Let's take a momentary detour from our usual travels around the world of supermarket retailing to consider the plight of that quintessential fast-food vendor, McDonald's Corp., to see if there's any similarity between the cures it's taking for sluggish business and those supermarkets are considering. McDonald's is a vast company with some 31,000 stores worldwide. It got to that size by pursuing rapid growth centered on opening big numbers of stores each year. Last year alone, it opened more than 1,000. Now McDonald's is facing some fundamental problems, most of them far worse than those of supermarkets. Chief among them is that its product offer is little more than a one-note tune, and when that tune goes out of fashion, there's little sound and less music. Indeed, a survey issued last week by the NPD Group shows that of a key client demographic, 18-to-34-year-olds with kids, 48% say they will spend less on fast food. McDonald's faces other proliferating problems, too, including that its brand is viewed in some places in the world as a stalking horse for U.S. culture, which means some overseas growth must be put on hiatus.
In reaction, McDonald's announced plans last week to reduce its annual capital-spending budget from $1.9 billion to $1.2 billion and to trim the number of outlets to be opened this year to 360. That's still big money, but clearly a move toward risk aversion. McDonald's is contemplating changes in core product line, too: its menu.
By comparison, then, supermarkets have a fairly benign slate of difficulties set in front of them, but, as you'll see on Page 1, the capital-spending cure McDonald's is taking is also prevailing at many supermarket chains. And that makes a lot of sense. After all, any retailer that sees a weak economic marketplace dotted with too many stores that sometimes produce a declining return on investment would decide to pull back on new-store development.
As is reported in this week's news feature, each of the Big Three traditional supermarket retailers -- Kroger, Albertsons and Safeway -- is backing off new-store endeavors in favor of fill-in projects, such as remodeling. And that's true of many other supermarket operators as well. And, just as McDonald's is seeking menu changes, supermarkets are looking at tweaking the product offer by considering larger departments in perishables and nonfood, plus the addition of fuel centers.
One executive quoted in this week's news feature pointed out that the return on a remodel is realized far more quickly than it is from an entirely new location: "An enlargement is a more productive investment than a new store. An enlargement will produce a return right away, whereas a new store will have a maturation factor that will have to come into play."
The new caution about capital spending also means companies in a position to do so are likely to grow by incremental consolidation instead of large-scale acquisition. There's plenty of real estate around to make that possible. Kroger acquired two independents last week and, with Eagle Food Centers' second Chapter 11 filing, there may be much more.