Crossing The California Rubicon

If the big chains can’t make a stand here, then it seems unlikely that supermarkets will ever be able to defeat Wal-Mart

For the better part of a decade, it has been obvious to most industry observers that the Wal-Mart Supercenter juggernaut would, like Balboa, eventually reach the Pacific. More specifically, like the 49ers who found there way to California convinced that there was “gold in them thare hills” so, inevitably, the large population base of the nation’s most populous state would attract the eye of the nation’s, indeed the world’s, largest retailer.

And so Wal-Mart came to California and opened its first supercenter there last March in the Palm Springs area.

Our Wal-Mart pricing report was brought to Palm Springs to identify precisely how the major national chains – Safeway, through its Vons division, Kroger, under the Ralphs banner, and Albertsons, with stores under its own name — are fighting back. We also surveyed an upscale concept, Jensen’s, just to set another extreme on the scale.

For the major supermarket chains this is a crucial battle. As long as Wal-Mart was principally in sleepy southern towns, it could take market share from independents and leave the giant supermarket chains with room to grow in more densely populated areas.

But California is different. If the big chains — and particularly Safeway, with its headquarters in Pleasanton — can’t make a stand here, if they can’t defeat Wal-Mart as it crosses the Rubicon into this vast market, then it seems unlikely that supermarkets will ever be able to defeat Wal-Mart.

And how has Safeway responded to the new Wal-Mart Supercenter? Well, the company closed its Vons supermarket in the city of Coachella about 7 miles away from the new Wal-Mart.

True Safeway has other stores in the area, but, still, if one is looking to hold onto market share, closing stores doesn’t seem like the best way to start.

Suzanne Powell, senior vice president, Peter Rabbit Farms, a major carrot supplier based in Coachella, lives locally and thus shops locally. Peter Rabbit Farms supplies all the major retail chains and has direct DC responsibility at Wal-Mart. She reports that she was particularly impressed with the emphasis the new Wal-Mart has placed on the local Mexican population: “Fresh Cilantro, overflowing bins of Chile Peppers, nopales, pinto beans, rice — all displayed in the produce department and showing Wal-Mart making a serious bid for the local ethnic shopper.”

This insight may point to a Safeway strategy. The store Safeway closed was the last conventional supermarket in the city of Coachella, which is now served by independent ethnic markets catering to the overwhelming Mexican population.

Might it be possible that Safeway assessed the situation and determined that the local Mexican population was likely to split their business between the new Wal-Mart supercenter and the local Mexican markets? Did Safeway decide that there was just no space for a conventional supermarket trying to sell the Mexican population at prices higher than Wal-Mart? We don’t know.

Wal-Mart Supercenter vs 4 Chains
Price Comparison — Palm Springs, CA

October 2004 – Prices Available To The General Public

What our study does demonstrate is that the strategy of the three supermarket giants is one of incrementalism. There will be no blood bath in the desert as the big chains vow not to cede an inch of California to Wal-Mart.

In produce prices available to any consumer who walks in the door, Wal-Mart wins hands down and by a substantial margin. Ralphs is priced 16% over Wal-Mart, Albertson’s 19% over Wal-Mart, and Vons is 20% over Wal-Mart. Jensen’s, showing it isn’t the least concerned with Wal-Mart, comes in as priced 60% over Wal-Mart.

The general trend appears to be a very slight narrowing of the gap between Wal-Mart and the big supermarket chains over time.

Albertson’s, for example, was 23% over Wal-Mart in Dallas, 30% over Wal-Mart in Portland, OR, and 22% in Phoenix, AZ. Only in the highly competitive and atypical Salt Lake City market did Albertson’s beat its performance in Palm Springs of being 19% over Wal-Mart’s price level.

Wal-Mart Supercenter vs 4 Chains
Price Comparison — Palm Springs, CA

October 2004 – Prices Available To Card Holders

Top executives at Kroger have taken to calling price and margin reductions “investments” and have indicated that they hope to increase sales in the future by “investing” labor savings, which are realized by reduced healthcare costs, as was explained on a recent conference call by David Dillon, Kroger’s chairman and CEO. “As those costs get more competitive, it is our intent that our pricing and other sales initiatives will become more competitive as well,” Dillon said.

This seems to lay out the basic approach. The big three would like to be competitive, but are not prepared to unilaterally reduce their price points to retain market share and then negotiate with employees and vendors to obtain a sustainable cost structure. Instead they are working to shave costs and then hope to use those cost savings to be more competitive.

In the meantime though, the big three seem willing to tolerate market share erosion to maintain profitable operations. Safeway’s decision to close the Coachella Vons store may be viewed in this light as an admission that certain demographics are just not right for its higher priced approach, and thus its closing is an attempt by Safeway to retreat to more defensible lines — among consumers who may possibly be willing to pay a premium for location, service or another attribute.

How They Stack Up Against Wal-Mart Supercenter

Possible competitive options are also indicated in the study. Jensen’s wild indifference to Wal-Mart’s pricing reminds us that there are many niche markets unlikely to find Wal-Mart’s offer appealing. Call it quality, call it convenience, call it service, call it snobbery, whatever name it goes by, there is no chance that the Wal-Mart Supercenter will have all the business.

Also pay close attention to the alternate pricing study presented that reviews the price that loyalty cardholders would pay for the same market basket.

Though Vons still is priced at 12% over Wal-Mart and Ralphs at almost 14%, Albertson’s utilizes its loyalty card program so aggressively as to reduce its disparity with Wal-Mart very substantially. In fact, Albertson’s comes out at only 6% over Wal-Mart’s pricing.

In the Phoenix market studied in round VI, we saw that both Fry’s and Safeway had used their loyalty card program to reduce the price differential with Wal-Mart to less than 5% over Wal-Mart’s pricing. Now it is Albertson’s that is using its loyalty card program to pose a credible threat to Wal-Mart.

This type of pricing sophistication may hold the most viable possibility for supermarket chains to combat Wal-Mart’s pricing edge. Just as some manufacturers have long used coupons in the hope of discounting prices to those consumers sufficiently motivated to clip and save, but keep charging higher prices to consumers indifferent to small price reductions on food, so, via careful management of loyalty card programs, supermarket chains may hope to be sufficiently competitive on price to attract those consumers who care about the subject, while earning hefty margins from consumers who don’t want to bother with cards and programs.

It is not certain such a strategy will work. Perhaps consumers who are impatient with cards and programs will be particularly attracted to Wal-Mart’s every-day-low-price program. But, perhaps, just perhaps, Wal-Mart, a company noted for its successful use of technology may find its greatest competition comes not from the retailer who prices most competitively, but instead, its toughest competition may come from some retailer who figures out how to use technology to filter out consumers who care about low prices on food from those who don’t.