THE ECONOMY USHERS IN POTENTIAL FOR RADICAL CHANGE

In this week's special issue, you'll find a review of the year we're about to exit, with a focus on company strategies, consolidation, executive changes, the fate of online retailing and other trends.No doubt, these trends and events are all important ingredients in the happenings of the year. But the subtext of many or all these changes is the condition of the economy. This is not to overlook the

In this week's special issue, you'll find a review of the year we're about to exit, with a focus on company strategies, consolidation, executive changes, the fate of online retailing and other trends.

No doubt, these trends and events are all important ingredients in the happenings of the year. But the subtext of many or all these changes is the condition of the economy. This is not to overlook the Sept. 11 attacks and their aftermath, addressed in this issue. These events had profound effects, including those on the economy.

Acknowledging that, let's turn our attention to the core condition of the economy, which, it was belatedly acknowledged, devolved into recession in March. It's increasingly evident that the food-distribution industry is now on the edge of big, economy-related changes that will play out during 2002. We could turn to a number of chains for illustration of this, but let's focus on Kroger Co., the nation's largest conventional chain.

As was reported in last week's SN, Kroger's recently issued third-quarter numbers showed a sharp drop-off. Net income for the period sank 34.3% on a sales increase of 3.8%. But get this: For the entire year, through the most recent quarter, sales were up 4.7% and income up 36.2%.

It's evident, then, that something happened in the third quarter. What happened was margin erosion. Margins were clipped by a confluence of two forces, the economy and competition from Wal-Mart Stores' supercenters. The second factor is the most telling. After all, the storm of a declining economy produces rain that drops on everyone. The storm of Wal-Mart doesn't.

Wal-Mart now has about 1,100 supercenter locations, roughly half of which go head-to-head with one of Kroger's approximately 2,300 locations.

In an apparent bid to liberate capital sufficient to sponsor lower price points and margins, Kroger intends to consolidate divisions and institute layoffs.

This raises a question: Does Kroger's situation illustrate something about the economy, or something about competition? It does both, but recall that this is the same Kroger that heretofore seemed to be doing well enough against supercenters. So the only meaning to extract is that the economic climate is driving shoppers into the arms of supercenters, and away from conventional supermarkets.

Incidentally, when Kroger made known its revamping strategy, its equity value fell like a stone. More than that, the equity of Safeway, Albertson's, A&P and others also dropped. What investors fear is that while Kroger and other chains are girding for battle with supercenters, they won't be able to profitably match Wal-Mart's price points and, in the end, will ignite a price war that conventional chains can't win.

The upshot of all this is that we should keep a close eye on the economy in the upcoming year. It seems increasingly evident that it's the economy that will be a major change driver in 2002.

The potential for change is fundamental: The food-distribution industry may be totally revamped as a leaner, more efficient and more integrated system by the time the economy improves.

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