SALES PLAN

Checking competitors' prices and making sure the various clip strips, blade signs and poppers that festoon Center Store aisles are intact are now a part of store employees' routine at Crossroads County Market in Wausau, Wis.It all takes time, but store manager Mary Gaiche believes it's worth it. When a Wal-Mart supercenter opened two-and-a-half years ago, sales at the 64,000-square-foot store temporarily

Checking competitors' prices and making sure the various clip strips, blade signs and poppers that festoon Center Store aisles are intact are now a part of store employees' routine at Crossroads County Market in Wausau, Wis.

It all takes time, but store manager Mary Gaiche believes it's worth it. When a Wal-Mart supercenter opened two-and-a-half years ago, sales at the 64,000-square-foot store temporarily declined 5%, but now are 5% ahead of last year.

"We were prepared to take a hit, but I [think] we took half the hit we thought we would take," Gaiche said.

What allowed the independent operator to duck was a Center Store program that its wholesaler, Supervalu, piloted at the Wausau County Market and six other north central Wisconsin stores in 2000. Blending everyday-low prices on "known value items" and tactics designed to encourage purchase of higher-margin items, the plan began helping its supplied stores, many of them stand-alone operations, fend off mass and supercenter competition -- long before other big-chain retailers adopted similar strategies.

Created in 1999, the EDLP/high-low format is being used by 570 corporate-owned and supplied independent stores, from the single unit in Wausau to the 20-store Clemens Family Markets chain in suburban Philadelphia, which is among the most recent adopters. "In some of these key categories, they were losing tremendous sales volume," said Dan Kositzke, corporate director of Center Store strategy for Eden Prairie, Minn.-based Supervalu. "That's when we said it doesn't make sense to walk away from this Center Store business. We need to fight back."

Jeff McClure, area marketing director for Supervalu's Midwest region, who helped create the program, said the object was to persuade shoppers that "they didn't need to fill their cart with edibles, then go to mass" for the rest.

A New Script

In creating the program, Supervalu combined its own research with teachings from an unidentified retailer that was competing successfully against mass merchandisers.

The first step was to make sure the mix and number of stockkeeping units were right, Kositzke said. Supervalu asked manufacturers to identify their top-selling items, then cross-checked that data with its own sales information. Happily for retailers, the SKU count declined as a result.

Smaller package sizes often were traded in for bigger ones. Supervalu found its stores often carried small sizes of things like toothpaste and bath tissue, when shoppers preferred big and multi-pack sizes.

Once Supervalu had the mix right, it used ACNielsen's category planners to understand the dynamics affecting vulnerable categories and conduct a price regression analysis to see how changes in prices would affect sales.

In categories like pet food, laundry detergent and paper products -- where a large percentage of sales had drifted to mass -- going EDLP clearly made the most sense. However, here some balance was required, for price cuts alone would only erode gross margins. In combination with the cuts, Supervalu executives looked for other items whose prices it could raise, and developed endcaps that combined competitively priced products with higher-margin items in other categories.

While some merchandising decisions made perfect sense, like combining diapers with applesauce and disposable cameras, others were less obvious. One scripted endcap combined coffee and pet products, for example, after Supervalu found using consumer data from ACNielsen's Spectra that shoppers of one are likely buyers of the other as well.

Recognizing that shoppers still respond to deals, Supervalu will knock a dollar off an EDLP item from time to time, and call it a "power buy." It continually reviews categories to determine if one needs to be added to or subtracted from the program. The trend has been to add categories, but not always. Paper products used to be EDLP, but Supervalu reintroduced promotions while keeping everyday prices competitive after finding that consumers still look for reductions in that category.

Following the pricing script is key to making the Center Store strategy work, Kositzke said. He sees two common reactions among retailers that can undermine this effort, though: Either they want to make every category EDLP after seeing how that approach can make products fly off the shelves, or they fear lowering prices in a category will hurt their gross profits.

"If you just drop your price to EDLP, you lose your gross margins," he said. "It's identifying every other opportunity to build your gross back up." A two-day training session instructs retailers about, among other things, how to make up for the inevitable loss of profit per item on some products.

In the end, though, retailers have to know what their local competitors' prices are, and know when they need to tweak the Supervalu-recommended price. As Gaiche said, "You still need to do what's right for your store."

Adjusting to Change

In general, Kositzke said, stores that have closely followed the Supervalu script have seen it pay off: Those that stuck to the plan enjoyed an overall 6.5% year-over-year lift in total store sales from April to December.

McClure was especially pleased to see an increase in gross profit dollars and sales per customer as a result of pilots.

"We got significant increases because they now felt comfortable buying products they used to buy elsewhere," he said.

Dan Gustafson, owner of Lee & Dad's IGA Plus in Belgrade, Mont., said in the year-and-a-half since he's used the program, his store has regained sales lost to Wal-Mart, and a recently opened Wal-Mart supercenter didn't impact sales as much as he feared.

"People are buying from us rather than Wal-Mart," Gustafson said.

Yet while all but 1% of stores that join the program stick with it, Kositzke said, 70% of participating stores scored 80% or higher in compliance as of the three months ended in December 2004. That's an improvement over the previous quarter, which he attributed to retailers getting used to the quarterly scoring.

As the numbers show, it takes work, rather than expense, to gain compliance. For most retailers, the cost is less than $3,000 in an initial sign package, plus replacements as needed. After that, participants said, making the plan work is a matter of committing the time needed to build scripted ends and maintain the signs.

"It's a high-maintenance program," admitted Tracy Job, a manager at Gary & Leo's Fresh Food, whose three stores in Montana have been on the Center Store plan three years. "Signs get knocked off, prices get changed a lot, and then prices automatically change based on cost."

Still, he said, it was important to do something to offset value competitors, or "we'd have nothing."

Full compliance takes not only discipline, but a complete change in philosophy, Kositzke said. "It requires a certain adherence to the program. It requires retailers to change way they do business."

The challenge for Supervalu is to stay abreast of changing consumer behaviors, and add or subtract categories as warranted. As it considers adding new categories -- cereal and frozen food, along with dairy, could be next up for discussion -- it also will need to hear out retailers like Gaiche, who belongs to a focus group that provides feedback on the process.

In an interview last month, Gaiche said she wasn't sure cereal should go EDLP.

"You get so many new launches. Sometimes you need to be out there with exceptionally low prices," she said, given that mass merchandisers "buy a truckload of cereal and move it on out."

Kositzke said Supervalu is forming an advisory board that will help the wholesaler keep the program current. Despite the pummeling conventional food channels have taken so far, Supervalu isn't prepared to cede any categories to mass.

"I think we've got high challenges in some of the categories because consumers have been trained," Kositzke said. "The consumer is not trained automatically to come to a grocery store and buy it. While we've lost a lot of share, I think we can get it back. I think it's how long it's going to take."