The invention of the supermarket

An interesting story in Forbes on the founding of King Kullen supermarkets in 1930 and its effect on how we live. They describe the way people bought groceries before self-service stores were invented, with a clerk picking out the individual items customers wanted (with few or no brand choices).

The process was erratic, labor intensive and costly. In 1930, Americans spent 21% of their disposable income on groceries. By 1940, that percentage dropped to 16%. Today, that figure is less than 6%--thanks to innovations in food distribution, mass merchandising and price competition that began in the 1930s.

"Supermarkets made it possible to achieve economies of scale at a lower cost to consumers," says Leslie G. Sarasin, chief executive of the Food Marketing Institute. "Americans were able to spend more of their disposable income on cars, education, clothing. They effectively created America's middle class."

A sidelight not mentioned in the story is that supermarkets spread so fast and destroyed the existing small retailers so quickly that only six years later, in 1936, congress felt it necessary to try to save the small retailers by passing the Robinson-Patman Act. Didn't work, did it?

A guaranteed argument-starter

If you want to get a heated argument (or at least a spirited discussion) going, just put together a list and title it "Best of ______". Whether it's the Top 100 Movies of All Time or the Best Books Ever Written or the 10 Best Quarterbacks, you're certain to leave a name off the list that many people believe should be near the top.

Interbrand has been putting out lists of the top brand name for a long time now, but this year for the first time they have compiled a list of the Most Valuable U.S. Retail Brands.

Numero Uno isn't going to surprise anybody, with Walmart's $129.8bil brand value being rated roughly six times that of runners-up Best Buy's $22.0bil and Home Depot's $20.8bil. Target and CVS follow.

But two of the top ten "retail" brand names are brands I would think of first as products -- #6 Dell and #10 Coach. Besides Dell, two other on-line retailers are in the top fifteen -- #11 Ebay and #14 Amazon. (Is Ebay a retailer at all? They sell nothing, others sell through them. They are really more like a mall, aren't they?)

See how quickly we can get an argument started?

There were a number of other interesting points. I was surprised to see Sherwin-Williams, with their mostly small outlets located in strip malls, ranked at #23. I was equally surprised to see American Girl, with only three or four outlets, on the list. But on reflection, both companies, however different, have done a good job of establishing thyemselves as brands, and maintaining their brand identity.

Where's Macy's?

The most interesting thing about such lists, though, is not who's on them, but who isn't. The #1 department store chain in the country, Macy's, is conspicuous by its absence, as is the former #1 retailer in the world, Sears.

Three department stores made the list -- Nordstrom (13), Kohl's (22), and JCPenney (24). Interbrand states, though, that department stores as a group have become "commodity chains without real difference." But they add a hopeful note:

... Macy's, Saks Fifth Avenue, Dillards and Sears have considerable brand strength, though they didn't make the list. All have the opportunity to capitalize on their brand to improve their financials.

But the most glaring omission was ...

No Supermarkets?!?!

Not a single traditional supermarket made the list. The only food retailer was Whole Foods at #47. Kroger? SuperValu? Didn't make the cut.

Traditional grocery earned the weakest customer loyalty scores. Over-reliance on discounts, rewards and promotions undermines any move toward a meaningful proposition and results in low brand strength.

If customer loyalty is a key measure of brand strength (and most would agree it is) then it's hard to argue that supermarkets have strong brands. Interbrand notes that further undermining the brand names of the leading chains is their multiple banners (Kroger includes Ralph's, Fry's, etc). And they also mention how excessive reliance on promotional funding can undercut branding:

The grocery sector also often misses out on opportunities for product differentiation, since small entrepreneurial manufacturers can’t afford to supply supermarkets due to the cost of supporting their promotions and the payment of slotting fees. In the U.S., there are a trillion dollars moving from the manufacturer to the grocer every year. As long as their vendors continue to pay for play, supermarkets may see no need to understand and serve the shoppers in their stores.

That last sentence sounds a bit harsh (and that's the first time I've heard that trade promo equals a trillion (!) a year in the supermarket channel alone), but I do agree that supermarkets harm themselves by locking out smaller suppliers, who could help them create a brand difference. Unfortunately, they're now hooked on trade promo, which is the difference between profit and loss, and kicking the habit (or even cutting back substantially) might be too tough a challenge.

I don't agree with all the rankings, but I found the exercise interesting and thought-provoking. Give it a read, and enjoy arguing with Interbrand (or with me).

Is Nash Finch back on track?

Nash Finch has had a lot of bad news in recent years. As this article states:

The good news about Nash Finch Co. is that there hasn't been much news lately.

That's probably a welcome relief to the Edina-based food distributor and retailer. Over the past few years, Nash Finch has endured management turmoil, slumping sales, a federal insider trading investigation and lawsuits from competitors, investors, and shareholders. Several Wall Street analysts have stopped covering the company.

But now there is some good news. The stock price was up strongly before the recent market problems, and sales have been growing in both main sectors of the business -- food distribution and military.

Under Covington, Nash Finch has also boosted profitability, invested millions of dollars in marketing and retooling retail stores, and -- perhaps most importantly -- cleaned up the mess left behind by former CEO Ron Marshall.

"Morale seems to have improved," said David Livingston, managing director of DJL Research in Pewaukee, Wis. Nash Finch "has more clear-cut objectives in terms of what they want to do. They certainly stopped going in the wrong direction. They seem to be on the right path."

More on price-fixing: this time in UK

Britain's Office of Fair Trading is investigating the grocery industry on possible price-fixing. The allegation is that pricing information might have been transmitted through vendors (one of the things that makes some folks nervous about collaboration and category captains.

Heavy fines may be imposed on grocers and suppliers after the Office of Fair Trading uncovered evidence that pricing information may have been shared.

The competition watchdog said in a letter that there were "reasonable grounds to suspect" that pricing data was passed between supermarkets via suppliers, the Financial Times reported.

Heavy fines, indeed -- potentially up to 10% of sales.

Retailers being investigated may include Asda, Morrisons, Sainsbury's, and Tesco (who are pretty much the entire UK grocery market). Manufacturers: Unilever, Mars, P&G, Coca-Cola.

Nash Finch promoting service offerings to retailers

Nash Finch is going after rival SuperValu by promoting the services it offers to retailers, including store layout and design, fixturing, and market research.

It had most of these services available previously, but they weren’t emphasized by the company or easily visible to customers, said John Paul, Nash Finch’s vice president of sales and marketing.

The effort is designed to appeal to independent grocery-store owners who may feel neglected by competing grocery distributors that are also “chasing after their own retail” businesses, Paul said. Though he didn’t identify it specifically, that’s a likely reference to Eden Prairie-based Supervalu, which gets most of its revenue from its retail chains like Cub Foods, but also supplies 2,200 third-party retail stores through its wholesale unit.

Another entrant in the small grocer race?

German retailer Lidl is planning to enter the US market in the next five years, as well as expanding in Germany (adding 1000 stores to their existing 3000) and entering Switzerland as well.

Lidl's stores are in the 10k-15k square foot range, which means they would be similar in size to Tesco's Fresh & Easy and Wal-Mart's forthcoming Marketplace stores, although Lidl puts less emphasis on fresh products than those formats, and tends to be discount oriented. Lidl will probably be more similar to their German rival Adli, which has been in the US for about thirty years and has about 900 stores here now.

HEB expanding in Mexico

I wasn't even aware that HEB was operating south of the Rio Grande, but apparently they are and are planning to expand.

Just 11 years after opening its first Mexican supermarket, H-E-B controls 29 percent of the northeastern Mexico market, according to numbers provided by the company.

H-E-B has 19 stores in Monterrey and another 10 stores in cities like Saltillo, Torreón and San Luis Potosí, as well as border towns like Nuevo Laredo and Reynosa.

As a consumer I loved HEB when I lived in Texas -- great selection and quality, competitive prices, and outstanding service. What else do you need. I also consistently see them at the top of vendor listing of the best retailers to work with.

I'm curious, though, whether any other American grocers are expanding into Mexico. I know Wal-Mart is -- but any others? If anybody can make a success of such an operation, I'd be inclined to think it's HEB.

Plans are in the works to open another four stores over the next 10 months: two more in Monterrey as well as the chain's first store in Piedras Negras, across the border from Eagle Pass, and a first of its kind discount store in Rio Bravo, in the border state of Tamaulipas.

Industry analysts and company officials say H-E-B, which was founded more than 100 years ago in Kerrville, has managed to export not just its stores, but also a fierce brand loyalty. Many of its northern Mexico shoppers have deep ties to Texas and had shopped in H E-B before the chain expanded in Mexico.

Weekend quick notes

Woolworths is the latest retailer to show an interest in India. The Australian giant is developing a deal with India's Tata Group to supply the group's retail outlets -- an opportunity for Woolies to study the market up-close. More on India here.

Home Depot has had a shake-up in its marketing ranks. Roger Adams is the new CMO -- the position has been vacant for a year. The exec-vp of merchanding & marketing is gone, as are a couple of other top folks.

Ahold's former marketing director has gone on trial for fraud. According to the government, he "booked whatever amount in income that they needed to make their targets."

Winn-Dixie looks like it will be out of bankruptcy soon. The question, as noted in the article, is whether they've figured out a way to compete with Wal-Mart. If not, how long before the next filing?

Tesco round-up

The entry of Tesco into the US market (see below, "Tesco to enter US") has generated a lot of commentary. We'll provide links here to some of the items we've read.

The general consensus is modestly positive, although the London stock market pushed Tesco's stock down after the announcement. Several commentators noted that Tesco has good experience in entering foreign markets (they are in twelve countries beyond the UK). On the other hand, they have focused mostly on developing markets, and the US is a very different case for them. In addition, they entered China just last year, and some feel that two big new markets might stretch their management thin.

Almost every story notes that European retailers entering the US market (Sainsbury, Marks & Spencer, Ahold) have had problems.

It has been noted repeatedly that, while they are entering Wal-Mart's home turf, they are also avoiding a direct confrontation by choosing the West Coast, where Wal-Mart is relatively weak, and by starting with a c-store format.

AMR Research says that Tesco's expertise in private label, store execution, and supply chain management will challenge US retailers.

Progressive Grocer: "It's another factor that will accelerate the trend of smaller independent supermarkets going out of business," he said. "It also spells for the convenience store industry another step in the ultimate shakeout of the industry, which, like the supermarket industry, tends to be dominated by smaller, independent chains."

Bloomberg: "The U.S. has been a graveyard for U.K. retailers, so investors are a little cautious…. It could be that it wants to get a flavor for the market through a small operation and then make a massive acquisition to get instant size.''

Convenience Store News: "The move into the United States will mark Tesco's second expansion into a major economy in less than two years. The retailer entered China in 2004, following Wal-Mart and Carrefour SA. Tesco now operates in 12 countries outside the U.K. and has 2,365 stores worldwide. Half of the company's floor space is outside the U.K.

The Sunday Herald: "It has embarked on an ambitious international expansion to fuel the next phase of turnover growth. But thus far, it has stuck to emerging markets like eastern Europe and Asia. Its success has been mixed. It has made significant ground in Poland and Korea. On the other hand, it is pulling out of Taiwan after failing to compete with French multinational Carrefour. And the competition is even greater in its latest territorial conquest. The US is where Wal-Mart reigns supreme; where independent grocers and larger discount goods players have been forced to their knees in its wake. "

The Business: "America is the country that invented big. Everything is supersized, from hamburgers to the girth of its people. So Tesco’s pint-sized assault on the US food retailing market announced last week will either plug the gap for small, or leave its customers feeling undernourished. No-one could accuse Britain’s most successful grocer of rushing into the States. It has agonised over its American problem for 20 years. Only now has it settled on a low risk entrée, launching a stars and stripes version of its successful Tesco Express convenience concept."

LA Times: "Carving out a distinctive identity will be important, said Nate Franke, an Orange County-based analyst with Deloitte & Touche. "It's a brand that is relatively unknown to the U.S. consumer, so I think their strategy has to be to create a niche, something that's different that the consumer isn't currently getting from the existing participants," he said.

The Guardian: "There has been speculation for some time that Tesco was considering a move to the US. The grocer had a team of executives working there throughout last year. They were thought to have been looking for acquisitions, and Tesco's name was linked with several US grocery chains, including Albertsons. That prospect alarmed some City analysts, who questioned the wisdom of moving into Wal-Mart's back yard and a market with the toughest price competition."

The Telegraph: "It will take all of the experience and knowledge Tesco has acquired through years of study in the US if it has any hope of cracking what is reckoned to be the most developed retail market in the globe. Tesco is launching its plans at a time when a host of US retailers have been forced to scale back or put themselves up for sale. Leading operators such as Albertson's have all been through the motions as they face competition from Wal-Mart on one side, and dollar stores on the other."

Food Production Daily: "Verdict predicts the UK retailer's choice to develop organically is the correct decision as it will not be burdened by the problems of a company it takes over nor will it be encumbered by stores which are unsuited to its operation. Moreover, this route will allow the company to manage its capital expenditure and learn from experience as it expands store numbers."

Albertson's sold ... finally

After being on the market and then off, Albertson's finally put through the deal. Most of the company will be sold to Super Valu, with stand-alone drug stores going to CVS, and other pieces being bought by the Cerberus equity group.

The purchase will triple Super Valu's size and vault it to the #2 spot in supermarkets. The problem for them will be absorbing so much so quickly, and fixing a very broken company -- Albertson's same-store sales have been down eight of the last fourteen quarters.

CVS should close a lot of the lead Walgreens has on them, and this gives them a big piece of the California market, where they've had little penetration. I've heard that they did well with the Eckerd takeover, so perhaps they know how to do this M&A stuff.