Grocers Try Fresh Ideas to Win Back Shoppers

Under pressure from Wal-Mart Stores Inc., Costco Wholesale Corp. and other discounters, supermarkets are launching the kind of war consumers love--a price war.

Kroger Co., owner of Southern California’s Ralphs grocery chain, fired the first round Dec. 11, announcing it will slash prices on selected items to defend its declining market share.

Safeway Inc., the parent of Vons, seconded the motion, saying it had lowered profit projections and earmarked a large pool of funds for discounts and promotions to keep shoppers from defecting to the big discounters.

The news highlights the squeeze supermarkets are feeling from discounters, membership clubs and even drugstores as consumers search for the best values.

Double coupons, it seems, just aren’t enough for some shoppers.

“They never add up to much, and they are for things we don’t use,” said Jessica Garcia, with her two young sons in tow at a Los Angeles Costco.

Kroger and Safeway executives declined to be specific about which prices on everyday items will come down and by how much. However, analysts expect lower prices on stock-up items such as cereal and detergent.

They also forecast more coupons, perhaps even quadruple coupon specials, and two-for-one deals in coming months to win back more shoppers such as Garcia.

And expect to see some nontraditional supermarket merchandise too. During the holiday season, for instance, Safeway boosted its bottom line by offering gift certificates to Nordstrom Inc. stores, cheap DVD players and a selection of toys.

Safeway declined to comment on the profitability of its holiday merchandise, other than saying the items were “well received” by its customers.

Wal-Mart officials, meanwhile, seemed unperturbed by Kroger’s announcement and said the 2,700-store chain is willing and able to defend the “We sell for less” claim that is written across its giant stores.

“We won’t let ourselves be beat,” Wal-Mart spokesman Tom Williams said, even if that means sacrificing some of its profit margin.

In its fiscal third quarter ended Oct. 31, Wal-Mart’s gross profit margin declined a third of a percentage point, after dipping slightly in its second quarter, mainly because of price-cutting in its grocery aisles.

However, with more people coming into the stores, sales for the quarter jumped 15.5% to $52.7 billion and net income rose 8.2% to a record $1.5 billion.

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Smaller Retailers Caught in Middle of Price War

Wal-Mart can afford to win a price war, analysts said. And although supermarket executives said they are trying to win back sales lost to Wal-Mart, it’s the weaker discounters, such as Kmart Corp. and regional supermarket chains, that will suffer.

“Smaller retailers are getting demolished,” Mark Husson, analyst with Merrill Lynch Global Securities, said in a recent report on the battle between Wal-Mart and supermarkets.

The reality is, Husson said, the top three supermarket chains--Kroger, Safeway and Albertson’s Inc.--have seen only minute dips in market share since Wal-Mart moved into their business in the mid-1990s. Despite its low prices, Wal-Mart commands just a 6.7% share of retail grocery sales in the top 100 U.S. markets in which it operates, compared with a combined 68% share for the top three supermarket chains.

In Southern California, Ralphs, Vons and Albertson’s control 66% of the market, according to supermarket data firm Trade Dimensions. Safeway officials think that share could grow, much as it has in Europe.

Nearby supermarkets lost market share when a new Wal-Mart opened, but most of the loss was regained a year later, when the novelty had worn off and shoppers retreated to familiar shopping patterns, said Melissa Plaisance, Safeway’s vice president of finance.

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Supermarkets Dealing With More Competition

Indeed, for all the talk about Wal-Mart encroaching on their turf, these chains are adding more food retailing space than Wal-mart, Kmart and Target Corp. combined, Husson said.

They are expanding at double the growth rate of the industry’s typical 1% to 1.5%, forcing out smaller chains with older stores and stealing customers from one another.

Still, there’s no question that the competitive pressure has been turned up on supermarkets as more types of retailers, from Target to drug chain Rite Aid Corp., are using cheap food to draw more customers into their stores.

“Our food business has grown significantly over the last year and we expect it to continue to grow,” Rite Aid spokeswoman Sarah Datz said. Shoppers can pick up milk, eggs, soda, bread, cereal, frozen dinners, canned goods and pet food at most Rite Aid stores.

Costco, which didn’t sell fresh food until 14 years ago, counts food as a $4-billion business, or about 11% of its sales.

“Food is actually leading the pack now,” said Richard Galanti, Costco’s chief financial officer.

Over the last several months as the economy has taken a hit, jewelry, electronics and apparel sales have slumped, he said, but “food has held its own,” and the company has expanded its meat, produce and deli sections.

Wal-Mart also has said it intends to increase its food business. Grocery sales at Wal-Mart’s 1,060 super-centers are growing at double the rate of its overall business.

The company plans to open 185 of these grocery/discount stores next year, as well as a number of smaller grocery-only stores it calls Neighborhood Markets.

To compete, supermarkets are trying to become more of a one-stop shop, adding new items to boost the bottom line.

Safeway stocked a selection of about 100 inexpensive toys chosen by KB Toys, such as the Fisher-Price Cash Register, the Barbie Beach Cruiser and a Hot Wheels Car Wash.

“Supermarkets are always trying to look for opportunities in nonfood categories,” said KB Chief Executive Michael Glazer. “We can provide them with exclusive items that they can’t get anywhere else and use our purchasing leverage to provide them with values that they couldn’t get themselves.”

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Selection, Quality and Service Are Keys

Many analysts and supermarket executives say supermarkets should stick to what they do best--food.

Better produce aisles, deli and butcher counters could be more effective than general merchandise in boosting sales.

“That’s what our customers come to us for,” said Larry Johnston, chairman and chief executive of Albertson’s. “We’re going to make it more attractive to them.”

Although many smaller chains, such as Stater Bros. Markets, acknowledge that they can’t beat Wal-Mart’s prices, they can survive and even thrive by offering customers selection, quality and service, along with a quicker trip in and out of the store.

“Our customers tell us they want a full-service shopping experience,” said Jack Brown, chairman and chief executive of Stater Bros. “They don’t have to touch a thing once they hit the check stands. We unload the carts and take the groceries out to their car.”

Although many shoppers hit Wal-Mart a couple of times a month to stock up on pet food, detergent or other items, many say it’s no replacement for a conventional supermarket.

“I needed honey, so I picked up some here,” said Monique Barron while shopping in the Panorama City Wal-Mart with her 2-year-old son. The low prices are nice, she said. But, “this is Wal-Mart, it’s not for food. It’s for other things.”

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Times staff writer Abigail Goldman contributed to this report.