Supermarket Smackdown

Cocky. Ruthless. Vicious. Mean. Those are some of the ways Jerry Davis, CEO of Affiliated Foods Southwest, describes the supermarket juggernaut that is Wal-Mart. He could have added hyperefficient, low cost and customer focused. The megachain's rapidly expanding grocery business--which now accounts for a fifth of U.S. food sales--has left a trail of shuttered supermarkets in its wake. This year in particular, the damage is piling up. Winn-Dixie, once a Southern power, suspended its dividend indefinitely, causing its stock to drop 28% in January, and is expected to close more than a hundred stores. This comes on the heels of Fleming Cos.' liquidation last summer of what had been the second biggest grocery wholesaling business in the country. But even excluding that particular flameout, the industry has lost more than 50% of its market value in the past five years. "The people at Wal-Mart don't want some of the business," Davis seethes in Little Rock, Ark., where his wholesaling cooperative supplies 50 supermarkets and some 600 convenience stores in and around Arkansas. "They want all of it."

Blaming Wal-Mart is a common industry response, but it's also misguided. The grocers have contributed enormously to their own problems. Their inefficient supply chain, for instance, provided Wal-Mart with a golden opportunity. And their initial response to the new threat was fairly myopic. Like too many of his fellow grocers, Davis thought getting bigger himself would make things better. Before Wal-Mart, he says, "we tried to limit our distance from our warehouses to 300 miles. Now we're going 500 miles" to reach stores as far as the Gulf Coast. Kroger, Albertson's and Safeway each went on an acquisition spree a few years ago, but whatever savings that resulted from centralizing operations have been offset by the obliteration of local ties and customer service. And Albertson's isn't finished. The company (2003 sales: $35.4 billion) just bought New England's Shaw's from old England's J Sainsbury for nearly $2.5 billion. Apparently, the British have had it with the colonies' low ROI.

"There really is a crisis in the industry," says Gary Giblen, head analyst at boutique Manhattan research firm CL King & Associates. The sky started falling--along with same-store sales--in 2001, as alienated shoppers began steering their grocery carts not only toward Wal-Mart's food-laden Supercenters but also toward warehouse clubs, discount chains, drugstores, dollar stores and, on the high end, trendy salutes to organic produce. "Conventional supermarkets really have no reason to exist anymore," says Giblen. "They're basically becoming convenience stores."