When Wal Mart Starts A Food Fight, It's A Doozy

Burton Banks, a supermarket owner from Paducah, Ky., used to be a Wal-Mart fan and shareholder. Then, the retailing Goliath opened one of its new Supercenters--a huge combination grocery and discount store--several miles from Banks's two markets. That was bad enough. But the last straw came on opening day, when Wal-Mart managers kicked him out of the Supercenter for checking prices. Wal-Mart employees had spent hours in his stores doing the same thing, he says. "After that happened, and after I saw their attitude, I didn't want anything to do with them," fumes Banks, who dumped his Wal-Mart stock.

As Wal-Mart Stores Inc. muscles its way into the $383 billion grocery business, Banks won't be the only angry supermarket owner. After experimenting unsuccessfully with huge, hard-to-navigate "hypermarkets" in the late 1980s, Wal-Mart now believes the smaller Supercenters are among its prime growth vehicles for the 1990s. It already operates 42 in nine states, with plans to add about 30 more by yearend and an additional 50 to 60 in 1994 (chart). Counting sales in its regular discount stores, Sam's Clubs warehouse units, and wholesaler McLane Co., Wal-Mart is likely to grow from a $13.8 billion grocer to the nation's largest by 1997, eclipsing the current leader, $22 billion Kroger Co., according to Burt P. Flickinger III, a principal at Booz Allen & Hamilton Inc. who has studied the Supercenters.

Why is Wal-Mart so interested in the low-margin, cutthroat grocery business? With $55 billion in sales, the retailer must tap new markets to sustain its 20%-plus earnings growth and boost its stock price. Considering Wal-Mart's reliance on profit-sharing to motivate employees, "above-average growth is really the key to the company," says Robert F. Buchanan, retail analyst at Alex. Brown & Sons Inc. Wal-Mart's stock slid in April after the retailer said sales growth in existing stores would fall below double-digit rates this year. The stock now trades around 28, down from 34 in early March.

Wal-Mart is not the only player rolling out combination stores, which aim to lure customers with one-stop shopping. Michigan-based Meijer Inc. and Oregon-based Fred Meyer are the largest combination-store operators, but analysts expect those chains to remain regional. Kmart Corp. has four combination outlets, known as Super Kmarts, and plans to add 17 more by yearend. But the No.2 retailer has not yet officially committed itself to a major expansion plan, despite apparent success in such places as Medina and Montrose, Ohio. Retail analyst Bernard Sosnick of Oppenheimer & Co. predicts the U.S. could support 1,000 combination stores within the next 10 years, with sales of up to $60 billion.

In theory, a combination store should be more profitable than either a grocery or a discount store. By offering groceries, it's supposed to draw extra traffic, boosting sales of higher-margin general merchandise. Both Wal-Mart and Kmart claim that the theory holds true in practice. More than 80% of Supercenter customers shop in both sides of the stores, says Nick White, the Wal-Mart executive vice-president who oversees the Supercenters. As for profitability, he says, the fact that Wal-Mart is opening Supercenters so fast means "the return on investment obviously is good."

CLOUT. The Super Kmart in Medina, Ohio, which opened two years ago, has annual sales of about $65 million, says store manager Mike McNerney. Analyst Sosnick estimates the Medina store generated a return on investment of about 25% in its first full year of operation. And Booz Allen's Flickinger says Wal-Mart's combination stores are "looking for a profit equal to or greater than $50 per square foot, which is not even approached by any other leading retailer except Toys 'R' Us."

Because of its financial clout, low operating costs, vaunted distribution and information systems, and steely determination to dominate markets, Wal-Mart is getting the most attention from grocery competitors. Their wariness is understandable. In the slow-growth food business, Wal-Mart's success must come at someone else's expense. Supermarket operators with weak balance sheets and meager market shares are most vulnerable, along with small wholesalers who have already faced a wave of consolidations.

Of course, supermarkets are not going to disappear overnight. Rivals claim that Wal-Mart is still weak on merchandising and selection in such key areas as produce and bakery, though it has hired seasoned executives from Albertson's Inc., an Idaho-based chain, and Meijer to help. And this time around, the competition is often a more sophisticated lot than the small-town general merchants Wal-Mart has steamrolled in the past. Grocers, used to profit margins averaging less than a penny on the dollar, often wage fierce price wars to protect their turf from interlopers. Cincinnati-based Kroger, with more than 1,270 stores, vows to defend its market share in the half-dozen areas where it now squares off with Wal-Mart Supercenters. Kroger spokesman Paul Bernish admits that Kroger is losing money or just breaking even in those markets. To help reduce its distribution and other costs, Kroger plans to spend $130 million on information technology in the next three years.

Even where Supercenters have not yet opened, grocers are girding for the challenge--in some cases by beating Wal-Mart to the punch. Harvey M. Gutman, senior vice-president of Supermarkets General Corp., says the company's 147-store Pathmark chain is expanding its own so-called supercenters in the Northeast. Less than half the size of Wal-Mart's biggest units, they offer such amenities as fresh seafood, video rentals, and a healthy selection of general merchandise. Gutman questions the ability of national retailers such as Wal-Mart and Kmart to understand local food preferences. "Why do you think there are really no true national supermarket chains?" he asks.

LONG WALK. Another skeptic is Robert E. Stauth, president of giant wholesaler Fleming Cos., which supplies more than 4,800 stores, including some Wal-Mart and Kmart supercenters. Stauth says Wal-Mart's cost advantages are bound to diminish as it tackles the complexities of a large grocery business and starts its own distribution centers. Wal-Mart recently opened its first food distribution center in Clarksville, Ark., with a second scheduled to open this fall in Texas. White admits that the Clarksville center, operated by wholesaler McLane, is already having difficulties because McLane's forte is supplying convenience stores. That has led to some items being out of stock in the Supercenters.

For now, Wal-Mart is sidestepping the stiffest competition by opening its Supercenters mostly in small towns. It's using them to replace the earliest Wal-Mart discount stores, which are in rural areas where founder Sam Walton originally wiped out his competition by offering lower prices and wider variety than local merchants could match. The 116,000- to 188,000-square-foot Supercenters draw customers from up to 60 miles around and build on Wal-Mart's familiarity and low-price image.

But not everyone enjoys one-stop shopping. Bernice Allen, a retired rancher in Mount Pleasant, Tex., still buys her groceries at the Winn-Dixie across the street from the Wal-Mart Supercenter that opened last August. Allen, 73, prefers Winn-Dixie's "personal touch" and manageable size. At Wal-Mart, she says, "you have to park so far back."

Loyal grocery customers may not change their habits overnight. Nevertheless, Wal-Mart is betting that selling juice, jumper cables, and blue jeans in one low-price store is the future of retailing. If it has to alienate a few grocer/shareholders along the way, so be it.