Supermarkets threatened by Supercenters

Rival grocery stores blame Wal-Mart’s practices for their losses of revenue and customers.
Tuesday, October 21, 2003 | 12:00 a.m. CDT; updated 9:08 a.m. CDT, Saturday, July 19, 2008

Before Columbia’s only Wal-Mart Supercenter opened five years ago, John Freeman usually made about four other shopping stops before he could buy everything on his list.

He frequented Gerbes, Eastgate Foods, Dollar General and area convenience stores looking for sales. But now, he just goes to Wal-Mart.

“They have everything and the prices are pretty much unbeatable,” Freeman said as he loaded a case of Pepsi into the trunk of his car on Monday.

Freeman said he usually saves about 50 cents per item by shopping at Wal-Mart, but figured it would still be cheaper to shop in one place than doing extra driving to find lower sale prices elsewhere.

But Freeman’s shopping convenience can spell disaster for other area grocery stores.

Officials at some of nation’s dominant supermarket chains — Kroger, Ahold, Albertsons Inc. and Safeway Inc. — cite competition from Wal-Mart Stores Inc. and other box stores moving into the grocery business as a reason to hold the line on labor costs.

Those costs include health-care benefits that are the sticking point in United Food and Commercial Workers strikes of 3,300 workers at 44 Kroger stores in West Virginia, Kentucky and Ohio; 70,000 workers at three southern California chains; and 10,000 workers at three chains in Missouri.

Similar struggles are expected within the next six months as UFCW contracts expire in the Phoenix and Washington, D.C., areas.

“Box stores are a very real threat,” said Archie Fralin, a Kroger spokesman in Roanoke, Va. “Their lower labor costs make it imperative for us to manage costs. That’s just a reality.”

Lori Willis, a spokeswoman for Schnucks Markets, said: “Three issues at the heart of the strike are health care, a slow economy, and unprecedented competition from non-union, non-traditional grocery stores like Wal-Mart. We have higher labor costs, and our cost of doing business is higher.”

Willis said health care costs for Schnucks, Dierbergs, and Shop n’ Save have doubled in an 18-month period to $33 million.

“We need to raise awareness of the necessity of leveling the playing field with non-union corporations like Wal-Mart,” Willis said.

“Schnucks will continue to be competitive by focusing on quality, variety and service, and getting our associates back to work.”

Wal-Mart doesn’t break out earnings by division, so it’s hard to calculate how much food it sells. But analysts say in just 10 years it has become the biggest player in the grocery business, last year capturing anywhere from 5 percent to 15 percent of the industry’s $680 billion pie.

Traditional supermarket sales have dropped about 3 percent in the past year, estimates The Food Institute, a New Jersey-based trade group.

“The supermarket chains are still profitable, but executives see their market share down more than 5 percent over five years and they’re frightened,” said George Whalin, president of Retail Management Consultants in San Marcos, Calif.

Lower labor costs for non-union workers make up part of the advantage of box stores like Wal-Mart.

Including pension and health benefits, Kroger estimates it pays workers on average $6 an hour more in West Virginia than Wal-Mart. Burt Flickinger, managing partner of Strategic Resource Group in New York, says the difference in other parts of the country runs as high as $10 to $14 an hour for full-time workers.

At the Cross Lanes Kroger in West Virginia, striking UFCW workers say Wal-Mart’s opening five years ago cost their store $100,000 in weekly receipts — between a third and a half of the store’s income.

In response, workers say, Kroger has slashed the store’s payroll from 86 to 45 full- and part-time workers.

“All we hear from management is ‘Do more,’” said Kay Underwood, 49, a 29-year Kroger employee. “We did an employee survey, and the number of us on Paxil, Prozac, blood pressure medicines, you name it, has gone sky high. We’re killing ourselves for this company.”

Fralin wouldn’t comment on individual Kroger store sales.

But he said industry studies show that Wal-Mart often takes as much as $100,000 a week from existing supermarkets, and he hypothesized that a store losing that much would see labor costs cut similarly.

Wal-Mart insists labor costs are just one part of a low-price formula that includes better purchasing logistics and information systems.

Analysts agree that the Arkansas chain’s famously efficient ordering and distribution systems give it an edge, as does its clout in pushing for low wholesale prices.

“Wal-Mart is a dominant retailer because they have adopted a system unlike any other retail establishment,” said MU economics Professor Kenneth Troske. “Their organizational structure is revolutionary.”

Whalin calls the grocery industry invasion by box stores like Wal-Mart and Target, warehouse clubs like Costco and even drugstore chains like Longs a “sea change.”

“Supermarkets have to do better at wringing the costs out of everything,” he said. “But no matter what they do, in the long run they can’t compete. Ultimately we’re going to see fewer chains operating in each region — two, not three or four.”

—Missourian staff Katy Kickham and Michael Burden contributed to this report.

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