Following A&P's Q2 loss of US$144.7m, the company is turning to budget-conscious shoppers to boost flagging sales. Its new Food Basics 'mini-supermarkets' take their concept from the increasingly popular dollar stores. However, Food Basics will only pose competition for the likes of Wal-Mart if A&P can maintain low prices and consistent product availability.

The Great Atlantic & Pacific Tea Company (A&P) has expanded its Food Basics chain in North Jersey to three stores. Next month, the company will open two additional no-frills supermarkets in Glen Rock and Wallington, New Jersey.
 
A&P says that economic slowdown and steep competition are the primary factors driving its decision to pursue the discount channel. The US economy has encountered drastic slowdown since 2001, when real GDP growth reduced tenfold to 0.3%. So far, it has shown little improvement.
 
Equally, according to an IRI survey, 26% of consumers say they are spending less after the September 11 tragedy. When shoppers do spend, they are increasingly hunting for bargains. Trips per household to Wal-Mart in the first half of 2002 grew by 5.3%, but declined by 4.4% to food stores and by 3.8% to drug stores, according to the same survey.
 
This preference towards budget goods clearly offers opportunities for mass discounters and dollar stores. DSN Retailing Today estimates dollar store sales at $11.9bn in 2001, up a whopping 16.5% from the year before.
 
Dollar stores, thus far, have been able to differentiate themselves and effectively compete with larger discounters such as Wal-Mart and Kmart through pursuing several strategies - picking viral marketing over expensive advertising; building small stores allowing faster shopping times; choosing urban locations, allowing access by public transportation; and selecting non-mainstream product varieties.
 
To compete with Wal-Mart and dollar stores, A&P must focus on ensuring highly efficient supply chain processes. It needs to learn from Kmart's experience and maintain adequate inventory levels of popular items, especially during promotional seasons; this will also allow A&P to cut costs and prices.
 
With more than a third of US households earning less than $30,000, traditional grocers certainly need to cater more seriously to the needs of budget-conscious shoppers.

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