THE SUPERCENTER JUGGERNAUT

In the growing battle between supermarkets and supercenters, the bottom line is, you ain't seen nothin' yet.Supermarkets are bracing for more serious conflict in the next few years as supercenters soar in number and fan out into new markets. In this issue, SN assesses the supercenter drama from a number of angles, with separate stories focusing on the big-three discounters-turned-supercenter operators,

In the growing battle between supermarkets and supercenters, the bottom line is, you ain't seen nothin' yet.

Supermarkets are bracing for more serious conflict in the next few years as supercenters soar in number and fan out into new markets. In this issue, SN assesses the supercenter drama from a number of angles, with separate stories focusing on the big-three discounters-turned-supercenter operators, the supermarkets' battle strategies, the consumer's view and an international supercenter

update. The coverage continues over the next several pages in this special section.

The supercenters' reach could extend to some 1,800 units over an eight-year period, accounting for $56 billion in grocery-related sales, according to an estimate earlier this year by McKinsey & Co., New York. Currently there are more than 400 of these large units from various operators. The combination of a grocery store and discount store in one facility creates a powerful cross-shopping vehicle, according to many observers.

With each supercenter affecting about five supermarkets, observers estimate that 10% of the nation's nearly 30,000 supermarkets are affected by supercenters today -- a number likely to grow to 20% within five years.

Fueling supercenter growth will be an increased commitment to quality perishables execution, a weak area for these alternative formats until recently, observers said. Also helping some of these operators is a highly advanced logistics system that grew out of their nonfood businesses.

By far the key player in the supercenter drama is Wal-Mart Stores, Bentonville, Ark., which alone will operate more than 400 supercenters by the end of 1997, according to observers. With Wal-Mart expanding its supercenter focus from the nation's interior into the East, competition will heat up as supercenters go up against more chain operators, analysts said.

"Right now Wal-Mart supercenters are pretty well confined to areas of the Southwest -- Arkansas, Oklahoma, Texas and Missouri -- where they compete mostly with independent operators and smaller-sized chain units in outlying areas," said Ed Comeau, a securities analyst with Lehman Bros., New York. "But in the next two or three years, Wal-Mart supercenters will expand into upstate New York, Pennsylvania, Florida, North Carolina, Virginia and Tennessee, where they will go up against more chain operators, including Penn Traffic, Food Lion, Winn-Dixie, Kroger and Albertson's," Comeau said.

The outcome of such battles is not likely to be decided quickly, especially in the case of larger supermarkets, Comeau indicated.

"While independents in those areas will generally be able to weather the supercenters for six months to a year before some closings occur, the chain operators will have more staying power."

Comeau said it remains unclear when Wal-Mart might begin moving into more urban markets like Memphis, Tenn.; Dallas, or Charlotte, N.C. -- areas where the chains' wherewithal will be even greater, he noted.

In many ways the supermarket-supercenter struggle may come down to a question of resources.

"Our concern is that a company like Wal-Mart is so committed to price that they are apparently willing to spend money for years before getting a return -- and they can spend a lot more than independents or even regional chains can spend," Michael E. Julian, chairman, president and chief executive officer of Farm Fresh, Norfolk, Va., told SN.

Still, supermarkets are beginning to learn the survival skills necessary to co-existing with these retail behemoths.

"There clearly is life after a supercenter comes to town," said Robert E. Stauth, chairman and chief executive officer of Fleming Cos., Oklahoma City.

"The supercenter is obviously going to have some impact on existing businesses, but most supermarkets are learning how to survive and, in fact, how to do a better job running their businesses more efficiently because of supercenters.

"If a retailer goes out of business when a supercenter opens, I believe it's due more to his inability to make changes and his individual mind-set. While a sign that a supercenter is coming to town inspires some retailers to say the supercenter will bring more people to an area and they will get more business, others are ready to die when they see such a sign and those are the ones doomed to go out of business."

Wal-Mart will clearly set the growth pace, with 174 supercenters currently in operation and about 37 to 42 more due to open this year, 100 to 110 more in 1996, and another 120 to 130 likely in 1997.

But the Arkansas giant isn't the only participant. Some other expanding supercenter players include the following:

Kmart Corp., Troy, Mich., with 77 Super Kmart Centers in operation, up to 15 more due this year and 20 to 25 more in two years. Observers told SN they believe the growth rate may slow as Kmart restructures and refines its supercenter strategies.

Target Stores, a division of Dayton Hudson Corp., Minneapolis, with only one store open in Omaha, Neb., and plans for up to 22 units in the next couple of years. Target plans to open its next SuperTarget in October in Lawrence, Kan., and a third supercenter next March in Papillion, Neb., five miles from the original Omaha SuperTarget. Target is also reportedly exploring possible supercenter sites in areas as diverse as Utah, Iowa and Virginia.

Meijer Inc., Grand Rapids, Mich., with 94 units in Michigan, Ohio and Indiana, and 107 anticipated by the end of 1996.

Fred Meyer Inc., Portland, Ore., with 90 supercenters in the Pacific Northwest and Utah, and 102 expected by the end of 1996.

Supermarket operators are closely watching the supercenters to determine how best to compete. As they've done with Efficient Consumer Response, supermarket executives are seeking to learn the best practices while there is time.

Harry Janson, chairman, president and chief executive officer of Harvest Foods, Little Rock, Ark.,

said, "While you can't ignore supercenter pricing, you can't try to compete on price because Wal-Mart has deeper pockets and greater staying power that can last forever."

According to Bill Lancaster, vice president of sales at Associated Wholesale Grocers, Kansas City, Kan., with supercenter operators committed to expanding the format and growing at a rapid pace, retailers can no longer expect to succeed without aggressive moves.

"We tell our customers they must invest and harvest, and then either reinvest or divest.

"An independent should be able to do well against chain or supercenter competition if he's a good operator," Lancaster said. "But to do so, he must re-evaluate all his expense lines to make sure there is no waste. And he must look at his merchandising and be exceptional in the areas of perishables and store brands.

"If a retailer operates each department efficiently, he will do fine. It simply requires great discipline and great commitment."

A central question is how consumers will ultimately accept and choose to shop the supercenters. A consumer survey in this issue, conducted at a Wal-Mart supercenter, found general acceptance of the format. (See Page 16.)

Jonathan Ziegler, a securities analyst with Salomon Bros., New York, said supercenters traditionally have been weekend destination points and, as such, will be used by consumers for fill-in groceries rather than for primary purchases.

"Consumers will continue to use supermarkets for their primary shopping, but they may find more opportunities to do fill-in shopping while they're browsing through a supercenter one or two weekends a month," Ziegler said.

Janson expressed a similar view. "One-stop shopping is nice, but how large does a store need to be?" he asked.

"Supercenters are good for browsing on a weekend, but the average consumer doesn't want to waste time there buying groceries at one end of the store and diapers at the other.

"And surveys consistently indicate that perishables are the supercenters' Achilles heel. So while supercenters may meet a traditional supermarket on price, they can't compete on perishables if they don't have the variety."

Janson said he expects supermarkets of the future to put a greater emphasis on perishables, in-store eating, takeout foods and possibly general merchandise. He said supermarkets can compete with supercenters by offering added-value products and greater varieties of size and selection along with more perishables.

Harvest has held its own despite competing with Wal-Mart supercenters on its home base, Janson said.

Other chain operators are also succeeding despite supercenter competition, said Gary Giblen, managing director of Smith Barney, New York.

He said the experience of Kroger Co., which competes with supercenters at 25% of its stores, "demonstrates that supercenters are not a big threat to public supermarket chains," noting that operating cash flow for Kroger's Delta region was up 20% last year.

Giblen added that Bruno's and Albertson's reported strong results in Alabama and Texas, respectively, despite Wal-Mart supercenter openings there, and Safeway and American Stores Co. had good results in Denver and Chicago, respectively, despite Super Kmart openings in those cities.

According to Julian, sales at a Farm Fresh that opened in late June in Newport News, Va., were not affected by an 18-month-old Super Kmart Center adjacent to the new store.

The key, Julian said, is to take a proactive position against the supercenter by lowering prices on key items and promoting weekly specials more aggressively, making a stronger commitment to in-store service, placing more emphasis on perishables, renewing the commitment to community involvement, using category management to select items to emphasize, creating excitement at store level through merchandising, and upgrading stores.

He said Farm Fresh looks at supercenters the same way it looks at any new competition entering one of its markets, "whether it's Winn-Dixie coming into Williamsburg or Hannaford Bros. coming into Tidewater. "But the difference is, so far, supercenters have not shown the ability to provide consumers with the same level of quality in perishables that many traditional supermarkets have done. Nor are they offering the same competitive edge as supermarkets in such areas as service and convenience of store size," Julian said.