RECASTING A COLOSSUS: THE NEW SUPERCENTER VERSUS THE DISCOUNTER
Byline: Valerie Seckler
NEW YORK — Does the dawn of the new supercenter sound a death knell for traditional discounters?
While supercenters aren’t expected to entirely eliminate conventional discounters from retail’s evolutionary tree, some industry watchers believe they will spark numerous store closings by secondary and tertiary chains.
Shoppers once bewildered by attempts to negotiate earlier versions of the giant stores are so squeezed for time today that they’re giving the latest supercenters a chance, observers noted.
The megastores — about 60,000 square feet larger than the 110,000 square feet averaged by traditional discounters — lure consumers with three key components: a grocery, a general merchandise area and destination services such as banks, florists, pharmacies and quick-processing photo labs.
Actually, today’s supercenters are slightly smaller than they used to be. To make them more profitable, they have been trimmed to 170,000 square feet from the 185,000 square feet they averaged over the past few years.
Consumers’ higher priority placed on value — including the price and quality of goods and services — and the increased popularity of casual dressing are also stoking sales.
In addition, the expansion of the female work force even as women remain the primary household shoppers makes megastores more appealing.
These forces spurred supercenters to sales of $35 billion in the U.S. in 1996.
“As our duties expand, including professionally, women are looking for ways to reduce the burden,” offered Kathleen Seiders, a marketing professor at Babson College in Wellesley, Mass.
“We’ve watched the old-time general merchandiser pretty much disappear, with few exceptions like Woolworth’s,” Seiders noted. “If traditional discounters disappear with the rise of supercenters, it has competitive implications for all kinds of retailers. There’s a real good chance that in the future there will be only supercenters and no discount stores.
“When you think about how powerful Wal-Mart is and that this is their major growth vehicle, supercenters could reconfigure the retail landscape.”
There are already signs that Americans finally may be getting used to the idea of buying a quart of milk and a can of tuna fish along with sweaters, blouses and jeans — as they bank, get film developed and fill prescriptions.
Data compiled by the Management Horizons consulting unit of Price Waterhouse found among a nationally representative sample of primary shoppers — people who do most of the shopping for their households — 50 percent head to a supercenter to buy both general merchandise and food. Another 25 percent each said they planned to shop for either food or general merchandise in the megastores.
Although the format has yet to catch on in a big way in the U.S., by the end of 1995, 10 percent of the primary shoppers surveyed by Management Horizons said they were shopping at supercenters weekly.
“This is not insignificant, considering there were only 586 supercenters in the marketplace,” said Elaine Pollack, director of retail intelligence systems/food, drug, mass, at Management Horizons. “By the end of 1996, the number of supercenters had grown by 25 percent to 731 stores.”
While past efforts to build business in megastore formats have failed in the U.S., Pamela Thomas Graham, a principal of McKinsey & Co., who heads the consultant’s New York-based retail practice, maintained: “There is no inherent reason the formula shouldn’t work. If a supercenter is merchandised properly, convenience will be realized for today’s time-starved shopper.”
However, Graham highlighted the need to improve on past merchandising strategies, store layouts and in-store signs if the format is to fly over the long haul.
“It requires a lot of visual cues for consumers to find their way through what some have found a confusing shopping experience,” she said.
It also demands that general merchandisers like Wal-Mart, Target and Kmart execute a high-quality grocery business — whose profit margins average a razor-thin 1 percent, observed Philip W. Abbenhaus, director of corporate transactions at KMPG Peat Marwick, St. Louis.
“If supercenters can keep the food quality high and hammer away at costs, it should be a successful strategy,” Abbenhaus said. The grocery area typically occupies about 40 percent of a supercenter’s selling floor.
The format promises the most for the near term in rural and smaller suburban markets, forecast Abbenhaus, who, as do others, cited problems securing large enough sites in metropolitan areas and densely populated suburbs.
However, he further noted, “Even grocery stores are expanding to 100,000-square-foot boxes, so who knows if small retail formats will be viable in the long run?”
According to Seiders, for the past few years Wal-Mart has been opening all of its traditional discount stores on sites large enough to “grow into” a supercenter.
“This is Wal-Mart’s real estate shuffle,” said a retailing consultant who requested anonymity. “They’re doing a big real estate rehash, knocking down 75,000- to 90,000-square-foot stores in small markets and replacing them with Wal-Mart Supercenters.
“It’s their latest way to boost productivity and jazz up comps,” the source added. “Nobody tinkers with square footage better than Wal-Mart.”
The potential to soup up sales productivity and swipe market share from competitors is prompting Wal-Mart, with sales of about $100 billion annually, to roll out 100 supercenters a year. At that rate, the chain — whose officials did not return a reporter’s calls Tuesday — would be operating 540 Wal-Mart Supercenters by the end of 1998.
The chance to boost traffic and transactions is pushing Target Stores to plan six to eight openings of its SuperTarget units this year, with more new sites slated for 1998 — even as the Dayton Hudson division says the format is still in a test phase. Two SuperTarget units are set to bow in Utah in March, one in Orem, another in Riverdale, the company said.
Target, with annual sales of roughly $18 billion, began testing supercenters in March 1995, launching its first SuperTarget in Omaha, Neb. Its other supercenters are in Papillion, Neb.; Lawrence, Kan.; Davenport and Mason City, Iowa, and Centerville and Park Centre, Utah.
Target executives declined to be interviewed for this story, but a spokeswoman said in a statement, “We have been pleased with the fact that in all cases, our business on the general merchandise side of the equation has been better than we anticipated.
“It’s still a little bit too early to say, but overall, we’re pleased with the results we’ve had so far,” she added. “We’re getting more profitable and learning how to work that business.”
Rick Church, vice president and retail analyst at Smith Barney, said, “Early signals are that the SuperTargets are performing at or above initial projections.”
“Annualized sales for the two initial stores in Omaha and Lawrence are close to $60 million, with a return on sales that’s very close to Target’s average of more than 5 percent,” he continued. “This suggests that SuperTarget’s operating profit contribution of about $3 million per store is roughly double that of the average Target.”
Also in the works, said Church, are SuperTargets to be launched this year in Olathe, Kan., in July, and in Overland, Kan., and Salt Lake City in October.
Church estimated that Wal-Mart Supercenter’s return on sales is 6 to 7 percent due to its greater scale and expertise.
“Target didn’t have a choice but to begin to open supercenters,” Seiders contended. “Wal-Mart will probably have over 500 Supercenters by the end of 1998. It’s a high-growth concept — no one can afford to be left out.”
Wal-Mart had launched 340 such sites as of Jan. 29, according to Pollack of Management Horizons. That gave the Bentonville, Ark.-based company about $17.8 billion, or 52 percent, of a supercenter market estimated at $35 billion for 1996, said Seiders.
Babson’s data shows Wal-Mart’s closest market-share competitor is Meijer, which won 22 percent of the market in 1996 with 107 superstores, followed by Kmart, which captured 12 percent in 97 Super K stores, and Fred Meyer, which snagged 9 percent in 107 super sites. Target has grabbed about 1.5 percent of the mega-market through its eight doors.
“The supercenter format is proving a very powerful consumer draw,” said Pollack. “They shop the format frequently due to the grocery section, then they move into the general merchandise areas and shop some more, so that supercenters produce more sales per square foot than traditional discount stores.
“This means the formula works, and for every few supercenters that are opened, there will be less business available for traditional mass merchants,” Pollack predicted. “It is clear to us that a supercenter can go wherever a traditional discounter is today, except where the real estate isn’t big enough.”
Nonetheless, one-stop shopping doesn’t appeal to everyone, advised Pollack, who believes the best conventional discount stores will survive.
“Some shoppers prefer smaller-size stores, where one can get in and out more quickly,” she said. “The supercenter is a potent formula, but I do think there will be players out there who can co-exist as conventional operators.”