In the wake of Winn-Dixie filing for bankruptcy and Albertsons, Marsh Supermarkets and Fresh Brands all throwing in the towel, the supermarket operators left standing may be wondering how they can win the battle in an increasingly competitive marketplace.On the following pages SN offers five ideas to consider as food-retailing executives plot their course for 2006.First, the concept of one-size-fits-all

In the wake of Winn-Dixie filing for bankruptcy and Albertsons, Marsh Supermarkets and Fresh Brands all throwing in the towel, the supermarket operators left standing may be wondering how they can win the battle in an increasingly competitive marketplace.

On the following pages SN offers five ideas to consider as food-retailing executives plot their course for 2006.

First, the concept of one-size-fits-all doesn't work any more for supermarkets, analysts said. Increasingly, it is important for food retailers to identify their best customers and market specifically to those people. It also may mean targeting a specific niche and tailoring the product assortment to satisfy that niche.

"You have to stand for something these days, and the goal is to have an indispensable offering for customers within a two- to three-mile drawing area," said Jonathan Ziegler, analyst, J.M. Dutton, Eldorado, Calif.

In some cases, retailers need to take a hard look at their operations and make some decisions about which markets are worth investing in and which are not. Although supermarket companies are often reluctant to shutter their locations, sometimes it has to be done for the health of the overall organization.

In a marketplace filled with increasing competition, creating in-store entertainment can provide a point of differentiation. Some retailers are doing this through closed-network TV systems, while others do it with sampling or on-site events.

As fuel costs continue to rise, retailers also can look at making their operations more economical by taking steps to make their logistics more efficient.

And lastly, as the consumer base becomes ever more diverse, retailers can rethink their strategies to enhance diversity among their management ranks. This requires a strong message form top management and a plan that goes beyond recruitment.


Retailers need to re-examine their marketing niche, find something that makes their stores an indispensible destination, and then establish that as a point of differentiation, industry observers told SN.

"Trying to satisfy the average consumer means you're not satisfying any one consumer group particularly well, and that puts you in an unsustainable middle ground," said Jon Hauptman, vice president, Willard Bishop Consulting, Barrington, Ill.

Retailers need to identify their best shoppers, said Hauptman, "and the rest is basic -- marketing stores to hold onto those shoppers and increase their spending through more targeted marketing that channels promotional dollars to those household. That's where the low-hanging fruit is."

"Re-examining your niche means you're determining something that matters to consumers as well as to your bottom line," said Chuck Cerankosky, an equity analyst with KeyBanc Capital Markets, Cleveland. "With differentiation, customers shopping at one store have no motivation to shop at another store."

Retailers can achieve differentiation by studying existing shopper data, he said, and while that may seem like an obvious way to determine a store's niche, "execution is always the most difficult part."

Shopper data is certainly readily available, "though it's often an asset retailers aren't using," said Jonathan Ziegler, a Santa Barbara, Calif.-based analyst for J.M. Dutton, El Dorado, Calif. "If what a supermarket is doing is no longer working as well as it once did, then that operator needs to re-examine his positioning. Maybe the neighborhood has changed, or possibly the tenor of competition, and a store needs to find a more narrowly focused niche, at which point it's a matter of re-merchandising the store and promoting it differently.

"You have to stand for something these days, and the goal is to have an indispensible offering for customers within a two- to three-mile drawing area."

Niches may vary, based on those being carved out by various chains: "lifestyle" formats by Safeway and Marsh; fresh stores like A&P's Fresh Markets, Kroger's Fresh Faire and Bashas' Ike's Farmer's Market; limited assortment/extreme value formats like Supervalu's Save-A-Lot, Food Lion's Bottom Dollar and Associated Wholesale Grocers' ALPS; urban formats like Minyard's Carnival; price formats like Kroger's Food 4 Less, Albertsons' Super Saver, A&P's Food Basics and Save Mart's Food Maxx; and upscale formats like Bashas' AJ's units.

To pinpoint the right niche, supermarkets have to keep ahead of the competition in spotting new growth segments, according to Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based international retail-consulting and investment-banking firm. "They've got to listen to the whispers before those whispers become a roar," he declared. "If Sam Walton hadn't been listening to the whispers of discounting when he was operating a chain of Ben Franklin variety stores, there would be no Wal-Mart.

"Food operators have a big strategic advantage in seeking out new growth segments, but too often they remain on the sidelines as observers and fail to use that advantage. What retailers need to do is go on the offensive from a position of relative strength to redeploy resources into growth segments."

David Frost, principal in Frost & Partners, Bellevue, Wash., said the problem for most supermarkets is that they don't know how to differentiate themselves. "It's something they've been talking about for 20 years, but most don't seem to have done much because they're still not very different from each other."

Even if they didn't have piles of data from loyalty cards, he said, "they could still learn the same things simply by standing at the door of the stores and talking with people to determine what their niche ought to be."

Frost suggested retailers look for potential niches on a store-by-store basis, "rather than what they can do across the company or at one group of stores," he said. He cited Starbucks, Ikea, Wal-Mart and Costco as companies that, despite their overall size, have learned how to customize each store to its market.

Elliot Zwiebach


Local power is far more important than national market share," Perry Caicco, an analyst with CIBC World Markets, Toronto, said in a recent research note, citing distribution and advertising efficiencies, price leadership, employee motivation and local merchandising sensitivity -- all elements of superior operating margins -- as benefits of a strong local market position.

Viewing assets through the perspective of local market share can reveal whether individual stores should receive new investment or be put up for sale or closure, sources told SN. They suggested retailers should apply the same perspective to local markets as they do to local stores and come to terms with what that might suggest.

"The problem with a lot of decision-making in the supermarket industry is that you tend to look at things on a store-by-store basis rather than a market basis: It's rare that you evaluate entire markets," Neil Stern, senior partner of McMillan Doolittle, Chicago, told SN. Stern said retailers tend to want to "fix" struggling stores as opposed to backing out on them.

"It's a retailer's nature to be optimistic," he said. "Whenever you do strategic planning and review a portfolio of assets, you'll find some clear winners, and some horrible dogs, and a lot in between. So, often it's a matter of distinguishing between, 'This thing's a dog and will always be a dog,' and, 'If we can get a 5% sales increase we'll be OK."'

In addition, he said, food retailers are reluctant to walk away from their businesses, noting that up-front equipment costs and the potential loss of employees make the decision harder.

"If I want to close a clothing store in the mall, other than the lease liabilities, I can pretty much walk away with my racks and my register and go home," Stern said. "With supermarkets, the stuff doesn't leave as easily. You get attached to your assets more -- because they truly are assets. Flexibility doesn't exist as much."

While many problems that individual stores face are fixable, weak market share and scattered operations have been at the heart of numerous supermarket crises, such as Winn-Dixie, and continue to dog retailers in places like the Northeast and in Texas, where supermarkets appear to be faced with the choice of building share or leaving, analysts said. Coming to terms with the need to shed some stores and focus on markets that are winnable while there is time to do so is key.

"Oftentimes in trying to fix stores, a company realizes they don't have sufficient scale to do so," Burt P. Flickinger III, managing director of Strategic Resource Group, New York, told SN. "We've also seen where mismanagement has left a broken business even worse and too broken to fix."

Market exits can often have strategic benefits, Flickinger noted, citing A&P, which appears poised to use funds gathered by market exits in Canada toward building greater scale in the U.S. Bi-Lo earlier this year sold operations in Alabama to fund growth in the Carolinas.

Flickinger suggested retailers study successful regional operators to learn how those companies use local market knowledge and scale to their advantage. "One of Wal-Mart's weaknesses is that it tends to be buying nationally and internationally now. Supporting local suppliers can be an advantage. Folks that try to centralize procurement and run businesses from their desktops tend to miss a lot of things."

Jon Springer


Supermarket operators have been stage hands rather than directors when it comes to creating in-store theater.

That role may be changing as food retailers face a fragmented retail marketplace where all retail sectors are concentrating more on the total customer experience to win sales and loyalty, and as consumer packaged goods manufacturers look to the retail stage to draw shoppers' attention to their products.

There are a few rare exceptions to the lack of retail theater in grocery stores. The classic examples cited are Stew Leonard's, with its animated cows and petting zoo, and Jungle Jim's with its singing animatrons, adventure tram and overall one-of-a-kind shopping experience. These retailers are dedicated to making the food shopping experience fun, a quality that observers say is too often lacking when it comes to supermarket shopping.

John Stanton, professor of food marketing, Saint Joseph's University, Philadelphia, said Americans' desire to shop is illustrated by the popularity of 24-hour home-shopping channels. "It's not that we don't like shopping. We love to shop," he said. "We don't like grocery stores because retailers don't make shopping fun. The American obsession is shopping, and we've created [food retail] stores that people don't want to go into."

The obstacle for supermarkets is overcoming a retail mind-set that is focused on targeting consumers who Stanton described as having "a penny and a pulse."

It's also about rethinking the business model that is heavily predicated on supplier fees for product display and advertising, said Stuart Armstrong, chief operating officer for Digital View, a provider of digital media services based in Morgan Hill, Calif. While a number of supermarkets are "dabbling" in digital media, Stuart said, it remains an asset that is controlled by the advertiser rather than the retailer. Wal-Mart Stores, Bentonville, Ark., with its own in-store television network that broadcasted live Garth Brooks concerts in 1998 to over 2,000 of its stores, is an exception.

Wal-Mart is currently in a partnership with filmmaker Christopher Coppola in an arts project that brings an artist to rural America to create a portrait of an everyday person in high definition. The portrait and its making will then be displayed in stores via Wal-Mart's television network, serviced by PRN Corp, Feeding Hills, Mass.

Stuart said retailers need to come to terms with digital media as a business issue. "Retailers need to walk the line between ad sales and media control," he said, explaining that the line shifts with the size of the retailer and amount of traffic the chain draws.

"Most retailers don't have the footfall through their stores as does a Wal-Mart," Stuart said. Yet, at the end of the day, retailers can offset the cost of an in-store digital network -- which is falling because the cost of flat panel screens is coming down -- if the system is incorporated into their operational model and becomes the centerpiece of communication for the entire company, Stuart said. That means creating original content that is entertaining and informative for the retailer's customers as well as using the network for staff training and corporate communications.

Bill Kies, principal of Kies Consulting, Chicago, said such networks aren't for everyone, pointing out that some stores have a clean shelf policy and don't want their customers to be bombarded with advertising messages.

However, he said digital networks can be dynamic. "Retailers want people coming in their stores twice a day vs. twice a week," Kies said. To increase store visits, "you have to add excitement, something new, something informative and something that will say 'wow,' and adds to the shopping experience."

Another way to add excitement is through in-store demos that are structured as retail-tainment events, Kies said. That means more than simply offering shoppers cheese on a cracker. Such events -- paid for by the sponsoring manufacturers -- may combine more than one product, may be tied to a theme or cooking solution, and may be broadcast on in-store radio or other media. They also use selected demonstrators who fit the product profile and can relate to the target audience.

With more manufacturers like Procter & Gamble shifting their ad dollars from television to retail, retailers can expect more targeted, sophisticated and entertaining sampling events, said Kies.

Chandler, Ariz.-based Bashas' Food City stores is proving it doesn't have to cost much to add theater and entertainment to the shopping experience. The Hispanic chain creates a nine-hour fiesta in its parking lots every Sunday. For the past six years, Food City has sent its Pachanga Movil, a customized 42-foot trailer with a mobile stage to its stores to treat customers with live cultural entertainment, including folklorico dancers, Mariachi bands, clowns and magicians. Two outdoor tents with seating for 400 people are set up for the event, sponsored by Marquez Brothers, Frito-Lay, Pepsi and Jumex. Robert Ortiz, vice president of sales and merchandising, Food City, said the cost is moderate, especially when considering that some stores can get as much as a 3% to 4% boost in sales. "It is positive. The store gets a bump and that bump will stay, especially if it is a new or converted store," he said.

Ortiz, who has been at Food City for the past 12 years, believes the supermarket industry is at a turning point and is breaking out of the cookie cutter mold when it comes to driving traffic. "Those days are over and companies are starting to look to new ways [to retain and get new shoppers] because the alternative formats are working," he said.

Christina Veiders


Retailers are looking for new ways to cut their delivery costs even as the price they pay for gasoline continues to rise.

As of last week diesel-fuel prices were running about 35.6% higher than last year, according to the Energy Information Administration. That can easily add up to hundreds of thousands of dollars per year in added costs for retailers, who measure their annual fuel purchases in millions of gallons.

To offset these increases, retailers are using various forms of optimization technologies, maximizing their loads and forcing other efficiencies into their transportation systems.

Beth Enslow, vice president, enterprise research, Aberdeen Group, Boston, said retailers have been making some progress in lowering their distribution costs as the relationships between retailers and their carriers have become less adversarial.

"The traditional transportation model has been to beat up the carriers for lower rates, or beat up the suppliers for lower rates, or, in the case of supermarkets, actually take control of the inbound freight," she told SN. "It has not been about how to look at what was inherently causing costs to increase."

Enslow, the author of a recent report called "Best Practices in Transportation Management," said increasingly retailers are looking at what they can do to make their own docks more efficient for their carriers.

"Retailers saying, 'I am going to actually give my carrier information in advance that will make them more efficient, and I should be able to share in some of that savings,"' she said. "It's much different than the adversarial carrier relations that we saw all the way up until 2003."

Retailers can save their carriers money at the warehouse docks by communicating electronically with them to help forecast delivery needs. This can help reduce what is known as "tender turndown," when retailers are forced to find alternate carriers because the lowest-cost provider is unavailable.

"If you are able give better capacity forecasts and you are able to tender electronically and earlier, you are able to cut those by 40% to 50%, and that lets you have a lower cost of operation," Enslow said.

Using dock-scheduling software and other means to make the actual delivery at the warehouse more efficient, retailers can also realize some cost savings to help compensate for higher fuel prices, she said.

"From a cost-savings perspective, if you can move your third-party carriers in and out of your yards in under an hour, instead of four, five or even six hours, which oftentimes in the grocery business is the case, then you can negotiate lower rates with your carriers."

Companies operating their own fleets can also do a lot to make them more efficient, such as using global positioning software to track them and using them to haul inbound freight, according to Adrian Gonzalez, director of the logistics executive council at ARC Advisory Group, Dedham, Mass.

"Having greater visibility as to where their assets are, helps them to better plan and optimize their operations," he said. "The price points of wireless technology to be able to track the trucks, using GPS-enabled cell phones, for example, using real-time visibility, have become much more affordable."

When fuel costs spiked over the summer, several retailers and wholesalers discussed their strategies for reducing costs with SN. Among them:

Associated Wholesale Grocers, Kansas City, Kan., is using computerized routing of outbound trucks to minimize the miles driven; seeking to get maximum cubes on the loads; and working with retailers to reduce the number of deliveries they need. AWG also ships as much product as possible directly to its members from manufacturers' plants, bypassing its own warehouses.

Unified Western Grocers, Los Angeles, tries to control costs by utilizing such measures as routing trucks more efficiently, eliminating unnecessary routes, reducing idling time or boosting spending to keep its equipment in better shape.

K-VA-T Food Stores tries to maximize its loads and encourages stores to get by with four deliveries per week instead of five.

Mark Hamstra


One glance around at any gathering of food-retailing executives reveals one of the industry's most glaring shortcomings: The management of the nation's supermarket chains doesn't have much in common with its customer base.

In fact, it doesn't have much in common with its hourly worker base either. In between the cashier level and chief executive level, the industry takes a sharp turn into the white male demographic.

Supermarket companies seeking to become more diverse in their executive ranks need comprehensive programs that define a clear path for advancement and they need to take steps to retain the female and minority leaders they already have, industry specialists in this area told SN. Such programs begin with a message from top management and are carried through the organization with clearly defined programs for recruitment, retention and advancement, they said.

"The industry is slowly recognizing that it just makes sense to have your workforce and leadership team look more like your customer base," said Joan Toth, executive director of the Network of Executive Women, Chicago. "Our customer base is 80% female and is quickly becoming more diverse in terms of race and nationality."

To guide more female workers from the lower levels of the company into the executive ranks, Toth said companies can use a variety of tools, including formalized mentoring programs, career pathing "that is specific and long-term in nature," more family-friendly work policies, and bonus pay for executives that includes incentives for diversity in advancement, retention and recruitment.

One recruiter cited Kroger Co., Cincinnati, as a company that has done an exceptional job in promoting women to management positions. Among its regional presidents are Donna Giordano, QFC; Phyllis Norris, City Market; and Lisa Holsclaw, Kroger Central Division. In addition, other senior female executives include Marnette Perry, senior vice president, and Lynn Marmer, group vice president, corporate affairs.

"Kroger has done a good job identifying those candidates, and giving them opportunities on both the merchandising/sales side and the operations side in getting them ready to run their [divisions]," said Gary Preston, a former Ahold executive and managing director of executive search firm Preston & Reffett, Philadelphia.

He said the process of making the workforce more diverse goes well beyond recruiting, and involves the entire organization.

"I think a lot of companies get someone [from a minority background] on board, and they say, 'OK, my job's done now.' But I would say your job has just begun," he said. "Getting a diverse candidate on board is one thing, getting them assimilated into the organization, which in many cases is not diverse, requires a plan, it requires some discipline, and it requires some resolve and commitment."

Companies also face challenges in retaining minority managers, Preston said, because they quickly become targeted by other firms.

"You have to work hard to get those people the right opportunities, because they are a very marketable candidate," he said. "If you are a top-performing, diverse candidate and you are doing well, I guarantee you are getting phone calls from people like me all the time."

Eric Watson, vice president of diversity and inclusion, Food Lion, Salisbury, N.C., said the industry needs to do a better job presenting an appealing image.

"It is important that we market the industry, because a large portion of the diverse community is not exposed to the industry and doesn't see the opportunities that exist," he said. "The image must be such that diverse candidates can see a successful career path in our industry."

To help diversify its management ranks, Food Lion has a retail manager training program through its partnerships with the 12 historically black colleges and universities in its operating region. The program currently includes 15 manager trainees.

In addition, Food Lion has relationships with other institutions that help it attract and retain minority and female workers, including student associations, Bennett College for Women and the Central Intercollegiate Athletic Association. The chain provides scholarships to CIAA schools, NAACP, Urban League and BCW.

"It is a business issue, not a human resources issue," Watson said. "There are basic foundational components to a successful and sustainable diversity and inclusion strategy. You must have an inclusive environment to attract, and more importantly, retain a diverse workforce. If people are not valued, included or comfortable, they may not come, and if they do, they may not stay."

Mark Hamstra