Can This Small Supermarket Operator Survive Against Bigger Competitors?

Size isn't everything. This small grocer boasts superior operating margins relative to its larger competitors--but how did Roundy's manage this feat?

May 23, 2014 at 9:46AM

Source: Roundy's

As Wal-Mart (NYSE:WMT) opened more supercenters nationwide, small supermarket operators like Roundy's (NYSE:RNDY) have been unavoidably affected. Roundy's only managed a three-year revenue CAGR of 1.6%, as Wal-Mart gained market share in its key markets--Wisconsin and Minnesota.

However, Roundy's management expects "the growth of competitors' market share in core areas to slow in 2014, as the market becomes more fully penetrated." Notwithstanding this positive development, Roundy's isn't necessarily disadvantaged vis-à-vis its competitors because of its smaller absolute size. Let's compare Roundy's with peers such as Kroger (NYSE:KR) and Wal-Mart, to draw further insights into the competitive grocery landscape.

Relative scale versus absolute scale
In the supermarket industry, profitability is very much correlated with local market share. According to its internal estimates, Roundy's local market share in its primary area of operations, Wisconsin, is approximately 35%, much higher than market shares of 26% and 24% for Kroger and Wal-Mart respectively. As a further illustration, Roundy's 42% market share in its largest market, Milwaukee, is three times that of Wal-Mart. The results speak for themselves--although Roundy's revenues are a mere 4% of Kroger's top line, its trailing twelve months EBITDAR margins of 7.1% beat Kroger's 6.6%.

Having dominated the local markets it operates in, Roundy's derives significant economies of scale and resulting cost savings in areas such as advertising & promotion and distribution. A single television or newspaper advertisement reaches out to the same number of potential customers in a local region, so Roundy's has a cost advantage over its peers. For the same dollar of advertising spent, Roundy's can reach out to a wider spectrum of its larger customer base.

With respect to logistics, Roundy's derives significant distribution efficiencies given its high density of stores in its key markets. Roundy's primary Oconomowoc Distribution Center, a 1.1 million square foot facility, serves all of its stores in Southeastern Wisconsin, including Milwaukee, Madison and Chicago.

There are some instances where absolute size matters, and one is purchasing power. Kroger obviously has stronger bargaining power with its suppliers than Roundy's, as it generates 25 times the sales of Roundy's. Kroger also has a sufficiently large revenue base to support its back office operations and data analytics efforts for its loyalty card program.The success of drawing insights from a loyalty membership program depends heavily on the law of large numbers--data analysis only works well if you have a sufficiently large sample size. Kroger has an edge over its other competitors here, with its loyalty cards used in over 90% of transactions and carried by about 50% of U.S. households.

Leveraging on the insights from its loyalty card membership program, Kroger has tailored its product assortment to the needs of its customers. One example was its natural and organic food brand Simple Truth, introduced in 2012, which uses clear and visible labelling in response to customer feedback. Kroger's customers have responded positively, with it achieving positive same-store sales growth for 41 straight quarters running.

Relative scale is more important than absolute scale in most cases when it comes to retail, as seen in the performance metrics of Roundy's.

Source: Roundy's

Tweaking store format strategies
Besides relying on its core banners 'Pick 'n Save', 'Copps Food Center' and Metro Market' in the Wisconsin and Milwaukee markets, Roundy's is also expanding its presence in Chicago with its specialty food retail banner, Mariano's.

Unlike its core retail banners, Mariano's is uniquely positioned as a differentiated food shopping destination, with an expanded variety of premium perishable and prepared, organic & natural food offerings. Examples include dedicated sandwich stations and other unique offerings such as wood stone fired pizzas and premium fine cut meats,

The numbers validate the business model of Mariano's. Mariano's store-level Return on Invested Capital (ROIC) of between 35% and 40% are on par with that of other organic food retailers, despite its initial investment outlay per store of $5.3-$5.4 million being lower than the $6.9 million average capital outlay for five other organic food retailers studied.

Going forward, Roundy's has plans in place to more than double its Mariano's store count from 22 to 45-50 in the future. With the former second largest player, Dominick's exiting the Chicago market, there remains opportunities for Mariano's to grab more market share in U.S.' third-largest metropolitan market.

Roundy's isn't the only one exploring different store formats and concepts to grow in a challenging retail environment. The world's largest retailer, Wal-Mart, has drawn inspiration from the recent success of dollar stores, which is why it announced in February that it will be opening 270-300 small stores in the new year.

As more consumers choose to shop at the most convenient locations available, Wal-Mart has decided to expand its small store footprint to capture the share of customers doing quick fill-ins. Initial results have been positive, with Wal-Mart's Neighborhood Market stores increasing their fiscal 2014 comparable sales by 4%.

While Roundy's and Wal-Mart have made their tweaks to their store format roll-out strategy, the underlying principle of meeting customer needs is uncannily similar.

Foolish final thoughts
Bigger doesn't necessarily mean better. Roundy's is large in the markets it operates in and has capitalized on its relative scale in its dominant markets to generate higher margins than its larger peers. In addition, Roundy's is expanding its specialty food retail banner, Mariano's to capitalize on the increased consumer emphasis on premium and healthy food choices, particularly in Chicago.

Will this stock be your next multi-bagger?
Small stocks have better chances of being multi-baggers because of the base effect. One example is Roundy's, a Mid-West supermarket operator with the largest market share in its core markets. Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks 1 stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252% and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

Mark Lin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers