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Squeezed on Two Sides, Mid-Sized Grocers Adjusting

Squeezed on Two Sides, Mid-Sized Grocers Adjusting

By ANDY FIXMER

Staff Reporter

Struggling to navigate between escalating labor costs and off-price competition, traditional grocery store chains have been forced to alter their strategies to maintain already narrow margins.

In 2002, the industry posted the smallest annual sales increase in eight years, and Value Line estimated that operating margins on food sales would fall to 6.5 percent this year from a high of 7.7 percent in 2001.

“The supermarket industry is in a vice,” said Sandy Skrovan, vice president of market research firm Retail Forward Inc. “Pricing pressures, margin pressures and escalating costs continue to drain the bottom line.”

Meanwhile, the cost of health insurance and workers compensation have continued to rise exponentially, further squeezing labor-intensive supermarkets.

For grocers, it’s a situation made worse as Wal-Mart Stores Inc. begins opening 40 “supercenters” across California during the next five years. It is already the world’s largest grocer.

With its massive buying power and non-union labor force, Wal-Mart offers groceries at a discount of as much as 10 percent. It’s a pricing structure unionized supermarkets have trouble matching, according to Bill Bishop, president of Barrington, Ill.-based Willard Bishop Consulting.

“We are coming to a crossroads,” Bishop said. “It’s either labor and retailers figure out a way to work together or Wal-Mart and others like them will be more successful in winning a large share of business.”

To meet the challenge, chains like Albertson’s Inc. and Ralphs Grocery Co., a subsidiary of the Kroger Co., have been cutting overhead and spending money on store improvements.

Grocers are betting that convenience, better customer service and accessible neighborhood locations will trump the lower prices offered at Wal-Mart’s regional supercenters.

“The simple answer is we don’t try to compete directly on price,” said Stacia Levenfeld, a spokeswoman for Albertson’s in California and Southern Nevada. “We continue to do what we think we do best.”

To stay competitive, Bishop said grocers must differentiate themselves.

“A different kind of store like a Bristol Farms, won’t be affected,” he said. “But if you’re a plain vanilla supermarket you are going to lose customers who shop your store for price.”

Bishop said thriving niche markets for specialty grocers have emerged, especially in ethnic enclaves that seek more than the one-taste-fits-all fare offered at supercenters.

Albertson’s has taken note of the trend and is customizing each of its California stores to fit the neighborhood where it’s located, Levenfeld said. As the chain continues to remodel its stores, it’s also specializing the types of food offered on its shelves.

“You are not going to see the same Albertson’s in every neighborhood because each one has its own needs,” she said. “We are trying to be that neighborhood store that carries specialized lines the neighborhood is looking for.”

The chains have also had a modicum of help from some local governments.

In Los Angeles, city officials are considering ordinances requiring workers in supercenters, like Wal-Mart’s, to be paid prevailing wages that match those paid to union workers. In Inglewood, an ordinance barring retailers from building stores exceeding 155,000 square feet and selling more than 20,000 non-taxable items, such as food and pharmaceuticals, was rescinded a few weeks after it was enacted on the advice of its city attorney.

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