Supermarket Smackdown

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The big national chains are undergoing a massive restructuring that will determine which among them survive. "We've made a few mistakes," concedes Safeway CEO Steve Burd, who was the industry darling for years until his cost-cutting skills sucked the life out of recent acquisitions, including Dominick's in Chicago and Genuardi's in Philadelphia. Revenues at the 1,800-store chain edged up 2%, to $35.6 billion last year, as the company logged $170 million in losses. With several big pension funds calling for his head, Burd embarked on a two-week road show last month to convince investors that his performance (Safeway's share price has dropped nearly 60% from 1999) is at least on par with his peers'. He also maintains that his tough stance on labor negotiations--which resulted in a strike in Southern California that cost the region's big three chains some $350 million in earnings last quarter--won enough concessions to stay competitive, even after Wal-Mart unleashes its Supercenters in the area. The next step, experts agree, is to continue narrowing the price gap with the world's largest retailer and find a way to justify the remaining premium. Here's what supermarkets need to do to avoid the ultimate checkout:

DIFFERENTIATE OR DIE

After Wal-Mart launched its Supercenter format in 1991, it took the company three years to reach $1 billion in annual U.S. grocery sales. But a mere decade later, it is topping $100 billion a year, which is almost as much as the sales of the next three biggest chains combined. "To a certain extent, Wal-Mart's strength is more of a reflection of the lack of difference among stores," says Willard Bishop, a supermarket consultant in Barrington, Ill. Conventional grocers are starting to get the message--differentiate or die--which is why some are jazzing up the old big-box routine. The northeastern Wegmans chain just opened its first store in Virginia, where it is spicing up its prepared-foods sections with daily cooking demonstrations. In Indiana, Marsh opened two stores this winter that have circular layouts. Each store has a central cafe with European-style markets on the perimeter showcasing, for example, artisanal cheeses in one room and baby food and supplies in another. And sticking with the old retail-is-detail adage, Marsh pipes mellow guitar instrumentals not only into the stores but also into the parking lots and faux-stone bathrooms.

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.