New Competition At Grocery Checkout
IT'S hardly surprising that New York's Public Development Corporation, a city business agency, wants to develop a huge supermarket on a city-owned site in East Harlem.Local residents insist they need a modern store, saying they are dependent on smaller "mom and pop" grocers, who tend to charge more than large chain outlets. Nor is it surprising that local mom-and-pop retailers are unhappy about such a prospect. A large-scale supermarket owned by the Pathmark chain that opened on the lower East Side of Manhattan in the mid-1980s quickly drove many smaller grocers out of business. Assuming there is a go-ahead eventually, local residents of the East Harlem neighborhood would be able to enter a grocery store that is between 40,000 and 50,000 square feet; in other words, a "super" supermarket three to four times the size of the more typical chain store. The "superstore" is slowly becoming a mainstay in many parts of the United States, as grocery chains seek to gain a competitive edge over rivals by holding down operating costs through economies of scale in an industry where profit margins are minuscule. Superstores are just one indication of the fresh competition occurring in the crowded grocery industry. Price-cutting, stepped-up advertising, and a pell-mell entry into new communities are also increasingly common, forcing local stores out of business or into mergers. In fact, says Ed Comeau, an analyst with Oppenheimer & Co., investors should be "fairly cautious" about the grocery industry, given the stepped-up competition at a time when the US economy is expected to grow only modestly. "A lot of chain s are getting scrappier" in seeking to boost market shares through expansion plans, he says. Who gains most? Probably consumers, through lower prices, experts say. Change has been coming fast and furious to the grocery industry during the past decade, as many chains took on enormous debt to finance expansion plans. Now, many of those same grocery companies are de-leveraging, in part by selling off unprofitable operations. At the same time, a number of chains are seeking to penetrate new markets, build superstores, many of which are combined grocery/drug stores, and cut labor costs by computerizing as much of their business as possible. The image that the industry likes to present to consumers is that of friendly little chains, seeking to improve neighborhoods. That's not totally untrue. But these are huge corporations known for their marketplace muscle. Of the 20 largest retail companies in Fortune magazine's list of the Fortune 500 service companies, nine are grocery chains. Of the top 10 retail companies, four are grocery chains - American Stores, Kroger, Safeway, and the Great Atlantic & Pacific Tea Company. Some vibrant chains have so expanded in recent years that they now have problem areas. A&P, for example, dominates Ontario, Canada, with its A&P and Dominion Stores. But recession has slowed sales in Ontario. Fortunately for A&P, it also dominates the important New York-New Jersey area. And some chains with debt, such as Kroger Company, are having to fend off well-heeled upstarts. Case-in-point: Food Lion, a chain based in Salisbury, N.C., is planning to enter the Dallas-Fort Worth area this fall with ov er 40 new stores. Kroger can't be thrilled. When Food Lion roared into Jacksonville, Fla., in the late 1980s, existing chains such as Winn-Dixie were forced to slash prices to hold their market share. Food Lion, which is controlled by a Belgian company, also plans to expand into Alabama, Mississippi, Louisiana, and Pennsylvania. Competition is also no-holds-barred in southern California. That hurts a national chain such as American Stores, the largest US grocery chain. American's outlets in Southern California - Lucky Stores - saw a reduction in sales during the first quarter of this year, according to Charles Cerankosky, an analyst with Kemper Securities Group Inc. Fortunately, American Stores' units in the upper Midwest and East Coast (Jewel, Acme, and Star) are posting good-to-impressive growth.