SHOP TALK

SCOTTSDALE, Ariz. -- The emergence of fresh foods as the dominant hallmark in today's modern supermarket has its genesis in market forces well beyond retailers' control, namely, the consolidation of regional players into national chains. In an increasingly crowded marketplace, the concept of freshness and quality has assumed new significance as a strategy that can not only protect margins, but cultivate

SCOTTSDALE, Ariz. -- The emergence of fresh foods as the dominant hallmark in today's modern supermarket has its genesis in market forces well beyond retailers' control, namely, the consolidation of regional players into national chains. In an increasingly crowded marketplace, the concept of freshness and quality has assumed new significance as a strategy that can not only protect margins, but cultivate an operator's profile by distinguishing it as a destination. There are numerous challenges along the way -- ranging from labor to merchandising, and food safety to store branding. Many of these issues are interconnected, and have required retailers intent on pursuing these opportunities to rethink the entire infrastructure of their store operations, from top management on down to store-level service associate.

ssitated the strategy, and we're now able to supply all of our stores with central-cut, packaged meat.

FINK: We have a central kitchen, also a central bakery, and we are providing our stores, in both those departments, with shelf-ready product. The majority of our deli and bakery sales are coming off of our self-service cases. I think that may be a bit contrary to the industry in terms of the amount being sold out of service. We offer service salads and entrees in all our delis, but it's really a small part of our sales in our market area. We started central bakery 35 years ago. We've been in central kitchen probably 20-plus years.

BECKERMAN: Some of our customers have some form of manufacturing facility. I wouldn't necessarily call it a central kitchen in the true sense, but they have some form of manufacturing and it's usually in a multistore situation. The big problem on the wholesale side that you face in trying to get into that venue is the logistics relative to where a single store might be located, relative to the freshness, and to the cost associated with the servicing of those types of stores.

EARDLEY: We do send out larger packs of product for our service meat cases, but everything in our self-serve case is cut, wrapped, weighed and ready to be merchandised right at a central facility. We feel that's the next wave in all supermarkets because it's getting to be impossible to hire meatcutters. We felt comfortable going to case-ready meat in a central facility because of our work in the past with our central kitchen, which we've been involved with now for about 12 years. It's grown to the point where we do basically no processing at all of deli, meal solutions, food-service type products at the store level. It's all at our central facility, including sandwiches, which are now being made there and delivered daily to the stores.

BERGH: I think what's important is that the product the customer gets meets or exceeds his expectations. That's not always happening. For instance, bakery is the most complex of the departments we run. It's got lots of moving parts, more so than others, and the shelf-life is shorter.

KEMPTON: I agree food quality is the issue. We've kind of gone the way Charlie is talking about, partnering with some other people. There's a restaurant chain in Kansas City that we've partnered with for our bakeries. They're doing a lot of central baking for us. It gives us the opportunity to keep our eye on the ball as a retailer instead of worrying as much about production and being in the distribution business as well as the production business.

HOBART: How do the stores go about ordering?

EARDLEY: That's the biggest challenge. It's based right now really on an old order-form, production-guide mentality: If I sold two, I need to order three to fill.

BERGH: Ordering is where most shrink starts in all perishables departments. But, we're giving our stores so much information. They can look at each week, at what they moved, and buy items that way.

HOBART: Did D&W have to develop a new set of requirements from your information folks as far as preparing replenishment orders, tracking sales data more closely, so that your replenishment system could work more effectively?

EARDLEY: Yes. Order replenishment was probably the biggest task in central-cut meat. In the past, we used to talk about cutting tests in the meat department and that was more theory, more concept, that it was reality, because everybody made this claim that this is what their cutting test was on meat. Well, now, we know what our actual yield is on every sub-primal or primal from every manufacturer. Probably the toughest thing for us was to determine what the customer wanted in all the stores and then write a spec for every single piece of meat that was cut, and that spec is no longer a theory. It's reality.

SN: Do you self deliver?

EARDLEY: We think logistics is one area that we can control and take some cost out. Obviously a benefit for D&W, and I think for Dick's also, is that when you're a regional company it's much easier to make this type of program work vs. a national company. All our stores are within a two-hour maximum drive from our facility. That takes away a lot of issues that someone else, on a grander scale, would have to face. We want to get every single minute of fresh shelf-life, while maintaining some really strict standards.

SN: What were some of the strategic reasons for going to central processing?

FINK: We're glad we have it at Dick's today. One reason is because of the help situation and finding people. Also there's the issue of food safety. Not that it's easy, but it is much easier to really control the areas that you need to, particularly in deli and food service, with the central facility. There, you'll find the equipment you really need, and have people who are truly trained at a level that you need them to be. I think one of the reasons our founders moved to this years ago was to enable us to move more quickly in getting things that our customers really want onto the shelf. In cases where you have to work through a supplier or manufacturer on the outside, for a lot of reasons, they're much slower to move and accommodate your needs. Central processing really gives you more control over your business, and we believe, creates greater loyalty from our customer base.

In-Store Merchandising

HOBART: With a central kitchen or bakery operation, is there an element of theater lost at store level? Or do you rethermalize to get the sense of freshness, the smells? Do consumers still get the same on-site experience, or is that important?

EARDLEY: I think it is important to have theater. At the same time, we overestimate what the customer wants to see as theater. Most of the restaurants that are doing theater food prep are certainly not cutting vegetables and trimming chicken out in front of the customer. They're just doing the finish cook, but I don't see any of those open kitchens preparing sauces in front of the customer. So I think we have to be careful how we define it and what the customer needs to see. What they need is great food and that's something our industry didn't do for a long time and I think that's why we've lost a lot of business to restaurants. We weren't delivering great-quality fresh foods some years ago.

KEMPTON: I think that's the bottom line, Mike. I'd like to know how big wholesalers can help the retailer with those kinds of things.

BECKERMAN: Some of the customers we serve have that element. All of us have been in a supermarket when they have a demo, and a dynamic person is there frying off some pork sausage or a new further-processed chicken product and it's warm and it tastes good. There's a feel-good ambiance about it. And, by and large, we all end up picking up a package or two and taking it home. But they have to know the food is fresh, and the real test of that is when they eat the product. I don't think our customer wants to see chicken being fried. I don't think we want to show the mess of the business. I don't think we want them to hear the mixer clanking against the wall in the back of the bakery.

EARDLEY: We actually got more attention for fresh bakery and theater when we put an electric oven out on the floor and started using parbaked or near-baked crusty breads that were fresh to within an hour than we ever did when we produced from scratch.

BECKERMAN: You can bake one or two items and build a reputation for having hot bread, or hot pies or hot cookies, or rotisserie chicken as simple as that might be. Just one item. That conveys all kinds of messages to the consumer and the big message that comes out of all that is, "Mmm. That tastes good." If it tastes good, then you're going to get a repeat and a comeback. You've got trip assurance.

SN: Are you becoming more dependent on your suppliers for marketing support or merchandising help in the perishables sections?

FINK: I think we're a little different on the perishables side because of how we do business with our central bakery and central kitchen. We really control that to a large extent, based on the bundling of products.

BECKERMAN: My assignment prior to this was on the manufacturing side in perishables and the way this business has evolved those kinds of monies were not built into the product profile in the same way it was traditionally done in grocery. In addition, in our go-to-market strategy, we suppressed the brand identity because we wanted it to be projected to the consumer as our bread, for example. So it was our French bread, not the vendor's. In meat and produce, those kinds of monies were never built in by the grower or the people selling the goods. When further-processed products came along, manufacturers began trying to build those monies in. But in the past, our business didn't evolve that way from the field or range to the consumer.

FINK: With our central facilities growing over the last eight or nine years, we've begun selling our products out of our central bakery and kitchen to either other retailers via DSD or to distributors in our area. We've been talking about the higher level of quality, but you have to have the high level of ingredient, and it costs more money. If you lose hands-on, you lose the product identification because it won't be the same. While we find retailers interested in what we offer because of our level of quality, there's some resistance even without building in those monies, because the cost is already high due of the quality. If we tried to build in those funds, it would limit our opportunity to sell the product because it would price us out of the market.

EARDLEY: This ties into making money on the sell rather than the buy and we took that as one of our guiding principles. We need to make a profit on the sell at all times. Manufacturers have far more marketing experience and expertise than retailers have. We're essentially retailers. We buy something and sell it. So when a company can add value to our business model, that's a win-win situation and some of the forward-thinking companies are seeing that as a tremendous opportunity.

HOBART: How do manufacturers fit in your store-brand strategy?

BECKERMAN: I think if you bought a banana and it was bad, you didn't think about it being a Chiquita, you think about where you bought it. That's the customer's perception. Where the manufacturer can help is to make user-friendly products in terms of putting them in a case that's easy to handle, that protects the integrity of the product, that does everything it can to help the retailer deliver the product in the best shape. In the end, it all sits on the store's shoulders.

EARDLEY: Our customers see all our products as private label. To a customer, artichokes coming out of our produce department are D&W artichokes. The beef customers buy in our meat department is D&W beef to them. We've taken that branding part of the business model rather than have someone outside build that part of the model.

BERGH: Your quality image is made or lost on your perishables. Your branded manufactured items will never enhance your quality image. All they can do is enhance the selection image, your price image. The supplier's responsibility in the fresh-food arena is to deliver to us the product that was specified, in pristine condition in terms of freshness, in the right quantity and on time. Then, it's up to us to merchandise that product.

SN: Do you all operate your own demo programs? Do you manage them instead of having an outside service?

FINK: In our case, for our central kitchen and bakery items, it's completely our program. We have a demo team in each store that are company members. Certainly we take advantage of the resources manufacturers bring to the table in other departments, but it's completely funded by us. It's a critical component for us to sell our product, especially if it's a new one. For the total store, we devote 40 to 80 hours a week to demos.

SN: Do you have in-store kitchens?

FINK: No. Our average store is 38,000 square feet, so we just don't have the space in the stores. I'd love to have that set-up but we're dealing with restricted space. We do utilize the equipment in the deli and bakery to support any demo in the store.

HOBART: How do wholesalers like Supervalu promote these complex fresh-foods programs? Do you bring members marketing programs or recommend certain demos?

BECKERMAN: In the wholesale complex, there's a marketing staff that interfaces with the retailers. Their methodology is to share best practices relative to their environment. We end up getting a broad perspective, but I'm sometimes envious of the retailer who can embrace a concept and go on their way. Time, value, situation, financials and capability all come into play. There are so many variables in wholesale, it seems like we have all of them. Through that process, you learn that one size definitely does not fit all.

KEMPTON: We're not operating our own demos. We have sourced one demo company that does all our demos within our walls with our manufacturers. We didn't want that responsibility. By having one company do it though, we have a good level of commitment and we can monitor performance and people.

BECKERMAN: In your demo process, do you give your demo people sales goals?

EARDLEY: No, not our outside demo people, but we do give our chefs a goal.

BERGH: I think it all depends on the product. If they're demoing salsa and chips it's easier to measure than if they're demoing swordfish or a meal that they're explaining the components of. The mission we have is we want them to be knowledgeable in what they're demonstrating, so they can explain the product and tell people where they can find it in the store as opposed to measuring sales. If we demoed center-of-the-plate items like fish and meat and some produce Thursday through Sunday, six hours a day, we'd get six to 12 times normal sales without reducing the price. When you look at the margins on some of these products, it doesn't take much in sales to cover a $10-an-hour demo person. It may be the most expensive form of advertising and promotion, but it is the most effective in terms of getting trial. And I'm going to push our company toward that 200 demo hours a week. We now have 80 to 100.

SN: How do you handle day-part merchandising of meal solutions in terms of equipment and in-store location?

EARDLEY: I wish I had a picture of our chef's station. We basically glued together some home utility-type things like a stove, sink and some mirrors, and a self-contained refrigeration unit. We purposefully didn't want our chef's stations to look commercial. We wanted a stove you'd have at home, for example, because we didn't want people to say, 'Oh, I can't do that. I don't have a super BTU stove or a hood.' We wanted home appliances. We use a regular food processor, for example, not a commercial type, not because it's easier, but because that's what customers use at home.

BECKERMAN: Recently, I was talking about a simplistic in-store bakery where you could focus on a couple of categories like crusty rolls and breads. A few years ago, it was invoked with a little kiosk, a food-court type of thing for a bakery application. I think that's still a valid opportunity, but what happens in supermarket business, is we have a short risk profile. We want to see results in a short period of time or we throw it out. We have some people who do it, but the majority don't because they want instant gratification. And I think to a degree that happens because we are a penny business and don't have the resources to invest in long-term research. If it doesn't give a quick response we move on, and I think sometimes we move on before we get there.

EARDLEY: Ironically, when we started using our chef demo stations, we sold a lot more kitchen gadgets. You know supermarkets traditionally have sold cheap kitchen gadgets, but all of a sudden we started bringing in high-quality knives and utensils. People are buying them. We took over a category that was a department-store category.

BECKERMAN: One thing here is that we have to think long-term investment in these ideas. Take sandwich stations, for instance. We have a number of retailers carving for sandwiches. The trouble is, when we're doing well and the guy across the street sees us, he puts one in. Then the pie's cut in half and pretty soon in quarters. Then we can't do it from a profit standpoint because sales volume has been diluted. We have a tendency to oversaturate quickly.

Labor

SN: A lot of what's been mentioned here seems to have a common thread, and that's the current labor situation.

EARDLEY: We feel that one of the great benefits of central processing is that it makes that frontline associate's job more palatable and really allows them to be tied into servicing the customer. There are plenty of opportunities to drive profitability by increasing sales and that comes with taking care of customer needs.

BECKERMAN: Don't you think the skill sets required to do multiple tasking are a little bit beyond what you can expect from a person in that environment? If you take a look at the tradition of our business you find that we have that kind of multiplicity being put on folks, who in many cases are young and just coming into the business. I think the industry as a whole continues to undervalue the skill sets that are needed to run the type of programs and product presentations that we want to give the consumer today.

BERGH: I'd agree with that. You have to have the right person, the right attitude. They have to like working with customers and they need to take pride in running your department. I'm talking about department managers and assistant department managers. They're usually tenured people. They're not new hires. I think most people will do the job that has to be done if it's clearly explained or they're given some basic training.

FINK: Even if you've got a manager with the skill sets, they're so time-challenged because they're dealing with so many more issues today related to the people they're working with, that they just simply run out of time. One of challenges is to get a better handle on the sell-through at the front end. But the reality is time is so difficult and we give our folks so much information, they can't get through. Central facilities help that to a certain extent, but it is a reality we're all facing -- just to get through the day and create a service level high enough that our customers want to come back to us.

BERGH: What I see happening is there's a tendency in store operations at times -- in controlling expenses -- to tie these department people to production jobs. They're producing right along with the people that are reporting to them and that's wrong. I think given that direction and given the time to execute it, I think most of them will step up and handle the task. They should be taking care of product, understanding what's happening with the customers, and watching and helping to train and bring along the new hires.

EARDLEY: I think Charlie hit on a great point that I didn't bring out in regards to the people we have at retail. I think as an industry we've kind of failed at making the work exciting, and I don't think it's just grocery retail. Restaurants are having the same issues today; department stores had it a number of years back. But when you're a service and quality leader like D&W is, you need a great level of associate on the front line taking care of your customer. That should be their sole duty. The problem, as Charlie stated, is they're not really all that good at ordering today. They don't have time to use all the tools that we do have for them. And on top of that, if you think they're also going to do the customer service, the ordering -- and let's say you don't have central facilities -- they're going to do in-store production and production planning? It just isn't going to happen. That's asking too much of people who aren't really in love with their job in the first place.

BECKERMAN: I agree with what you say on the production side, especially in the in-store bakery. It's far more complicated than anything else in the store. The number of times that you can experience a failure through the handling process is -- there's nothing else like it in the store. And in my mind, quality production of specialty bakery products and even home-meal replacement is a skill set unto itself in the environment that we're in. It's a heck of a lot easier, in my opinion, to work in a $60,000 deli or bakery in terms of production, because there's less risk involved because of the volume. But, take that down into a micro situation, where you have a much smaller store, where you have to manage that in a very focused arrangement, you are asking for some pretty good skill sets. And on top of that, usually the store leadership is not experienced in those kinds of skills, to train and help develop.

HOBART: How do you establish the root needs of your customers?

EARDLEY: I recall all the talk about the promise of HMR. Maybe the thing we did more than anything throughout the industry is we hyped a customer need and tried to fill that need by saying it's a product. It's not a product. It's a customer need. I don't think the customer has changed. They still need great-quality, fresh food. They are still time-starved. They need to have products available to them that are going to save time, that are going to save their energy. They're still eating. And most of those customers have found that the trade-off of eating mediocre food at McDonald's is more worth it to them than going through some of the work we make them go through to buy food at the supermarket.

KEMPTON: Convenience is the factor that comes up. Consistent quality is important, but we talk about great quality. I don't know where that falls in the spectrum. Convenience is probably the No. 1 factor to the customer today.

EARDLEY: Supermarkets still make it very, very hard for a customer to get in and out with meal solutions. And I think our company has done a number of things. We have put in separate entrances by our food-service area to make it quicker, and we put in separate check lanes. We've tried to make it in-convenient for ingredients shoppers so we can get meals shoppers in and out. We've tried to segregate parking so you can get close to the door. The perception of convenience and speed -- the industry hasn't done a good job of marketing itself as a place where the customer can get very convenient food.

BECKERMAN: Tied into that, though, there's a whole segment that is related to value. There is an economic segment in this country that wants convenience, but the reality is that they need to save money when they go to buy their foodstuffs. They're a big and very important piece of the whole pie. I don't know that the drivers that take the upper and middle classes into the lovely environments that we create are necessarily the same ones that put the rest of the population into our stores. I don't think value should be overlooked in this discussion.

KEMPTON: Bob, we were just talking yesterday about the changing customer and talking about our kids and the "value" seen by today's 29-year-old. They want convenience. They want the $2 bottles of New Age beverages. They'll walk right by the 25-cent vending machine and go buy the $2 New Age drink.

SN: There seems to be an emergence now of the ready-to-prepare category. How do you target those customers, particularly if you're managing from sales data and preparing upstream? How do you get that end-user, consumer-based information in order to tailor your programs for the next wave or incremental sale, or just to add to the variety?

FINK: We hold focus groups with our customers on a fairly regular basis to talk directly to them. I think the feedback we receive at store level is an area we don't take advantage of, to the degree we could. It's an opportunity where we could really listen to what the customer is interested in -- not only what products they're looking to buy, but the packaging, the size. One of the changes we're beginning to make at our central kitchen and bakery is to move to smaller packages. In the market area we're in, we're now seeing the size of families decrease, the older population that has more discretionary income and is making those impulse purchases perhaps more than they ever have. They don't want to buy an eight-pack or 10-pack of buns. They want to buy a four-pack.

EARDLEY: Marketing and getting customers to understand what you're trying to do is one of the biggest challenges out there and we don't have a multimillion dollar advertising budget to explain what we're doing to our customers. It's really accomplished on a one-on-one basis by the associate explaining the product to the customer. We have a chef out on the floor of many of our stores who is actually showing customers the food, how it's convenient, and showing them the fresh quality. And you get the customer one by one by one.

FINK: When it comes to developing products out of our central facilities, we actually do this on a formal basis every two years: we bring together people from our retail operations as well as from our production facility and brainstorm ideas. We're all consumers. You also get ideas they've got from customers, from family members. We actually establish a list of products we're going to roll out over a period of time and we'll infiltrate that list with trends going on in the industry as well as other opportunities that present themselves as we do our day-in, day-out business.

KEMPTON: One word that's been abused is partnering. But, I'm going to use it again because that's what we've tried to do. But it's got to be a win-win deal. You can't go in with an adversarial position like "if you guys screw up, we'll throw you out and start over." We try to get a commitment from the other side that they're not out selling this product to other supermarkets. So it's really been good for their business and the restaurants they're in, too. Having the product in our stores has helped bring more recognition to their products.

EARDLEY: We do use outside producers when it adds strategic value. The one thing we really challenge ourselves on consistently is if somebody else can do the work for us they can probably do it cheaper and better than we can. It's just that we don't find a lot of people who have that level of quality. We sell, for instance, a pie under an outside brand that's an exclusive to our stores. But we sell that pie because it's better than what we could produce ourselves. We want some sort of signature, whether it's ours or not. KEMPTON: Speaking to the value situation, when we made the transition in our bakeries, we went from the two-for-$5 pie program that every supermarket had to an $8-, $9-, $10-pie program and everybody was scared to death about what was going to happen to our pie business. But our unit sales went up. The customer does want good quality. It's a complex formula what value is, and where name comes into play in that value perception.

BERGH: If the customer buys that $9 pie, it has value for them. If it wasn't good quality for $9, it wouldn't be a value and wouldn't sell.

KEMPTON: One of the interesting things in the pie partnership is we retail for the exact same price they retail it in the restaurant they sell to. We cannot and will not discount it. No weekly specials on that. It has up to a three-day shelf life, depending on the pie, but we still can't reduce it as it gets near its sell date.

SN: Who in the group here has operated retail-level restaurants or food-service venues?

FINK: We had full-service family restaurants in two of our eight stores, but we no longer have them. I think, in our setting, it made an impact, because we were a small community. People understood we operated them. Today, I don't think that's the answer to creating the understanding that we have a good, consistent, high-quality product, but it didn't hurt us then. We ended up getting out of the restaurant business because we had difficulty making money. But it helped us with the central kitchen because of the background it gave us.

BERGH: I believe in our restaurant and our catering businesses, which will be about $3 million this year, and have a high gross margin and contribution. I consider them product demonstrations that somebody else pays for. If you're catering a party or wedding, there are people there who may never have shopped Bristol Farms, but then they ask where the food came from. I believe it has brought new people into our stores who have become regular shoppers. The same is true of our cafes.

FINK: We do catering, too, and I think it has a great impact as far as exposure to consumers who may not know what you're about, who haven't been in your stores. You have the opportunity to reach a larger cross section of customers and we do brand our catering as Dick's Catering, so there's a direct relationship to Dick's Supermarket. A lot of our catering products are available in our stores, so even customers there make the conncetion. It's a significant opportunity for crossover sales, and something to take advantage of.

Food Safety

HOBART: Getting to food safety, do you see manufacturers becoming better purveyors of food-safety training and resources?

FINK: Food safety is the most critical component of what we do and the training has got to come from people who understand how to train. The manufacturer isn't that key person. If a manufacturer is trying to do too many things, it's difficult to do them all well, and it's the same at retail. One of the things we learned with HMR is there's too much to be done and it's hard to focus and do it all well enough.

EARDLEY: It's a challenge, especially when turnover rate is over 100% in the supermarket industry. In Michigan, our food-service business in summer goes up tremendously, and the problem is, if we train our associates in March, they may be gone in June. At D&W, food safety is its own separate training program. All our department managers have to complete the ServeSafe program along with a state program; every associate within 30 days of hire has to go through the food-safety course, which focuses on time and temperature, cross-contamination and personal hygiene, to make sure they're thinking food safety.

BERGH: In our company we put them through an orientation program that includes food safety, give them a quiz, put them in a store for four to six weeks and give them exposure to the business. That's working, but I remind the department managers we can't take these people out of this environment and send them to college for six months. Most of this has to be on the job, it's part of the department manager's responsibility. That's another reason managers should not be tied to production jobs.

FINK: HACCP, in particular, I think has raised the bar for us, for all of us in the industry. At least, I like to think it has. It certainly is a challenge to manage HACCP because of the paperwork side of it, but quite frankly I think HACCP is a sound approach for our industry to take, to the next level of food safety for our customers' benefit.

Consolidation

SN: I'd like to return to consolidation and the bigness of the industry. How do you see yourselves fitting into a world that is increasingly concentrated?

BERGH: I think it offers opportunities for companies who are committed to quality, highly differentiated fresh foods, and knowledgeable, quality service. There's going to be room for companies like ours to operate in the same markets the big companies are in. There's room in our market area for 35 or 40 of our stores. We're not going to have 150 stores. Site and selection are critical. We've got to have right sites, the right demographics, but there's room for us, even in a market that's now in the hands of three large players.

KEMPTON: There's fresh food and niche marketing. Large retailers are committed to selling 20% of their items that will do 80% of their business and the heck with the rest of it. I heard frequent-shopper programs mentioned. We have really moved in that area in the last year and and a half and today 90% of our transactions are on our frequent-shopper program.

BERGH: You don't make your money buying; you make it selling. You need to buy competitively, but don't spend a lot of time trying to drive a quarter-cent a pound out of whatever you're trying to buy.