Taking Stock

June 2008
by Jeff Metzger

Food World Market Study Analysis

And here comes Harris Teeter from seemingly out of nowhere to gain ground on the field. Jockey Fred Morganthall barely has to use the whip to improve his position. Also moving up on current leader Giant Disappointment is Safeway’s Lifestyle and Shoppers’ Discount with respective jockeys Steve Neibergall and Dick Bergman on their mounts. This is indeed a formidable field which also includes that big colt SuperCenter as well as the pesky Costco.

Excuse me, I’m writing this just after watching Big Brown’s underwhelming performance at the Belmont, missing out on what could have been horse racing’s first Triple Crown in 30 years.

Retailing can also be unpredictable, but during the past 12 months there weren’t many surprises in the Baltimore-Washington market.
Giant/Landover continued to lose sales and share, and Safeway and Shoppers continued to grow, partially at the expense of Giant. And for the first time since it entered the market nine years ago, Harris Teeter - with 18 stores operational during our market study measuring period (four others have opened since) - has become a significant factor in the greater Washington market.

Let’s face it, for many years the Baltimore-Washington market hasn’t been that competitive. As recently as the mid-90s, not many wanted to buck heads with Giant. The Landover, MD based company had the best locations, the most talented personnel and a steely desire to protect its turf. That was the old Giant.

Since Ahold acquired Giant in 1998, the wheels have continued to come off the cart, and what was once one of this country’s finest supermarketing organizations has become a company that’s a bumblin’, fumblin’, stumblin’ train wreck.

Quarter after quarter, the nearly $5 billion supermarket chain, part of the Stop & Shop management arena, continues to post negative comps – even after cycling poor numbers during the corresponding period the previous year. And that’s even with the effect of inflation, which over the past 12 months has been as significant as it’s been in more than the past 25 years.

It’s true that Wal-Mart, Costco, Target, Whole Foods and CVS were not really factors 15 years ago, but Giant’s damages have been primarily self-inflicted.

So that’s the big picture of the Baltimore-Washington market. Let’s view the leading organizations on an up close and personal basis. I’ve divided my analysis into two segments: Legacy Retailers and Wild Card Newcomers.

The Legacy Group

Giant/Landover – Simply stated, the numbers have to improve. And quickly. Since Ahold acquired the chain nearly 10 years ago, sales have plummeted, morale has eroded and even the chain’s new stores are way too vanilla. Considering that Ahold purchased a Mercedes that might have needed some engine work done but turned it into a sputtering Ford Pinto is unbelievable in itself, but things seem to get a little worse each year. Enter Robin Michel. The chain’s new general manager, who joined Giant as executive VP in April, is trying very hard to change things – particularly the culture. Associates tell me she’s extremely hard-working, very energetic and a good listener. And she will be based in the market. Those are very important traits considering how the previous Giant leadership regimes confused suburban Washington with Cape Cod. Another good thing is Giant’s earnest attempt to improve its physical plants. “Project Refresh,” the company’s potential $300 million investment in store enhancements, is really the first time Ahold has invested in improving its store base and expanding its real estate program. The handful of projects that have been completed are major improvements from the chain’s tired predecessors. So let’s review the Giant checklist: Michel’s a keeper; Project Refresh is a major step in the right direction; and VIP – well that’s a loser. It may be helping Stop & Shop, but all it’s done for Giant is reduce margins while failing to grow top line sales. Whoever in Quincy or Amsterdam confused VIP-oriented “value” with discount perception (especially in a market where the club and the mass segments are growing) must not have analyzed Giant/Landover’s DNA too closely. And that leads to me my most important suggestion to Ms. Michel: go with your gut, don’t always listen to Quincy. If you are truly empowered to make change, you must think locally. Having been born and raised in Baltimore, that shouldn’t be too hard, because you can remember when the Giant culture gave the local retailer an intangible advantage over every competitor in the market. Some may argue that too much toothpaste has been squeezed out of the tube already, but if there’s a ray of hope, it’s in having Giant’s associates regain their pride and passion.

Safeway – A steady year as it continues to convert stores to its “Lifestyle” concept, a program that will be completed chain-wide by 2010. In a market like Baltimore-Washington, with very good locations and solid consumer acceptance of “Lifestyle,” Safeway is well positioned for the future. However, after intensive market store checks over the past few months, I did see some areas of concern. With an overall shifting market and now a challenging economy, Safeway, along with Harris Teeter, offered up the market’s highest retail prices. Personally, I don’t care what retailers charge for their groceries, but strapped consumers might. Also of concern were the conditions of some of its stores. At some units, the crispness and sharpness that helped Safeway improve for much of this decade has diminished and it was obvious to me that there was less labor on the floor. Whether part of the issue was because the chain has lost some well-qualified store managers (a problem that affects many retailers in the B-W market) or a need to capture more short-term profit, I can’t say, but it’s worth watching. On an overall basis though, Safeway’s performance remained solid.

Shoppers Food & Pharmacy – Pushing the $2 billion sales mark, Shoppers has come a long way over the past decade. The positive metamorphosis began under the leadership of the now retired Bill White and has continued with retail veteran Dick Bergman at the helm. Both men (strong operators) and excellent store operations, have been a key difference maker for the Lanham, MD unit of Supervalu. Shoppers opened only one new store during our market study measuring period (April 1, 2007-March 31, 2008) but that store was a big winner, a “from the ground up” unit in one of Baltimore’s most underserved neighborhoods, Mondawmin. It was also a year of positioning for Shoppers as it improved the quality of its perishables and, at the same time, took margins up a bit. However, that may not have been enough to change the consumer perception of Shoppers’ roots in the “warehouse price” model, regardless of its noticeably improved quality and service. If Bergman and his team can continue to sell and execute its new service message, Shoppers’ future will continue to be bright.

Food Lion – As format changes go, one might consider Food Lion’s conversion of almost half of its B-W stores to its Bloom or Bottom Dollar banner disappointing in terms of sales gains, but consider if the retailer hadn’t made those changes - then the biggest unit of Delhaize America would have been roadkill. Food Lion has now cycled through a full year of operating stores in the perishable-driven sector (Bloom) and the extreme value pathway (Bottom Dollar) and in Maryland, Virginia and DC, Bloom will ultimately be the keeper. Still, retailing is always relative to the market one is competing in. So, while Bloom may be viewed as a stellar perishables oriented retailer in parts of North Carolina and Tidewater, when playing against Wegmans, brand new Harris Teeters and remodeled Lifestyle units, Bloom’s fragrance is not quite as fresh. At its mainstream Food Lion banner, the company has made strides, expanding its product selection and increasing the size of its newer stores. Bloom can become a very serviceable banner for Delhaize in the Washington area, and Food Lion can compete effectively in the Baltimore area and on the Eastern Shore (where it is the market leader). It had just better hope Wal-Mart doesn’t build too many more SuperCenters.

Wild Cards

Harris Teeter – A breakout year for the Charlotte, NC area based chain. With 22 stores now open in the Washington area (18 during our measuring period) and a slew more to come, the Teeter now has the local infrastructure to compete effectively in many areas of one of America’s best markets – especially in terms of HT’s sought after consumer. Store performance has generally been very good, but there are some soft pockets, particularly in Loudoun County, where planned new home development has been slowed by the soft housing market of the past several months. Still, Harris Teeter plows ahead with new stores to open soon in the Baltimore area (its new unit in Columbia, MD which opened after our measuring period ended, and it was one of the chains’ best debuts in its history), on the Eastern Shore and plenty more to come in greater Washington. The strategy seems almost too simple: find a demographically favorably location, pay what is necessary to gain a site, target market leader Giant as the key competitor and let the games begin. One such visceral example can be found in the tiny hamlet of Long Neck, DE, about 15 miles inland from Rehoboth Beach. Giant opened a new store on May 2, Harris Teeter debuted on May 28. Currently, there is barely enough business for one supermarket and there’ll never be enough for two. Guess who the trade is betting on?

Wegmans – On June 8, Wegmans opened its fourth store in the B-W market, another Disneyesque showpiece near Potomac Mills in Woodbridge, VA. The 140,000 square foot unit represented the Rochester, NY uber-retailer’s newest prototype and, I believe, its finest offering ever. So why, with only four stores in a nearly $20 billion food and drug market, would I include Wegmans as a wild card?
Do the math: those four stores are expected to generate $225-$250 million in annual sales. That alone will put a dent into retailers that have to compete against Wegmans in those locales. Add to that the fact the there will be a Wegmans coming to your area in the next three years if you live in: Manassas, VA; Leesburg, VA; Fredericksburg, VA; Landover, MD; Columbia, MD; Gambrills, MD; or Frederick, MD. Those locations potentially add up to more than $700 million in annual volume (which would be about 20 percent of the regional chain’s current total annual sales) and Wegmans is as challenging a competitor as many retailers will have ever dealt with. Enough said.

Wal-Mart – Always ferocious, the “new” Wal-Mart in the B-W market comes in SuperCenter sized packages ranging between 180,000 and 204,000 square feet. We’re no longer talking about Aberdeen, MD or Fredericksburg, VA – the outer edges of the market. The Behemoth is building fewer stores and the majority of its next generation of units will be SuperCenters. Those combo stores still have perishables challenges, but the retailer has improved its overall grocery operation greatly and it does offer price and surprisingly good variety within its 60,000 square foot food box. Did I mention price? Severn, MD, Arbutus, MD and Cockeysville, MD all welcomed new SuperCenters during the past 12 months and there’ll be at least a half dozen more opening in the next four years in Baltimore-Washington. In football, if two offensive linemen block a defender both high and low, that’s a 15 yard personal foul penalty for a chop block. If you’re competing in a given locale against both Wal-Mart and Wegmans, that’s a chop block of another type – and it’s perfectly legal.

Food Trade News Market Study Analysis

In perhaps the strangest year in recent memory (and it could get even stranger in the next six months), our annual market study once again proved that the cream rose to the top.

Without regard to specific channel, those retailers that were perceived by the consumer to offer value and a significant point of difference moved the pile forward in challenging and unusual market conditions in which monthly price increases have seemed almost the norm since late last year.

The key word here is “compete.” Retailers in the Mid-Atlantic region need to ask themselves whether they are actively driving sales (versus managing margins), and creating a comfortable and creative shopping experience for their customers. (Even with new stores, are they sterile and vanilla? Do they have that intangible buzz?)

While quarterly earnings projections (for publicly-traded companies) and the thirst to create maximum efficiencies (always-pleasing industry-speak to financial analysts) have become a defined operating style for many retailers, the good ones still seem driven to sell more boxes while remaining focused on some degree of customer service.

From the supermarket channel, the two best “competers” this year were ShopRite and Giant/Carlisle. Each retailer moved its same store sales well beyond food price inflation levels while also demonstrating a “no holds barred” mindset to capture every available dollar in an overstored and increasingly diverse 55 county overall marketplace.

Not surprisingly, Giant and ShopRite made life more difficult for mega-retailers Wal-Mart and Wegmans. And while both supermarket chains also held their own against the alternate channel operators, they had particularly fine years capturing sales and share against their traditional supermarket rivals.

From the non-supermarket classes of trade, mass merchandisers Wal-Mart and Target continued to impact supermarket sales the most, followed by the drug segment. CVS and Walgreens, in particular, were effective in continuing to add more grocery SKUs to their mix while expanding their store counts. And while club store growth was limited during the past 12 months, the big three – Costco, BJ’s and Sam’s – continued to “steal” retail dollars, while producing the highest extrapolated per store averages of any retail channel. And ,back to the supermarket channel, while they may not quite be conventional, Whole Foods and Trader Joe’s also enjoyed very good years.

The bottom line is that retail is tougher than ever, and over the next few years the “hangers on” will most likely be thrown off the island.

As we do each year, let’s focus on the key players in the $45.3 billion market by analyzing them from an up close and personal view.

ShopRite – If the members of Wakefern who own the 161 ShopRite stores in the market resembled a football player, they’d be part Dick Butkus (toughness), part
Peyton Manning (smarts) and part Gale Sayers (speed). If there was ever a testament to the strength of independent food retailing, ShopRite is the gold standard. Wal-Mart, Wegmans, Costco, the slipping economy, overstoring, channel blurring and a host of other factors which seem to impact virtually all other retailers seem to bounce off ShopRite like rubber bullets. Certainly the company isn’t immune to problems; it just seems to be able to overcome its challenges more easily and effectively than anybody else in the region. In the past year, ShopRite hoisted its banner at eight South Jersey units that had long struggled as Stop & Shops (and Super Gs before that). The net result: substantial increases in sales at all stores (some volumes have doubled) despite cannibalization from other existing ShopRite stores. The truth is, after a slight lull at the co-op in the late 90s and early part of this decade, ShopRite is stronger than ever, especially with its PriceRite discount format doing well and looking for future new markets to enter. The only real issue long-term is the perpetuation question. Are there enough family members to continue the dynasty, and will they possess the same fire in their bellies to work seven days a week and back down to no one?

Giant/Carlisle – The best performing unit of Ahold will beat you with its brain (innovative marketing programs), its heart (one of the biggest philanthropists in the industry) and its fists (Wegmans can tell you about an old fashioned street fight in the Harrisburg market). While Giant may tout itself as “simple country grocers” its urban model is working just fine in and around Philadelphia, too. The numbers don’t lie: 52 consecutive quarters of positive comps; 36 straight years of increased earnings; and dollar and unit share growth of more than 200 basis points last year. And the vendors agree, too, constantly citing Giant’s name when listing the most productive and accessible accounts they call on. But “numbers” on one level are hollow. The real story behind Giant’s continued success is the talent and chemistry of its management team. Carl Schlicker was well-prepared to take the helm last year when Tony Schiano retired, and he’s done a stellar job. His team consists of reliable “old hosses” like Peter Labbe, Larry Stover, Mike Baumeister, the soon-to-be retiring Denny Hopkins and Rick Waite; “young bucks” with a ton of brain power like Erik Keptner, Dan Glei and Rick Herring; and “git er done” executives like Jeff Martin, Steve Fanion and Ron Domenick. And Giant’s new store program is back on pace with a dozen new units scheduled to open in the next 30 months. All cylinders are clicking in Carlisle now, and as long as it stays hungry and doesn’t get sidetracked by some misguided Ahold initiative (did somebody say VIP?), the sun will continue to shine on Giant for quite some time.

Acme – Yes, I’m aware that Acme recently launched a new price impact program designed to regain sales and share in the Delaware Valley. However, since our annual measuring period ended March 31, the new plan didn’t have any effect on a very challenging year for the unit of Supervalu. Acme still has the best locations in the Philadelphia market and it’s got lots of terrific people. But the bottom line has been that the Malvern, PA simply hasn’t competed effectively, especially with price driven heavyweights like Giant/Carlisle and ShopRite adding stores and hunting down additional share of market gains at Acme’s expense. Until the recent unveiling of the price plan, retail prices haven’t been in line with most of the rest of the market. Acme also hasn’t added many new stores over the past few years to its base and some of its new units (Limerick, PA, London Grove, PA) have failed to launch. Whether Acme’s passiveness during the past year was due to corporate restraint or an inability of local management to maximize its talent, the point is moot; as the share of market leader, Acme has become a defender rather than an aggressor. There is still concern over the long-term, especially with a cap-ex plan that calls for quite a few remodelings, but only one new store to open in the next year (a replacement unit in Mantua, NJ). As the leading operator in the Philadelphia market, Acme still holds the hammer However, a lot of toothpaste has been squeezed out, and getting it back in the tube is going to be very, very expensive. During the next 12 months, the whole market will get to see how aggressively Acme and Supervalu want to “compete.”

A&P/Pathmark – Last December, it finally happened. Two companies with excellent locations and notable histories, who have spilled a lot of red ink over the past decade, got married. And if you listen to A&P CEO Eric Claus and executive chairman Christian Haub, the sum of their parts will create a better new “whole.” We’ll see. A&P is in the early stages of “whack ‘n hack” ball, attempting to save $150 million this year and create a more efficient company. All that’s great if they can continue to execute at store level and ultimately win new shoppers. A&P (which maybe should be renamed Atlantic & Pathmark) is making some headway in its core metro New York stores with its “fresh” concept, but the Philly area continues to be a bugaboo. Again, much like Acme, the company needs a solid cap-ex plan devoted to new and replacement stores. A bunch of medium-grade remodelings just aren’t going to do the trick. If this deal had happened 10 years ago, it would have been a godsend for both retailers. Now, I wonder who the combined entity is going to take sales from, especially when competing against ShopRite is like facing the ’27 Yankees. I applaud Haub and Claus for having the fortitude to pull the trigger on the deal, I’m just not sure there’s enough “there” there moving forward. We’ll know a lot better in 18-24 months when the efficiencies have been utilized and we see whether A&P ultimately produces real top line growth.

Wal-Mart – The past 12 months were solid, not spectacular at Wal-Mart. The Bentonville, AR merchant produced good comp sales, but its two new store openings in the region were the fewest in 15 years. However, when the economy became a noticeable factor in late 2007, it was music to Wal-Mart’s ears, as same store sales started to really take off. In fact, it’s been three months since our market study measuring period ended, and as the economy continues to worsen, the decibel level of the Behemoth’s low price mantra keeps getting higher. Next up is a return to the chain’s aggressive growth platform, this time in pure SuperCenter form. During the next year, combo units will open in: Middletown, DE; Edison, NJ; Vineland, NJ; and Deptford, NJ. One SuperCenter has already opened in Willow Grove, PA, a 204,000 square foot unit which is smack dab in the middle of the Del-Val market and already doing land office business. By our count, as many as 20 more SuperCenters could open in the overall region in the next four years, including a half a dozen in New Jersey and suburban Philly, virgin areas for the Behemoth. And I believe somebody once told me that not many of us stay virgins forever.

Wegmans – After a hectic few years of multiple openings in Pennsylvania and New Jersey, Wegmans’ new store growth slowed this year. The Rochester, NY based uber-retailer only opened one new unit during the past 12 months, a 140,000 square footer in Mechanicsburg, PA. That store is doing well, despite an ongoing battle with Giant/Carlisle which defended its local market share leadership with a vengeance. With only 16 stores operational, you’d wonder why we’d put Wegmans on our “prime time” list. Volume, baby, volume. Sure, Wegmans is a superb retailer by many measures – execution, store décor, customer service, and creativity - but when a retailer produces $1-1.5 million a week in sales, that’s a “9” on the local Richter scale. While much of its store activity will be centered on development in Virginia and Maryland over the next three years, new Wegmans units in Malvern, PA and Collegeville, PA are almost certain to be winners based on the local demographics alone. If you want to see live retail action, check out the shopping activity in the corridor where Wegmans’ Warrington, PA store and Wal-Mart’s new Willow Grove unit are based. That’s a 6.3 mile stretch of retailing bliss, or pure hell, depending on which banner you’re flying. As I’ve said, “Food Retailing 2008” is no place for the meek.

Wawa – Still an incredible story. A locally-owned dairy becomes a modest convenience store chain and then, through ingenuity and tenacity, becomes a great American retailer. To be ranked third among all retailers in a market as large and diverse as the Delaware Valley is unheard of among c-store operators in any other market. But the Wawa experience is almost cult-like (and as Philadelphia born comedian Dom Irrera might say, “I mean that as a good thing.”). Wawa coffee, Wawa gas, Wawa sandwiches, no-charge ATMs and a recently launched meal solution program have all contributed to the company’s success. Wawa is even testing drive-through car hop service at two locations in the Tidewater area of Virginia. The company continues to execute retail fundamentals at a very high level – and that’s not easy with so many part-time workers in so many different markets. Some say Wawa’s success is in the mastery of its branding, others note that it’s the pure convenience of its many locations coupled with those special added touches. I’ll add one more area of success – motivated, talented and well-trained people..

This is only part of Jeff Metzger's Taking Stock column. The complete, full-length version of Taking Stock is available only to subscribers of Food World and Food Trade News. Subscribe now to receive the the best analysis of the Mid-Atlantic grocery industry available only in Food World and Food Trade News.