Passing on the pressure

by Josh Sosland
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LA QUINTA, CALIF. — Persistent pressure on supermarket profit margins will not abate as the industry becomes more global and will spill pressure onto food companies, said Allan S. Noddle, the retired president and chief executive officer of Giant Food Stores, Carlisle, Pa. Profit margins averaged about 1% last year, he said, about the same as the profitability rate in 1965.

Mr. Noddle, who also was an executive vice-president and member of the corporate executive board of Giant’s Dutch parent, Royal Ahold, was the keynote speaker March 19 at the annual meeting of the American Bakers Association. The A.B.A. annual meeting was held March 18-21 at the La Quinta Resort and Club.

As a career supermarket executive, Mr. Noddle noted the extraordinary investment supermarkets have made in technology over the past decades, but he bemoaned the reality that "the savings all went to the American consumer."

He warned that the retail environment abroad is not better, with Germany, Poland and China even more competitive.

"Germany has been a terribly difficult market since the (Berlin) Wall came down," he said.

The years of intense competition and tight margins have taken a toll on the U.S. supermarket business. The diminished luster of traditional supermarket chains is readily apparent, Mr. Noddle said. Consumers don’t shop nearly as often in supermarkets as they did in the past, and the largest supermarket players are not the leaders they once were, he said.

"On the one side you have discounters relying on price," he said. "On the other side are unique specialty food merchants focused on the upscale products. They have fantastic service, products, bakeries, delis and restaurants. In the middle, how are we going to survive?"

Mr. Noddle said retailer consolidation will continue because the largest four food industry players account for less than 50% of the market. Recent transactions include Albertsons/Supervalu and Whole Foods/Wild Oats.

Making the transactions more attractive than in the 1990s are depressed valuations, Mr. Noddle said. Ultimately, he predicted there will be a handful of global retailers that include Carrefour Group, Aldi, Wal-Mart Stores Inc. and Tesco P.L.C.

As these groups coalesce, they will place unprecedented pressure on their suppliers, Mr. Noddle said. Intensifying this pressure will be the continued expansion of the discount sector.

"They (discounters) are technology literate, and they play that to their advantage, and it is a global phenomenon," he said. "It isn’t just in America."

Beginning with the Efficient Consumer Response Working Group (E.C.R.) in the early 1990s, there has been a massive investment in technology by food retailers. Supply chain (warehouse management solutions), loyalty cards, self checkout are among the investments, Mr. Noddle cited.

"Self checkout is the latest," he said. "It is slower, but it will succeed because it saves money for the retailer and gives the consumer control. R.F.I.D. (radio frequency identification) is another technology that will be coming as costs come down."

Another trend that is not going away is what Mr. Noddle described as the blurring of formats. For instance, drug stores are replacing convenience stores as consumers’ quick source of choice for food products. The drug store business has consolidated to the point that only two companies will survive as major players — Walgreens and CVS, he said.

In turn, convenience stores are responding by replacing their standard prepared food fare of "greasy burgers and fries" with an array of fresh foods, Mr. Noddle said.

"It’s fresh brewed coffee, fresh sandwiches, fresh fruit," he said.

As a model, Mr. Noddle identified Wawa, a mid-Atlantic chain of 500 c-stores based in Wawa, Pa. The chain offers made-to-order hoagies, hot breakfast sandwiches, Wawa brand juices and a selection of ready-to-eat salads, fresh fruit and other produce.

Other c-store chains identified by Mr. Noddle as leading the move toward fresher food include Sheetz, also based in Pennsylvania, and 7-Eleven, which operates 31,000 stores globally and is based in Dallas.

While the upward trajectory of Wal-Mart Stores, Inc. over the company’s 45-year history has been breathtaking, Mr. Noddle said the chain is facing a number of changes. He noted that from the time the Bentonville, Ark.-based company opened its first store in 1962, it became the world’s largest company in only 40 years. In the last five years, Wal-Mart has lost that distinction to Exxon Mobil Corp., but Mr. Noddle said Wal-Mart’s days of growth are not in the past.

"Wal-Mart is smoking toward half a trillion dollars in sales," Mr. Noddle said. "They may be wounded, but they are down not out."

Troubling Wal-Mart recently have been several developments, including public relations problems, aging stores and the size of the stores. The company is not standing idly by in the face of these difficulties, Mr. Noddle said.

"They are planning to remodel 1,800 of their stores over the next 18 months," he said.

Mr. Noddle showed a series of images from the Plano, Texas, model store. He described the markedly improved selection and appearance of each of a variety of departments — produce, wine, refrigerated sections, shoes and housewares.

At the heart of this remodeling effort is a desire to slow the momentum and market share gains of rival Target Corp. and a recognition that Wal-Mart customers are overwhelmingly driven to the stores by price considerations and that other attractions are needed.

Turning to health, nutrition and food safety, Mr. Noddle described the trend as "here to stay."

"After decades we’ve realized that what we put in our bodies determines not only how long we live but how well we live," Mr. Noddle said.

He predicted "another leap forward for private label."

He described multiple-tier programs that range from highly economical alternatives to super-premium products intended to eclipse the target brands.

"It’s a proactive philosophy now rather than reactive," Mr. Noddle said. "Retailers want exclusivity, differentiation and innovation to bring the brand to life. It is the brand of the store. I work with companies that do 38% of the business in private label."

What does this mean for branded food companies?

"If you’re an ‘A’ brand, you will probably be around," he said. "Secondary and tertiary brands will have to ‘fight for their lives.’"

While food store sizes have been growing steadily in recent years, Mr. Noddle said there are reasons to believe this trend will reverse going forward. Certain stores already are reducing the variety they offer to customers with a surprising impact.

"Typical consumers spend 22 minutes in a store versus 54 minutes a generation ago," Mr. Noddle said. "The proliferation of s.k.u.s (stock-keeping units) gives a sense of less choice, not more. Retailers are acting on research demonstrating that when selection is reduced 8% to 10%, consumers perceive increased selection, not less."

Mr. Noddle predicted a reversal toward smaller stores, smaller sizes and multiple formats. This prediction is premised on consumers’ chronic impatience and the reduced popularity of mega-malls, he said. Instead is the return to strip centers that are far more up to date than the strips of the 1960s.

A significant driver is the aging population.

"They want a more personal experience," Mr. Noddle said of the aging baby boomers.

Mr. Noddle concluded his presentation with a series of suggestions:

• Be the low-cost producer — globalization will force market share down. Only the efficient will survive.

• Invest in your people — It’s tough to get the right people and to keep the right people.

• Research lifestyle changes of consuming public – travel

• Recreate the "lost" art of creative in-store merchandising. He said that the bane of the E.C.R. movement was an excessive, but needed, focus on efficiency.

"Merchandising is simply the influencing of the sale of goods," he said. "This industry is in transition. If you want to be part of the future, adopt some of these changes."

This article can also be found in the digital edition of Food Business News, April 3, 2007, starting on Page 1. Click here to search that archive.

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