THE FORMIDABLE FORMAT

The good news for traditional supermarket operators is that most alternate formats don't pose a major threat at this point, according to analysts and other industry observers.The bad news, however, is that one nontraditional format -- the supercenter -- continues to multiply and gain food market share and will become an increasingly serious adversary for supermarkets in the future, those observers

The good news for traditional supermarket operators is that most alternate formats don't pose a major threat at this point, according to analysts and other industry observers.

The bad news, however, is that one nontraditional format -- the supercenter -- continues to multiply and gain food market share and will become an increasingly serious adversary for supermarkets in the future, those observers added.

"Alternate formats aren't going to be a serious frontal assault on the supermarket business," said Gary Vineberg, vice president of equities research at Merrill Lynch, New York.

"Look at warehouse clubs. They gave the industry a fair amount of trouble a few years ago, and it took a while for supermarket operators to adjust, but they did."

However, Vineberg called supercenters "the latest big challenge to the supermarket industry, but the biggest threat of all," particularly in the case of Wal-Mart Stores, Bentonville, Ark., which already has nearly 150 supercenters and projects opening 100 more per year over the next five years.

"The consumer trust in Wal-Mart is there," he explained. "They are clearly improving on the food side, particularly in perishables. And when they operate in unionized areas, they have the advantage of a lower cost structure for labor. The consumer couldn't care less if the supermarkets' cost structure is higher -- there's nothing value-added there for them."

Edward Comeau, senior vice president of equity research at Lehman Bros., New York, said most alternate formats don't present major problems for most conventional operators because they are generally niche concepts.

"Warehouse clubs, limited-assortment stores and other alternate formats require a trade-off from the customer, such as buying in bulk or choosing from a limited selection," Comeau noted.

Comeau sees no such trade-offs with supercenters, however -- which is one of the main reasons he believes they will become even more of a food player as they expand.

"You'd be hard-pressed to find a compromise that consumers have had to make to shop in a supercenter," he said. "[Supercenters] carry a full selection, have good prices, quality of service, an ample amount of checkouts, a separate entrance for the food side and are distinctly laid out and easy to shop. Plus, the customer has the opportunity to do some general merchandise shopping as well. If you're within a 2- to 3-mile radius of a supercenter, I think you look at it as you would any other supermarket." Observers said the real threat from supercenters is to independents and small chains in rural outposts, because such operators lack the financial resources to do battle with a major supercenter operator such as Wal-Mart, Kmart Corp. of Troy, Mich., or Target Stores, Minneapolis.

"All our studies show that when a supercenter opens, there is a minimal impact on the major supermarket operators because they have the deep pockets to fight back," said David Rogers, president of DSR Marketing Systems, a consulting firm in Deerfield, Ill. "But the independents and small chains suffer. You can't add that much floor space to a small, rural market without someone dying."

Not only have supercenters had an impact on conventional operators, but they've also cut into the sales of other alternate formats, some observers said.

"Limited-assortment stores like Aldi don't go into a market and destroy everybody -- they go in and get their niche, which is very price-oriented," Rogers said. "It's a quiet format, and it does very well in rural, low-income areas. The problem is, companies like Aldi had the small towns pretty much to themselves until Wal-Mart came in."

As long as Wal-Mart continues to concentrate its supercenter focus on small towns where it already has a presence and can come in and immediately vie with smaller, weaker supermarket operators, it will be successful with the format, analysts said.

"I think we'll continue to see real rapid supercenter expansion from Wal-Mart, but at the end of the year, they still won't have a huge number relevant to grocery stores," said Jonathan Ziegler, a securities analyst at Salomon Bros., New York. "They'll have plenty of room for even more growth.

"They've learned from the mistakes of other formats, like the warehouse clubs and hypermarkets; they're improving their operations and they continue to get bolder and stronger. The rural strategy is a strong one for Wal-Mart."

Kmart's strategy to open Super Kmart Centers in urban markets -- competing with well-established, major supermarket chains -- has been much riskier, and has delivered mixed results for the company's 72-store supercenter division, according to observers. This uneven performance has played a role in Kmart's decision to indefinitely scale down its once-ambitious supercenter expansion plans.

Last year, the company talked about opening 100 Super Kmart Centers per year, but internal problems at the parent company forced the discounter to put those plans on hold. Observers said they expect Kmart to open a more modest 15 to 25 supercenters in 1995. As for Target, the jury's still out. The discount store division of Minneapolis-based Dayton Hudson has received good reviews on its first SuperTarget, which opened in Omaha, Neb., in March. Observers said the company is expected to open as much as a dozen supercenters over the next two years -- including its second in Lawrence, Kan., in October -- but beyond that, Target isn't saying.

Despite Kmart's efforts to establish itself in metropolitan markets, urban operators have little to fear from supercenters invading their turf -- at least for the next few years, observers said.

"I don't think the way urban shoppers like to shop is conducive to supercenters," Vineberg said. "In urban areas, people are busier -- they don't want to drive that far to a 180,000 square-foot store where they'll have to park a quarter of a mile away and it'll take them hours to go through the aisles. Some portray this one-stop shopping concept as convenient, but in many ways, it's the exact opposite."

"I don't think we'll see a metro push from Wal-Mart for some time," Comeau added. "But there's no reason to think they can't do it. When they do, it'll likely be in Southern markets where labor and real estate are cheaper."

Regardless of the format's ultimate expansion strategy, supercenters are here to stay, and traditional supermarket operators need to accept them as competition and devise strategies to defend against them, observers said.

"Supercenters should be regarded as formidable competitors, just like any other," Roger Stangeland, retired chairman of Vons Cos., Arcadia, Calif., told SN recently. "We'll see how well they do, and my hunch is they will do very well and become an accepted part of the industry."

Added Vineberg, "Whether or not the supercenter is a better format, we can't stop them, and we already see the initial tremors of a major conflict that I believe is coming [between supercenters and traditional supermarkets]."

He continued, "Supermarket operators are wise to be concerned with the supercenter format and to address how to combat it."