COMPTON, Calif. -- After nine months of working out the details, Ralphs Grocery Co. here and Food 4 Less Supermarkets finally completed their merger last week, a move that will have a major effect on the dynamics of the southern California marketplace.
The combination, which formed a new entity called Ralphs, has the potential to stabilize pricing in southern California, observers said. In particular, the new Ralphs debt load will probably prohibit the chain from fueling a pricing war for now, they explained. Moreover, the merger will also erase some lesser banners from the market, leaving the stronger players to face off in a more stratified field, observers added.
"After talking about it for almost a year, the local industry is ready for this merger to take place," one Ralphs competitor told SN. "Now let's see what happens." The merger will involve the conversion of various stores to either the conventional Ralphs format or the Food 4 Less warehouse format over the next few months, ultimately creating a chain with 258 Ralphs units and 79 Food 4 Less stores. Those conversions will result in the elimination of the Alpha Beta, Boys Markets and Viva names from the marketplace. Ralphs also plans to lower prices at a few units to bring them in line with the rest of the operation, a move that doesn't mean widespread price lowerings are forthcoming, analysts said. The company said it will lower prices by 5% to 10% at approximately 30 inner-city stores as
they are converted to the Ralphs banner. Most of them are former Boys Markets, which observers said have been among the highest-priced stores in the area. Jonathan Ziegler, a securities analyst with Salomon Bros., New York, said lower prices at those units "may be a way of getting people back into certain stores, though it's certainly not an indication of any overall change in Ralphs pricing marketwide."
He said the long-term result of the merger should be a stronger, more competitive marketplace. "Instead of a relatively weak chain like Alpha Beta competing against a stronger franchise like Ralphs, the merger removes the weaker company and folds it into the stronger one," he explained. "That leaves you with a more competitive marketplace, where Ralphs and Vons compete for middle-income shoppers, Food 4 Less warehouse stores go after price-sensitive shoppers, Pavilion goes after the upscale shopper and Lucky falls in between with a low-price operation for the price-sensitive customer who wants full service." Ziegler also said he believes synergies in advertising, supervision, buying and distribution will enable the new Ralphs to reduce its costs, "and private-label merchandising of Ralphs products will be more effective." Ziegler said he doesn't regard the company's heavy leverage -- approximately $2 billion -- as a negative, "because this is a good, heavy cash business, and the high debt levels will keep the market priced sanely." Another analyst, who asked not to be named, stressed that debt service is likely to force the company to keep a rein on pricing. "Rather than seeking to increase promotional levels right away, the new Ralphs will be more inclined to apply cost savings to paying down debt instead of challenging Vons and Lucky to another round of cutthroat competition," he said. He also said he doubts that debt will be much of a problem, given the level of savings -- which the company estimates at $90 million a year -- that Ralphs expects to achieve through synergies. Ed Comeau, an analyst with Lehman Bros., New York, said the merger will enable the marketplace to undergo a desirable consolidation. "Southern California is a market that has tolerated too much capacity for a long time when the economy was good and population was growing. But with both the economy and population growth slowed, it's a good time for excess capacity to come out of the market, especially marginal competitors like Alpha Beta. "Overall, the merger should be healthy for the area, though most competitors would prefer to compete with a weaker franchise like Alpha Beta than with a Ralphs," Comeau said.