Supermarket Smackdown

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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."

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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.

But perhaps Wal-Mart's greatest industry legacy will be helping supermarkets wean themselves from a slew of so-called vendor allowances, which suppliers pay to cover everything from how an item is promoted to how much shelf space it gets to how much of it is sold. These allowances have little to do with consumers and add complexity to operations. Yet the industry has relied on them for profits--instead of, say, finding and selling the stuff that shoppers really want. Grocery manufacturers, who have leaned on the allowance system to help launch new products and unload unpopular ones, were forced to shift gears because Wal-Mart forgoes all allowances and simply negotiates--famously and ferociously--for a lower total price, or dead net cost.

Since then, Albertson's and other big chains have publicly vowed to follow suit. Safeway, for instance, has gone dead net with a few vendors but admits that the evolution is slow because it takes so long to sift through years' worth of byzantine allowances in order to compute--and compare--dead net. "It's a little bit like translating some ancient scrolls that you might find in the Dead Sea that are in a language that you don't know," Burd told analysts. It's an honest--and stunning--admission that Safeway doesn't know what its true costs are.