Special Reports 2004

The big stories in the supermarket industry in 2003 were Ahold’s accounting scandal and its subsequent battle for survival, Fleming’s demise and the intricate maneuvering around the sale of Safeway UK. All the underscore the inherent weak spots in the sector as a whole: an inefficient business model, debatable accounting practices and concentration that borders on oligopoly.

Ahold moved from darling to demon beginning in February. Previously praised for double-digit sales and earnings growth, the unique combination of local marketing and global logistics and a consolidation strategy that acknowledged future share-of-stomach involved food service, the company is now the poster child for corporate mismanagement.

mass was lacking and continued skepticism, because even third-quarter figures for 2003 had to be reissued.

Fleming’s fall from grace underscored the inefficiency still built into the supermarket industry in the US. Less than a month after heralding an addition to its c-store supply business, the company filed for bankruptcy protection. Its descent goes back as far as its ‘winning’ of the Kmart supply contract.

The slow, slogging sale of Safeway UK presented a sharp contrast to the dissolution of Fleming. Although Wm Morrison made its first bid in the first week of 2003, the final price and details of the sale were not yet complete at year end.

Ahold	Fleming
Ahold: Accounting & Resignations	Fleming adds c-store business
Bank refinancing obtained	Fleming bankruptcy
Broad corporate governance issues	C&S to buy Fleming Wholesale
Deloitte & Touche under fire	C&S acquires Fleming wholesale assets
Employee retirement funds disappear	Safeway-UK
Suppliers on horns of a dilemma	UK-Safeway: Prime Merger Target
Anonymous letter	William Morrison starts the action
US and Uruguay question fraud	Asda, Sainsbury weigh in
Retire debt, sell operations	Private groups and Tesco
Manufacturer debate	Kenneth Morrison: UK’s Sam Walton?
Questionable doings at US Foodservice	About the merger panel and OFT
Real estate issue in Connecticut	UK Delays Safeway Deal
Postponing official reports	Morrison wins Safeway-UK battle
Ahold: More investigations	Safeway UK: Aftermath of OFT ruling
Ahold delays results again5	Safeway-UK: Inching Along
Ahold 2002 results
Results and warnings from Ahold

Any discussion of alternate channels must focus on Wal-Mart—now the largest grocery retailer measured in dollar sales—in the US. Wal-Mart made the radar screen early in the year when it was rumored to be contemplating the wholesale grocery business. The outcome by year end was that its wholesale unit—McLane—was part of Berkshire Hathaway. Wal-Mart explained the sale by saying it wanted to focus on its core strength—retailing—and have the maneuvering to grow.

Not everything went well for the Bentonville Behemoth: Its used car experiment did not produce desired results and was closed down. Wal-Mart also increasingly became the object of much debate about its size. Generally recognized as having greater sales than many countries’ GNP, economists noted that the company itself was a global economic force—contributing to overall productivity and more.

Other discount/general merchants were newsworthy as well: JCPenney, Costco. Other channels also made inroads: Convenience stores continued to innovate, dollar stores became Wall Street darlings.

Drug chains under growing pressure to capture nonprescription sales have expanded food departments—especially in urban locations, where they can do significant lunch business.

Fast food is increasingly competing for share-of-stomach. Beyond new décor, changing menus and kid-directed promotions, many of the outlets now sell staples such as milk. And even CDs.

Toys ‘R Us added food, as grocery stores added toy aisles. Marshall Field (a division of Target) raised the ante in leased departments—by including motor bikes alongside the candy and cosmetics.

**Please note that Clicks-and-order e-Tailers is a separate report this year. (approximately 24 pages, $75)

Convenience stores	Kmart-Sears Connection
C-store growth slowing	Kmart
Another automated c-store model	Target adds food for traffic
7-Eleven expands urban strategy in US	Wal-Mart’s McLane sold to Berkshire Hathaway
Innovation in the convenience store channel	Emphasis on supercenters
What doesn’t work: Endless Aisle	Wal-Mart moves into shopping malls
What doesn’t work: RedBox	Wal-Mart ends used car experiment
Drug chains	VMI success story: JCPenney
Walgreen tests new strategies	Imitation is more than flattery
Consumer Reports’ bottom line	Wal-Mart: Expansion continues
Pharmacy: No longer a sure way to build sales	Wal-Mart: Debating size
Fast food and restaurants	Costco
Straightforward business plans	Strategies for Surviving Wal-Mart: Be Costco
YUM: Multi-pronged growth strategy	Strategies for Surviving Wal-Mart: Be independent
McDonald’s: Updates, DVDs, France	Dollar stores
Grocery Restaurants: Gimmick?!	Dollar stores maintain appeal
FoodservicElite rankings	99¢ Only Stores
Reinventing #1 McDonald’s	Wall Street and the dollar segment
McDonald’s case study	Kroger Houston test
Sandwich vending machines in subways	Competing Successfully on Price
Discounters and mass merchants	Specialty stores
Wal-Mart As a Wholesaler?!	Toys R Us tests more food
Kmart Bankruptcy Progress	Spotlight on Costco
Supply contract terminated	Marshall Field: Sublease
Saving Kmart: Customer relocation	Ahold’s Giant: Endless Aisle
Wal-Mart vs Publix	Trader Joe’s: Specialty food at a discount
	Toys sections everywhere

Industry status report	East Coast pay up at Costco
UFCW and Wal-Mart claim victory	Big Three negotiate in California
Union vote at Publix	Single contract for St Louis retailers
Satisfied employees = satisfied customers	St Louis
Building in Joliet IL	Southern California
Safeway: Minorities, outsourcing ends	Financial perspective
UFCW targets Target	Wal-Mart: Illegal janitorial workers
Meijer union contract in Detroit	Safeway: Unions flexes its muscle
UFCW and Safeway Canada	Safeway: Management counters
Kash n’ Karry settles with cash, coupons	St Louis settlement
Wal-Mart’s Lee Scott	Saga continues in California
Sears/Kmart’s Edward Lampert	Handling subcontractors
Safeway problems: Chicago and Canada	Long term: Rethink the workforce

Everyone continued to analyze consumer in every way possible to determine ways to get them to buy more. Studies by ethnicity confirmed what many marketers had already expected. Two groups in particularly, Asians and Hispanics, are wealthier than expected and underserved. Children also made the news—good and bad. The good news is their buying power is substantial and their influencing role as well. The bad news is that they are obese, as is the rest of the nation, so selling them more may not contribute to their longevity as customers.

Seniors and single person households were also recognized as viable target groups because of their spending power, fueling interest among manufacturers for smaller sizes. And regarding customer service—all groups thinks there’s room for improvement. And the most recently-developed segment: the one-spouse decision price point.

Consumers Redefine Value Forever	Bagging grocery: science and art
Hispanics and online shopping	Customer service: An oxymoron?
Right-handed shopping	Broad appeal of kosher food
Cool: According to kids	Comfort Foods/Men & Women
Cool: Target losing it	Understanding consumers better?
Annual Bon Appetit survey	Making sense of the weather
Shoppers willing to self-serve	Red meat gains respect
Group Gigante: Winning Hispanic shoppers	Better eating habits
HEButt: Catering to neighborhood shoppers	Better living habits
Lineup changes, lane switchers	Global Shopping Trends
FMI: How Consumers Shop/Top line data	Eyes vs Stomach
FMI: How Consumers Shop/Selecting a supermarket	Convenience: What shoppers want
FMI: How Consumers Shop/Acting on health and safety concerns

Just as soon as pundits agreed that bricks-and-mortar grocers had the inside track in grocery ecommerce, Fresh Direct invaded New York City with no storefront. To generate trial, it offered $50 in free perishables and boasted almost 100,000 customers by the end of the year. By year end, Fresh Direct had not only satisfied its customers by cooking their Thanksgiving and Christmas dinners, but had satisfied its banks as well by receiving a second line of financing.

Meanwhile, conventional grocers continued to expand delivery options—even in Des Moines—as Wal-Mart decided there was life beyond groceries on the Web. By year end, Wal-Mart was selling furniture and music on the Web.

Conventional grocers have edge

Key players: Big chains, third parties

Going after the college market

Potential in niche, not mass markets

Amazon-Target alliance continues

Good news for food and beverage

FreshDirect growing

eCommerce competition in Des Moines

Internet Grocery : Downs & Ups

Wal-Mart Watch: Eyes on the Web/Selling music

Wal-Mart Watch: Eyes on the Web/Selling more at Christmas

Pioneers on the Web

The numbers confirm the obvious every year: big companies are getting bigger…but not necessarily better. While sales and earnings numbers grow both nationally and globally, it is the smaller companies that consistently make the lists of ‘best places to work.’

The food distribution industry overall is lagging in return to shareholders, especially over the last year. Data from FMI suggest the picture will not get prettier, since shoppers are increasing their weekly trips to alternate channels. In the annual Consumer Reports rankings, the national chains were noticeably absent in all categories.

Fortune ‘100 Best Companies to Work For’

Forbes Platinum 400

Data Bank: Chains, Banners, More

Annual Industry Reports

Forbes Industry Rankings

Fortune Industry Rankings

Progressive Grocer Annual Report: Overview

Progressive Grocer Annual Report: Operations and trade relations

Progressive Grocer Annual Report: Consumers

FMI Speaks 2003: supermarket stats

Fortune Global 500

Benchmarking leading chains

Acknowledging the challenge of ranking

Annual Cannondale Rankings

Companies: Private & Family

As supermarkets look to squeeze out every penny, they are increasingly considering multiple avenues: (1) Some no longer accept shopper checks for payment because of processing charges. (2) Some are issuing proprietary cards good for charging elsewhere and generating loyalty points. Starbucks was the first with a debit/cash card for coffee and credit card in one. (3) Some are installing kiosks for additional services, including money orders, cashing pay checks and wiring funds.

Wal-Mart continues to pursue full service banking—a move that could deliver an enormous advantage in transaction processing. Those who look more than a year ahead talk about RFID for payments to further speed checkout and satisfy customers’ desires to carry less cash everywhere.

Nationwide decline in use of checks

7-Eleven to expand financial services

Beware of proprietary credit cards

Lowering transaction costs

Wal-Mart....still thinking full service

7-Eleven goes kiosk

RFID payment: soon everywhere

Largest smart card test

Wal-Mart: Cash, gas discounts

Starbucks: credit, loyalty & free coffee

Instore banks imperfect

The Decline & Fall of Cash: Payment habits evolving

The Decline & Fall of Cash: Retailers lead the way

The two extremes are prospering in the private label and branding arena. Megabrands are growing as national manufacturers look to capitalize on well-known, positive brand images they have spent years and billions to create. At the other extreme, private label production is up, although the number of manufacturers is declining. Industry insiders attribute this to consolidation of retailers and excess capacity.

Some of the most intriguing developments in private label are coming from outside traditional supermarkets: 7-Eleven introduced an upscale private label beer, and private label wine is flying off the shelves at Trader Joe’s. Premium private labels are thriving as shoppers gain sophistication and expect both quality and value.

As much as megabrands are growing in many categories (think Crest and Colgate beyond toothpaste to toothbrushes and whitening products), brand recognition is shifting dramatically. Where it was formerly packaged goods names that topped brand awareness lists, technology brands are invading the top performers.

Private Label Case study: Cott	Case study: Prepacked salads
Affirmative action lesson from grocers?	Power shift to retailers
Private label beyond center store	Manufacturers turn to organics for sales
Category management & blurring	Global Branding Scoreboard
Instore co-branding trend	Produce: Premium price points
Private label suppliers to shrink	Trader Joe’s: Promotion
What makes a megabrand	Wal-Mart: Betting on Krispy Kreme
Online polls up customer brand input	Transferring brand names
Private label builds store loyalty	Entering new industries
7-Eleven and beer	Target upgrades private label
Active & intelligent improvements	Retailer ‘Brand’ Marketing
Loyalty, advertising and a tie breaker	Strategy: Finetuning nonfoods
Business rationale for brands	Strategy: Optimizing the overall mix
Case study: Department stores

Two trends result from the increased concentration among top players and overstoring in the industry—both related to cost cutting: (1) Retailers are looking for any tools they can use to trim capital expenditures. (2) Manufacturers are using weight out to maintain or lower shelf prices. (3) The TDlinx database, which is updated monthly but not designed as a precise numerical tracking tool, suggests that little will change as concentration creeps up.

Overstoring confirmed	Case study: Atlanta evolution
Significant business potential in Europe	Supermarket service: Not an oxymoron?
Channel blurring quantified	Food Lion: Lower lease costs
Improving food safety	Unsaleables creep up
‘Weight Out’ activity	Reality check #1: The economy & share strategy
Examining capital expenditures	Reality check #2: Geopolitical risk
How to trim basics	Reality check #3: Fees create stealth inflation
TDLinx Data Bank	Reality check #4: Supermarkets out of favor
Survival strategies of regionals	TDLinx Data Bank

To outsiders supermarket technology may sound like space age innovation, but insiders know it is directed against improving razor-thin margins by improving productivity, reducing shrink and often reducing labor or shifting it to the customer.

In the area of productivity, supermarketers embraced e-learning, shifting some of the CD-based training programs to interactive applications on the Web to improve employee understand and provide for greater feedback and tracking. To improve overall store productivity, chains increasingly adopted pricing and demand management—so prices can be adjusted in response to demand for individual item, optimizing overall sales. Electronic shelf labels also gained popularity as demand management programs appeared because of the labor involved in handling them.

Shrink reduction initiatives included adopting more biometrics for employee and shopper identification. And shopping carts could be tracked anywhere…from parking lots to the aisles to determine shopping patterns.

Increasingly, retailers pursued technology that would have shoppers take over labor-intensive store tasks. Kiosks and ATMs began handling more customer service functions and offering additional products and self-scanning and self-checkout became fixtures everywhere.

The key enabling technology was radio frequency identification (RFID) which, when broadly implemented when costs go down, will allow product to be tracked from raw materials to checkstand without manual intervention.

Pharmacy robot to meet future demand	Checkout and loyalty systems merge
RFID at Wal-Mart and Tesco	Cell phone loyalty program
Safeway ‘Smart Carts’	More options at Coinstar
Saving money as a catalyst	Wal-Mart: EPC on cases and pallets by 2005
Data synchronization for efficiency	The case for data synchronization
Supply chain savings untapped	Amazon’s outsourcing subsidiary
Retailer priority	RFID and privacy
Self-checkout	HEButt on out-of-stocks
Departmental collaboration for IT	Preparing for Sunrise 2005
CPM for Better Implementation	Wireless device usage growing
IT spending down	Kiosk success stories
Technology in pharmacies	Technology screens IT hires
Software skepticism remains	Practicality and RFID privacy
Outsourcing logistics	Between now and ePC
Self-checkout comes of age	Quantifying all costs
Cutting order-to-delivery time	RFID: Wal-Mart road map, timing, etc
Adopting other channels’ software	Willingness to use technology and frustrations
Scan-based trading for magazines	Future Store report card
RFID for shopping carts and more

Supermarketers continued to experiment with smaller and larger format variations. Gas pumps became increasingly common in corners of parking lots…often with C-stores nearby. Retailers without major drug or general merchandise assortments added them. Albertsons concluded that combination stores would be its best defense against Wal-Mart’s impending arrival in California. Other chains tried gourmet variations.

With fewer, clearer and concise signage

With shelves to suit products

Mass merchant tries c-stores

Loblaw ‘dollar’ tests

Food Lion

New York metro area

Standardizing center store

Save-A-Lot/Deal$ prototype

Chicago suburbs embrace SuperTarget

Creative site selection

Doors make the difference in cold storage

Tailoring the front end

Improving Front-End Performance

Food Lion

Wild Oats

Sears Grand

Targeting an Aging Population

Everyone continues to await whether the sex discrimination suit against Wal-Mart gets class action status. The discovery process made it clear that the magnitude of dollars and people involved is enormous. It also heightened sensitivity among other retailers and underscored that passivity was no longer acceptable management —especially in view of earlier settlements by leading industry players.

The federal government found plenty of time to irk manufacturers and retailers alike with high-cost potential legislation designed for ‘consumer protection and enlightenment.’ The bills included Country of Origin Labeling, trans fats labeling guidelines and food serving size on labels.

Regulators also took a closer look at accounting transparency after the Ahold scandal…and of course, slotting fees.

Wal-Mart and sex discrimination	Whole Foods: Organic certification
Kmart indictments, Fleming contract	Packaging Legislation Battle
Wal-Mart sex discrimination suit	Wal-Mart class action hearing
Slotting fees still in question	COOL confrontation continues
Accounting Transparency	SEC investigations continue
Trans Fatty Acids Now on Labels	Revisiting slotting fees
Basics: Country of Origin Labeling	Food labeling debate at FDA
Wal-Mart: Women and ‘class action’	More transparent accounting
	State-run stores for underserved areas

Consolidation and globalization in the supermarket industry extended past mergers and acquisitions during 2003. In the food manufacturing industry, since 2000 sales for the top ten food and beverage manufacturers have grown by 16%. With the supermarket industry, acquisitions were geographically confined, due to declining performance of the major chains, which made so many acquisitions in past years. Evidence of this is A&P’s trimmed store count and Supervalu’s exit from the Denver market. Two companies long on the selling block were removed when no acceptable bids were received: Marks& Spencer’s Kings in NJ and Safeway’s Dominick’s in Chicago.

Growing concentration was obvious elsewhere: Four companies now control 60% of pork production in the US; the two data collection companies in the industry are locked in a lawsuit and no longer report sales from Wal-Mart—a growing factor; competitors in Mexico and Canada are forming buying groups to improve efficiency and there is a backlash against chains in Britain.

Perhaps the single most telling evidence of industry consolidation is the evolution of the FMI Exposition each May. The trade group—which now includes the formerly separate food wholesalers association—is now acting as landlord/host to other trade associations at the May event. Attendance has been steadily declining among both exhibitors and attendees, as remaining larger companies demand headquarters visits.

Food and beverage manufacturers	Duopoly in data collection
A&P stores: Hot buys	Size is relative: P&G
Boots-Sainsbury partnership termination	TDLinx Databank
Latin American pharmacies imitate	Think pork
China: Refrigeration and culture	Supervalu: Leading the Dominick’s race
Domestically: FMI show changes	Big box burnout
In Britain: Prejudice against chains	Safeway/Dominick’s deadlock
Everywhere: Buying stores isn’t simple	Texas Food Fight
Industry concentration continues	Convention outlook glum
Fighting Wal-Mart clout in Mexico	Supervalu exits Denver
	Revitalization advice from outsiders

Caveat Cardholder!

Donuts and cross-promotions

Results for 2002

Online comes of age

Quantifying insider perceptions

Loyalty bottom line

About the data collected

Cheaper Offers Can Pull Better

Creative sampling

Web coupons work best in South

Internet coupon fraud

Single company FSIs

Internet Fraud: Chapter 2

HBC coupons: Advantage supermarkets

Supplier promotion practices

Manufacturer practices

Prevalence of frequent shopper programs

Store Traffic Builders: Santa Claus

Store Traffic Builders: Turnpike Toll Transponders