Chain Follows the Money to Areas with Little of It

Discussion
Aug 31, 2005
George Anderson

By George Anderson

A headline in yesterday’s Wall Street Journal nicely sums up Save-A-Lot’s strategy for success: No-frills grocer goes where other chains won’t.

Catering to consumer households with annual incomes of $35,000 or less, Save-A-Lot has struck a chord with many looking to stretch their grocery dollars. The chain, mostly made up by licensee operators, currently has 1,229 stores in 39 states and has plans to move into California.

While growth has been strong in recent years, Save-A-Lot has found that it has had to scale back its plans this year. Instead of opening 90 new stores as originally planned,
the chain will open half that. Rising energy prices, increased competition and the need to remodel stores have served as a drag on the company’s profits. (See RetailWire 7/21/05,
Save-A-Lot Losing Some Momentum)

In its search for new store sites, Save-A-Lot has found that urban areas offer great potential. While others have passed on areas that they saw has generating too few sales and having too much crime, Save-A-Lot has stepped up its store openings in cities such as Baltimore and Wichita.

The Wall Street Journal article referenced a U.S. Department of Agriculture report, which found the density of grocery stores is lowest in urban areas where food stamp use is high.

Bill Moran, president and chief executive officer, Save-A-Lot, said he expects urban locations to eventually make up half of the chain’s stores. At present about 25 percent of Save-A-Lot stores are located in urban areas.

Save-A-Lot began opening its first stores in Baltimore in 2002 at a cost of about $750,000 and it has five stores now operating in the city limits and it is looking to possibly open additional locations. Two of the stores Save-A-Lot has opened since it first began doing business in Baltimore have closed.

Moderator’s Comment: Do you see the demand for operators such as Save-A-Lot continuing to grow? To which retailers do “hard discounters” such as Save-A-Lot pose
the greatest competitive threat? What will the chain and others entering low-income urban markets need to do if they wish to be successful?

The economic data certainly points to continued growth for operators such as Save-A-Lot. According to the latest report from the U.S. Census Bureau, those
living in poverty were up for the fourth straight year in 2004. The percentage of Americans living below the poverty line stood at 12.7 percent in 2004 compared to 12.5 percent
the year before.

George Anderson – Moderator

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6 Comments on "Chain Follows the Money to Areas with Little of It"


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Don Delzell
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Don Delzell
15 years 6 months ago

I believe the question is “Who is most impacted by the success of Save-A-Lot?” Wouldn’t that be the marginal, smaller, and less well operated IGA-type grocers? Independents? Most urban blight areas I drive around (note, not “through”) seem to lack major chain operations. I recall Walgreens building just off Cabrini Green in Chicago. Very tall steel fences. Small parking lot. The location requirements just don’t fit the model.

Hurray for SAL. Urban-blight-dwellers can’t starve, or shouldn’t. The trouble is that operating efficiently in that niche requires a great deal of attention and execution. The shrink issue has been addressed already. What about the spoilage cost? Fresh categories have significant wastage built in…and the wastage rate goes up geometrically with lower quality providers. Ask any grocer who’s tried to cut costs by sourcing lower quality perishables. Doesn’t work.

I admire SAL. I would really not want that challenge.

Bernice Hurst
Guest
15 years 6 months ago

Just as loan sharks notoriously charge higher interest rates to those who most need money but can least afford to borrow, in the UK supermarkets often open small, convenience type stores that charge more for many basics than the nearest large branch of the same chain. If Save-A-Lot does what it’s name implies, then there is much room for it in the marketplace and, instead of being seen as a threat, it could be perceived as an opportunity for larger companies to attract business and loyalty. Not everyone is able to get to a big out of town location and those who cannot should be treated just as legitimately as anyone else. As I understand food stamps, the retailer still gets paid even if it isn’t by the customer directly. To be successful, I think the retailers need to be transparent in their pricing and ensure that there are no premiums for the poor. They also need to be treated to some polite customer service just like everyone else.

Mark Lilien
Guest
15 years 6 months ago

SAL owes much of its success to the owner-operator model. It minimizes labor costs, since unionization is unlikely and family members are often compensated at less than market rates. Furthermore, motivating the management is not a challenge, since the owner of a location is often the manager. Staff recruitment, incentives, and management issues are minimized under this model. For many other retailers, staffing issues are as tough as customer issues. Every retail chain’s management, regardless of category, should question whether everyone would be better off as a franchise, instead.

David Livingston
Guest
15 years 6 months ago
I do see an increased demand for operators such as Save-A-Lot to service the under-stored blighted areas of America’s inner cities. There are few incentives for conventional supermarkets to remain in these difficult areas – crime, shoplifting, low per capita expenditures, difficult marketing challenges, and the human resource nightmares have chased the supermarkets away. Save-A-Lot is able to recycle the skeletal remains of these vacant stores, usually with added financial help from government agencies. By keeping the stores small and not selling expensive items, shoplifting is kept under control. These stores can survive just fine doing only $75,000 per week. Their man hour production is around $200, still well below the $600+ at Aldi. Save-A-Lot really poses no significant threat to larger supermarkets or discounters. First because they are small and second because they often open where there is limited competition. To remain successful, Save-A-Lot needs to control their shrink. Many of the Save-A-Lots I have visited in difficult areas such as Detroit have only one way out that requires going through the checkout. They… Read more »
Dave Wilkening
Guest
Dave Wilkening
15 years 6 months ago

I think that if a grocer can actually offer prices to consumers that are equal or at least comparable to prices found in non-urban areas, and can also mitigate shrink, this effort will work. Given the example that 2 of 5 stores closed, it looks like this will not be easy.

Stephan Kouzomis
Guest
Stephan Kouzomis
15 years 6 months ago

SAL has taken a page from the successful Wal-Mart strategic approach to the marketplace. And SAL can do well, if it is efficiently operated, and cost is driven out of thr price, e.g.: distribution and inventory cost. Just like WM did!!! Hmm…………

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