War in the Supermarkets

PEOPLE beefing about the oppressive price of food may find it hard to believe, but the supermarket business has traditionally operated with profits as thin as a sales slip and competition as keen as a butcher's blade. Prices are going up not because supermarkets are squeezing out more money, but primarily because they have had to pay more to wholesalers, who in turn have had to pay more to farmers. The July wholesale price index rose at an annual rate of 8.4%, from 6% the month before, mainly because of food costs. Retail food prices will continue to increase; farmers got 1.5% more for their produce in June and July, breaking a price-index record set during the Korean War.

In an all-consuming competition with each other, many supermarket chains have absorbed part of these rises and pared their sales markups ever finer; industry profit margins have fallen from 1.2-c- on a dollar in 1965 to .87-c- last year. Lately the big A. & P. chain has escalated this intense rivalry into a monumental war of the supermarkets.

The big-barrel weapon now is discount merchandising, which has spread to 40% of the nation's supermarkets. Generally, discounting involves scrapping frills such as trading stamps and games, reducing the variety of goods, and trimming prices on a large percentage of store items. Buying at a discount store can save consumers about 5% and sometimes more of the cost of shopping at a conventional supermarket.

In theory, price reductions are offset by greater volume and lowered operating expenses. In practice, they chew into earnings. Since last January, when A. & P. started a cut-rate drive called WEO (for Where Economy Originates), earnings for many chains have reached the vanishing point. A. & P. increased sales volume 9% in the quarter ending last May, but it reported a $20 million loss. In its last fiscal year, Finast showed a deficit of $689,000. Kroger reported a 10% earnings dip in its June interim report, and Grand Union a drop of 38%. The war is hottest in the East and Midwest, where A. & P. is strongest. On the West Coast, where discounting has been practiced for years, many chains are in the black, including Safeway, which registered a first-quarter earnings gain of 13%.

A. & P. has been one of the most stodgily managed chains in the industry, and its business has been nibbled away by more inventive retailers. Recently, the hustling Safeway chain, which began discounting in earnest in 1965, nosed out A. & P. as the biggest supermarketeer. Determined to recapture its dominant position, A. & P. has converted 3,700 of its 4,200 stores to WEO, and by fall all of them will be discounting. The company trimmed its prices so low that its gross profit margin (before taxes and operating expenses) has slid to an estimated 12%, v. about 14% for most discount food chains and 21% for conventional supermarkets.

Though a recent comparison check at a conventional A. & P. and a WEO discount store in the New York City area found some prices identical, especially for meat, it also turned up bargains. Samples:

Super-Right Bacon (1 Ib.) WEO 87-c- ; A. & P. 89-c-

Super-Right Canned Ham (4 1b.) WEO $4.19; A. & P. $4.29

Stringbeans (1 Ib.) WEO 29-c-; A. & P. 39-c-

Skippy Peanut Butter (28 oz.) WEO 93-c-; A. & P. 97-c-

A. & P. frozen orange juice (4 cans) WEO 79-c-; A. & P. 95-c-

This discounting has roused considerable controversy. Shoppers charge that many discount stores are dirty and slack on service. The Federal Trade Commission claims that some cut-rate items promoted by A. & P. stores are not available at the advertised price when customers try to buy them. A. & P must now either agree to a consent order to correct its practices or risk a formal complaint from the FTC. Meanwhile, complaints are clanking in from other chains, which are striving to meet A. & P.'s posted prices. Bohack President Joseph Binder fumes: "A. & P. is helping to place the supermarket business into a tailspin. That company is selling items at prices at which it could not possibly make a profit." Prospects of more bloodletting are worrying investors. In the past two weeks, the stocks of three major chains--Jewel, National Tea and Supermarkets General--all plunged to lows for the year. A. & P.'s stock is down to 16 7/8, compared with 22 in January and its historic high of 70 1/2 1961.

The Late Show. While persisting in their money-losing efforts to combat A. & P.'s assault, many chains are seeking new ways to boost earnings. One new wrinkle is round-the-clock service, which has been adopted by some or all stores in the Jewel, Pathmark, Arlan's and other chains. They aim to attract new customers while A. & P. and other competing stores are closed. Says Marvin Lerner, executive vice president of Manhattan-based Bohack, which has put its discount chain of Village Stores on a 24-hour schedule: "We've competed as far as we can go on price, so now we're turning to longer hours." So far customer response has been good. Stuart Rosenthal, assistant to the president of Supermarkets General, which operates Pathmark, says: "We get all kinds of people late at night or early in the morning--couples unable to shop together during regular hours, or the wife who trusts her husband to baby-sit only when the kids are asleep." The added cost of increased hours has generally been minimal. Explains Ralph Krueger, vice president of Allied Supermarkets, which manages Arlan's: "It doesn't add much to our labor expense because we must have people in to stock at night anyhow. Certain other expenses, like rent, remain the same whether we stay open or not."

Striving to increase profit, supermarket managers are also stocking a growing grab bag of nongrocery items from banjos to philodendron plants, and making room in their stores for wine shops, sports-clothes boutiques and even pharmacies. But some food-chain managers fear that if the fierce price-cutting clash continues much longer, the entire industry is headed for a bumpy shake-out period of failures and mergers. Others take a less apocalyptic view, believing that the discount craze will run its course and the old merchandising cycle will start all over. Says Eugene Walsh, president of Ralphs Grocery chain in Los Angeles: "People will probably start playing games again.

Then stores will go back to stamps." Until that happens, American shoppers --who spend an annual average $2,080 per family in supermarkets--can take some solace in the fact that the great discounting war has prevented prices from rising even higher.

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