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Competing in a Consolidated World

BY CSA STAFF

Independent food retailers are facing unprecedented challenges from consolidation within the industry, shrinking margins and the proliferation of supercenters, such as Wal-Mart and Target, which have achieved almost ubiquitous penetration into the grocery sector.

Attendees at the Main & Wall conference heard successful strategies from two mid-size grocery retailers that serve opposite ends of the economic scale and operate on opposite coasts.

Kings Supermarkets, headquartered in Parsippany, N.J., has 26 stores serving high-end markets in New Jersey and New York with gourmet foods and the freshest possible selection. On any given day, shoppers may find delicacies such as yak, rattlesnake and buffalo fresh from the range, as well as a vast assortment of produce from around the world.

On the West Coast, Berkeley, Calif.-based Grocery Outlet, with annual sales topping $600 million, has 130 stores located in six Western states and Hawaii. The Grocery Outlet stores occupy an average of 20,000 sq. ft. or less and are stocked with products that are sourced “opportunistically” to provide shoppers a variety of products at closeout prices.

Speaking on a Main & Wall panel, co-CEO MacGregor Read, grandson of Jim Read who founded Grocery Outlet in 1946, described his stores as a treasure hunt for groceries. His family-owned business has established long-term relationships with a number of consumer-product-goods manufacturers, which provide the infrastructure for sourcing products at deep discounts. As much as 70% of the inventory in Grocery Outlet stores is purchased from close-out deals.

For the more affluent shoppers in Kings’ upscale markets, fellow panelist James Demme, chairman of the board at Kings Supermarkets, described a more pragmatic than opportunistic approach to merchandising. “You have to buy what you sell,” he advised, “because you don’t always sell what you buy.”

That said, he suggested independent grocers are typically stronger with their perishable areas than the large consolidated chains or the mass merchandisers. For instance, Kings’ shoppers will find delectable fruits such as mangosteens imported from Thailand that traditional grocers would not carry.

Key to the success is giving customers what they want, such as a gourmet selection of prepared foods as well as a wide assortment of imported spices and exotic condiments. From this respect, supplier relationships are as integral to Kings’ operations as to the Grocery Outlet strategy.

In one respect, Grocery Outlet is more similar to King’s high-end neighborhood markets than a typical deep discounter because it also relies on sales of made-to-order foods, which represent 30% of total sales, and perishable products.

“Fifty percent of what we sell is in a climate-controlled environment and 72 of our stores carry fresh meat,” said Read. “The typical transaction size almost doubles when meat is in the basket.”

“We’ll probably stock 200,000 unique SKUs over the course of a year,” continued Read, “and it’s a little like the movie industry—out of those we’ll have three or four blockbusters a year, but we aren’t sure which those will be when we’re buying [inventory].”

The increasing popularity of organic or “natural” foods has proved to be a blockbuster hit for all food retailers and Grocery Outlet has jumped on the organic bandwagon, finding that value-oriented shoppers are just as eager as affluent shoppers to purchase products that promote a healthier lifestyle.

“Whole Foods and Trader Joe’s have created opportunities for us in terms of expanding our product mix,” noted Read. “Organic products just flow off our shelves.”

Although Grocery Outlet shoppers appreciate an organic product mix, retailers such as Whole Foods Market and Trader Joe’s aren’t direct competitors. The toughest competitor Grocery Outlet has encountered, according to Read, is another regional discount chain: WinCo Foods based in Boise, Idaho. With 60 stores in five states and roots dating to the 1940s, there is considerable overlap in the markets, products, pricing and shoppers of both brands.

Additionally, Read noted, “Super Wal-Mart has taken market share away from us, but in many cases it becomes a real-estate game [for positioning].”

Asked if his stores had felt an impact from the arrival of Tesco’s Fresh & Easy markets in California, Read replied, “It’s premature to comment, but there has certainly been a lot of noise and I would not underestimate Tesco’s abilities. I have been surprised, however, that Tesco does not appear to have a more unique product mix.

“What we are hearing about,” he continued, “is Tesco’s unique approach to real estate deals. They’re taking larger spaces than needed, to get the location, then sub-leasing the part of the space they don’t need, and they are paying higher rates than Walgreens to get prime positions in the marketplace.”

Regardless of the competitive landscape, regional grocers, like mid-size retailers across all sectors, are focused on continuous improvements in operations and comp-store sales. A general rule of thumb for the grocery sector, according to Demme, is that “whatever amount comp-store sales go down, EBITDA [earnings before interest, taxes, depreciation and amortization] is down double—when comp sales are down 4%, EBITDA goes down 8% to 9%.”

The five key components to a successful strategy in food retailing that Demme outlined were fundamentally simple: clean stores, fresh selection, friendly service, well-stocked shelves and good prices. However, he predicted that the biggest change in the food-retailing model for the future will be that CEOs will increasingly take on the role of corporate visionary, while their management teams run the day-to-day business operations.

Noting there had been surprisingly little consolidation among food-outlet retailers, Read predicted the outlet niche will avail itself of mergers-and-acquisitions opportunities.

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Wal-Mart to sell earth-friendly CDs

BY CSA STAFF

SANTA MONICA, Calif. As part of Wal-Mart’s “Earth Month” the company is selling more than 20 Universal Music Group titles that come with special earth-friendly inserts. The inserts are made with special seed paper and, according to the companies, can actually bloom into wildflowers.

The inserts, in addition to being good for the environment, also offer consumers three free digital downloads from Universal Music. Universal also said that a number of its new CDs will be packaged in third-party certified, renewable recycled board and recyclable paper.

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ODP urges rejection of Levan nominees

BY CSA STAFF

DELRAY BEACH, Fla. Office Depot is continuing to urge its shareholders to reject dissident nominees and elect the company’s nominees to its board of directors at its annual shareholders meeting this April.

In a proxy statement sent to investors, Office Depot said that Alan Levan’s proposed nominees would do little to help improve shareholder value. According to the statement, Levan’s company, Levitt Corp. has seen its share price fall about 93% over the past three years and that its subsidiary, Levitt and Sons, is in bankruptcy. Office Depot also noted that BankAtlantic, of which Levan is chairman and ceo and one of his nominees, is president of real estate, construction and development, share price has dropped approximately 75% over the past three years.

Office Depot also cited news reports that commented on Levan’s failing business ventures, as well as others that said that his nominees are not qualified to serve on Office Depot’s board of directors.

The company pointed out nominee Mark Begelman’s experience with Mars Music, a company he founded in 1997 that went bankrupt in 2002. According to Office Depot, many news reports attributed this failure to a flawed business strategy.

According to Office Depot, when Levan’s other nominee, Martin Hanaka served as chairman of Sports Authority from 1998 to 2003, the company saw its price fall by about 13%.

Office Depot stressed that its directors best understand the company and are well-suited to help the company grow.

“We strongly believe that removing two of the most experienced retailing executives from our board, including our current ceo who is driving the implementation of our strategic turnaround plan, would be highly disruptive, could delay the implementation of internal and external initiatives and could damage prospects for a successful turnaround,” Office Depot said in the proxy statement.

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