Where will SoCal price wars lead?

Articles
July 02, 2009

Where will SoCal price wars lead?

Remember the bad old days of supermarket price wars—characterized then by sharp markdowns, double and triple coupons, and continuity programs that sapped margins and brought chains down to their fiscal knees? They’re back! This recession has revived what good sense eradicated in most markets for years: retailers’ heated pursuit of savings-driven shoppers. However, when tactics like today’s sweeping price cuts erode margins in order to restore market share, the clock begins to tick on store operators who can’t sustain this approach for long. With card-check legislation looming as well—and more chains potentially being pulled into unionization and higher operating costs—chains could be on an even shorter financial leash. We can’t imagine anyone wanting a repeat of the last labor strikes in Los Angeles, which devastated stores and retailing careers. If the potential one-two punch of price wars and higher labor expenses were to cause a shakeout in 2009-2010, SupermarketGuru.com anticipates that the Tesco Fresh & Easy- and Marketside by Walmart-style stores (10,000 to 16,000 square feet) would populate plenty of location opportunities. By then, the formats would be more field-tested, refined and market-ready—and shoppers might trial them more readily and discover aspects they like.

Remember the bad old days of supermarket price wars—characterized then by sharp markdowns, double and triple coupons, and continuity programs that sapped margins and brought chains down to their fiscal knees?

They’re back!

This recession has revived what good sense eradicated in most markets for years: retailers’ heated pursuit of savings-driven shoppers.  However, when tactics like today’s sweeping price cuts erode margins in order to restore market share, the clock begins to tick on store operators who can’t sustain this approach for long.

With card-check legislation looming as well—and more chains potentially being pulled into unionization and higher operating costs—chains could be on an even shorter financial leash.

We can’t imagine anyone wanting a repeat of the last labor strikes in Los Angeles, which devastated stores and retailing careers. If the potential one-two punch of price wars and higher labor expenses were to cause a shakeout in 2009-2010, SupermarketGuru.com anticipates that the Tesco Fresh & Easy- and Marketside by Walmart-style stores (10,000 to 16,000 square feet) would populate plenty of location opportunities.  By then, the formats would be more field-tested, refined and market-ready—and shoppers might trial them more readily and discover aspects they like.

What’s happened so far in Southern California, the hotbed of current price cuts:

Albertsons threw down the price gauntlet when it lowered prices on thousands of items in dozens of categories at its 222 area stores. Stater Bros. responded by slashing prices on 10,000 of its most frequently purchased goods, some as deeply as 20%, chief executive Jack Brown told the North County Times.  Vons and Ralphs have also grown more aggressive, according to local media accounts, all in the name of winning back shoppers lost to Walmart, Target and other discount formats in this recession. 

Canaccord Adams financial analyst Simeon Gutman told the Los Angeles Times that Albertsons had the furthest to go to be competitive, based on his analysis of food prices in the San Diego market. On a market basket of 80 items, Albertsons charged 4.6% more than Ralphs and 1.4% more than Vons, and was the least promotional, he said.

These are veteran operators who know how to compete without sacrificing too heavily for their own good. If the economy doesn’t whipsaw them with another sudden drop that would drive more traffic to the hard-core discount outlets, shoppers will act like juries, as always, and rule who the market winners and losers ought to be.