Fresh Brands Inc., the Sheboygan-based owner of Piggly Wiggly and Dick’s Supermarket stores, is caught in the middle of a cutthroat grocery market game it may not survive.
Milwaukee-based Roundy’s Inc. has captured most of southeastern Wisconsin’s middle market with its Pick ‘n Save stores. Wal-Mart Supercenters are growing by seizing the low-cost end of the grocery market, and upscale grocers such as Sendik’s have found a healthy niche on the high end.
That leaves Fresh Brands struggling to find a place in the local grocery hierarchy.
Unless it finds a way to distinguish itself from its competitors soon, the company will be doomed to join others that have flourished and then faded from the southeastern Wisconsin’s grocery market – stores with names such as Kohl’s, Red Owl, Sentry, A&P and Kroger’s.
Fresh Brands suffered declining sales throughout 2004. The company has bounced back some this year, posting a thin first-quarter profit of $212,000, which was an improvement over a loss of $696,000 in the same period a year ago.
The company’s quarterly sales increased slightly to $197.7 million in the quarter from $196.4 million a year earlier.
Louis Stinebaugh, president and chief operating officer of Fresh Brands, is hoping the company has bottomed out and will rebound.
However, David Livingston, a Pewaukee-based grocery industry consultant, said he sees the increase in sales as a false hope for Fresh Brands.
"Because the profit amounts were small and insignificant, it looks like window dressing just to show a profit," Livingston said. "When you take into account inflation and population growth, Fresh Brands took a nice giant step backwards."
Fresh Brands closed five underperforming Piggly Wiggly corporate stores and one franchised store in 2004 in an effort to become more profitable.
"I expect several more store closings as Wal-Mart and Roundy’s continue with their rapid expansion," Livingston said. "Fresh Brands needs to look for an exit strategy, perhaps merging with a larger company who is interested in consolidating their wholesale operations into their own."
In a memo (see accompanying story) he wrote this year to a hedge fund manager who had sought information about Fresh Brands, Livingston said the only way that The Pig could survive in this cutthroat market is to sell its wholesale business.
Starting last year, Fresh Brands tried to boost Piggly Wiggly by slashing prices, while at the same time emphasizing the quality of meat and produce in the stores and the level of customer service that shoppers receive.
"We have lowered several thousand prices within our stores to become more competitive in our marketplace," Stinebaugh said. "We have had a very good consumer response, and we have achieved the goals that we set forth to increase sales and traffic count."
The changing market is driven by a consumer demand for quality meat and produce at low prices, and storeowners also are catering to shoppers who linger at the store. Piggly Wiggly is losing on all of those fronts, Livingston said.
Larger, upscale, well-lit grocery stores are quickly replacing the boring hassle of a traditional supermarket for some shoppers, while Wal-Mart Supercenters offer the consumers who are seeking cheap groceries a one-stop-shop with unbeatable prices.
"As Roundy’s and Wal-Mart opened larger and lower-priced stores nearby, Piggly Wiggly was not able to keep up," Livingston said. "Wal-Mart sometimes would relocate out of a shopping center shared with Piggly Wiggly, leaving them in a dead shopping center. Then (Wal-Mart would open) up a Supercenter, selling groceries 20 percent cheaper."
Fresh Brands’ hometown, Sheboygan, is a microcosm of the company’s dilemma.
Wal-Mart announced it will close its discount store in the Taylor Heights Shopping Center in Sheboygan and build a Supercenter on the south side of the city and another Supercenter just north of the city. Then, earlier this year, Fresh Brands closed its Piggly Wiggly grocery store at Taylor Heights.
Piggly Wiggly lost the battle after an onslaught of new Wal-Mart Supercenter and Roundy’s stores opened in Wisconsin, Livingston said. Fresh Brands did not have the wherewithal to keep up with larger, lower-priced competitors, he said.
Robert Mariano, chairman and chief executive officer of Roundy’s declined to comment for this report.
Wal-Mart currently operates 39 Supercenters, 36 discount stores, 11 Sam’s Clubs and two distribution centers in Wisconsin.
Wal-Mart’s newest store concept that was launched in 1998, a stand-lone grocery store called Neighborhood Market, could step up the company’s competition with Roundy’s and could be the death knell for Fresh Brands.
"Neighborhood Markets tend to go into areas that are perhaps a little bit more congested (where) the amount of space needed to build a Supercenter (is not available) and in the cases where Supercenters are so far apart that it makes sense to put a grocery store in between them," said Dan Fogleman, spokesman for Wal-Mart.
The Wal-Mart Neighborhood Market offers everything a Pick ‘n Save, Piggly Wiggly, Jewel Osco and the like can offer, including a pharmacy, health and beauty section, pet food section and a DVD section, Fogleman said.
It is unclear when the Neighborhood Market concept will be rolled out in the Wisconsin market, Fogleman said.
However, last October, Wal-Mart announced plans to open 40 to 45 new discount stores, 240 to 250 new Supercenters, 25 to 30 new Neighborhood Market units and 30 to 40 new Sam’s Clubs across the nation in the 2005 fiscal year.
The company said 160 of the new Supercenters and 20 of the new Sam’s Clubs will result in the closing or expanding of existing regular Wal-Mart discount stores.
Wal-Mart also plans to open three new general merchandise distribution centers and three food distribution centers in the next year.
Roundy’s continues to expand in Wisconsin and currently operates 100 corporate-owned Pick ‘n Save stores in the state, according to the company’s Web site, www.picknsave.com.
Mike Houser, chief executive officer of New Berlin-based Cascio Music Co. Inc., also known as Interstate Music, worked for Fresh Brands for 25 years. Houser was executive vice president, chief marketing officer and vice chairman of the board for Fresh Brands before retiring in 2004 and moving on to Cascio.
Houser declined to comment on the status or the strategy of Fresh Brands, but he did comment on the grocery industry as a whole.
"If I were Roundy’s and didn’t have a reputation for the lowest prices or best service, or something else, I would be concerned," Houser said. "Clearly, Wal-Mart has the low price covered, and perhaps Sendik’s has the (upscale) niche. In the long run, anyone in the middle has to be concerned."
Ted Balistreri, an owner of Sendik’s Food Market, could not be reached for comment in this report.
The supermarket industry is following in the footsteps of other retail industries by focusing on niche marketing, and companies need to set themselves apart from their competition, Houser said.
Date:
Spring 2005
To:
Hedge fund manager
From:
David Livingston, grocery industry consultant
Subject:
Explanation of the market position of Fresh Brands Inc. in Wisconsin
About half of Fresh Brands stores are in small, basically one-store communities. They serve those markets very well and have a good program for independents. There is really no threat of new competition moving into those one-store markets. Fresh Brands has done an excellent job in expanding and remodeling these small market stores.
Fresh Brands has added a few new retailers after the Fleming bankruptcy, however most of these stores tend to be lower volume units which the larger wholesalers do not mind losing.
Where Fresh Brands has failed is in the medium to larger communities which have both Roundy’s (Pick ‘n Save and Copps) along with Wal-Mart Supercenters. Before the Wal-Mart Supercenters opened, the Piggly Wigglys in those larger communities struggled, but were able to get by. Once Wal-Mart opened, sales at the Piggly Wigglys began to tumble.
Roundy’s is an excellent operator which has at least a 60% market share in Milwaukee and is still rapidly expanding. However, they are not in the same league as Wal-Mart. So when a Wal-Mart Supercenter opens near a Roundy’s store, Roundy’s will typically try to get some of the lost sales back by focusing on the smaller and weaker competitors, such as Fresh Brands. When a Wal-Mart Supercenter opens, Roundy’s can expect to lose about 20-25% of their sales. Then by turning their focus on Fresh Brands to replenish lost sales, they end up losing only about 10-15% after Piggly Wiggly closes. Trying to get lost sales back from Wal-Mart Supercenters is futile.
Both Wal-Mart and Roundy’s have plans for many more new stores in the state. As far as I know Fresh Brands only has plans for fewer stores.
What is really sad is Wal-Mart has plans for two new Supercenters in the small city of Sheboygan, the home base (of Fresh Brands). If they are forced to shut down their hometown stores, it will be a humiliating defeat.
What is the future for Fresh Brands? My guess is that Super Valu, Nash Finch or some other wholesaler might purchase the wholesale business and incorporate it into their existing Wisconsin operations. Roundy’s has been very adamant about only focusing on retail for the future, so they most likely would have no interest.
Wal-Mart has plans to open stores in Hartford near the Slinger Piggly Wiggly, Germantown -near the Hubertus Piggly Wiggly, Platteville near Dicks; Jefferson; Janesville; Zion, Ill.; Maquoketa, Iowa; and two in Sheboygan. The two Sheboygan Wal-Marts are a real slap in the face. Not only has the city betrayed Fresh Brands in their own hometown but the impact will be felt in several more surrounding Piggly Wiggly communities such as Kohler, Cedar Grove, Sheboygan Falls, Howards Grove and Ootsburg. This is both a financial and psychological blow to Fresh Brands.
Roundy’s has plans for new stores in Kenosha and South Milwaukee which will have a devastating affect on the nearby Piggly Wigglys. Also they are building new stores in Oconomowoc and Delafield which are near two of the state’s premier Piggly Wiggly stores. Roundy’s likes to open stores near the best performing units of the weakest competitors. Overall another 15 Piggly Wiggly (stores) could be facing the grim reaper soon.
Eventually I expect Wal-Mart to roll out more of their smaller Supercenter formats in Piggly Wiggly towns like Waupun, Monroe, Darlington, Lancaster, Merrill, Saukville and Waupaca. By that time Fresh Brands will have probably already been absorbed by
an acquirer.
Wal-Mart openings in Oshkosh, Racine, Appleton, Portage, Burlington, and West Bend, along with Pick ‘n Save opening in Hales Corners has led to several Piggly Wiggly store closings. Fresh Brands recently closed a store in Sheboygan on the anticipation that Wal-Mart was going to open.
It should also be noted that new stores opened by Fresh Brands have had disappointing results in Kenosha and Sheboygan.
Wal-Mart often has a double impact on Fresh Brands. First when Wal-Mart is already in an existing shopping center with Piggly Wiggly – they relocate leaving the shopping center empty. Then they open a Supercenter with groceries 20% cheaper. This one-two punch knocks them to the mat and then Roundy’s kicks them in the head when they are down. Supermarket retailing can be a brutal and cruel business.
Tough in the middle
"Just take a look at the department store business, as an example," Houser said. "Discounters like Wal-Mart, Target, etc. have carved out their successful position in the industry, while people like Gap, H&M, American Eagle and others cover the specialty end, while department stores like Sears, Penney’s, Federated and others in the middle suffer. I really think it is the same for food."
Responding to customer feedback and opening store locations in underserved communities go hand-in-hand with filling a market niche and offering something unique compared with the competition, said Lisa Malmarowski, director of brand and store development for Milwaukee-based Outpost Natural Foods Cooperative.
Outpost Natural Foods focuses its business on offering natural and organic foods to consumers and working as a cooperative within the community it serves. With 1,200 owners, two locations and one more to open soon in Milwaukee’s Bay View neighborhood, Outpost has flourished by listening to customers and owners and letting the product sales determine how popular different brands are in the store, Malmarowski said.
Outpost sees any company that sells food, whether it is a grocery store or a restaurant, as competition, Malmarowski said.
To further complicate Fresh Brands’ attempts to hold onto the middle ground, Austin, Texas-based Whole Foods Market Inc. will enter the Milwaukee market in 2006 with a 54,000-square-foot grocery store, filling space in the first level of the Columbia St. Mary’s Hospital expansion on the corner of Prospect Avenue and North Avenue.
In the natural food niche, Whole Foods will be competing with Outpost. However, Outpost is not worried, Malmarowski said.
"It is an exciting time to be in business, and I think competition is a good thing," Malmarowski said. "It is the ‘rising tide floats all boats’ kind of thing that keeps everyone on their toes."
Whole Foods strives to deliver the highest quality and balances its higher prices, compared with some grocers, with its own brands called 365 Everyday Value and 365 Organic Everyday Value, which boast lower prices, said Scott Curcio, associate director of marketing for Whole Foods Market’s Midwest region.
"What you will find is that when you come into a Whole Foods Market, you are going to experience something like never before – lush produce, sparkling seafood, much better lighting," Curcio said. "We believe shopping for food should be fun."
Outpost has much more modest goals than its competitors.
"We don’t have any plans like some publicly traded companies will say they want to open 180 new stores in the next six years," Malmarowski said. "Our plan is to listen to the community and to what the owners want and to help other communities start their food co-op."
The southeastern Wisconsin grocery market is constantly evolving and changing.
The closing of Kohl’s Food Stores created a gap in the middle market that Roundy’s quickly took advantage of in the last decade, Houser said. Roundy’s opened new Pick ‘n Save locations and shied away from the low-price sector to take over the middle market with locations such as the downtown Metro Market, he said.
"They have had the luxury of driving everyone else in the middle out of the market and been able to move their prices up to the consumers," Houser said. "Without someone like Kohl’s, who at one time had a 48 percent share in Milwaukee, or another large, well-funded grocer, they can, within reason, do what they want. The Milwaukee consumer has not really won, from a pricing standpoint, as in many neighborhoods, there is only one choice, Pick ‘n Save. This is never good for the customer. Not enough competition, prices go up."
Stinebaugh’s plan
Fresh Brands is choosing to focus on both the low-price sector and the middle sector of the market, Stinebaugh said.
"We have seen positive trends this year. We have seen a lot of things move into the direction we were looking toward, and we continue to evolve," Stinebaugh said. "Big-box stores and value-oriented consumers have changed the landscape of retail. Everyone now has to be mindful of that.
"I think what we accomplished was certainly offering a better value to the consumer and at the same time put excitement back into the stores, back into the merchandise and back into the communication," Stinebaugh said. "The big message that we want to get out is lower prices, but with an emphasis on quality and service. That is what Piggly Wiggly stands for, and it has been that way for the last 50 years."
In the meantime, Wal-Mart and Roundy’s continue to plan new bright and shiny store openings near existing Piggly Wiggly locations, Livingston said.
"This one-two punch knocks (Piggly Wiggly) to the mat, and then Roundy’s kicks them in the head when they are down," Livingston said. "Supermarket retailing can be a brutal and cruel business."
Company
Grocery Store Chain
Wisconsin Locations
Roundy’s, Inc.
Pick ‘n Save stores
100
Fresh Brands, Inc.
Piggly Wiggly stores
83
Dick’s Supermarkets
7
Wal-Mart Stores Inc.
Wal-Mart Supercenters
39
Sam’s Club stores
11
El Rey Mexican Products Inc.
El Rey Markets
5
Sendik’s
Sendik’s
9*
Supervalu Inc.
Save-A-Lot stores
5
Cub Foods stores
7
Sentry Foods
Stores are independently owned
39
Albertson’s Inc.
Jewel Osco stores
16
Outpost Natural Foods Cooperative
Outpost Natural Foods
3**
Whole Foods Market Inc.
Whole Foods Market
Will open 2006
* A ninth Sendik’s store will open in the fall.
** Outpost will open a third store later this summer.
July 22, 2005, Small Business Times, Milwaukee, WI
