CHICAGO -- Two words can sum up supermarket retailing here -- Dominick's and Jewel.
A closer look reveals Chicagoland as a proving ground for independents desperate for growth, if not survival. And the arena is one where membership clubs have been the major alternate channel threat, not Wal-Mart Supercenters.
Beyond being the "hog butcher for the world," Chicago is a big food-consumption town. Ranked in the top three of the top 50 metro-market areas in the nation for food sales, between $8.5 billion to $14 billion was generated in total grocery sales here last year, according to various media and research sources.
What makes Chicago attractive to any retailer is the density of its upper-income population -- more than 8 million people making up 2.9 million households, with over half of those households averaging $50,000 a year.
The market's density -- in Cook, DeKalb, DuPage, Grundy, Kane, Kendall, Lake, McHenry and Will counties -- also extends to the number of stores fighting for market share here. There are approximately 681 supermarkets in the area that account for roughly 81% of food sales.
Within this dense urban center, surrounded by several suburban areas of varied demographics, two of the nation's biggest players -- Albertson's Jewel and Safeway's Dominick's -- are firmly entrenched, each maintaining a very strong share of food sales. No other significant rival has emerged on the scene to disturb the dominance of the two heavyweights, both of which declined comment to SN.
What's more, Albertson's and Safeway's acquisition of the hometown favorites has not affected either one's market share, even though both of their parent companies have introduced new strategies.
Despite this stranglehold on food sales by the big two, Chicago's a big market and various other retailers believe there is room for growth. The alternative formats, such as Costco and Wal-Mart's Sam's, Meijer and some smaller independents, have begun to make inroads to challenge the role of the large traditional supermarket chains.
A Bull and Bear Fight
Jewel Food Stores, based in Melrose Park, Ill., a division of Albertson's, Boise, Idaho, and Dominick's Finer Foods, Northlake, Ill., a division of Safeway, Pleasanton, Calif., have been holding steady as the one and two players, respectively, well before Safeway's acquisition of Dominick's in 1998, and Albertson's merger with American Stores Co., in which it acquired Jewel, the following year.
Jewel, with 161 stores, is currently ahead in Chicago with 38% of food retail sales. It operates as a combination format with Osco Drug, another Albertson's holding, which has helped the banner remain dominant in the market. Dominick's trails with a 28% share and 119 units.
While competition between the two is tight, neither is playing any price games against the other. SN recently researched prices at Jewel and Dominick's, and found that prices in stores in the same neighborhoods matched nearly to the penny on a wide variety of items. However, SN found that Dominick's lowered its prices where it competes directly with price-impact formats like Cub Foods.
Overall, analysts don't see either chain making any great strides to gobble up any of the other's share of market.
Sid Doolittle, principal analyst, McMillan & Doolittle, Chicago, said, "Both Dominick's and Jewel seem happy with their respective market shares.
The two chains almost operate their stores on a maintenance level [in terms of market share]. They will close stores only to open a new one very close by, and then hang on to the property to keep the other guy out. But on the whole, I think they accept each other for who they are." The two chains have implemented marketing programs remain competitive with other operators, if not each other.
According to Bill Bishop, president, Willard Bishop Consulting, Barrington, Ill., Dominick's has undergone "dramatic" changes since Safeway took over, and those changes probably gave Jewel some initial advantage because Dominick's shoppers had to adjust to the new programs. One of the biggest changes was the beefing up of its customer service, said Bishop. "Customer service traditionally in Chicago has been pretty average. So to really have done a good job in this area is a major point of differentiation for Safeway," said Bishop.
Dominick's also has completed its implementation of the Safeway private label, and continues to expand its fresh-store model, which has been stepped up in areas where Trader Joe's and Wild Oats have come in to compete with the stores. Doolittle said this move is to ensure that natural-foods formats do not take away from Dominick's market share; it is not necessarily a move to compete with Jewel.
Jewel has created an extensive "Good For You" merchandising program throughout the store, drawing attention to healthier items in all of its departments. In almost every section of the store, from pharmacy to produce, special shelving highlights foods that are low in sodium or fat, are organically produced, or offer other health benefits.
To lift sales and its share of market, Jewel also offers discounted gasoline at several of its locations, part of Albertson's national rollout of supermarkets with fuel centers. In a market with some of the highest fuel prices in the nation, Jewel's marketing of gasoline at a few cents cheaper than average could pay off if prices continue to rise through the summer.
The two chains' extensive use of loyalty programs has further solidified their tight hold on the market, making it especially difficult for other players to break into, analysts said.
The two chains do not differ on price, but they have taken to offering large savings through use of loyalty cards. Jewel offers savings to its customers through its Preferred Customer card, and Dominick's loyalty program is offered through its Fresh Values card.
"It's quite amazing how many items you can save money on using the cards," Doolittle told SN.
"Many customers have both cards, read the circulars carefully, and will shop either store to get the best deals. It is a very disciplined market, and the customers are loyal to Jewel and Dominick's over other chains. It's hard for anyone to make a foothold here," added Doolittle.
Bishop said the competition comes down to which chain most effectively uses its loyalty data to the best advantage. "Jewel uses it in detail more effectively, and Dominick's uses it programatically, tied into United Airlines. They're smart, too," he observed.
To cater to the diverse Chicago area, both chains have expanded their ethnic food offerings, especially for Hispanics. Visits to both operations revealed an increased amount of shelf space dedicated to the ethnic market than in past years.
Smaller Supers
The only chain controlling any substantial share of the market apart from Jewel and Dominick's is Cub Foods, run by Supervalu, Minneapolis. With roughly 25 stores in Chicago, the stores are pulling in 6.3% of food sales.
Supervalu initially announced plans to saturate the Chicago market with Cub stores, which are price-impact units without all of the added services found at Jewel or Dominick's. But reports say that Supervalu has pulled back on its aggressive rollout of stores, as the company found shoppers were remaining loyal to the big two.
Gary Giblen, senior vice president and director of research for CL King Associates, New York, said, "The Cubs in Chicago have been disappointing. Logically, they should succeed in Chicago because it's a two-horse town, so you would think there was room for a third competitor with a differentiated format, especially with Dominick's closing the Omni [a hypermarket format)]. So I would guess the problem is execution.
"Safeway made changes at Dominick's that are the right changes, but that caused some customer defections, and Albertson's has not done much with Jewel, so there's room for a third competitor. But Cub has done poorly so far, which is surprising, since the chain initially brought in Bill Bolton, who came from Jewel, to run the Cubs. So there must be real execution challenges there."
Cornering the specialty and natural foods market, Whole Foods, Austin, operates eight stores in the area. Mostly found in higher-income areas, the stores offer a variety of prepared foods and gourmet wines, in addition to natural and specialty dry goods.
Posting a 1.2% market share, the chain will face increased competition with Dominick's stepping up its fresh format and Wild Oats entering the city. At present, the Boulder, Colo.-based natural and organic foods supermarket operates two stores in the outer suburbs and has a 0.2% share of the market.
Catering to the inner-city market and based here, Treasure Island operates six units in or close to the city center. The small independent, supplied by Certified Grocers Midwest, La Grange, Ill., holds a 0.6% share, even with such a small store base.
Marketing to Chicago's Hispanics, LaChiquita, based here, operates four supermarkets.
Competing for the remainder of the market are hundreds of small independent stores supplied primarily by Certified Grocers and Central Grocers Cooperative, Franklin Park, Ill. Combined, the two wholesalers supply more than 200 stores that account for 15.6% of the market.
But on the whole it has been difficult for independents, with Jewel and Dominick's achieving near-total saturation throughout the market.
Eagle Food Centers, Milan, Ill., which still operates 21 stores in the Chicago area, has in recent years put a lot of energy into improving its position in Chicago. However, despite costly efforts, the chain has only a 2.5% market share.
Analysts told SN they look at Eagle as a microcosm of the difficulties independents and smaller players have experienced in attempting to penetrate the market.
Commented Doolittle, "I think the independents have given up in some regards. There is a real limitation in terms of expansion. Even Eagle Food Centers, which tried to grab some serious market share, went into bankruptcy for a time trying to do so."
Other minor players, like Aldi, Batavia, Ill., which operates 46 stores in the market, have also been unable to establish a strong Chicago presence. The limited assortment discount retailer has only a 1.9% market share.
However, Bishop points to opportunities he sees for some independents like Euro Grocer, which took over a 35,000-square-foot former Eagle store. Its emphasis is on perishables and providing an imported-product assortment that sells at competitively low prices. "There are a number of independents who have really re-defined what their stores are," Bishop said.
No matter how well an independent's operation may run, there are factors inhibiting expansion, Doolittle noted.
"A lot of real estate firms out here are afraid to lease to anyone besides Dominick's and Jewel. They are afraid the stores will get crushed," he told SN.
Also trying to take a bite out of the market-share pie is Chicago-based Shop N Save, which has been opening price-impact stores in the area on a steady basis over the past several months. According to industry sources, business is brisk at some stores where the only alternative is Dominick's or Jewel, and customers looking for a low-price store have been trying out the Shop N Saves in the area.
Other Formats
Chicago is a market where operators can at least be thankful they don't face a major challenge from Wal-Mart Supercenters. There are only three in the market, and they account for less than 1% of total food sales.
But Sam's Club, the wholesale club operated by Wal-Mart Stores, Bentonville, Ark., has been a serious competitive factor with 21 units.
But a two-player battle also is being played out among club stores, with Costco, Issaquah, Wash., emerging as Sam's Club's newest direct competitor. "Costco is growing quickly," said Bishop. "The amount of cross shopping that is going on between Costco, in particular, and the big guys [Jewel and Dominick's] is quite impressive."
Costco has six stores in Chicago and plans on opening more, according to John Gaherty, vice president of Midwest operations at Costco.
"We haven't set a number of total stores, but there are a number of sites we are eyeing. We're always looking for locations that will fully support our operation."
Although the market isn't oversaturated, Gaherty noted, it is hard to find good locations. "If you do the math, there are about 9 million people here, and we need roughly 250,000 members to fully support a store," he told SN.
Gaherty noted that Costco can compete against the likes of Dominick's and Jewel for food dollars because shoppers can take advantage of so many of the retailer's additional services during a single trip.
"You can get your tires changed, your prescription filled, buy Waterford crystal and a polo shirt, all while picking up a large part of your grocery needs as well," Gaherty said.
Gaherty also said that Costco has not altered its format to combat the supermarkets, but has kept to the tried-and-true Costco design found in all markets.
Analysts like Doolittle view Costco as creating some excitement in an otherwise dull retail environment.
"Costco is the biggest thing to hit here in five years," Doolittle told SN. "Sam's was not really tending to its stores, then Costco came in with new stores, offering tons of added services like gas and travel services, which lured a lot of Sam's Club customers. Sam's woke up and started reinvigorating its stores here. Now both are in lively competition with each other, stepping up their fresh produce and meat offerings."
Further varying the retail landscape is Meijer, Grand Rapids, Mich., which has opened three units in the market in recent years. The retailer says this proves there is room in the market for more Meijer openings.
"We're hopeful, that's why we are moving forward," Meijer spokesman John Zimmerman told SN. Zimmerman said that Meijer plans on opening a total of 20 stores in the Chicago area, but added that there's no exact time frame for the projected openings.
Two new stores are scheduled to open this summer in Elgin and Algonquin, two Chicago suburbs, Zimmerman said.
However, Zimmerman confirmed reports that Meijer has cancelled plans to build one store and postponed construction on two other locations. He declined to give further details.
Some sources said the problem lies with local resistance rather than any reluctance on Meijer's part for further expansion.
Zimmerman said this does not signify any slowing down on the part of Meijer.
"It has always been our goal to have 20 stores, and we can only build so many stores at a time," he said.
He noted that the competitive atmosphere has been strong.
"It has been difficult. We expected a tough fight and the market has not let us down, but we will continue to stay competitive. We have had a tough fight against pretty much everyone," he said.
Zimmerman added that the company is trimming its labor costs by 15% by eliminating some office jobs as part of its plan to remain competitive in all markets.
