California Dreaming

ELLIOT ZWIEBACH

Albertsons is the X factor in Southern California.

While Ralphs and Vons continue to slug it out in a seesaw battle for market-share leadership, Albertsons is struggling for a more secure foothold and Stater Bros. Markets is trying to chip away at all three from its stronghold on the fringe of the metropolitan area.

What could shake up the market is whether Minneapolis-based Supervalu decides to invest a lot of capital in the Southern California Albertsons store base or opts to sell it in a bid to reduce debt and improve earnings.

With approximately 160 stores in the Southern California region (and another 60 in other parts of the state), Albertsons' greatest strength is its mass, one industry observer noted. The condition of the stores, however, may be its greatest weakness.

“Many of them are older and in desperate need of a lot of capital investment, and it isn't clear if the executives at Supervalu will be willing to make that investment,” the observer, who asked not to be identified, told SN.

Supervalu had expressed a commitment before the economy weakened to invest in the region, and the company's new top management has not indicated what it plans to do.

If Supervalu invests the money needed to make the Southern California stores more competitive, then Albertsons could become a stronger market factor, observers said; if Supervalu decides not to make the investment — or to delay it — the stores are likely to lose market share, they added.

Some industry observers doubt Supervalu will get rid of Albertsons.

“You don't give up on the West Coast, and you don't give up California real estate that easily,” one analyst told SN. “The stores there are salvageable.”

According to another analyst, “Supervalu's goal is to create synergies among its various store banners, and it's already got the Albertsons stores involved in the ‘premium fresh and healthy’ program. So it would probably make more sense to invest the money and get the stores in better shape before considering any sale.”

Despite the “big relief” program Albertsons introduced in Southern California in mid-May, sales have not picked up appreciably, some observers said.

If Supervalu were to dispose of Albertsons, that could give Stater Bros. an opportunity to move from the fringe of the market into areas where it's under-represented or not represented at all.

As things stand now, Ralphs, a division of Cincinnati-based Kroger Co., is the market leader in the Greater Los Angeles area — which encompasses Los Angeles and Orange counties — where its 237 Ralphs, Fresh Fare and Food 4 Less stores control a combined market share of 22.6%, according to Tucson, Ariz.-based Metro Market Studies. (Ralphs and Fresh Fare alone have a share of 17.5%, while the Food 4 Less share is 5.1%.)

While Ralphs benefits from Kroger's ability to target customers based on loyalty card data, the weak economy is enabling Kroger to pick up market share at its Food 4 Less stores in ethnic and low-income neighborhoods because of that format's strong price orientation, observers said.

Vons, a division of Pleasanton, Calif.-based Safeway, is No. 2 in the region with 131 stores and a 13.7% share. Local sources said Vons is benefiting not only from the lifestyle upgrades but also from the strong base of stores in good locations it has to work with.

Albertsons, with 112 stores in the metropolitan area, is in third place with an 11% market share, while Stater Bros., with 55 stores in the area, is a distant fourth with a 5.7% share.

Both Ralphs and Vons, with promotional formats, vie for price leadership, though Stater's everyday low pricing undercuts the general market.

Ralphs, Vons, Albertsons and Stater account for a combined 53% of the region's estimated volume of $12 billion, with the balance controlled by a variety of specialty, discount and ethnic formats plus conventional independents.

In San Bernardino and Riverside counties east of Los Angeles-Orange — the Inland Empire — Stater is the dominant player, with 99 stores accounting for a market share of 28.3%, followed by Ralphs (59 stores across three formats), with a share of 14.8%; Albertsons' 39 stores with 11%; and Vons' 30 stores with 8.3%.

In Ventura County, northwest of Los Angeles, Vons dominates with 24 stores and a 35% market share, with Ralphs' formats accounting for 13 stores and a combined 17.9% and Albertsons with 10 stores and 16.3%.

According to one longtime market observer, the major chains have been losing ground to alternative formats over the last few years as they've opted to invest more in existing stores than to expand their store networks.

“While the niche operators have really been expanding their businesses, the chains have been holding off on new-store growth and investing capital back into existing stores,” Tom Gast, principal in Gast Retail Group, Tustin, Calif., and a former Ralphs real estate executive, told SN.

“They've slowed their aggressive expansion plans over the past three or four years — long before the economy weakened — in an effort to avoid diluting their market share. As a result, they've become more selective and cautious by reinvesting capital in proven locations in stable areas, which is opening the way for the alternate formats to grow at the chains' expense.”

Other observers agreed, noting that Vons has slowed new-store growth in favor of upgrading stores to the lifestyle format; Albertsons, under prior and current ownerships, has been too cash-strapped to expand; Stater slowed expansion as it invested in new distribution facilities; and Ralphs simply pursued a more cautious approach to store growth.

That has opened the way for other formats to gain share, with Costco Wholesale Corp., Issaquah, Wash., achieving a share in the metropolitan area of 10.8% — putting it in a virtual tie with Albertsons' 11% — with 37 warehouse clubs; and for Trader Joe's Market, Monrovia, Calif., achieving a share of 3.7% with 63 relatively small stores.

In contrast, Tesco's Fresh & Easy Neighborhood Market, with about 50 smaller stores opened in the past couple of years, has a share hovering close to 1%.

“Fresh & Easy is getting more promotional and sharper on price, but I believe we're past the point in time when the weak economy could help that format,” Jim Hertel, managing partner at Willard Bishop, Barrington, Ill., told SN.

“I don't think they've thought of themselves as a value option soon enough, so they've continued to sell the quality of the food and the convenience of the format rather than latching on to what was happening in the economy until recently.”

If Albertsons were put up for sale, the stores could be sold piecemeal to a variety of buyers, including local independents, or to an outside buyer — possibly someone like Tesco, Jack Brown, chairman and chief executive officer of Stater, suggested.

“I don't think Tesco is the kind of company that backs off,” Brown said, “and it wouldn't surprise me, if the opportunity arose, to see them come into the market with full-size supermarkets. That would represent a huge investment for them, but it could be an opportunity too good to pass up.”

According to Randy Delgado, general manager of the Southern California region for Unified Grocers, Los Angeles, any sale of Albertsons by Supervalu “would enhance Unified and its members.”

“I believe we could absorb most of those stores,” he said. “And if independent operators got a significant number of them, then they would be able to compete more on price and itemization.

“But if the stores went to someone like Stater — or if Food 4 Less took some — then that could make things more competitive because both operate below the overall market on pricing.”

Brown told SN he's keeping an eye on the Albertsons situation.

“Under the Obama administration, the Securities and Exchange Commission is enforcing rules more strictly, and I think it would be very difficult for Kroger or Safeway, who are already doing big business in the area, to add another chain to their portfolios.

“That leaves Stater as the only existing major competitor with any chance at those stores, and it's our policy to look at any existing retailers or stores within California.”

When Albertsons and American Stores merged in 1999, Stater acquired 43 Albertsons and Lucky stores out of 68 available. Brown said he wouldn't be afraid to take on a similar challenge if the opportunity presented itself.

Stater operates 167 stores across the entire Southern California market, “and if we had 200 or 250 stores, it would probably make the market a little more competitive because we are more price-oriented than the three national chains and we have a very loyal customer base.”

Stater already runs TV spots that reach areas of Southern California that have no Stater stores, “so we've pre-sold ourselves to families who may encounter us when they come to the San Bernardino-Riverside area for vacations,” Brown explained.

“And when we acquired those 43 Albertsons 10 years ago, we took the position that the customers didn't know us but they knew the former Albertsons employees we ‘adopted,’ and I had thousands of letters from people who said they were glad to see those familiar faces still at those stores.”