PHOENIX -- The recently announced merger plans for Smitty's Supermarkets here and Smith's Food & Drug Centers, Salt Lake City, underline the competitiveness of the Phoenix market, according to observers.
The need for consolidation in Phoenix -- which has always been considered one of the country's most competitive markets -- proved to be a key to the decision by Yucaipa Cos., Smitty's Los Angeles-based parent, to merge the stores with Smith's, observers said. "Yucaipa realized that population [in Phoenix] is growing but not fast enough to support 17 new stores last year and 20 to 22 planned for this year," one industry source told SN. "They realize consolidation is inevitable, and when Jeff Smith [Smith's chairman and chief executive officer] raised the issue of combining Smith's and Smitty's operations, it made sense." As reported, the merger, valued at $240 million to $250 million including Smitty's debt, will mean that Smith's will take over the 28 Smitty's units in Phoenix and Tucson. The parent company of Smitty's, Yucaipa Cos., will own 14% of Smith's stock upon completion of the deal.
Smith's entered the market here in late 1989, simultaneously with the local entry of Albertson's, Boise, Idaho. Since then nine operators have been fighting for market share, building new stores as fast as they could and running up the total square footage. The market leader here is Fry's Food Stores, a 38-store division of Kroger Co., Cincinnati, with a 20% share, followed by Smitty's, whose 25 local stores account for 15%; Abco Foods, with 14%; Safeway, with 9.7%, and Smith's, with 9.3%. Ironically, the merger announcement closely followed an aggressive program by Smitty's to build up its image. Late last year Smitty's launched the largest advertising campaign in its history -- built around the slogan, "Bigger, Better and Brighter" -- accompanied by a new red, white and blue corporate logo and new employee uniforms. As part of the store remodeling effort, food was boosted to 50% of floor space, with nonfood getting the other 50%, compared with a 30% to 70% split in the past. The new marketing effort resulted in an immediate sales increase of 5% to 7%, David Green, president and chief executive officer of Smitty's, told SN late last year. "And we expect to grow on that as people come back into our stores and as we focus more on consumer needs in our marketing," he added. The sense of calm at Smitty's about the future proved short-lived following news of the deal. The Smitty's banner is expected to give way to other banners following the merger.