Does Wal-Mart Rule?

If anyone had any doubts about who sets the agenda for the supermarket industry these days, Wal-Mart apparently cleared them up when it announced expansion plans for next year.

Even the most optimistic observers predicted a continuing tough fight for chains, independents, and wholesalers, and the pessimists saw bankruptcies and store closings looming all across the sector.

The world's largest retailer said that in the fiscal year beginning February 1 it intends to open in the U.S.:

?170 to 180 new supercenters, which combine a discount store with a full supermarket, on top of the 835 it was operating on September 30;

?15 to 20 Neighborhood Markets, the conventional supermarket prototype that has been expanded to 52,000 square feet from the 40,000-square-foot floor plan that debuted a couple years ago (13 were up and running September 30);

?40 to 50 Sam's Club warehouse stores, of which there were 469 at the end of September; and

?Almost 7 million square feet of warehouse space, with three new regional distribution centers for general merchandise, two for groceries, and two for fresh foods.

About 100 to 110 of the new supercenters will be relocations or expansions of existing discount stores and the rest are to go up in new territories. About half the new Sam's Clubs will be expansions or relocations.

Bentonville, Ark.-based Wal-Mart did not specify the new markets it will enter, and a spokesman did not respond to a request for elaboration on the announcement.

The mega-retailer's latest plans fall into a strategy that Thomas K. Zaucha, president of the National Grocers Association, found alarming enough to call "saturation bombing." Said Zaucha, "They have the ability to come into a market with their supercenters, with their Neighborhood Markets, with their traditional Wal-Marts, and with the clubs. I think there is a growing concern that not only do we have the potential for concentration, we have the real possibility of monopsony power."

Meeting that challenge will be a major theme of NGA's convention in January, he said. "This is not something one should or can take lightly. I think there's an urgency to respond."

"They're restructuring the industry," said David Rogers, president of Deerfield, Ill.-based DSR Marketing, who will make a presentation on Wal-Mart at the NGA convention. "When you put that amount of floor space in, you have to take out an equivalent amount of floor space, and that's going to happen through store closings, isn't it? It's the brutal truth."



'Everybody Feels It'

Rogers expects to see hundreds of supermarkets?chain stores as well as independents?close over the next few years as a result of the Wal-Mart expansion. "Everybody feels it," he said. "It's just that if you're a price merchant with out-of-date stores you feel it more than everybody else. And that includes a lot of chains."

And the problem gets worse as Wal-Mart gets better at the business, Rogers said. "They used to have a lot of stores doing $300,000 a week, $350,000 a week in grocery, and now we're seeing more and more of them doing $700,000 a week."

Said Burt Flickinger, managing director of Reach Marketing in Westport, Conn., "Fleming and the regional wholesale grocers are going to have the greatest exposure, but since Wal-Mart announced that food was going to be their focus going forward in 1996, there have been nine major regional supermarket chain bankruptcies, and eight of the nine have been heavily influenced by Wal-Mart's expansion."

In his discussions with CEOs of many of the chains that have liquidated or gone into Chapter 11, Flickinger said, all agreed that except for the star performers like H-E-B, Wegmans, and Publix, very few regional chains will be able to survive past 2005 because of the growth of Wal-Mart supercenters and Sam's Clubs.

"The entire industry is going to comp by negative 4.5 percent on a same-store basis, just based on Wal-Mart's sales increases," Flickinger said.

Robert J. Gatty, vice president of communications & marketing at Food Distributors International, warned that if longstanding differences and mistrust between wholesalers and some of their retailer customers aren't overcome, "there's no way they're going to be able to hold this wolf at bay."

Observers blamed much of the traditional supermarket industry's difficulties in competing with Wal-Mart on government, particularly the Federal Trade Commission, which doesn't take into account the amount of supermarket-type merchandise that moves through outlets like Wal-Mart, Kmart, Target, Sam's Club, Costco, Walgreen's, and CVS when it evaluates grocery competition in a market.

That limited view, which has prevented important acquisitions by Ahold, Kroger, Harris Teeter, and others over the last year, will probably help push a dozen major companies in the food, drug, and mass channels into bankruptcy in the next three-and-a-half years, Flickinger predicted.

"Food wholesalers need to be allowed to merge and the regional supermarket chains, both in market and out of market, need to be allowed to merge," he said. "But every government decision fosters Wal-Mart's geometric growth and prevents any competitors from achieving any type of size and scale to compete."

NGA has pressed the FTC to enforce fairness under the Robinson-Patman Act in the areas of pricing, promotion, product availability, packaging, and payment terms. "We are concerned that some of the mega-companies in this industry are demanding and receiving preferential treatment," Zaucha said.

Gatty said the ever-increasing competition underscores the need for the level of retailer-wholesaler cooperation often described as the "virtual chain," and for improved shelf management and new-product introductions in stores, as outlined in FDI's recently released Retail Implementation Study. Workbooks and training materials are being developed based on the study's conclusions, he said, and regional training sessions are to be scheduled.

"It's not rocket science," Gatty said. "These guys for a long time have had the ability, if only they would change the way they work. Maybe they just haven't had enough of an impetus; maybe this will give them that impetus."



Keys to the Future

Zaucha said NGA has been providing members with programs and services to help them compete and has established "nine keys to the future success of the independent retailer."

The association is also telling state and local government officials about the potential impact of industry concentration on price and variety in attempts to head off the granting of zoning variances and tax abatements to mega-retailers that may overwhelm community-based businesses.

And NGA is working with the National Cooperative Bank to encourage independent supermarket operators to invest in urban markets, where there are still many growth opportunities, Zaucha said.

He said independent grocers will continue to play to their traditional strengths, which include flexibility, maneuverability, merchandising and marketing creativity, and the image of community commitment.

Flickinger, however, saw little hope for independents over the long run. The Wal-Mart expansion, he said, "is the greatest threat to the independent grocery industry since A&P and Merrill Lynch/Safeway expanded in the first quarter of the last century without any antitrust laws protecting the independents."