One begins with the traditional small retailers and progresses through the department store period; the Sears, Roebuck and Montgomery Ward era; the Woolworth's and J.C. Penney stores; factory stores, chain grocers such as A&P; supermarkets chains such as Kroger's and more recently the formidable power of the mega-retail discount chains, including the rise of Kmart, Target, Wal-Mart and their thousands of stores; then the Warehouse Clubs such as Sam's Clubs, Price/Costco and such new major arrivals in the home improvement field as Home Depot and Builder's Square.
Similarly the nation's rural areas, towns and villages grew into small urban areas and the small retailers collectively developed the nation's traditional "Main Street." "Main Street" America, particularly in New England, the South and the Midwest created a charming traditional set-up of groceries, drug stores, gift shops, bookstores, men's, women's and children's apparel stores, hardware stores, bicycle shops, general merchandise stores, and later special "niche" boutiques. This period is best described in Constance Beaumont's 1994 publication How Superstore Sprawl Can Harm Communities.1
Also the first half of the 20th Century saw the rise of three major retail giants; J.C. Penney, Montgomery Ward and Sears, Roebuck. These stores rapidly developed into mature chains rivaling each other on price and product, and in a sense were the forerunners of the current mega-retail discount chains.
Also during the period such chains that harmonized without creating chaos on "Main Street," were Woolworth's, Grant's, S.S. Kresge, Mattingly's, etc. They were earlier referred to as "Five-and-Dime" stores, but evolved into more sophisticated types of merchandisers. Their prices were generally lower than in the department stores. However, they seemed to harmonize with the rest of "Main Street," and the competitive environment had little in common with today's competitive "attack and destroy" environment.
All experienced steady growth from the sixties to the eighties. While Wal-Mart had a strong start in the Midwest, it opened only about 500 stores in the sixties and seventies.
These discounters had vigorous rivalries over price competition, but more on a regional basis than national one. Sears continued to maintain a very strong national position. In the early eighties Wal-Mart was still best known in the small towns and cities in the Midwest.
In the 1970's, there were a number of specialized or "category" retailers who entered the retail market. They included Toys "R" Us, Walgreen's Drugs and Home Depot.
The "Clubs" currently include in their memberships large numbers of legitimate smaller retailers who are limited in buying from wholesalers because of the "direct" mass purchases of the mega-retail discount chains. The smaller retailers take advantage of purchasing from Price/Costco and Sam's Clubs at low prices and thus are able to stock their stores with inventory. This is not a solution to the inability of the small retailer to survive permanently, but it gives them a chance to stay in business at least temporarily.
Price/Costco and Sam's Clubs generally sell a limited line of products, based upon the concepts of a "good buy." Suppliers often consider themselves as having excessive inventories and therefore at times are anxious to unload at reduced prices. The Warehouse Clubs qualify as "Big Boxes" and may average 120,000 square feet in size. These are like traditional warehouses with little or few sophistications or frills.
Price/Costco operated over 200 stores in the United States, Canada and Mexico with sales in 1995 of $18.6 billion. In most Clubs members pay a dues of approximately $35 each and are able to buy at what might be described as "wholesale" prices.
Sam's Clubs parallel the Price/Costco facilities. Sam's Clubs were opened by Wal-Mart in 1983. Wal-Mart operated over 400 Sam's Clubs stores by early 1996. In 1994, Wal-Mart acquired 99 PACE club stores which have been converted to Sam's Clubs. Sam's Club sales exceeded $19 billion in fiscal 1996.2
Both Sam's Clubs and Price/Costco set up warehouse type facilities, generally on "industrial" land, much cheaper by the acre than commercially zoned land. The Clubs generally do not buy from distributors but generally only buy "direct" from suppliers and manufacturers. As might be expected they have very low labor costs and do little advertising.
The mega-retailers, discounters and manufacturer outlets offered free parking, low prices, wide product lines and impressive merchandising, promotion and advertising. Because of the huge buying power represented by mass purchasing, the traditional independent retailers began to lose influence with their suppliers, who in a non-financial sense began "partnering" with the mass purchasers represented by the mega-retail discount chains. "Partnering" also included interactive information systems (EDI) and other cost savings and benefit items for the major mega-discount retailers. Significant market share formerly possessed by small retailers collectively began to be lost to the mega-discount retailers.
Aside from the history of improved highways and the mobility of shoppers and the desire for a one-stop shopping location, Wal-Mart, Super Kmart and others employ a current strategy of "destination" stores. The "enveloping" area is a strategy to locate within a 5 mile radius in urban areas and 25 mile radius in rural areas. The objective of these stores is to attract customers directly and purposely to their location as a "one-stop," sole destination. The ability of the traditional retailer to survive is seriously threatened unless there is reasonable zoning regulation by state and local governments to protect the traditional "Main Street."
A later chapter in this study will describe the history of the Fair Trade legislation in the United States with the Sherman Act going on to the Federal Trade Commission Act, the Clayton Act and the Robinson-Patman Act. These pro-competitive acts will be discussed as to whether the "enveloping" theory is an intrusion in a free and fair market and what needs to be done to counteract it.
Mobility in driving to the "Big Box" to or from work has become a way of life for many consumers. Also driving to the "Big Box" at night or on Sundays when the small retailers might be closed further directs sales away from "Main Street."
Wal-Mart was the initiator of the concept of Supercenters. It first introduced this concept which includes groceries, special services and food courts in 1988. It was planning almost 150 Supercenters, of which 80 were to be built in 1993. 4 As of January 1996, 154 Supercenters were operated by Wal-Mart. Their high quality management, modern business systems and inspired executive leadership helped total operations reach a sales volume of approximately $93 billion in fiscal 1996 with double-digit increases in growth expected during the next decade.
In the 1980's, Kmart purchased Builders Square and Walden Books. Further development followed with the purchases of Pay Less Drug in 1985. In 1991, Kmart acquired Pace Membership Warehouse, Inc., Marko, Inc., OfficeMax and Sports Authority. In 1992, it purchased the Borders Bookstore Chain. Despite Kmart's early growth and profitability, it failed to match the aggressive leadership enjoyed by Wal-Mart and others in the early 1990's.
Kmart's more recent plan was to concentrate on its principal mission; general merchandise plus a new Supercenter concept involving discount groceries. The company's Super Kmarts were designed to rival Wal-Mart's newest Supercenters.
Recently, Kmart began to downsize, and to make decisive changes in top management. Joseph E. Antonini was ousted as chairman and outside director Donald S. Perkins was named as his successor. Currently, Floyd Hall is Chairman, CEO and President. Kmart had eight consecutive quarters of disappointing earnings. Personnel moves were in concert with the disappointing earnings and finally posted a 4th quarter loss of $420 million ending January 1996. Much of this loss dealt with the write-off of its investment of the Builders Square chain. The Builders Square write-off followed a spinoff of 3 non-core businesses; Office Max, Borders and Sports Authority. Kmart appeared to be learning the hard way that its best strategy is to go back to its discounting roots. In early 1997, after a further write down of Builders Square by over $350 million, Kmart is entertaining merging this division with Waban's HomeBase division to move into the number 3 spot in home improvement chains behind Home Depot and Lowe's. 5
In 1994, close to 175 Walden Book Stores were closed and to discontinue operations in about 70 smaller Kmart stores were discontinued. In 1995, after news of the change in the chairman's position, the drastic change in top executives was followed by an announcement that 73 additional Kmarts would be closed. Further actions to sell or spin off Office Max, Inc., the Borders Group and Sports Authority Inc. have aided in Kmart's financial recovery.
Filing for Chapter 11 protection, Bradlees became the hardest hit of Northeastern regional discounters. These retailers have felt the pinch as the national mega-retail discount chains became stronger factors in their regional markets. In addition to the strong entry of Wal-Mart, Kmart slashed prices in the Bradlees' area and consumers grew more and more price conscious in their buying.
"They have a Kmart in basically every one of their backyards. Wal-Mart has moved into their territory in a very big way," said Kurt Barnard, publisher of Barnard's Retail Marketing Report.
Bradlees opened 16 stores in the greater Philadelphia area in 1985 and 1986. It's 17th area store, at Franklin Mills in Northeast Philadelphia, opened in 1994. In all, there were 136 Bradlees stores in the Northeast and Mid-Atlantic states.
The company announced that its stores would continue normal operations, and that employees' wages, salaries and benefits would not be interrupted. Bradlees also announced the resignation of its President, Samuel Mandell, as well as two key vice presidents. Peter Thorner, vice chairman, was then named to succeed Mandell as President and Chief Operating Officer.
Analysts agree that the worries of suppliers and factors - who pay suppliers up front and collect from the retailer - triggered the Bradlees bankruptcy filing. "If not for the factors pulling the plug, the company seemed to be in decent shape," said Jack Hersch, a bankruptcy analyst with Donaldson, Lufkin & Jenrette Securities Corp. "This is the sort of thing that's self fulfilling," according to Kurt Barnard, of Barnard's Retail Marketing.
The Bradlees debacle illustrates the point that jobs are being lost and firms are going out of business--not only the small retailers but also the regional chains all are threatened by the formidable financial and buying powers of the mega-retail discount chains.
Recently Kmart's decision to close numerous stores and to shake up its management, as well as sharp declines in profits indicate that no firm, large or small, is immune to the results of the feverish desire by mega-retail discount chains to cover every acre in America with a "Big Box." Ultimately as stores get older and populations shift, the nation is left with urban and rural sprawl, boarded up stores and terrain that looks like the "bombed out" area in Italy after the Battle of Cassino in World War II.
A new national pharmaceutical trade association is forming and for the first time is enlisting the aid of both independents and chains to fight the major mail order drug firms now growing strongly through "managed care." 6 In the Philadelphia, Pennsylvania area during the last decade the number of independent neighborhood pharmacists or drugstores has fallen from over 2,000 to less than 1,000.
Walgreen's had over $10 billion in sales in 1994-1995 and operated over 1,900 stores. This chain has a long history, having opened its first store in 1901. Walgreen has accepted the latest in management techniques in the planning, building, design and operations of the contemporary pharmacy. Most of the chain stores are very modern.
Since 1993, Walgreen's national plan has been to add about 150 stores annually until the year 2000 when they are expected to have between 2,500 and 3,000 drugstores. Needless to say, Walgreen's rapid growth and the rise of many other smaller drug chains have created hostile attitudes on the part of independent pharmacists toward the chains, in some cases leading to litigation. As of Fall 1996, Walgreen's has over 2,100 locations.
Rite Aid is quickly gaining momentum on Walgreen's number 1 position. In late 1996, Rite Aid announced the purchase of the Thrifty Payless drugstores which gave Rite Aid the lead in the number of locations at over 3,500 stores. This purchase was after Rite Aid had abandoned its 5 month pursuit of the Revco drugstore chain amid troubles with the Federal Trade Commission and allegations of antitrust problems due to geographical conflicts. The Thrifty Payless acquisition is free of that concern as the majority of their locations will complement Rite Aid's already existing stores.
Recently, such litigation alleging "predatory pricing," under Arkansas State law took place between the independent pharmacists and Wal-Mart in Arkansas, with Wal-Mart eventually becoming the winner at the State Supreme Court level. This litigation will be discussed in greater detail in Chapters IV and V.
The chain has diversified its product line and several hundred of the newer stores now sell children's clothing as well as children's books. In fact, separate facilities known as Kids "R" Us are often built directly adjacent to the toy store. This firm is exporting its merchandising philosophy internationally having opened up about 175 locations in Asia and Europe in the past few years.
The phenomenal growth of Toys "R" Us has stimulated an FTC investigation of the toy industry and according to a recent article in The Wall Street Journal, the FTC is accusing Toys "R" Us, Inc. of illegally boosting prices by pressuring manufacturers into harming other discount retailers' ability to compete. The impact of this anti-trust action should provide precedent for a similar review by the FTC of other alleged influences by mega-retail discount chains on the pricing practices of suppliers and manufacturers. See further discussion of the Toys "R" Us case in Chapter VII-A on Predatory Pricing.
In the short term, the customer wins with lower prices but in the long term, they will lose. While the obvious advantage in the short run is lower prices, this market control can lead toward monopolistic practices, if unregulated, putting the consumer at risk and eliminating price advantages. Quality and selection will decrease because there will be only a few large corporations controlling selection and price.
Banking on their successful experiences with Supercenter concepts in the Midwest, Wal-Mart appeared ready to apply the same successful concepts in the Northeast according to newsman Rick Stauffer, who reported his interview with Don Spindel, a retail analyst with the national brokerage firm, A.G. Edwards & Son, in St. Louis, who stated: "People on average, shop for food two to four times per week. They (Wal-Mart) use food to drive their general merchandise business, and, unlike a regular supermarket, Wal-Mart does not have to make money on food--but they do." 8
In the same article, Wal-Mart spokesperson Betsy Reithermeyer said: "Most of our Supercenters will be in relocated or expanded in existing Wal-Marts." 9
Stauffer also interviewed Janet J. Mangano, a retail analyst employed at Burnham Securities in New York City who added: "It (the Supercenter) is the most profitable store they have and when a Supercenter replaces a regular Wal-Mart, it does much better (from a sales standpoint)." 10
The Buffalo News also reported that from 1988 to 1994, Wal-Mart had opened 79 such Supercenters and that the company announced in January 1994, that 65 additional Supercenters would be opened during the year. 11 Actually in 1994, one new Supercenter was opened and 37 Wal-Marts were relocated or expanded to Supercenters. In 1995, 6 new Supercenters were opened and 69 were relocated or expanded to Supercenters. In their 1995 Annual Report, Wal-Mart announced their plan to accelerate Supercenter growth, opening 90 to 100 in each year, 1996 and 1997. 12
The major concern these Supercenters, both those of Wal-Mart and Kmart, bring to the traditional grocery chain is the use of an entire industry, food, as a "loss leader." David Rogers, a supermarket consultant with DSR Marketing Systems (Deerfield, IL) stated: "The danger for supermarkets is that Wal-Mart is turning their business virtually into a loss leader." 13 Rogers questions how traditional supermarkets can compete with Wal-Mart which can sell groceries at close to cost and recoup on general merchandise with higher margins.
Wal-Mart's "dominance" strategy certainly applies to the food industry. At the Annual Stockholder's meeting on June 7, 1996, John Menzer, CFO, said that Wal-Mart is aiming to snare a similar market penetration in food as it has already achieved in hard- and soft-line goods. In 1995, Wal-Mart's market share of the retail food industry was 3.16% with $13.5 billion in sales. It is projected to rise to 8.67% by the year 2000. 14 In fact, by 2010, it is believed that nearly all of the currently existing 2,000 stores will carry food. 15
The legal discussion of the "market basket" approach versus the "single product" approach will be discussed in Chapter V in greater detail. In an Arkansas case and the subsequent appeal in a Mart and three local pharmacies, both sides were argued. The dissenting judges argued that the market basket approach could not be used and that a single product approach indicated predatory pricing practices. With the mega-retail discount chains now entering the food industry competitively and indicating that they will use food as a "loss leader," it is believed that this issue will be contested more than once.
The PaineWebber conclusion about expected weaknesses in Supercenters' growth and profits appears faulty to the authors of this study. It is based on part that warehouse "clubs," which in the 1980's appeared at first to threaten core supermarket operations, by late 1993 however, these clubs, according to PaineWebber, had "clearly shaken out as a format and begun leveling off in food share, with supermarkets correspondingly regaining sales momentum." 18
PaineWebber also justified its cautious endorsement of Supercenters, in great part, because of its evaluation of Kmart's performance and activities in the 1960's, as well as in more recent years.
PaineWebber's mostly negative report on Supercenters' combining food with non-food items such as apparel and housewares, appeared largely influenced by what their research showed as a failure in "one stop shopping." PaineWebber stated that the Chicago Super Kmart's displayed "tomatoes with tires, lettuce and light bulbs." Further, they displayed food together with non-food in the entry foyer. They apparently did not care for alternative advertising and promotion with an additional example from Kmart's ads such as "We've got juice, jumper cable and jeans" and "Shop here for carrots and car mats." PaineWebber may have mistakenly believed that only a small minority of Supercenters customers would "shop both sides of the store."
In the same 1994 study, PaineWebber study described several major disadvantages that Kmart would have with Supercenters. PaineWebber stated: "Kmart's well-known corporate problems give it a negative image among consumers as well as developers."19
The PaineWebber study also reported that Kmart's decision to use third party food wholesalers saved much needed capital by lowering overhead, but put Super Kmart at a substantial disadvantage in fulfilling Supercenters' low price positioning. If Kmart continues using third party wholesalers, it will put them at a substantial disadvantage to Wal-Mart and Target.
The author of this study does not accept the premise that Wal-Mart will have similar problems as did Kmart in executing the Supercenter program. Wal-Mart's national management and store management appears quite strong. Wal-Mart, unlike several major supermarket chains, is unconstrained by corporate problems and appears to be going with 100% self-distribution thus minimizing overhead.
Most supermarket chains self-procure and self-distribute. Apparently, when Kmart opened new Super Kmart's, utilization of outside food wholesalers strained Kmart's staff resources in opening new locations, with intense travel required as well as essential staff training requirements.
A major advantage for Wal-Mart's Supercenters, generally is its lower labor costs as compared to both the unionized and non-unionized supermarkets. Wal-Mart is presently non-union. Kroger, the dominant supermarket chain, is unionized, but, nevertheless, it, unlike many supermarkets, continues to be strongly managed, effective and highly profitable.
The excellent management of Kroger is illustrated by a PaineWebber survey done during March, 1994 in Rosenberg, Texas, where Kroger's union labor gap would be wide relative to other regions. Nevertheless, Kroger came within 4% of the Super Kmart's pricing which was enough to neutralize price as a shopper issue. This, despite the fact that Kroger was unionized. The total pricing on a 46 item "market basket" was $83.19 or 104 indexed to Super Kmart, where the price was $80.04 indexed at 100. 20
Kroger, among all supermarket operators has experienced the heaviest overlap with Supercenters and, normally, would be expected to be most vulnerable because of its mature (seniority) unionized labor force.
Kroger is the largest and most powerful U.S. supermarket chain and retains unusual flexibility to subsidize tough competitive regions with easier ones. Further, PaineWebber reported in March 1994, that; "In total, Kroger's results have not been substantially impacted by Supercenter competition." 21
Kroger combats low price Supercenters in the following manner: 22
Kroger's is one of the leading chains in the United States with 1995 sales of $23.9 billion and continues to compete successfully with Meijer, a very private and successful Supercenter and non-Supercenter operator. Meijer's private label line was relatively underdeveloped compared to Kroger. Kroger continues to be successful against A&P, Big Star (Grand Union), Bruno's, Food Lion, Publex, Kmart's Supercenters, etc.
This writer believes, however, that Wal-Mart's capitalization and managerial expertise, plus its mass purchasing, advertising and promotion budgets will prove it to be a formidable rival for Kroger and other supermarket chains in the next few years. It appears to be drawing further and further away from its old rival Kmart in terms of profits and volume. Kmart said it will conduct another strategic review of its business, including merchandising, leadership, financial policies and operational execution. That is in addition to the company's recent plan to slice $800 million in expenses.
But investors and Standard & Poors, which lowered its ratings on Kmart's $3.7 billion in debt, point out that Kmart is in a defensive position against competitors like industry leader Wal-Mart Stores, Inc. For example, Kmart reduced its original capital spending, while Wal-Mart planned to boost its capital spending.
Mr. Antonini, who was removed in March, 1995 as head of Kmart had a relatively unsuccessful tenure, marred by flat-to-down earnings, inventory troubles, and loss of market share. Best known in Kmart's television commercials for his promise, "It's our job to make sure no one has a lower price than Kmart." Mr. Antonini had been criticized by industry experts for failing to stock the right merchandise, improve inventory control systems and adequately cut costs.
Until now the small retailer has been threatened by the power of the mega-retail chains--now it appears that the same thing will be true of the regional and in some cases, mature supermarket chains. What will this mean for joblessness and the U.S. retail employment picture in the next five years?
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