Detroit’s Window To The Future

Produce pricing at A&P’s Food Basics and Meijer give compelling reasons to think there might be a way to beat Wal-Mart.

From the Atlantic to the Pacific, Produce Business has crisscrossed the nation searching for the retailer who has found the way to present real competition to the phenomenally successful Wal-Mart Supercenter. In this, the eighth region covered by the Produce Business Wal-Mart Pricing Report, we head into Detroit where we may have found not one, but two real competitors to the Wal-Mart Supercenter concept.

For the first time in the study, a retailer has beaten Wal-Mart in produce pricing and done so substantially. A&P’s Food Basics concept came in a little more than 17 percent less expensive than Wal-Mart on our market basket study. Up till now, no non-Wal-Mart retailer has beaten Wal-Mart’s Supercenter concept by even a penny. To students of retailing, it is interesting, maybe even ironic, that A&P should be the one to come up with the concept that might beat Wal-Mart on price. In market after market, we have seen conventional supermarket chains basically throw in the towel on price. They compete with Wal-Mart, of course, but either they do it by going upscale — thus ceding the great middle class to Wal-Mart — or they focus on maintaining market share by beating weaker competitors and simply say their prayers that location, reputation, etc., will allow them to stay in business in the face of competition from Wal-Mart.

Other than in Salt Lake City, where the competitive situation was keeping prices low, no supermarket anywhere was able to offer a price-oriented value package to its customers that would beat or even approximate the Wal-Mart proposition.

The ‘Great’ Irony

Of course, the last food retailer to stand astride America the way Wal-Mart does today was A&P. There was a time when A&P was doing 80 percent of the supermarket business in the United States and had four times as many stores as Wal-Mart, albeit much smaller stores. So perhaps somewhere in the corporate DNA of the Great Atlantic and Pacific Tea Company is a memory of how the mighty can fall, a memory missing from other chains that come very close to giving up on competing with Wal-Mart on the basis of price.

Of course, a 17 percent savings over Wal-Mart, a chain that proudly banners “Always the lowest prices. Always.” on its stores, cannot have gone unnoticed in Bentonville. Which brings us to a slight asterisk we may need to place next to the Food Basics win: it is not 100 percent clear that Food Basics is a supermarket.

We can almost surely say that executives at Wal-Mart have not classified it as such, because they are treating Food Basics as a different class of trade, more like a warehouse club than a supermarket. Otherwise Wal-Mart executives may have felt a need to respond. It is also possible that since the banner is owned by A&P and not Safeway, Kroger or Albertsons — chains with which Wal-Mart is involved in a great national battle — the store’s pricing may have led to less concern in Bentonville.

Whatever the reason that Wal-Mart executives have been content to let this price differential exist, the fact that it is the first one we’ve been able to find in the country and that the difference is substantial means that the concept deserves scrutiny.

Finally, the Food Basics concept is still under development and its profitability is not yet determined. Perhaps Wal-Mart doesn’t feel a need to compete against experimental concepts. Whatever the reason that Wal-Mart executives have been content to let this price differential exist, the fact that it is the first one we’ve been able to find in the country and that the difference is substantial means that the concept deserves close scrutiny.

Supermarket Or Warehouse Club?

The reason we raise the question as to whether Food Basics is a supermarket at all is that it promotes itself as offering warehouse club prices without the larger sizes most warehouse club prices without the larger sizes most warehouse clubs feature. It does this through various means, including not giving away checkout bags but instead urging people to bring their own or offering to sell them bags.

The stores also feature a more limited selection — 20,000 SKU’s as opposed to 45,000 in a conventional store. The stores are low service — no service deli, all case-ready meat, no in-store bakery, etc. Everything is geared toward keeping expense out of the box so that the lowest retails can be offered. In produce, specifically, all but about 70 items are regular A&P stocked items. But the 70 items specially bought for Food Basics make a big difference, as does the decision of which of the regular A&P items should be displayed. Like a warehouse club, Food Basics tries to stock only the fastest moving items, so one won’t find the extensive range of items that most supermarkets now carry. Although the quality of the produce seems to meet all conventional supermarket chains that will insist on presenting the consumer a set of size of each

Wal-Mart Supercenter vs 4 Chains
Price Comparison — St. Louis, MO

January 2005 – Prices Available To The General Public

Fruit, at Food Basics the charge is to identify the “sweet spot” in the market. They look for the size where the crop is peaking and where the best values are.

It should be noted that this approach made it difficult for our comparison study to include as broad a range of items as we might like. Our approach in these Pricing Reports is to identify comparable items at all stores in a given market. If it happens to be that one store in the market is out of coconuts on the day we survey, we simply remove coconuts from the price comparison.

In Detroit, we found we had to remove more items than usual, principally because Food Basics didn’t offer a comparable item. For example, we usually include large red apples in our survey. Food Basics’ offering, on the day we were there, was too small to be directly comparable and so we excluded that product from the study.

Day-To-Day Buying

Limiting selection to high volume movers and buying at the peak size of the crop is only part of the Food Basics formula for produce success.

Food Basics is not committed to the brand-driven programs that most conventional supermarkets are tied into. In this sense, the procurement model, which literally involves buying at the very best price possible each day, can be viewed as a throwback to the Wild West days of produce buying before contracts and other long-term arrangements came into vogue. Ironically, the very fact that this day-to-day buying may have fallen out of favor may make it more effective for those who do practice it today. After all, as more and more chains are committed on various programs, those who have surplus product have fewer and fewer potential homes for the produce. As such, the supply/ demand situation should allow Food Basics to get plenty of offers of produce at lower and lower prices.

Finally, terminal market wholesalers are reporting that with Food Basics, they feel they have a shot they don’t have with most chains. If the wholesalers are long on good quality product, Food Basics is interested in a transaction. Most chains have closed their doors to the same wholesalers except for fill-ins or low-volume items. Although in a sense this opportunistic buying strategy — buy in the free market without obligation to particular brands or suppliers and use all sources of products including terminal markets — may ultimately limit the scalability of the Food Basics concept. That is probably not a real concern to A&P.

How They Stack Up Against Wal-Mart Supercenter

It is doubtful anyone in Montvale, NJ, is even thinking of “beating” Wal-Mart as this concept is developed. More likely, they are looking for a good concept for a 25,000-square-foot box.

And, of course, A&P is a much smaller and more troubled chain than Wal-Mart.

If you told the A&P executives that their concept was limited and they could only have 500 profitable Food Basics stores, they would throw a party both in New Jersey and in Germany at the headquarters of the Tenglemann Group, which is one of the world’s largest retailers and the owner of the majority of A&P shares. It is not clear that Wal-Mart would even be interested.

Still, Food Basics is a significant concept because it competes in the marketplace without ceding the price competition to Wal-Mart. It may point the way, along with Aldi and Sav-a-Lot, perhaps even the dollar stores, to a developing new class of trade that is prepared to wrestle Wal-Mart on price.

Squeezing Wal-Mart

In an age when Wal-Mart is so powerful and so seemingly unstoppable, is it possible to see the marketplace developing where Wal-Mart gets squeezed between low-price formats and supermarkets that have gone upscale?

However the future shakes out for Food Basics, Wal-Mart’s more immediate probe in Detroit may be Meijer. Meijer was doing super centers when super centers weren’t cool, and although they priced higher than Wal-Mart in this study, it was a normal amount — just 2.82 percent. This is close enough that other competitive factors come into play.

One of the great mysteries of the late 20th century retailing is why major supermarket chains never developed their own general merchandise/food combo superstores. Their failure to do so means that, for example, even at this late date Wal-Mart can open Supercenters in California, and Safeway has no effective response in its arsenal to woo shoppers who prefer the Supercenter model.

As a result, with the exception of a limited number of Target Supercenters, Wal-Mart may still win; perhaps consumers will prefer Wal-Mart stores even if prices are identical to Meijer’s. Or, perhaps, Meijer has to cut prices to compete with Wal-Mart but doesn’t have the cost structure to sustain these price levels and make an adequate return on capital. Anything is possible.

Still our study found a produce pricing difference of 22 percent in favor of Wal-Mart last time we bumped into a Target Supercenter down in our South Florida report. Wal-Mart would doubtless feel more comfortable if it were showing that kind of price differential against Meijer.

We also surveyed A&P’s conventional Farmer Jack concept and a Kroger store, and found both out of the price competition game with Wal-Mart. Farmer Jack came in at 23.99 percent over Wal-Mart and Kroger was a stunning 27.77 percent over Wal-Mart. Still, the combination of A&P’s Food Basics and Meijer makes Detroit a particularly challenging market for Wal-Mart and a window on how the retail trade may develop.