Deli BUSINESS Oct./Nov. 2005 10 Deli BUSINESS C C O O V V E E R R S S T T O O R R Y Y appreciate exceptional quality more than they value low price. The dilemma here is that this strategy is almost certainly correct for any individual store, yet, applied on the scale of a national chain, it winds up forfeit- ing large swathes of the consumer market to Wal-Mart. The Forgotten Consumers An individual store can survive and even thrive by focusing on a particular segment of consumers, such as upscale shoppers or organic consumers and a national chain can succeed and neglect the interests of certain consumers, say not focusing on kosher food. But price is simply too basic and important a retail draw for major national or regional chains to simply cede the market of con- sumers who care about price. Yes, Whole Foods can build a profitable, growing business on consumers with an environmental and health-oriented psycho- graphic. In all the attention paid to what is a legitimately interesting and important phe- nomenon, however, it is well worth remem- bering that the sales of both Whole Foods and Wild Oats combined are less than 1 per- cent of the total supermarket industry, not counting Wal-Mart and warehouse clubs. In other words, it is a niche business and not a viable strategy for anyone looking to win the favor of the great number of Ameri- cans who live paycheck to paycheck. Census Bureau statistics for 2004 (the latest avail- able) give the median household income at $44,389 before taxes are taken out. This means that half of all households have incomes below this level. It doesn’t require extensive consumer research to know that households trying to feed a family with this income level are going to be less concerned about the newest pan- nini and deeply concerned about the price of ham for the kid’s lunchbox. Yet, Safeway, for example, doesn’t seem to pay any attention. Instead it explains that: “...Safeway has been aggressively remodeling its stores and opening new stores in what it has called its ‘Lifestyle’ format store. These stores feature an inviting decor with warm ambiance and subdued lighting that high- lights its high-quality fresh products and enhances the Safeway shopping experience. In addition, many of these stores have unique offerings including a large selection of natural and organic foods, full-service meat counters, full-service bakeries and floral design centers, as well as sushi bars and olive bars.” It is not so much that this is a bad strate- gy on Safeway’s part, it is more that its upscale, fresh focus ignores half the house- holds in America. The company might as well have issued a press release saying: “If you are focused on ‘subdued lighting’, we are your store; if you like a value, go to Wal-Mart.” Wal-Mart’s Deli Strategy It is not that quality doesn’t matter. The truth is Wal-Mart has built its reputation as a low-price leader on selling branded prod- ucts for less. Indeed when Wal-Mart began building its super center concept, it focused on using brands in its perishable offerings so as to piggyback on the credibility well estab- lished brands have with consumers. This was deemed crucial by top executives in Ben- tonville because Wal-Mart had no estab- lished reputation with consumers for quality perishables. In produce, the strategy was very effective. Brands such as Chiquita reassured the consumer of the quality of the offerings. By Jim Prevor F or a decade now, you could attend vir- tually any food industry conference, pick up any food industry trade publi- cation, talk to almost any retail consultant and you would get advice on the same sub- ject: how to compete with Wal-Mart. In a sense, the advice has been a very good thing for the deli/retail foodservice industry because the advice was always the same: Become the anti-Wal-Mart. A retailer look- ing to compete with a newly opened Wal- Mart Supercenter ought to emphasize per- ishables, high levels of service, focus on spe- cialty items, ethnic and organic foods — all things that the deli department is very well positioned to do. And so the heroes lauded in workshop upon workshop, article after article in both the trade and consumer press have been Wegman’s, Ukrop’s, HEB’s Central Market and, of course, the most anti-Wal-Mart of them all: Whole Foods. Sometimes these concepts and others like them have been credited with being viable strategies for com- peting against Wal-Mart. Other times they seemed to be focused on simply because they are so interesting and fun, especially for the well-educated journalist who feels more cul- tural affinity with the Whole Foods’ shopper than the Wal-Mart consumer. Yet, in the wake of Winn-Dixie’s bank- ruptcy and the decision of Albertson’s to sell out, something is becoming increasingly clear: namely, that these anti-Wal-Mart pro- posals are not so much proposals for how to effectively compete against Wal-Mart as they are proposals for how to to avoid competing with Wal-Mart. In essence, these proposals are designed to help supermarkets focus on those con- sumers who value variety and service and E dit or ’ s Ana l y s is: Wal-Mart: Remembering The Forgotten Consumer
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appreciate exceptional quality more thanthey value low price. The dilemma here isthat this strategy is almost certainly correctfor any individual store, yet, applied on thescale of a national chain, it winds up forfeit-ing large swathes of the consumer market toWal-Mart.
The Forgotten ConsumersAn individual store can survive and even
thrive by focusing on a particular segment ofconsumers, such as upscale shoppers ororganic consumers and a national chain cansucceed and neglect the interests of certainconsumers, say not focusing on kosher food.But price is simply too basic and important aretail draw for major national or regionalchains to simply cede the market of con-sumers who care about price.
Yes, Whole Foods can build a profitable,growing business on consumers with anenvironmental and health-oriented psycho-graphic. In all the attention paid to what is alegitimately interesting and important phe-nomenon, however, it is well worth remem-bering that the sales of both Whole Foodsand Wild Oats combined are less than 1 per-cent of the total supermarket industry, notcounting Wal-Mart and warehouse clubs.
In other words, it is a niche business andnot a viable strategy for anyone looking towin the favor of the great number of Ameri-cans who live paycheck to paycheck. CensusBureau statistics for 2004 (the latest avail-able) give the median household income at$44,389 before taxes are taken out. Thismeans that half of all households haveincomes below this level.
It doesn’t require extensive consumerresearch to know that households trying tofeed a family with this income level are going
to be less concerned about the newest pan-nini and deeply concerned about the priceof ham for the kid’s lunchbox.
Yet, Safeway, for example, doesn’t seem topay any attention. Instead it explains that:“...Safeway has been aggressively remodelingits stores and opening new stores in what ithas called its ‘Lifestyle’ format store. Thesestores feature an inviting decor with warmambiance and subdued lighting that high-lights its high-quality fresh products andenhances the Safeway shopping experience.In addition, many of these stores haveunique offerings including a large selectionof natural and organic foods, full-servicemeat counters, full-service bakeries and floraldesign centers, as well as sushi bars and olivebars.”
It is not so much that this is a bad strate-gy on Safeway’s part, it is more that itsupscale, fresh focus ignores half the house-holds in America. The company might aswell have issued a press release saying: “If youare focused on ‘subdued lighting’, we are yourstore; if you like a value, go to Wal-Mart.”
Wal-Mart’s Deli StrategyIt is not that quality doesn’t matter. The
truth is Wal-Mart has built its reputation asa low-price leader on selling branded prod-ucts for less. Indeed when Wal-Mart beganbuilding its super center concept, it focusedon using brands in its perishable offerings soas to piggyback on the credibility well estab-lished brands have with consumers. This wasdeemed crucial by top executives in Ben-tonville because Wal-Mart had no estab-lished reputation with consumers for qualityperishables. In produce, the strategy was veryeffective. Brands such as Chiquita reassuredthe consumer of the quality of the offerings.
By Jim Prevor
F or a decade now, you could attend vir-tually any food industry conference,pick up any food industry trade publi-
cation, talk to almost any retail consultantand you would get advice on the same sub-ject: how to compete with Wal-Mart. In asense, the advice has been a very good thingfor the deli/retail foodservice industrybecause the advice was always the same:Become the anti-Wal-Mart. A retailer look-ing to compete with a newly opened Wal-Mart Supercenter ought to emphasize per-ishables, high levels of service, focus on spe-cialty items, ethnic and organic foods — allthings that the deli department is very wellpositioned to do.
And so the heroes lauded in workshopupon workshop, article after article in boththe trade and consumer press have beenWegman’s, Ukrop’s, HEB’s Central Marketand, of course, the most anti-Wal-Mart ofthem all: Whole Foods. Sometimes theseconcepts and others like them have beencredited with being viable strategies for com-peting against Wal-Mart. Other times theyseemed to be focused on simply because theyare so interesting and fun, especially for thewell-educated journalist who feels more cul-tural affinity with the Whole Foods’ shopperthan the Wal-Mart consumer.
Yet, in the wake of Winn-Dixie’s bank-ruptcy and the decision of Albertson’s to sellout, something is becoming increasinglyclear: namely, that these anti-Wal-Mart pro-posals are not so much proposals for how toeffectively compete against Wal-Mart as theyare proposals for how to to avoid competingwith Wal-Mart.
In essence, these proposals are designedto help supermarkets focus on those con-sumers who value variety and service and
Editor’s Analysis:
Wal-Mart:Remembering The Forgotten Consumer
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But Wal-Mart was thwarted in executing itsplan in deli because Boars Head refused tosell to Wal-Mart.
Wal-Mart hoped to use Boars Head,with its high consumer recognition for quali-ty deli products, as a foundational brand ofits deli efforts. Boars Head feared alienatingits supermarket clientele and was concernedthat its association with a discounter such asWal-Mart might diminish its own brandequity, so the deal was never struck.
Instead Wal-Mart developed a two-prong strategy, both carrying a wide varietyof branded product with a special emphasison seeking brands with high regional appealand launching a private label deli line, PrimaDella, which Wal-Mart executives claim isdesigned to equal or exceed the specifica-tions for the best broad line vendors in thedeli marketplace.
Wal-Mart is now selling in excess of 20percent of all the supermarket sales in thecountry. Although weaker in perishables, it isstill likely that in 2005, Wal-Mart will havesold at least 15 percent of all the deli prod-ucts sold at supermarkets in the U.S. Onewonders if, at some point, the executives atBoars Head won’t regret their decision.
Wal-Mart doesn’t do a lot of trendythings in deli and retail foodservice and thusdoesn’t get a lot of attention for its merchan-dising and marketing. This is because thefocus among top executives in Bentonville isnot so much on what they might like to do,but rather on identifying those initiatives
that Wal-Mart can execute well and scaleacross its enormous number of high volumeunits.
Wal-Mart Deli ServiceIn Wal-Mart internally, there have been
debates for years as to whether the consumeris best served by having a service deli at all.In the meat case, Wal-Mart is completelycase-ready. Outside observers claim the
motivation was to avoid trouble with union-ized butchers. Wal-Mart executives say it wasa judgment that case-ready would providethe most consistent quality.
Many think a commitment to self-servicedeli products would make equal sense. Sofar, the service deli advocates have won outand for two prime reasons: First, in the super
center concept where service is sparse, theservice deli provides one of the few points ofinteraction between consumers and thestore staff, and maintaining this interactionhas value. Second, certain hot food pro-grams, such as rotisserie chicken, are verysuccessful at Wal-Mart and would requiresubstantial staff anyway, so having this staffdo double duty makes financial sense.
This assessment seems firm right now butis always being reevaluated. If Wal-Martshould one day make a change and decide tofocus strictly on self-service in the deli, oneshould expect a dramatic change in thenature of product available. When Wal-Martswitched to case-ready meat, for example, itprovided the critical mass that allowed themeat industry to develop new products andpackaging. (Ironically, many of the sameefforts in case-ready meat have been imitat-ed by competitors such as Dollar General,which carries fresh produce, case-ready meatand other refrigerated and frozen items in itsDollar General Market concept stores.)
Supplier ReactionSuppliers’ take on the Wal-Mart phe-
nomenon varies. Whenever anyone gets sobig, suppliers get nervous as they becomevulnerable to losing the account. Most how-ever are thankful that the relationship withWal-Mart is free of constant pressure to payvarious fees and even free of the casual pres-sure to take the retailer’s buyers out forexpensive trips to the Super Bowl and what
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No Slowing Down
M easured by sales, Wal-Mart is the largest company in theworld, more than double the size of the next largestretailer, Carrefour, the French Hypermarket company. It
has almost 6,500 stores around the world and well over 100 millionpeople shop in its stores every week. Most astoundingly, its growthdoes not appear to be slowing despite its large size. In 2005 alone,Wal-Mart opened approximately 50 million square feet of retailspace, which is more than the combined space of many of its com-petitors.
And the potential seems vast. Wal-Mart executives like topoint out that in the United States, Wal-Mart accounts for 8 per-cent of total U.S. retail sales of all items, but in many mature mar-kets the dominant firm has a market share of 30 percent, some-times more. So its horizon for expansion seems substantial.
Many competitors are quick to focus on Wal-Mart’s non-unionlabor force and various cost advantages as the key to its success.But this discounts its enormous success as a merchant. Kmart wasthought for a while to be the one that could really challenge theWal-Mart Supercenter for leadership. Target, it is supposed, cantrump the Wal-Mart Supercenter with its upscale orientation, yetdespite similarly sized units, Wal-Mart’s Supercenter revenue isaround $90 million a year per store, Target is only $55 million a
year per store, and Kmart only about $35 million a year per store.These sales numbers tell quite a story as such a gap in sales per
square foot has the effect of reducing costs per dollar of sales asfixed expenses get applied to higher volumes.
Perhaps the biggest difference between Wal-Mart and conven-tional supermarkets is cultural. Sam Walton established a primedirective in which Wal-Mart would consider itself as a “buyingagent for the consumer.” This means that when Wal-Mart is ableto secure lower prices, it passes the savings directly onto the con-sumer. This is a different approach than most supermarkets, wherepricing dips are apt to be seen as opportunities for marginenhancements.
The philosophy of being a buying agent for the consumer dic-tates much of what goes on at Wal-Mart. The decision to be anEvery Day Low Price (EDLP) retailer, as opposed to most super-markets on a high/low pricing regimen, is part of an effort to drivecosts out of the system. Ads and specials tend to cause irregularproduction runs at manufacturing facilities and excessive ware-housing costs as retailers look to take advantage of special deals.Equally, slotting fees and various vendor payments tend to increasewhat vendors must charge for their products. So Wal-Mart doesn’twant these fees. DB
It often appears tosuppliers that Wal-Martis successful in deli
despite itself with itsmassive sales creditedmerely to the massivecustomer count... not onthe excellence of the deli.
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not. As with industry leaders such as Cost-co, accepting such favors is cause for dis-missal.
Many suppliers are critical about in-storemerchandising at Wal-Mart, claiming it isirregular and that too many stores are unac-ceptably disheveled. All suppliers acknowl-edge that Wal-Mart sells lots of deli prod-ucts, with particular strength in a lot of con-venience items, such as grab n’ go items. Butit often appears to suppliers that Wal-Mart issuccessful in deli despite itself with its mas-sive sales credited merely to the massive cus-tomer count flowing through the stores on agiven day, not on the excellence of the deliin merchandising, marketing and, more gen-erally, serving customers.
Insiders at Wal-Mart think such a cri-tique is beside the point. To whatever extentit is true, Wal-Mart executives think it is afunction of rapid growth. In 2005 Wal-Martannounced plans to open 50 new discountstores in the U.S. (which sell a limited selec-tion of self-service deli products), 220 newSupercenters, overseas it planned another140 new stores. And this doesn’t even countSam’s Club, a membership warehouse con-cept similar to Costco, or NeighborhoodMarkets, a smaller footprint store selling atthe same price as a Supercenter and capable
of being inserted both between Supercentersand in more urban areas where large tracksof land are unavailable.
These are just numbers on a page, and if
you say them fast they don’t seem like muchof anything, but the total sales of just thesenew outlets will exceed the sales of all butperhaps three U.S. supermarket chains. It is aphenomenal achievement of logistics andengineering, an annual construction projectrivaling the building of the Panama Canalbut, inevitably, it causes strains. It means a
continuously inexperienced staff, a supplychain always being expanded, a learningprocess going on to identify individual mar-ket needs at new stores.
If execution is a problem, executives atWal-Mart are confident it will get betterwith time as its workforce gains seasoningand stores become more established.
More generally the critique may fail totake account of the nature of the typicalWal-Mart customer. The chain is particularlystrong among immigrant groups and youngfamilies, and Wal-Mart is serving as the placewhere many get their first exposure to “deli-catessen”. In other words, it is Wal-Mart’slow-price strategy that encourages trial ofspecialty cheese, for example, among peopleto whom the product is foreign.
No Whole FoodsWithout a doubt, Wal-Mart is no Whole
Foods and doesn’t have the breadth of offer-ings or carry the most expensive lines, butevery consumer has to start his or her jour-ney somewhere and for many of the nextgenerations, that initial exposure is occur-ring in Wal-Mart.
Somewhere along the line, supermarketsjust decided to give up the price card andallow Wal-Mart to seize the business of con-
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Every DELI needs thisENTERTAINING QUARTETEssential for parties - GREAT for every day
just decided to give upthe price card and allowWal-Mart to seize thebusiness of consumerswho are focused on price.
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sumers who are focused on price. In a senseWal-Mart’s mad dash to open stores can beattributed to the fact that when they open ina town, Wal-Mart can count on supermar-kets moving over and focusing on fresh, ser-vice, organics, ethnic foods, etc., and thusmaking room in the market for a price-ori-ented vendor. It virtually assures Wal-Martthat its stores will be profitable
Looking ahead, when the midnight oil isburning in Bentonville, it is almost certainlynot because of supermarket initiatives suchas the Safeway Lifestyles concept. These aremerely efforts to get out of Wal-Mart’s way.Far more troubling in the minds of Wal-Mart executives are concepts such as Aldi,Save-A-lot and the dollar stores, conceptsdesigned to challenge Wal-Mart’s ownershipof the price card. There is concern thatsome of these concepts seek to subdivide thesector of the consumer that Wal-Mart hasclaimed as its own. The Dollar GeneralMarket concept attracts a consumer with anaverage family income of only $30,000 —numbers such as this really concern execu-tives in Bentonville.
The CEO of a supermarket once told methat he wasn’t worried about beating outWal-Mart. The analogy he used was that ofa group of campers walking through the
woods and being set upon by a hungry bear.He pointed out that it wasn’t necessary to beable to outrun the bear, you only had to beable to outrun the other campers.
It is an interesting analogy, but one witha fatal flaw: Bears get hungry again after awhile. If you are on a camping trip, you arepresumably in your car hundreds of milesaway when the bear wants his next meal.But in retail competition, there is no run-ning away.
Right now there is a vast market of for-gotten consumers, those who live paycheckto paycheck and whose focus is on value, notsubdued lighting and wood floors. Havingbeen forfeited this market,Wal-Mart is on anurgent mission to seize it before someone elsedoes. And the potential for growth here isstill very substantial, perhaps an increase inmarket share from 20 percent to 30 percentof the supermarket business, maybe more.
No Safe HavenBut even those retailers that have gotten
out of its way shouldn’t feel safe. Wal-Mart’sNeighborhood Market is being developed asa next generation platform for growth whenthe super center concept has saturated thedomestic market. And future iterations willfocus on ethnic marketing and experiment-
ing with more upscale offerings. Indeed, inBentonville it is firmly believed that Wal-Mart’s vaunted logistics ability, combinedwith its philosophy of acting as a buyingagent for consumers, should allow it to offercompelling value propositions on all classesof goods, including luxury items.
How this will play out is yet to be deter-mined, but the Japanese auto industry mayprovide a model. Wal-Mart’s customer baseskews very young, much as the early pur-chasers of economy cars from Japan did. Intime, though, the Japanese car makers gottired of losing their customers when they gotolder and became more worldly and moreaffluent. In the fullness of time this led tothe development of upscale brands fromeach of the major Japanese car producers:Honda has Acura, Nissan created Infiniti,and Toyota developed Lexus. All are reallydesigned to give the Honda, Nissan and Toy-ota customer a way to stay in the family asneeds and desires change.
The whole supermarket industry mayhave been content to forget the mass legionsof price-oriented consumers, to give up com-peting on price and cede that consumer toWal-Mart. But they haven’t forgotten aboutany consumers in Bentonville; they aremerely biding their time. DB
