A gorilla in their midst

It’s not dead yet, but in the long term it’s not looking great. Supermarkets, excluding supercenters, experienced a 3.5% increase in dollar sales last year, according to the 55th Annual Consumer Expenditures Study. This would seem like a good thing for traditional grocers, but within those numbers lies the fact that grocery stores are losing share hand over fist to supercenter formats such as Target, Super K-Mart, Meyer, and of course, Wal-Mart Supercenters, because they’re charging too much.

According to Neil Curry, the food and drug retail analyst for UBS Warburg who spoke in a conference call with beverage analyst Caroline Levy yesterday, the traditional supermarket chains have lost 10% of the market to supercenters since 1994. Grocery stores represent 65% of grocery sales, down from 75% in the mid-1990s. Additionally, drug chains like Walgreens, c-stores, and high-end epicurean smaller chains like Whole Foods have and will continue to gain share, probably because their innate convenience complements the large supercenters for shoppers. Albertson’s, Kroger, and Safeway are at risk (particularly Albertson’s), while HEB, Publix, and smaller regional chains and some independents are still strong.

SUPERCENTERS TO TAKE OVER. Neil predicts that within only five years, supercenters and dollar stores will reach up to 40% of all chain store sales, up from less than 15% today. Naturally, as the category leader, Wal-Mart will gain the lion’s share of those dollars.

WHAT HAPPENED? How did supermarkets drop the ball so badly? Two main reasons: 1. They cling to a supply-driven model rather than adopting Wal-Mart’s demand-driven model. Supermarkets sell shelf-space to the highest bidder and let suppliers put whatever the want on the shelf.. often with 20% of items in a store not selling well. Wal-Mart, on the other hand, only stocks what consumers want to buy. If something is slow-moving, Wal-Mart yanks it immediately and replaces it with something that sells better. (Beer Business Daily spoke with an exec with Pioneer Flour based in San Antonio, one of the largest millers in the country, and he said he prefers working with Wal-Mart because supermarkets charge so much for slotting. Obviously in the beer business we don’t have to worry about slotting fees).

2. Price. Neil points out that the producer price index (PPI) has risen at only half the rate of the consumer price index (CPI), indicating that supermarkets have been padding price increases healthily. Indeed, EBITDA margins for supermarkets are in the 7.5%-9.5% range, which is very high compared to grocery stores in other countries. Wal-Mart, on the other hand, has clung to the everyday low price (EDLP) model and strong-arms suppliers to cut costs out of their system so that they can pass the savings on to Wal-Mart, who passes them on to the consumer. Neil calls this concept “everyday low cost” or EDLC.

WAL-MART COUNTRY. Wal-Mart will expand their supercenter concept to add 1,000 stores in the US over the next five years while also building Neighborhood Stores (see BBD 03-28-03). They will particularly be aggressive in expanding into California. So A-B’s capturing of category captain status at Wal-Mart, and Miller Lite’s designation as a VPI, are certainly good moves. This chain will rule the off-premise segment.

GOOD NEWS/BAD NEWS. The good news for brewers and distributors is that private label doesn’t seem to work with beer (at least not yet). EDLP keeps beer selling at a steady clip so it’s not feast or famine. Also, Wal-Mart is not hip to stocking a bunch of SKUs just for the sake of variety, so delivery and merchandising are easy and cheap. They will not stock two similar brands if one will do, and only in the larger pack sizes. This could be bad, however, for marginal imports and slow velocity craft brewers.

THE FRAGMENTED BUFFER. And beer will perhaps be the hardest consumer goods category to strong-arm, as the distribution channel remains fairly fragmented and provides an excellent independent buffer between the retailer and the brewers. It’s the reason brewers are glad to have the three tier system. Our brothers in the soft drink business are unable to raise pricing, mainly due to pressure from big retailers like Wal-Mart on their large, publicly-held bottling divisions. Once CCE and PepsiAmericas falls, the rest fall with them. If a Reyes or an Anderson fall, it doesn’t mean a Bergson or a Huggins necessarily follow. Independence is a good thing.

BUT THERE ARE PITFALLS FOR THE UNWARY. Brewers are making noise about creating special large package configurations just for Wal-Mart, kind of like a semi-private-label, so that uniform EDLP pricing can be achieved across the nation (and you can imagine that the EDLP per ounce will be a bargain, a la 30 pack). The foot traffic in Wal-Mart is just too great for brewers to ignore this gorilla in their midst. You could brew a beer with used cat litter in it and it would sell in Wal-Mart, at least initially. I’ll leave you with that lovely image for the day.