Food and Staples Retailing: As Supercenters Intensify Competition, Quality and Service Become Critical
Competitive pressures have intensified in this already highly competitive industry over the past decade. At the forefront of new competition are mass merchants, most notably Wal-Mart. Wal-Mart is now the No. 1 seller of groceries in the world. Their ability to compete on price stems from cost advantages, such as economies-of-scale, buying power, and a nonunion workforce. They also have the ability to accept lower margins on groceries because groceries are used as a magnet to increase weekly traffic flow around their higher-margin general merchandise. But supermarkets are fighting back by building superstores with additional value-added products and services. Prepared meals, ethnic and organic foods, in-store pharmacies, banking services, and video rentals are just some of these products and services. High-quality fresh foods are distinguishing some supermarkets from Wal-Mart, so supermarket chains are investing in stores that specialize in premium quality products.
Drugstores have also experienced heightened competition. The big-three drugstore chains are now entering each other's territory after saturating their own areas. Mass merchants, supermarkets, and mail orders from pharmacy benefit management plans have added substantial competition for prescriptions. But drugstores are also fighting back with expanded selections of food and general merchandise, and private-label brands, as well as opening in-store clinics. The aging population and new, more effective drugs in the pipeline bode well for this segment. The new Medicare prescription plan is helping to bring price-sensitive cash-paying customers from mass merchants back to drugstores that offer greater convenience and customer service. The increased use of generic drugs will help drugstores because they earn a higher margin on generic drugs. But the pharmacist shortage, resulting from growth in prescriptions written outpacing the growth in the number of pharmacists, is costly for all pharmacy outlets.
Improving efficiency is paramount for this high-volume, low-margin industry. B2B commerce is reducing costs and providing faster deliveries. Efficient customer response programs, with point-of-sale information and electronic data interchanges, streamline distribution and lower prices for customers. RFID technology is being implemented in an effort to save costs and improve margins. Supermarkets need to contain their healthcare and pension benefit costs by receiving concessions from unions, but many unions have initiated strikes over this issue.
This industry report was written by John W. Molka III, CFA, Senior Industry Analyst and Editor, 212.984.2753, jmolka@advisen.com.
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