and trading down from high-end retail operations.

"The numbers are a reflection of both consumers' heightened focus on value during this slow economy and increased acceptance of the discount-store format," Weinswig said. "Consistent with the trend of consumers buying close to their needs, sales were particularly strong in the final week before Christmas after a slow start in the first two weeks of December."

Mark Husson, analyst with Merrill Lynch here, said that discounter growth percentages are indicative of a maturing store base that is cannibalizing itself.

Husson said, "Where before there was one Wal-Mart in a town, in many cases there are now three. A couple of years ago discounters were pushing well into the double digits in comparable-sales growth; now that is only 5% or so. We see that they are actually fighting themselves for share, not supermarkets and other retailers like they were when they first arrived."

Though food was not a disproportionately large percentage of Wal-Mart's strong sales, the company's general-merchandise sales gains indicate that discounters can prove to be a problem for supermarkets that emphasize general merchandise, according to some analysts.

Jack Murphy, vice president with Credit Suisse First Boston here, said companies like Kroger, Cincinnati, which operates stores with higher levels of general merchandise, can be feeling the pressure from Wal-Mart more than other operators.

"Kroger said late last year when it released its earnings that nonfood items were the most vulnerable and weaker areas," Murphy said. "We're continuing to see discretionary categories like floral become weaker and weaker in supermarkets, and Wal-Mart is definitely taking away market share in those areas."

Murphy also told SN that competing with supercenters, and the requisite price wars involved, could spell increasingly thin margins for supermarkets going forward.

"The real question [for supermarkets] is, despite decent sales, [what is the] potential impact on the gross margin, as general merchandise sales are weaker and prices are slashed? Once we see companies reporting margins in quarters that include December, we can see the true effect of supercenters this holiday season," Murphy said.