Quality Competition in Retailing - Competition in The Retail Food Industry

Competition in The Retail Food Industry

The retail food industry is composed of two relatively distinct submarkets: supermarkets and grocery stores. Although chain grocery stores date back to the early 1900s, the supermarket format was not introduced until the 1950s, when the rise of nationally branded products and the diffusion of the automobile created a natural incentive to build larger, less centrally located stores. Situated in the suburbs to economize on land costs, supermarkets were 5 times larger than their rival grocery stores, carried far more products, and advertised heavily. Distinguished by the variety of products they carried, supermarkets and grocery stores were vertically differentiated: if they charged the same prices, consumers would choose the store with a wider selection. While supermarkets quickly captured the bulk of sales, grocery firms maintained a foothold by serving the remote locations and niche consumer markets that the supermarket firms ignored.

By the 1980s, supermarket firms realized that maximizing product variety meant building their own distribution networks. While grocery firms were mostly supplied by independent wholesalers, supermarket firms vertically integrated into distribution. The computerized logistical and inventory management systems introduced by mass-merchandisers like Wal-Mart required a degree of coordination, both in terms of scheduling and technology adoption, that was difficult to achieve through an arm’s length contract. For example, even getting independent grocers to implement a standardized scanner system proved to be a major hurdle for third party wholesalers.

By 1998, 49 of the top 50 supermarket firms were vertically integrated into distribution, operating state of the art, climate controlled warehouses and specialized trucking fleets. The savings from integration are significant: according to a 1997 report by the Food Marketing Institute, operating costs are 25% to 60% lower for selfdistributing chains. Although grocery firms (and third-party wholesalers) continue to capture around 25% of overall food sales, they do not compete directly with the dominant supermarket chains, focusing instead on smaller niches like ethnic foods and rural towns.