Steep Competition

ELLIOT ZWIEBACH

The Rocky Mountain region is a tough place for supermarket operators, and it's about to get tougher.

With a lot of wide-open spaces and a population that averages just 10 people per square mile, there isn't much wiggle room for retailers to win back customers they've lost to a competitor, nor are there many new potential customers to attract.

“As the economy has tightened, people here have opted for grocery stores offering value,” one local observer explained. “Whether that will continue when the economy improves is not clear.”

What is clear is that retail success in the Rockies for the past decade has meant finding ways to compete with Wal-Mart. But new challenges lie just over the next peak that could shake up food retailing in the region, including:

• The expansion of Boise, Idaho-based WinCo into Utah and potentially into Montana and other Rocky Mountain states — moves that could challenge Wal-Mart's hegemony as the low-price leader in the region while challenging other operators' survival.

• The sale and conversion of 34 Albertsons stores in the Salt Lake City area to a more fresh-oriented format — providing independents there with new opportunities to differentiate themselves from the price operators.

• The planned move by Los Angeles-based Smart & Final into the Denver market with its warehouse stores that offer consumers a new and potentially intriguing shopping alternative.

The Rocky Mountains extend south from Canada and wend their way through Montana, Idaho, Wyoming, Utah, Colorado and New Mexico — six states with a combined population of just under 13 million people, or 4.1% of the total in the U.S. — about the same population as lives in the state of Illinois alone.

Wal-Mart Stores is the region's dominant player, building a solid business over the past decade. Kroger Co. — doing business under the King Soopers banner in Colorado, Smith's in Utah and New Mexico and Fred Meyer in Idaho — also has a strong presence in the Rockies, as does Safeway; and there are also remnants of the original Albertsons chain, now part of Minneapolis-based Supervalu, still doing business in many communities across the region.

The vast majority of residents in the Rocky Mountain states are white and, to a large extent, middle-class, with some ethnic pockets in farming and tourist areas in the north, though as one moves south into Colorado, New Mexico and parts of Utah, the Hispanic population increases.

However, there may be cultural changes ahead, as younger people from other parts of the U.S. migrate to the Rocky Mountain states because of more affordable lifestyles, Mike Griswold, a Boise, Idaho-based analyst with AMR Research, Boston, pointed out. “The demographic between the ages of 25 to 35 or 40 is still a fairly small segment, but it's growing, and over the next few years we may see a shift in preferences toward more demand for specialty retailers like Trader Joe's, Whole Foods and Fresh & Easy,” he explained.

Until that happens, however, the majority of consumers want basic groceries and good values, Griswold said. “That's why Wal-Mart has become so prevalent in the last decade and why WinCo has its eye on expanding in the region,” he explained.

WinCo, based in Boise, will open its fifth store in the Salt Lake area in June — with an eye on possible expansion into Montana and other parts of the region, industry sources told SN.

“WinCo is a very healthy, growing company that sticks to staple products. Its focus is on a low-frills offering that feels a lot like shopping at a club store without the club-sized packages,” Griswold said. “And it has a pretty good supply chain, which is the key to its growth — supporting each new store with a strong supply chain.”

According to an industry observer, “WinCo's business model is to be the low-price leader in every market in which it operates.”

Craig Rosenblum, a partner at Willard Bishop, Barrington, Ill., said WinCo delivers on that model. “Wal-Mart will tell you the only retailer it fears is WinCo because WinCo is able to offer prices that are equivalent to or better than Wal-Mart's and a shopping experience that is equivalent to or better than Wal-Mart's.”

WinCo may also offer a fresh alternative to Wal-Mart for some consumers, Bob Harmon, vice president of the customer for Harmons, Salt Lake, told SN.

“With Wal-Mart rolling back prices once again, consumers may be getting a little leery about how low Wal-Mart's pricing is because they've heard the argument too often,” he pointed out. “It looks like those two companies will knock each other around for a while, though Wal-Mart has much bigger buying power.”

As a way to deal with WinCo, Rosenblum said he expects Wal-Mart to begin converting more of its Division 1 discount stores in the Rocky Mountain region and elsewhere to a new format the company has been testing at some locations — a 100,000-square-foot format that devotes half the floor space to groceries and the other half to a supermarket-style assortment of general merchandise.

“Wal-Mart will also be ratcheting up the shopping experience to offer more than just price, with a broader selection of perishables — a natural evolution that will be more geared to compete with traditional grocery stores,” Rosenblum said.

That will leave independents and other operators in the Rockies with few alternatives but to seek ways to differentiate themselves from the two price leaders, he pointed out. Without much of an ethnic population to cater to, those operators may have to opt to go more upscale, albeit with competitive prices, he said.

“They have to figure out why consumers shopped with them in the first place — service, local buying, a better knowledge of the customer and what her needs are — and then do what they can to cater to those needs and once more be the local guy with local products and local ties,” Rosenblum explained.

“Shoppers will usually give a WinCo or any new player a chance because the prices are so good — and they'll drive past the local guy to do it. But the local guy can get that customer back by differentiating himself based on local values and services, as long as he stays within 10% of the price leader's pricing. That's the tipping point, and once you go beyond that, you're unlikely to ever get back the customers you've lost.”

UTAH

Roughly 80% of Utah's population of 2.8 million lives in the I-15 corridor in the north-central part of the state, and most of those people live in the Salt Lake City region, which has a broader demographic mix than some other Rocky Mountain areas, local sources noted.

Once dominated by a string of strong independents, Salt Lake has become a price-driven market since Wal-Mart's entry less than a decade ago — a situation that will only be exacerbated as WinCo gains a stronger foothold there.

Salt Lake had once been a strong market for Albertsons, which enjoyed the city's top market share for several years, local sources said. But with Supervalu investing its resources elsewhere, business at Albertsons declined, prompting the sale of 34 of its Salt Lake stores earlier this year to Associated Food Stores, a Salt Lake-based member-owned cooperative.

Kroger-owned Smith's is the market-share leader in the Salt Lake City market, with 23 stores and 23.2% of the volume, according to the 2009 Metro Market Studies Grocery Distribution Guide, followed by Wal-Mart, with 13 stores (10 supercenters and three Neighborhood Markets) and 18.4%.

Albertsons, with 22 stores, accounted for a 15% share prior to the sale, while Associated's corporate stores had a share of 3.6%. In the wake of the sale of the Albertsons stores to Associated, Associated would appear to be the No. 2 retailer in the market, with a share approaching 18.6%.

Rosenblum said the acquired stores “are in really excellent locations, and what Associated must do is really differentiate them from anything else in the marketplace.

“Acquiring those stores gives Associated and its customers a way to avoid getting caught in the kind of vise Bashas' found itself caught up in, between value and upscale retailers.”

Associated is operating the 34 stores under the Fresh Market banner, and it's possible some locations may eventually be spun off by the wholesaler to members, though that could be several years off as the new owner builds up the stores' volumes, Dick King, president of Associated Fresh Markets, told SN.

Associated is operating the stores separately from its other corporate stores “because each of those corporate stores were previously owned by families whose names still mean something to many customers,” King explained.

The acquired stores are geared to the neighborhoods each serves, with some locations carrying more upscale specialty merchandise and others a more basic mix, King said. But all will stress the overall freshness of all store departments, including Center Store, and all will feature the same pricing, he pointed out.

“Stores are competitively priced — not the lowest in the market but competitive with Smith's pricing and lower than Albertsons was pricing them,” King said. “Smith's has been picking up a lot of Albertsons' business in the past year, and we're trying to get some of that back.”

While Wal-Mart's entry forced some independents to put more emphasis on price, it prompted Harmons to go more upscale, Harmon told SN — boosting its employee count by 480 over the years to raise service levels; offering artisan breads baked from scratch in-store, along with chef-prepared entrees and soups; selling artisanal cheeses from local sources and from around the world; and featuring all-natural meats, including dry-aged Prime beef at seven locations.

COLORADO

Colorado is the largest of the six Rocky Mountain states by population — it exceeds 5 million, two-thirds of which live on the eastern slope of the Rockies in the Denver area.

The western slopes tend to be more rural — and more politically conservative — with pockets of wealth in ski resort areas, alongside smaller pockets of minority populations who work at those resorts; the eastern slope has a more diverse population and a more politically liberal bent.

However, most Coloradans agree on green issues, Nikki Baird, executive director of research at Retail Systems Research, Denver, told SN. “Colorado is also a great area for future studies of alternative energy sources, given that we have so many high winds and a lot of sunny days. And there's also a large interest in health foods and healthy living in the state.”

Wild Oats originated in Boulder, as did Sunflower Farmers Market — both of which were founded by Mike Gilliland.

Denver is a Kroger town, with the chain's 71 King Soopers there accounting for a market share of 32.3%, according Metro Market Studies; followed by Safeway, with 55 stores and a 21.9% share; and Wal-Mart, with 19 supercenters and a 13.1% share.

King Soopers and Safeway once had comparable market shares, one observer pointed out, but the influx of Wal-Mart over the years, and to a lesser degree Target, took more business away from Safeway.

The chain that has seen its share deteriorate the most over the last few years has been Albertsons — to 4.2% for 15 stores in 2009 — whose corporate parent, Albertsons LLC, has opted to close many locations rather than upgrade them, providing opportunities for specialty operators like Whole Foods Market and Sunflower to move into prime real estate in the city, local observers told SN.

“But Denver is a tough market for an outsider to break into,” one local source told SN.

The latest to try is Los Angeles-based Smart & Final, which is preparing this summer to open five units of SmartCo Foods, a hybrid format that combines aspects of Smart & Final Extra and Henry's Markets. “SmartCo will add to the price volatility in Denver,” a local source told SN.

All five SmartCo stores will be located in former Albertsons units that have been closed for some period of time. The stores, ranging in size from 40,000 to 61,000 square feet, will be Smart & Final's largest companywide.

“We saw an opportunity in the Denver market that made it look attractive to us,” said Randall Oliver, the company's director of corporate communications. It's also a market in which the Smart & Final name is not known, “so there are basically no preconceptions about us,” he added.

The openings will be marked by a major advertising campaign. Besides shipping merchandise to the stores through its regular distribution network, Smart & Final plans to utilize local suppliers for the SmartCo stores “to provide added freshness and to meet local tastes,” Oliver explained.

Hispanics account for about 25% of metropolitan Denver's population. Nash Finch Co., the Minneapolis-based wholesaler, tried to cash in on that demographic in 2002, when it opened the first of five Avanza stores. The wholesaler continues to operate three Avanzas in Denver and one each in Greeley, Colo., and Omaha, Neb.

IDAHO

Idaho is a state of just over 1 million people that is primarily rural outside of Boise, with farming predominant in southern Idaho — where there's more of a Hispanic mix of customers — and logging predominant in northern Idaho, where middle-income whites form the primary customer base.

As business in both farming and logging slowed, spending dropped, but it's beginning to come back statewide, local sources told SN.

In Boise, the state's largest city, Albertsons is the market-share leader with 20 stores and a 33% share; followed by Wal-Mart's six supercenters and an 18.3% share; WinCo, with five stores and 17.6%; Costco, two warehouses, 10.9%; and Fred Meyer, six stores, 9.8%, according to Metro Market Studies data.

Albertsons maintains its lead because its roots are in Boise and it operates so many locations there and across the state, sources told SN. However, since Supervalu acquired Albertsons in 2006, prices have moved up, one local source said, “and while the original Albertsons was a big part of the state and its businesses, now it's just another supermarket with out-of-state owners.”

The source said he considers Fred Meyer “probably the most competitive conventional operator” in Idaho; and although Safeway has lowered its shelf prices, he said he believes the chain's pricing will go back up once the economy recovers “because Safeway's shoppers are not going there for price but for the services and quality it offers.”

The state, which is 85% Caucasian, has only a small ethnic population, with several smaller specialized stores serving the Hispanic segment that lives in the suburbs around Boise, Griswold said.

MONTANA

Montana offers a “predatory climate” for supermarket operators, according to McKee Anderson, president of the Montana Food Distributors Association.

“For the last 10 years, there's been a total onslaught from price operators like Wal-Mart,” he told SN, and with WinCo seeking sites in the state, that situation isn't likely to change, he added.

Montana's population is approaching 1 million, with most people living in the western part of the state. “In the rest of the state there are more cows per acre than there are people,” Anderson said.

The state's population is mostly white and either lower- to middle-income or rich, he noted. The state's major businesses are mining minerals and farming small grains like wheat, barley and canola, he noted, but property values have been falling during the recession and tourism has been down.

Wal-Mart entered Montana about 10 years ago, “and that has slowly devastated the independents and hurt just about all food operators except Costco,” Anderson said.

In Billings, the state's largest city, Wal-Mart's three supercenters lead the market with a 33% share; followed by Albertsons, with six stores and 31.1%; and Costco, whose single warehouse accounts for a share of 20.7%.

With WinCo scouting sites in Missoula, Anderson said he expects pricing pressures to accelerate. “We look at what's happened in Spokane [Wash.] between Wal-Mart and WinCo as indicative of what's likely to happen in Montana,” he said.

“WinCo put in two stores there across the parking lot from two existing Wal-Marts in mid-2009 and underpriced Wal-Mart by 5% to 7%. Each of those WinCos is reportedly doing about $1.25 million a week, and Wal-Mart is still doing enough business to put in a new store between the two Spokane stores to ease the pressure of the business at those stores.

“As WinCo scouts sites in Montana, there's really no new business for it to find here, except to take it away from existing operators, and that's likely to hurt Albertsons and some of the independents more so than it will hurt a chain operator like Safeway, which offers so many different programs,” Anderson said.

In a state with as spread-out a population as Montana, the secret to success in the grocery business is logistics, Anderson said. “It's the acquisition and distribution of product that gives retailers an advantage,” he explained.

WYOMING

Wyoming is the smallest state by population in the U.S., with only 544,000 people.

Although the economy there has been less negatively impacted by the recession than most other areas of the U.S., that hasn't stopped its residents from becoming value hunters, local sources told SN.

“Unemployment has been fairly moderate compared with the rest of the country, running in the 5% to 7% range,” Tim Myers, senior vice president, development and retail, for Affiliated Foods Midwest, Norfolk, Neb., told SN. “But with a lot of plant closings across the state, people are seeking values, and that's still posing problems for smaller grocers.”

In Cheyenne, Wyoming's largest city, Safeway is the market leader, with three stores and a 30.8% share; followed by Albertsons, with two stores and 19.4%; and Wal-Mart, whose single supercenter accounts for 18.3%.

The hunt for value has prompted many Wyoming shoppers to drive past their local independent, or the Safeway or Albertsons, to Wal-Mart, Myers said. “And a lot of dollar stores have been popping up around the state since the recession started,” he added.

With population growth static, maintaining sales has been a real challenge, Myers said.

Customers in Wyoming are fairly homogeneous, he pointed out — mostly white and blue collar — and what they look for at the supermarket is fairly basic. “There isn't much of a push for specialty items or organics,” he explained.

NEW MEXICO

Like most of its neighboring states in the Rocky Mountain region, New Mexico has a population that's concentrated in a handful of cities.

Of the state's 1.8 million people, most live along the Rio Grande as it runs through the middle of the state from Colorado to Texas, with roughly 800,000 in Albuquerque, 120,000 in Las Cruces and 60,000 in Santa Fe.

The economy hasn't been too bad in New Mexico because of the large number of people who work in the public sector, on either military bases or nuclear research labs, local sources noted.

In contrast with the other Rocky Mountain states, the majority of the population — approximately 60% — is Hispanic, with a large segment of Mexican immigrants plus others who have lived in the state for hundreds of years.

In Albuquerque, Wal-Mart operates 13 stores (11 supercenters and two Neighborhood Markets) to lead the market with a share of 24.9%; followed by Smith's with 18 stores and 23.8%; and Albertsons, 16 stores, 15%.

Bob Crumpton, district manager for Sweetwater, Texas-based Lawrence Brothers Supermarkets, which operates two of its 23 stores in New Mexico, said Wal-Mart has been less effective in the past year or so as it's cut back on inventory. “Customers come into our stores saying they are through shopping at Wal-Mart because they can't find what they want,” Crumpton told SN, “so that situation has been a real asset for us.”

Seth Nodelman, vice president, retail services, for the Albuquerque office of CB Richard Ellis, told SN there's very little expansion going on at Smith's or Albertsons. While Wal-Mart continues to open new supercenters, he noted, it is the natural-food segment that is growing the fastest, including Sunflower, Whole Foods, Vitamin Cottage (a Golden, Colo.-based natural-and-organics chain) and Trader Joe's.

There's also a growing number of outlets to serve the Mexican immigrant population, he said, including Pro's Ranch Market and El Mezquite Market, which operates five stores in Albuquerque.