Supermarket Smackdown

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The mood seems to work. "There's something about this place that isn't in-your-face stimulating," says Cathy Beerbower, 45, who frequents the new Marsh store in Fort Wayne, Ind. And her reason for avoiding the local Wal-Mart--"it's too chaotic"--could be the industry's salvation. Kroger is trying to emulate the swanky Whole Foods scene in a few of its 2,500 stores by adding in-store chefs, gourmet meals and upscale wines. Likewise, Safeway, which is making a huge push into quality perishables in general and prepared foods in particular, is doing so with new woodlike floors and softer lighting. "The feedback we're getting from consumers is that it's just a less stressful place to be," Burd says of the new look.

Meanwhile, Albertson's 2,300 stores hope to reel in customers with the power of other retail brands. Its new store-within-a-store concept has carved out space not only for its well-known pharmacy, Osco, but for 1,900 Toys "R" Us alcoves, 1,000 Krispy Kreme nooks, some 300 Starbucks cafes and a dozen or so Office Depot sections. "We're really just trying to maximize choice," says Bob Dunst, Albertson's chief technology officer. That impulse helps explain why his company — along with several others, including Kroger, Marsh and H-E-B — is hedging its bets via multiple store brands that cater variously to upscale, discount and ethnic shoppers. Some supermarkets have even been installing gas stations in their parking lots to bring in more traffic.

Handle the Unions
Labor unions have represented workers at big chains like Safeway since supermarkets first appeared in the 1930s, but their inability to crack Wal-Mart leaves the chains' employers at a wage disadvantage they can't abide. Something has got to give, so Burd's most formidable target is labor, which accounts for 68% of Safeway's budget. According to consulting firm Retail Forward, Wal-Mart's labor costs are 25% to 30% less than the big unionized chains', which contributes to prices that are 15% lower.

Knowing that Wal-Mart plans to open 40 Supercenters in California in the next five years, Burd, who took the helm at Safeway in 1993 and has been lauded for trimming bloated costs, played hardball during regional negotiations with the United Food and Commercial Workers (UFCW) union last fall. After its workers went on strike on Oct. 11, Albertson's and Kroger subsidiary Ralphs locked out their UFCW employees. Five grueling months later, the UFCW agreed to a two-tier plan that pays new hires less and requires them to contribute more for health care. "It still leaves [existing employees] with the highest wages, the highest health-care plan and the highest pension benefits in all of retail," says Burd. The tactic may have helped the company reach a settlement recently, without a strike, in and around the Washington-Baltimore area, another UFCW stronghold. Since a hostile work force won't help bring in new customers, Safeway wisely created a multimillion-dollar hardship fund to provide financial grants to employees who fell behind on their house, car or other payments during the strike.

Albertson's, which is giving its employees $10 million in strike-ratification bonuses, is taking other preventive measures by outsourcing some of its customer service to a new call center in Utah and reducing the overall need for checkers, hostile or otherwise. The company has installed 1,800 self-checkout aisles and plans to reach a total of 5,000 by fall. It is also using the Dallas — Fort Worth market to test a shop-and-scan technology, similar to Speedpass, that obviates the need even to go through a checkout aisle.

At Meijer, the Michigan retailer that invented the supercenter way back in 1962, the top brass would no doubt argue against such a strategy. Sales plummeted at the company when Wal-Mart started moving into its strongholds a few years ago. "They sold everything we sold and ran promotions that we could not match," says Jim Jensen, 46, who was managing a 209,000-sq.-ft. Meijer in Howell, Mich., when a Wal-Mart moved in across the street in 2000. Jensen responded with six-hour price specials, supersales and coupons galore, and when those initiatives failed to pull the store out of its death spiral, he got employees to start offering product demonstrations in every department, including fashion shows. It took a full 12 months for sales to climb back to pre-Wal-Mart levels, and, says Jensen, the most successful measure that year was also the simplest: "Talking to people, making them feel at home."

Streamline Operations
For years the supermarket industry viewed its 1% net profit margin as a badge of its efficiency. In reality, the opposite was true: the grocers earned so little because they weren't that good at managing the supply chain. Wal-Mart exploited that weakness with devastating effect on the grocers, and it has forced food suppliers to become more efficient too. For starters, the leviathan has changed the way grocery stores deal with their vendors, as everyone seeks to copy its Retail Link system, which provides real-time sales data to manufacturers. Wal-Mart also helped persuade the pack to subscribe to UCCnet's data-synchronization service, which, by cutting back on invoice errors, should save companies $1 million for every $1 billion in sales, according to a study by A.T. Kearney.