Winds of Change

MARK HAMSTRA

Five years ago, Chicago had Safeway on the ropes. Long the second banana to Supervalu's Jewel-Osco chain, Safeway's Dominick's banner was reeling — sales were declining, stores were closing and the “for sale” sign was out.

But these days there's a fresh breeze blowing in the Windy City. Although it's still a distant No. 2 in market share, Dominick's is seeking to claw its way back from its former status as one of Safeway's “distressed assets.”

“It's a lot different for Dominick's today than it was a few years back, and we are very, very proud of that,” Don Keprta, who was brought in as president nearly five years ago to turn the chain around, told SN in an interview last week. “We have a plan. We offer quality products at reasonable prices, we have the best services and we get a lot of good marks along those lines.”

The chain has remodeled 53 of its 81 stores with the company's lifestyle format, which includes an expanded perishables offering, more prepared foods, new lighting and decor, and more self-checkout, among other changes. One brand-new store recently opened — the second since Keprta came on board — and the company has another new store and two complete rebuilds on the horizon.

Last month, the chain rolled out Safeway's new, aggressive pricing program, dropping shelf prices on some items by as much as 30% for some temporary promotions and moving to an EDLP strategy on “thousands” of high-volume items across the store. The move followed the rollout of the “Big Relief Price Cuts” at rival Jewel in April, leading some observers to say the city had entered a price war.

Dominick's had already implemented a new price-reduction program for its Fresh Value cardholders on about 5,000 items earlier this year, a move that preceded Supervalu's Big Relief.

Some observers said the price cuts were long overdue.

“This was an action that was necessary in my opinion because Jewel and Dominick's prices had historically been quite high,” said Jon Hauptman, a partner with Willard Bishop consulting, Barrington, Ill. “And in this environment, shoppers are looking for value and can find strong value in alternative stores, such as supercenters, limited assortments stores such as Aldi — which has grown its presence in Chicago significantly — dollar stores and other low-priced supermarkets.”

Until the recent economic downturn, Chicago's two leading traditional chains had been somewhat insulated from nontraditional, price-focused competition.

“I think what's really set Chicago somewhat apart is that the supercenter influence has been very late, and they still have not penetrated to the degree they have in other parts of the country,” Hauptman explained. “So we are seeing a delayed reaction. The Chicagoland retail marketplace is now experiencing the turmoil associated with supercenters beginning to grow their influence, similar to what other large Midwest markets went through several years ago.”

With 170 locations in the 14-county Greater Chicago market, as measured by Tucson, Ariz.-based Metro Market Studies, Jewel has the leading market share by far with 35.4% of the grocery market. Dominick's has 11.9% of the market with a little less than half the number of locations.

SUPERCENTER GROWTH

The three large supercenter operators in the area — Wal-Mart Stores, Meijer and Target — so far have only been able to ring the fringes of the market — where the Chicagoland population is expanding — although they are pressing ever closer to the city itself.

Wal-Mart, with 21 stores and 5.1% of the grocery market share, has only one traditional discount store within the city limits, but has aggressively pursued building supercenters. Local reports this year indicated the company was still vying for a location at West 83rd Street and South Stewart Avenue to build a 150,000-square-foot supercenter, despite a previous rejection by the city.

“Chicago is still a struggle for [Wal-Mart],” said Neil Stern, senior partner at Chicago-based McMillan Doolittle. “In the city itself, after years and years of trying, they have a grand total of one non-supercenter open in Chicago.

“They can have a little easier time moving into the suburbs, but the challenge for them is finding real estate. You still have to drive 35 miles or 40 miles outside the city of Chicago to get to a supercenter.”

The Bentonville, Ark.-based retailer has faced political, community and union backlash, but the main problem is finding sites that can accommodate its massive locations.

Meijer also has been pressing in from the outskirts of the city, where it has 14 stores and 3.8% of the market.

Earlier this year, the chain unveiled plans for a smaller store in the Chicago suburb of Niles, Ill., that will focus on the grocery and pharmacy side of its business and could give it access to more sites closer to the city itself. The 102,000-square-foot outlet — about half the size of a typical Meijer store — is scheduled to debut in the first quarter of next year. The store will “reinforce our commitment to invest and grow in Chicagoland,” Hank Meijer, co-chairman and chief executive officer of the Grand Rapids, Mich.-based retailer, said in a prepared statement in June.

“Meijer has had an influence in the pockets in which they operate,” said Hauptman.

And Minneapolis-based Target Corp., with 2.1% of the share from 13 stores in the market, has a good reputation among Chicagoans, observers said, and has been adding food to its traditional stores in the city, but the company still has only a handful of SuperTargets in the metro area.

“The growth of supercenters in Chicago has been slower, but I think we will see more, whether it is from Wal-Mart or Target,” Hauptman said. “A lot of retailers have been trying to crack the code on how to expand in the city, given that historically Jewel and Dominick's have the best sites.”

Chicago is also the largest market for limited-assortment specialist Aldi, the German-owned discounter that has a U.S. base in nearby Batavia, Ill. The retailer has 137 stores in the 14-county region, capturing 4.1% of the grocery market share.

“This is Aldi's largest market far and away, and obviously they are performing very well in this recession,” said Stern, who noted that the format's new prototype “has been very effective” in Chicago.

Cincinnati-based Kroger Co. — once thought to be a potential suitor for Dominick's — has a limited presence in the market, with a handful of its Food 4 Less price-impact stores.

Independents also have a strong foothold in Chicago — stores served by the Central Grocers cooperative generate nearly 10% of the market share, according Metro Market Studies.

“A lot of business in the marketplace in the last 10 to 20 years has gone to independents,” said Hauptman of Willard Bishop. “They are doing a good job of keeping their finger on the pulse of marketplace needs and have beaten the national players to the punch in responding to shoppers' demands for low prices and strong values with their new programs.”

Meanwhile, traditional players in Chicago are also under pressure from the high end, with Costco's 14 locations and Whole Foods' 15 stores, including a handful that opened in the last year. Whole Foods has in Chicago what Stern described as the chain's second-highest-volume store — ringing up an estimated $1.4 million per week.

Combined with other specialty players like Trader Joe's and strong independents like Caputo's, competition in Chicago isn't getting any easier.

“On the fringes, any of these guys individually don't have a lot of market share, but when you add up Trader Joe's and Whole Foods and others — Target just opened up a couple of new supercenters in the marketplace — that starts to have an impact on the traditional guys,” Stern said.

The impact can be seen at the experimental small-format store called Urban Fresh that Jewel opened in the market last year at the site of Supervalu's failed Sunflower Market site, which Stern described as basically a good store in a good neighborhood, but in a difficult location just blocks from the high-volume Whole Foods and also near a Trader Joe's that is about to become co-located with a unit of Aldi, its sister chain. The layout will have Aldi on the ground floor with Trader Joe's above it in its existing space on the second floor.

PRICE BATTLE

Stern said he was surprised that Supervalu selected Chicago as the debut market for its Big Relief program.

“The assumption has been that Jewel has been one of the better-performing markets for them, so it was a bit of a surprise that they rolled that out here,” he said. “That would indicate that they are either losing market share or sales are not as strong as they want them to be here.

“Even in the old Albertsons it was far and away the star performer,” he added. “Jewel has been a pretty healthy competitor in this market for a long time.”

Supervalu spokeswoman Haley Meyer said Chicago was chosen for the Big Relief debut because of “a number of factors, including the current competitive environment.”

“Customers have responded favorably,” she said of the Big Relief program. “In this economy, consumers are looking for ways to stretch their food dollars, and the Big Relief Price Cut has helped them save on many key staple items.”

When Jewel rolled out the program in April, it touted savings “up to 20% on thousands of items in dozens of categories across the store,” including staples and stock-up items, “from peanut butter and pasta to deodorant and detergent.”

In its price program, Dominick's took the discount further by another 10%, touting savings of up to 30% off, but Keprta didn't seem to agree with some descriptions of the Jewel and Dominick's price cuts as a “price war.”

“We pay attention to what all the competitors do in this market, but our plans are designed to get us where we need to go,” he said.

“It's all part of our strategy here,” he said in describing the price cuts. “Earlier this year, we lowered prices on about 5,000 items, but that was all Fresh Value pricing, and it didn't affect the everyday low price. Now we have thousands of items that we have taken the base price, and lowered it. These are not random items — they are high-velocity, highly consumable items that you would find typically on any shopper's list, and they are throughout the store — cereal, fresh foods, cleaning supplies, baked goods — all the key categories across the store. It's not just some random items that would have very little action.”

He declined to describe the initiative as a “promotion.”

“We expect these prices to stay in effect — unless there is some key change in a commodity like sugar — through the end of the year and beyond, and some prices will even go lower.”

He said the program was similar to Safeway's pricing initiatives in other regions, “but tailored to the market.”

The new pricing initiative at Dominick's is being promoted with new yellow shelf tags that show the original price of an item crossed out and the new price printed below it. On further discounted items, a third, still lower price, obtained only with the Fresh Value card, is also printed.

The cuts are being supported with an integrated ad campaign that includes TV, radio, online and print.

Keprta said the program is “getting rave reviews” from both employees and customers.

“We have a lot of loyal new customers, and we like the grades we are getting so far,” he told SN. “We've talked to customers, they tell us they like what they see and they tell us they see the difference in what they are spending, and it is allowing them to splurge on things that maybe did not fit within their budget for the last 11 months.

“This allows them to stock up if they need to, but be comfortable knowing that that price will still be there when they come in next time,” he added. “If they don't feel comfortable stocking up, they don't have to.”

In addition to the price cuts, Dominick's has also been active on the expansion and remodeling front.

The company opened one new store about a month ago, has another new store in the planning stages and is undertaking complete rebuilds for two other stores that will include expansions and conversions to the lifestyle format. The expansions will “nearly double” the existing square footage of the two stores and include new lifestyle architecture.

“Here in Chicago, we have been on a tear getting through all the stores and updating them,” Keprta told SN. “We are bringing our stores into the new millennium, and the lifestyle stores are getting rave reviews. Customers are telling us with the number of trips and the volume we are doing in those stores — we are very happy with how those stores are performing.”

NEW DEVELOPMENT

Although retail vacancies have surged in the city, creating some opportunities for real estate acquisition, some developers have had trouble obtaining financing for projects, Keprta noted.

Some smaller operators have backed out of real estate deals, he said, which has “opened up some opportunities,” but because of the slowdown among developers “there are pluses and minuses” to the current real estate market, he said.

Meijer has 3.1% of the market with its 14 stores.

“We are very happy with some of the properties we are working on right now,” Keprta said. “We have a significant number of them that will come to fruition in the next few years. The economy has helped us in some respects, but has hurt the whole process. It has not hurt us personally — some of the projects we thought might be up and running are now cash-strapped, but others have taken their place.”

Despite the difficulty in developing good real estate in Chicago, Milwaukee-based Roundy's Supermarkets — run by several former Dominick's executives — has secured two locations in the city, the company said.

It has an 80,000-square-foot, bi-level supermarket planned for North Halstead Street in the heart of the city, and another 55,000-square-foot store planned for a mixed-use development called Lakeshore East.

Previous reports have also indicated that the company has eyed several locations in suburban Illinois, and that it is planning a new name for its stores when it enters the market.

A Roundy's spokeswoman would only confirm that the plans for the two Chicago locations were still intact and declined to comment further. The company said in 2007 that it planned to open several stores in the Chicago area during the following three years.

“They know Chicago, and because they know Chicago they will have a very good idea of how to enter the market, and will do so in a purposeful way,” said one industry observer, who asked not to be identified.