Local grocers brace for corporate competition- American Independent Business Alliance AMIBA

February 15, 2005

Grocery Wars: Who's Winning?
As rivals proliferate and margins shrink, local grocers face competition on steroids

By: KEITH BRANNON

The changes at Dorignac’s Food Center started gradually. First, it was a new frozen food cooler and then wider aisles in the center of the 57-year-old Metairie supermarket. The moves would have drawn little attention at most grocery stores, but at Dorignac’s, where some of the cashiers and baggers have been on staff for more than 20 years, change is rare.

With its speckled linoleum floors, block-lettered aisle signs, diner-style cafeteria, brown paper logo sacks and shirt-and-tie-clad bag boys, the store looked like a throwback to the 1960s. Compared to the spacious, brightly lit grocery sections of the Wal-Mart Supercenters and large chain supermarkets, Dorignac’s looked its age.

“The whole store needed renovating and cleaning up,” says owner Joseph Dorignac III, who hired a Texas marketing consultant to modernize the store and spruce up sales. “You have to keep up with the times.”

A year later, a lot has changed. The floors are refurbished; the cafeteria is smaller and has been incorporated into a new specialty foods division and deli nestled next to an expanded wine center. A gourmet butcher shop and seafood section replaced the old deli space. At the front of the store, shiny Mylar balloons hover above a bright Hallmark greeting card display. Fresh-cut flower arrangements stand in neat rows under handwritten signs: “Tulips $9.99 — 10 stems to a bunch.”

There are also subtle changes. Seasonal products like Louisiana citrus occupy the first display cases at the store entrance. The bakery is more prominent with an expanded bread selection. The store’s name and marketing slogans, once reserved for bags and outdoor signs, now show up throughout the store on doors, cashier computer screens and staff uniforms. You can even buy Dorignac’s T-shirts, coffee mugs and totes, or a hat priced at $9.99 that says “Dorignac’s: the best is better.”

“We’re committed to marketing ourselves. We really feel strongly that Dorignac’s is an institution in New Orleans,” says Director of Business Operations Scott Miller. “Dorignac’s has a great legacy, and any good business is going to take advantage of that reputation.”

The fact that an established local brand like Dorignac’s is spending millions to renovate, update and market itself reflects the changing landscape of the grocery business. Independent stores are desperate to stand out in an industry increasingly dominated by Wal-Mart and regional chains. In Dorignac’s case, a rival is setting up shop in its backyard. National upscale grocer Whole Foods Market will open a 53,000-square-foot store in April a few miles down the street on Veterans Memorial Boulevard. Dorignac’s, which draws shoppers from all over the city, already competes with Whole Foods’ 30,000-square-foot Uptown store.

This month Dorignac’s will knock out a wall and add 800 square feet to its produce section. Miller is aware that many may think the changes are to prepare for Whole Foods.

“It is a reason, not the reason,” he says. “Everybody knows that they are coming, and they have been coming for a long time.”

Pressure from all directions

The grocery business has never been more competitive with more than a dozen types of retailers vying for consumers’ limited food budgets. Local grocers now contend with supermarket chains, supercenters, wholesale clubs, limited-assortment stores like Save-A-Lot, other independents, convenience stores and more, says Michael Sansolo, senior vice president of The Food Marketing Institute, a retail trade group in Washington, D.C.

“Today, it’s like competition on steroids,” Sansolo says. “You’ve got food being sold not just in supermarkets but in mass merchandise stores, drug stores, convenience stores, sometimes in places like bookstores and gas stations and in some cases the Internet. So everybody is competing for the food market in every way.”

The New Orleans area grocery market is feeling pressure from both the high and low ends of the spectrum. Whole Foods has aggressively expanded here within the last three years. Wal-Mart has also added more supercenters at a time when Save-A-Lots and dollar stores have proliferated. Caught in the middle of the battle are the regional chains — Winn-Dixie and Sav-A-Center — and the locally owned independents.

“It’s very competitive because of the different formats out there,” says Barry Breaux, owner of Breaux Mart. “But Wal-Mart is the biggest new competitor in that they have shaken up the market the most.”

Wal-Mart effect

In less than a decade, Wal-Mart has become the No. 1 grocer in the country. Its supercenters sold more than $31 billion in groceries in 2003, the most recent year of annual sales available. Wal-Mart has 10 supercenters in the area, representing $460 million in sales last year, according to The Shelby Report, a Gainesville, Ga.-based supermarket trade journal.

“It has greatly affected sales in the market,” says J.H. “Jay” Campbell, president and CEO of Associated Grocers Inc., a Baton Rouge wholesaler that supplies roughly 80 percent of the independent grocers in the New Orleans area. “I think Albertsons’ exit out of New Orleans is a classic example. There were too many chains and too many competitors fighting for too few dollars.”

The nation’s fourth largest chain, Albertsons, pulled out of the area last year. It closed three stores and sold the remaining four to Sav-A-Center parent company A&P. Of course, New Orleans also lost local and regional brands like Schwegmann’s, Canal Villere and Delchamp’s during Wal-Mart’s ascent to the No. 2 grocer in the market.

Winn-Dixie, which operates 33 stores in the area, is the No. 1 grocer in New Orleans with sales representing almost 29 percent of the market, according to Shelby Report estimates. A&P, which operates Sav-A-Center, is No. 3 with 21 percent market share. The top three combined represent 73 percent of the market’s estimated $2 billion in annual sales. Shelby Report ranks market share based on sales estimates collected by Trade Dimensions International. Low-cost retailer Save-A-Lot ranks fourth followed by Robert’s Fresh Market, Breaux Mart, Rouse’s and Whole Foods. The remaining independents like Dorignac’s represent 17 percent of the market.

Because the local area isn’t growing much, sales gains come at the expense of competitors. Within the past three years, Winn-Dixie’s market share has fallen almost 10 percent, and A&P’s has declined 1.8 percent. During the same time Wal-Mart’s share grew more than 15 percent.

“They changed the face of retailing,” Campbell says. “Obviously the perception from consumers’ standpoint is that it’s cheap, that Wal-Mart has the lowest prices. That’s a great perception that they have worked very hard to achieve well over 15 years since they have been selling groceries in the supercenter format. They have been very aggressive … and obviously retailers have had to respond.”

Representatives from both Winn-Dixie and Sav-A-Center declined to be interviewed about Wal-Mart or the state of competition in the industry. Winn-Dixie is struggling to compete with Wal-Mart on a national level. A&P is in undergoing a corporate restructuring to reduce roughly $75 million in costs during the next two years. The company has moved local administrative executives out of the area to its headquarters in Montvale, N.J.

Smaller stores compete

Breaux says the chains have a tougher time against Wal-Mart because they are trying to compete on price when their costs are higher. While independents typically operate stores of less than 35,000 square feet, modern chain supermarkets are around 50,000 square feet and higher.

“The two national players in this market are weak, and they are vulnerable (to Wal-Mart),” Breaux says. “The independents are sitting back in older, smaller buildings with more established locations (and) without huge rents, where they can be extremely competitive against Wal-Mart today, where Winn-Dixie and Sav-A-Center cannot because of their high rents. They are not attaining the volume for the square footage that they have put in.”

A recent Food Marketing Institute finds that more grocers like Breaux are competing with smaller stores. The average supermarket in the United States decreased to 34,000 square feet in 2003, taking the size of new stores below 40,000 for the first time in a decade.

Breaux Mart’s stores range in size from 20,000 to 33,000 square feet. Breaux opened a new store last year in a former Winn-Dixie location on Lapalco Boulevard in Gretna near three Wal-Marts. He says the store is performing well.

Breaux and others in the industry don’t expect new national chains to enter the area anytime soon unless they buy the assets of Winn-Dixie or Sav-A-Center. National chains like Kroger, Costco, Safeway and Publix have steered clear of the market.

Larry Rabin, director of the retail division for Corporate Realty, says national chains would have a hard time finding a suitable location because the market is so tight for prime retail space. “Where do you find a location that can compete?” he says. “There is very little growth, and there is just no place to put new grocery stores.”

Finding a niche

Retailers say New Orleans is an unusual market because the independents are so strong. Grouped together, they represent more than 20 percent of grocery sales in the area.

“The independent market in the greater New Orleans area is probably one of the best in the country,” says H.D. Lanaux, owner of Langenstein’s. Lanaux, whose family has been in the grocery business since 1922, operates a 4,500-square-foot store Uptown and a 20,000-square-foot store in Metairie.

Local grocers say they have focused on customer service and variety to differentiate themselves. A recent survey by the National Grocer’s Association found that 56 percent of grocers say customer service is the best way to compete with Wal-Mart. Roughly 20 percent said they carry a greater variety of products to vie for customers; only 1 percent said they compete on prices.

“Years ago there were lots of retailers who enjoyed the idea of being the low-price leader whether it was Schwegmann’s or whoever,” Campbell says.

“When that perception was removed from them, they somehow were not able to adapt and be something else. I think an effective and successful retailer has got to change with the consumer and also face the reality that they are not what they were.”

For many, that means finding a niche and promoting it. Providing “value” is the industry buzzword. What do customers value most, and how can retailers deliver?

“Location used to be one of the prime determinants to success,” says Sansolo of the Food Marketing Institute. “Now shoppers say freely they will drive to the kind of store that provides the right value for them. For some shoppers value equals price.”

Other shoppers may place a higher value on getting in and out of the store quickly; some may be looking for specialty meats or organic foods. Independents try to fill needs not being met by the large chains, says Chuck Gilmer, Shelby Report editor.

“That has been the rallying cry of the independents for a number of years since the onslaught of Wal-Mart: Find your niche and find something that makes you stand out, and work at that. That’s what we’re seeing in a lot of cases.”

Dorignac’s focused on the areas that set it apart such as its customer service, meat selection, high-end deli, bakery and liquor department. The company places a high priority on fast check-outs, staffing baggers and cashiers at several stations so that customers don’t have to wait in line. More than half of Dorignac’s 225 employees work full time so customers get used to seeing the same faces when they shop.

“We see our variety and selection as one competitive advantage,” Miller says. “We’re not here to be cheaper. We are here to provide a great shopping experience that is supported by the history and the legacy of Dorignac’s — the best meats, the best service, good prices, variety and gourmet.”

It’s also no coincidence that the areas Dorignac’s improved or renovated contain higher-profit items. The typical gross margin on groceries for conventional stores is 22 percent, according to a National Grocers Association report. On bakery items it’s 41 percent, 24 percent for meats, 30 percent for produce and almost 39 percent for deli items. Margins are even higher for upscale stores.

Miller also hired a price coordinator to make sure items were competitive and the store updated buying strategies to lower inventories to improve product turnover.

Unite and conquer

Independents use membership in a member-owned cooperative to increase their buying power. Associated Grocers operates a 50,000-square-foot warehouse in Baton Rouge that distributes food to stores in Louisiana, Texas, Mississippi, Alabama and Arkansas. Dorignac’s, Breaux Mart and Langenstein’s buy from Associated Grocers.

“One of the keys to success for independents is the health of their wholesalers because that is where they get a lot of their resources,” Gilmer says.

Associated Grocer is spending $7.3 million this year to more than double its warehouse space. Campbell says its members pool their buying resources to get the same bulk supply rates enjoyed by the chains.

“If the independents were all owned together, they would be a very formidable chain in their own right. They all buy from us so we, in effect, are like a chain because of our buying clout. That is why they are competitive price-wise,” he says. “Yet they can offer their own unique flavor of customer service.”

Buying power is important because margins are so low in the grocery business. Overall, average net profit for most grocers is just below a penny on the dollar, Sansolo says.

“Even in the most profitable markets you are talking about a very low margin percentage. If people make 1.25 percent, they are ecstatic,” he says.

Whole Foods’ market

One of the few retailers in the market that says Wal-Mart hasn’t affected sales is Whole Foods. Kristina Bradford, marketing director for Whole Foods’ Uptown store says she didn’t see an impact when Wal-Mart’s supercenter opened on Tchoupitoulas during the summer.

“We’ve broken a sales record recently so I would say no,” Bradford says.

Whole Foods specializes in organic and seasonal produce as well as natural foods that don’t have artificial colors, flavors or preservatives.

“We have a set of quality standards that applies to all the products that we sell here, whether it’s meat or seafood or produce or packaged goods or baked goods,” Bradford says. “Those company standards are very important to us. We don’t allow bleached or bromated flours (in baked goods), antibiotics or steroids in meat or seafood product or milk.”

Whole Foods is the nation’s largest retailer of organic food. The company also sells environmentally friendly household products, natural cosmetics and homeopathic herbal remedies. Bradford says the New Orleans market is different from other regions in that customers are more interested in food items. For example, the store recently hosted a seminar with an owner of a natural cosmetics line and few showed up. A similar event in San Antonio attracted more than 100 customers.

“So I would say our focus is more on a passion for food rather than necessarily some of the other body care and supplement items,” Bradford says.

Whole Foods entered the market in 1986 when it purchased an exsiting 4,000-square-foot natural foods store on Esplanade Avenue near Bayou St. John. The company opened its Uptown store in late 2002.

Bradford wouldn’t speculate on how the Uptown store has affected nearby rivals. However, All Natural Foods, a small health food store directly across the street from Whole Foods, shut down after trying to compete for six months. Other natural foods stores reported sales declines. A nearby Sav-A-Center has redesigned its produce department at least twice since the Whole Foods store opened.

Lanaux flew to Texas before Whole Foods opened Uptown to see how the chain operated in another market.

“We did our homework,” he says. “We probably went to Texas three times just to go in at different times of the year to see what they did. We wanted to see what were our strengths and what were our weaknesses and to change those things and get ready.”

Langenstein’s expanded operating hours Uptown and opened on Sunday to compete. Lanaux says sales were initially affected.

“Anytime somebody as large as a Whole Foods comes in with a state-of-the-art building, it’s going to take some business away from you. But there again, you do the things you can,” he says.

He says the chain’s Metairie store will likely draw shoppers from rivals for the first few months the way the chain did Uptown.

“It’s going to affect everybody to some extent,” he says.

Breaux doesn’t expect to see a lasting impact because Whole Foods doesn’t carry products and brands most consumers buy on a day-to-day basis.

“Whole Foods does not sell Coca-Cola, Pepsi-Cola, Nabisco, Frito Lay or anything Procter & Gamble makes. Do you know how big Procter & Gamble is in my store?” Breaux says.

He also doesn’t think most consumers can afford the chain’s upscale pricing. Whole Foods has been nicknamed “Whole Paycheck” because buyers can easily spend more than they intended on premium products.

Mike Carr, marketing director for Whole Foods’ Esplanade store, says the company tries to compete on price with its “365 Everyday Value” private label products like pasta sauce, canned goods, frozen foods and other staples.

“You can spend as much as you like or as little as you’d like,” Carr says. “With the basic staples, we really have competitive prices.”

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