Major Supermarket Chains in Food Fight

FRANK GREEN / San Diego Union-Tribune 18may03

Hungry for sales:
Everyone is selling groceries these days, giving supermarkets competitive indigestion

Major supermarket chains are in a food fight with a growing number of adversaries that includes club warehouses, convenience outlets – even drugstores.

At the Longs drugstore in Grossmont Center, for instance, fully one-third of the floor space is now given up to food products.

They include bins of apples, onions and other produce, shelves stocked with canned coffee, spaghetti sauce and tuna, and refrigerated cases packed with milk, eggs and yogurt.

"I haven't been to a supermarket in probably a month No reason to go," said one elderly customer as she examined a grapefruit at the drugstore's fruit and vegetable stand.

It seems everybody is picking away these days at the market share of such traditional grocers as Albertsons, Kroger (which operates Ralphs and Food 4 Less) and Safeway (owner of Von's). Competitors range from gas station mini-marts to membership warehouse clubs such as Costco and superstores operated by Wal-Mart and Target.

The increasing fragmentation in the $500 billion U.S. food industry can be seen in sales figures compiled in recent months by the Food Institute, a trade group that tracks grocery-related information from its offices in Elmwood Park, N.J.

In March, sales at traditional supermarkets dropped 1.2 percent compared with the same period in 2002. The decline was part of an ominous trend that has seen total sales decrease by about 3 percent in the last year.

The protagonists in this battle for the heart and stomachs of consumers are the numerous alternative shopping sources, says Brian Todd, a Food Institute spokesman.

"Just 10 years ago, for example, warehouse clubs and supercenters accounted for only 2 percent of all U.S. retail trade, but now account for 5.4 percent," Todd says.

In San Diego County, the traditional grocery industry remains relatively stable, with Vons, Ralphs and Albertsons controlling 73.3 percent of the market, though that is down 2 percent from 1997, according to a study conducted by Directions in Research for The San Diego Union-Tribune.

All that may change in the next several years with the opening of 40 Wal-Mart Supercenters in California. As many as five will be in San Diego County.

In addition to the Supercenters, Wal-Mart likely will introduce its Neighborhood Market format, which incorporates groceries and general merchandise in outlets covering just 39,000 square feet.

Wal-Mart says that its Neighborhood Markets supplement "a strong distribution network and provide added convenience."

Retail Watch, a trade journal published by McMillan-Doolittle, warned this month that the markets "spell very bad news for the rest of the supermarket industry. We believe this is a format that can be an extremely effective competitor against current supermarket competition and creates a lethal companion to the Supercenter."

Analysts also expect Target to begin opening SuperTarget warehouses in the state in coming years. Brie Heath, a Target spokeswoman, said the Minneapolis-based company has "no immediate plans" to introduce the stores here.

The more than 100 SuperTargets that already have debuted in 19 states offer a wide mix of upscale groceries and general merchandise over an average of 174,000 square feet of space per outlet.

Most of the stores include Starbucks shops, banks, bakeries, delis, one-hour photo centers, portrait studios, optical centers and pharmacies.

Wal-Mart's hybrid stores cover 230,000 square feet and feature food items at up to 10 percent off the price of traditional supermarkets, industry observers estimate.

Analysts say Wal-Mart and Target can afford to heavily discount groceries because the price breaks boost customer traffic and spur sales of higher-margin apparel, appliances and tires in other areas of the warehouse.

The incursion of the corporate behemoths into the county's highly competitive grocery industry "will only speed up the shift away from traditional supermarkets," says George Whalin, president of Retail Management Consultants in San Marcos. "There already are a lot of folks out there selling some category of food."

It isn't that the Ralphs of the world aren't implementing novel retail strategies in an attempt to keep customers loyal and even grow market share.

Most chain supermarkets offer nearly as many non-food products and services as tomatoes and pasta.

"My wife and I were in a Vons the other night and they were selling patio furniture," Whalin says.

At the Albertsons off Fletcher Parkway in La Mesa, shoppers not only can make their weekly food purchases, but also do their banking at an in-store Downey Savings, rent DVDs, turn in film at the one-hour photo center and get roses at the full-service florist.

The store also operates a catering service and a deli section that specializes in take-home meals, reflecting the fact that about 45 percent of all food dollars are spent on meals prepared out of the home.

"We strive to be the neighborhood store, not the cookie-cutter warehouse format," says Stacia Levenfeld, an Albertsons spokeswoman . "Our stores reflect the trend in consumer retailing for one-stop shopping."

Levenfeld downplays the withering effect analysts predict that supercenters will exert on the regional marketplace. "Competition is competition," she says. "We operate in a very different niche" than Wal-Mart.

Vons spokesman Brian Dowling emphasized that the chain has some of the best supermarket locations in the county.

"We differentiate ourselves with high-quality perishables like meat, produce, from-scratch delis, bakeries ... ," Dowling said. "We're going to focus on our strengths."

Vons is the most dominant grocer in the county, with 57 stores and 30.9 percent of the market, according to the Union-Tribune study.

That's way ahead of Albertsons (47 stores; 21.7 percent share) and Ralphs/Food 4 Less (41 stores; 20.7 percent share).

But those stores are increasingly being challenged by such warehouse clubs as Costco (11 stores, 5.5 percent share) and Wal-Mart's Sam's Club (two stores, no market share available). There are 10 Stater Bros. stores in North County (3.4 percent share) and growing competition from specialty grocers that include Henry's (17 stores, 4.3 percent share) and Trader Joe's (eight stores, 1.8 percent share).

And looming on the horizon is Wal-Mart, which has become the top grocer in the United States with 1,200 Supercenters and sales of $95 billion last year, according to Supermarket News, a trade publications.

Certainly, Wal-Mart has been beating up for months on Albertsons, Kroger and other traditional grocery chains throughout the United States.

Indeed, Albertsons recently said fourth-quarter earnings dropped by 29 percent as it closed stores and cut prices to compete with discount retailers. The company's shares dipped from $35 a year ago to the $20 range last week.

Meanwhile, Kroger said in March that fourth-quarter earnings rose 8.7 percent, even though same-store sales declined by 1 percent. Kroger's shares have also plunged in the past year, from about $25 to the $15 range.

Earlier this month, Safeway announced that it had a first quarter profit of $162.6 million, spiking shares by 7.6 percent on investor optimism that sluggish sales at the chain might be picking up.

Shares of Safeway were trading in the $20 range last week, down from about $40 during the same period last year.

Not all retail analysts believe that Wal-Mart is the 900-pound gorilla in the U.S. grocery business.

A report on the food industry, issued May 9 by Merrill Lynch, concludes that major supermarket chains are beginning to adjust and co-exist with their larger big-box rivals. The ultimate victims of the conflict will be small regional stores, the report says.

"Wal-Mart continues to derive most of its dollar gains in smaller town America, away from where most big supermarket chains are concentrated," the report states. "While Wal-Mart gains sizable dollars in big cities too, other retailers like Kroger, Safeway and Albertsons individually and collectively are in the same league in 2004."

Analysts also note that Wal-Mart could encounter difficulty moving into the area market because most of the area's grocery employees are union members. There also has been resistance in some communities to Wal-Mart Supercenters and SuperTargets.

On May 9, the Contra Costa Planning Commission approved a measure that will prohibit the operation of stores in excess of 90,000 square feet from having more than five percent of sales space devoted to groceries.

Similar restrictions have also been approved in Martinez and Oakland in recent months.

(Wal-Mart spearheaded a successful petition drive in Calexico that led to the passage last year of a referendum that allows construction of stores larger than 150,000 square feet.)

Analysts also say Wal-Mart and Target will be entering a unique retail market. San Diego County, they say, is populated by fickle consumers who are hypersensitive to prices, store locations and selection.

Many people are so-called cross-shoppers who patronize one store for most of their grocery needs, then stray elsewhere.

More than 39 percent of Ralphs primary shoppers, for example, also patronize Vons, while 37 percent of Vons primary shoppers regularly stop by Albertsons, the Union-Tribune study reveals.

The top reasons for the split loyalties were convenient location (42.7 percent), lower prices (16.8 percent) and wider selection (10.7 percent).

Respondents to the study, which polled 1,007 shoppers, said they thought Ralphs and Vons had the highest supermarket prices in the county. Food 4 Less and Stater Brothers were named as the low-price leaders.

Traditional grocery stores

These stores are facing competition from warehouses, gas stations and even drug stores, all of which now carry some food selections. Ralphs, Vons and Albertsons are the largest grocery chains in San Diego County. These are industry estimates:

Number of stores locally: 150

Total national revenues of 3 top local chains (in billions): $120

Percent of local food market: 73

Percent of sales that are food: 90

* Types of services offered at most locations: deli, bakery, floral, cosmetics. Some stores now have restaurant partnerships and banks.

Superstores

These stores, run by companies like Wal-Mart and Target, offer groceries, general merchandise and a wide variety of other services. Analysts predict up to 5 of these stores will open in San Diego within the next few years. These are industry estimates: Number of stores nationally: 1,350

Revenues (in billions): $100

Percent of national food market share: 6

Percent of sales that are food: 30

* Types of services offered at most locations: grocery, deli, bakery, bank, one-hour photo, pharmacy, clothing, jewelry, electronics, restaurant partnerships

Discount warehouses

These stores sell all their merchandise in bulk and require customers to buy membership cards to shop. Sam's Club and Costco both have locations in San Diego County.

These are industry estimates: Number of stores locally; nationally: 13; 1,000

Revenue nationally (in billions): $75.5

Percent of national food market share: 11

Percent of sales that are food: 60

* Types of services offered at most locations: food, bakery, floral, tire service, optical center, electronics, clothing, jewelry, cosmetics, home appliances, pharmacy

Where we shop

U.S. grocery store sales total $682.3 billion a year, according to the U.S. Department of Commerce. These are the 10 biggest players in the food business, as ranked by Supermarketnews.com:

1. Wal-Mart Supercenters

2. Kroger

3. Costco

4. Albertsons

5. Safeway

6. Sam's Club

7. Ahold USA

8. Supervalu

9. Publix Super Markets

10. Fleming

source: http://www.signonsandiego.com/news/business/20030518-9999_mz1b18hungry.html 19may03