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The changes that Wal-Mart Stores has made to the landscape of Center Store are only beginning, even though the juggernaut has been a serious factor for years and a growing grocery specialist since 1988."Wal-Mart is not through growing," said Bill Lancaster, vice president of corporate sales for Associated Wholesale Grocers, Kansas City, Kan., and a longtime observer -- even an admirer -- of the so-called

The changes that Wal-Mart Stores has made to the landscape of Center Store are only beginning, even though the juggernaut has been a serious factor for years and a growing grocery specialist since 1988.

"Wal-Mart is not through growing," said Bill Lancaster, vice president of corporate sales for Associated Wholesale Grocers, Kansas City, Kan., and a longtime observer -- even an admirer -- of the so-called Bentonville Behemoth. "They are doing model cities across the country now, to test what kind of square footage they can put in and what sort of dollars are there."

"Wal-Mart is in the driver's seat in terms of changing the industry. Everybody else is playing catch-up or devising alternate strategies," said David Rogers, president of DSR Marketing, Deerfield, Ill., who is from England but has worked in the U.S. industry for 20 years.

Wal-Mart is driving change not only for retailers but for manufacturers and suppliers as well. Seventeen percent of Procter & Gamble's sales come from Wal-Mart, according to industry sources.

"One of the positive contributions of Wal-Mart is that they are driving out of the industry many of the silly games, like marketing funds and allowances," said Rogers. "What Wal-Mart has done is restore the balance. Many of the manufacturers, if they would be honest, would say they are very uncomfortable with the way Wal-Mart does business, because it's change and people don't like change."

Center Store categories that have been hit by mass merchandisers are everywhere. Laundry detergent and diapers are big ones, but so are cereal, pet food and paper products. Truckload sales are one tactic that Lancaster said have worked well for AWG's banners in all of these categories. Those stores have stayed healthy in the face of competition from first the Sam's Clubs in 1983, then the supercenters starting in 1988 and the Neighborhood Markets, which began to roll out in 2000.

Wal-Mart has also influenced the development of private label, leading nine new supermarket customers to join Topco Associates this year, according to a spokeswoman for the Skokie, Ill., private-label member cooperative.

The mammoth retailer has also inspired the rise of alternatives such as New Jersey-based neXpansion's Endless Aisle, which allows traditional supermarkets to expand their offerings by thousands of stockkeeping units through the use of online ordering.

In frozen foods, Wal-Mart's huge departments stock more brands than traditional retailers can carry. "They have the luxury of the space," said Bill Spear, frozens buyer for Bashas' Markets, Chandler, Ariz. "There's no way we can have every item that someone with lots of space has." Also, in frozens and other categories, Wal-Mart's selection has led some chains to authorize new suppliers, just to keep Wal-Mart from being too unique. When a Wal-Mart comes to town, one of the first sections to slow down is frozens. Making it tougher is an expected launch of a line of Wal-Mart private-label frozen dinners, industry sources said.

Some of the perception might be sleight-of-hand.

Wal-Mart might not have more variety -- it could be that the immense case space makes shoppers believe it, said one food broker from upstate New York. "You could count and find that other retailers have just as much. But the way they present it, it looks so grandiose, it makes people think they have more," said John Bari, a business manager with Acosta Buffalo.

Advice on how to compete with Wal-Mart runs the gamut.

"Run a good sale and get the customer in there again to those departments which they may not have been traveling," is Lancaster's advice. "Rebuild your image. Every store has image in its bank account. When they don't compete, they lose, and will end up having customers shop selectively, only picking the cheapest items." Of course, this is not the way for a supermarket to make money. To get the customer to shop all the categories takes trust.

Although Wal-Mart is known for everyday low prices, some said its prices are not always the lowest, that public perception is a big part of its success. A competing retailer does not have to match them on price, but can be "close enough," according to Lancaster and others.

What Wal-Mart is doing with its vendor policy -- keeping it pure, no gimmicks like slot fees and allowances -- is how it is able to offer those low prices, along with the huge volume it buys. How the supermarket industry chooses to respond may sound the death knell of slotting fees.

Lancaster called Wal-Mart the new paradigm in distribution retailing. "It's as clear as the Swiss watch when the digital came in," he said, that "there have to be major adjustments in thinking in how we buy.

"There has to be EDLP in key items now. You've got to be right in key items.

"[Wal-Mart] takes a category, be it cereal or dog food, and they make sure they are right on the price, and then they make sure they are right seasonally, and that the displays that are out reflect the value," Lancaster said.

Tried-and-true ways to compete are: buying more efficiently; passing savings on in lower prices on the shelf; building the private-label program; and offering things Wal-Mart does not, such as organics, extra service, attractive stores and a more pleasant shopping experience. "We sell food; that is what our customers want," said Bernie Rogan, spokesman for Shaw's Supermarkets, West Bridgewater, Mass.

As other retailers have widened their aisles and started partnering with Office Depot on stationery supplies and getting in doughnut franchises, Rogan predicted, "It's not going to work. We don't do much general merchandise, just seasonal and cookware. We are doing more value-added and expansion of organic foods, things Wal-Mart does not do."

Counter-approaches like those are the traditional advice. But is that enough?

As Wal-Mart grows and gets more acclimated to selling groceries and expands its Neighborhood Market format, there will be less and less that traditional grocers have that Wal-Mart doesn't. Asked how Ahold USA plans to address this situation, spokesman Barry Scher in Chantilly, Va., told SN, "We have a plan, but it's strictly an internal plan. The mass merchandise retailers are always on our radar screens, and that includes Wal-Mart." Competition has increased significantly over the past few years in all markets, he said.

Rogers, of DSR Marketing, zeroed in on the buy side, saying retailers must move to reducing their costs. From England, where he was touring stores, he said:

"They are having the same impact over here, where they are driving prices down, with Tesco helping them," he said. "It's a Wal-Mart phenomenon, part of a deflationary trend that business is having a very hard time adjusting to. Tesco is buying better, buying from different suppliers because it doesn't want Asda to say Asda is bringing lower prices to the U.K.," Rogers said.

Tesco and Morrison's are staying with Asda quite closely, similar to what Kroger is doing, he said. "They [Kroger] really are ahead of the curve, followed by, probably, Albertsons. Those are the responses you're going to have to have, if people are going to survive."

The extreme-value propositions of Aldi and Save-A-Lot are doing well, Rogers noted, at the same time as Whole Foods is doing well in same-store sales. "They're taking volume away from retailers such as Safeway and Albertsons that say they are appealing to the higher end."

The retailer must first reduce its costs, then prices, then do things to make itself attractively different from Wal-Mart, Rogers said. "They must have local brands that Wal-Mart doesn't carry -- in dry goods, in branded grocery and obviously the whole ethnic area, depending upon the trade area.

"If you are serving a heavily Cuban area or a Guatemalan area, it could give you an advantage over Wal-Mart, which thinks all Hispanics are Mexican."

For Center Store goods, retailers have to go to suppliers and ask for the same prices as Wal-Mart, Rogers said. "They may have to go to diverters and various sources of supply -- or buy product in Canada, where the value is 60-odd cents to the U.S. dollar."

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