In With the New: The Sacramento Market

Changing demographics and an ongoing influx of non-union, price-impact food retailers are challenging some of the conventional operators in Sacramento, Calif.

The move by a growing number of young professionals escaping the Bay Area in search of a better quality of life has opened the door for a wider variety of food retailers to enter California’s capital city.

In the last few months Sprouts and Fresh & Easy have set up shop in Sacramento, with Walmart Neighborhood Markets and The Fresh Market on the way.

The result is that competitive pressures on the city’s three primary conventional operators — Raley’s, Safeway and Save Mart — could become even more intense.

Steve Junquiero, president and chief operating officer of Save Mart Supermarkets, Modesto, Calif., characterized Sacramento as “a very tough market, and it really looks like it will get tougher. But I also think many of the new companies coming is are specialty players who are going after certain segments of the consumer base.”

Eric Stille, president and chief executive officer of Nugget Markets, Woodland, Calif. — an upscale independent chain — said he’s been surprised by the number of food retailers coming into the area. “Over the last three or four years, the market has been more competitive than we ever anticipated, with Target and Wal-Mart adding more food, Costco going strong, plus Sprouts and now Fresh & Easy.

“Given the economy we’re in, the market has become more competitive than it’s ever been before.”

For years Sacramento was considered pretty much of a “cow town,” according to one local observer — lacking the sophistication of next-door San Francisco or the bright lights of Los Angeles to the south.

However, over the last few years, more young people from the San Francisco area — fed up with high housing prices and too much traffic — began moving 90 miles east to Sacramento for lower-priced homes in a less cluttered environment. That influx resulted in a big growth spurt in bedroom communities around the city, which opened up more locations for supermarkets, accompanied by a more varied demand for food options.

Bill Coyle, vice president, real estate, for Grocery Outlet, Berkeley, Calif., said space for additional stores is already at a premium. “Real estate has tightened over the last 18 months and is quickly disappearing,” he told SN.

“The old, stalwart conventional chains are not growing, but the market has been invaded at the low end by several price-impact stores and at the high end by specialty players like Whole Foods and Trader Joe’s, and they’ve been eating up the space.”

The real-estate drain is having an impact even on the newcomers, Coyle added. “Fresh Market would probably have liked to come in with a large number of stores to have more impact, but so far it’s only been able to make deals on two locations,” he noted.

Raley's Closes Stores

The retailer most likely to be hit hardest by all the changes going on around it is Raley’s, a family-owned chain that has dominated the Sacramento market for more than 30 years.

Though it’s still the market-share leader, there appear to be chinks in its once impenetrable armor — with more than 150 corporate layoffs last year and several store closings this year.

“We are struggling to sustain our business due to the economic downturn and increased competition,” Michael J. Teel, president and chief executive officer, acknowledged last November.

Bob Reynolds, principal at Reynolds Economics, Moraga, Calif., told SN, “It’s hard to know if Raley’s is in trouble because no one sees its numbers, but I would assume the chain has seen significant same-store sales declines because of new competition at the high and low ends of the market and the revitalization of Safeway. It’s not a happy time for a company caught in the middle, as Raley’s is.”

Raley’s operates 130 stores, of which 40 are located in the Greater Sacramento area under the Raley’s, Bel Air and Food Source banners. Those stores control the city’s largest market share — 28%, down from 30% four years earlier, according to Metro Market Studies, Tucson, Ariz.

When Raley’s made the administrative cutbacks a year ago, Teel said the goal was to make it easier for the company to react more quickly to competition; to operate more efficiently; and to transform the business “to be lean, swift to move and innovative.”

Since the beginning of the year Raley’s has closed four stores — a move it attributed to competition from more than 250 non-union stores that have opened in its Northern California-Northern Nevada operating area since 2008.

According to Reynolds, Raley’s has never recovered from its expansion through acquisition into Las Vegas and New Mexico in 1999 — stores it sold in 2007. “Raley’s was the leader and innovator in Sacramento for so many years, but it never recovered from those expansion moves.

“The company is very much pursuing a defensive strategy, and I don’t see how it can get back in the game without a rather massive infusion of capital to re-invest in its stores and its marketing programs.”

Even with the recent store closings and increased competitive pressures, Raley’s still has a dedicated following in the area, observers told SN.

“For many years Sacramento has been absolutely dominated by Raley’s — shoppers there got used to shopping at that kind of conventional store, and I’m not sure how willing they are to switch,” John Quinn, owner of PAQ, Stockton, Calif., told SN. “When Safeway began converting its stores to the lifestyle format several years ago, it was more of the same — just a different version of Raley’s.”

With more price-oriented, non-union operators apparently chipping away at Raley’s strong consumer connections, the question of whether Raley’s might seek a buyer keeps resurfacing.

One observer told SN, “If Michael Teel can turn things around and improve the operation, Raley’s would have to consider selling if it got a reasonable offer.”

According to another market source, “Every investment banker has been trying to break down the doors there because Raley’s has some great sites. But so far, there’s no indication the family is interested in selling.”

Save Mart Seeks Recognition

The challenges for Save Mart are different. Where Raley’s is a homegrown Sacramento institution, Save Mart has been in the market for just five years— since it acquired Albertsons’ Northern California stores in 2007.

The company operates a total of 234 stores. In the Sacramento area it has 14 conventional Save Mart locations and a single price-impact Food Maxx, with a market share of 9.2%, compared with 10% four years ago.

According to Reynolds, Save Mart rarely invests capital in its stores, to its own detriment. “But it is OK on price — in the middle range with the other unionized stores,” he said.

 “Our biggest issue in Sacramento is name recognition,” Junquiero told SN. “We’re a well established, household name up and down the Central [San Joaquin] Valley, but Sacramento was a new market for us, and we weren’t well known there.”

To help make itself better known in the communities in which it operates, Save Mart has launched a “Save Our Pools” campaign to help provide funding that will enable local cities to open their swimming pools this summer. “We’ve promised to match what each community can raise, up to $500,000, and we believe that’s going to help give us more name recognition,” Junquiero said.

The stores Save Mart operates in Sacramento had originally been owned by Lucky, one of the industry’s earliest EDLP proponents and a well-respected name in California. When Albertsons acquired Lucky in 1999, it opted to put its own name on the stores and to implement its own marketing program, which resulted in a volume drop, observers noted.

“People who were used to shopping at those stores when they were operated by Lucky went in one day and found everything, including the pricing, changed, and they opted to shop somewhere other than Albertsons,” one local resident with ties to the industry told SN.

According to Junquiero, the stores did well for a couple of years after Save Mart acquired them, “until the economy fell apart. That really hurt the whole area and made Sacramento a tough market for us,” he explained.

“As a result we’ve developed a go-to-market strategy there and elsewhere that drives a very strong investment in promotions and aggressive pricing — including programs that lock down prices for a period of time, along with daily specials — and we’re seeing positive results.

“We believe there is much we can build on in Sacramento to make our stores relevant to the communities that surround each one, and that is our focus. We’re not there yet, but we’re definitely moving in that direction.”

Safeway, based in Pleasanton, Calif., a few miles southeast of San Francisco, certainly has strong name recognition in the Sacramento area.

With 36 stores there, its market share is up to 16.7%, compared with 15.7% four years ago. During that period stores were upgraded to the lifestyle format.

Safeway is faring well, observers said. “It has good locations, and unlike Raley’s, it has tried to keep up with changes in the market demographic and make itself more relevant,” one local source explained.

However, some local sources said Safeway’s tiered pricing makes it difficult to pinpoint how its prices compare to the rest of the market.

“Safeway is so dependent on promotions, two-for-one offers and other kinds of deals that it’s hard to figure out the real everyday price of anything,” said Reynolds. “You have to buy larger quantities to get the lowest price, and that’s not always practical for older shoppers.”

Fresh & Easy Enters Market

The city’s newest competitor is Fresh & Easy Neighborhood Market — the U.S.-based division of United Kingdom-based Tesco — which opened five stores in Sacramento in March.

Three of the five are located directly across the street from a Raley’s format — Raley’s-banner stores in Folsom and South Sacramento and a Bel Air in Elk Grove — and a fourth, in an established urban area of Sacramento, is located across from a Wal-Mart.

Brendan Wonnacott director of neighborhood affairs for the chain, told SN, “We think Sacramento will be a good market for us because we give people the opportunity to try something new and exciting, and we offer value, which means wholesome food at affordable prices.”

Fresh & Easy has been planning its entry into Sacramento since 2008, though the recession prompted it to postpone the openings.

Wonnacott said the chain has several additional sites in Sacramento on hold, with plans to open one more store in the market later this year — in an underserved area near downtown Sacramento.

One Sacramento resident with ties to the industry said she sees value in the Fresh & Easy concept. “I think more consumers are interested in buying fresh prepared meals, and that’s one of Fresh & Easy’s strengths. What the stores offer fits a young professionals’ lifestyle, and these stores have the potential to change what all supermarkets offer.”

Reynolds, on the other hand, said he does not expect Fresh & Easy to have much impact in Sacramento. “The stores are still heavily dependent on private-label goods, while the fresh and easy part of the original business — fresh foods and ready-made meals — isn’t working.

“Though prices are reasonable and the stores may work for a quick in-and-out shop, continuing to rely on self-checkouts lops off a big segment of its potential customer base, particularly elderly shoppers who are intimidated by technology.”

Still, Fresh & Easy sees big things for Sacramento and other Northern California markets, with a distribution center targeted for nearby Stockton. The company has begun construction on the site but has not set a timetable for the facility to become operational, industry sources told SN.

Sprouts Expands

Sprouts Farmers Market has been in the Sacramento marketplace for about a year, having inherited a single location when it merged with Henry’s Farmers Market a year ago. Since then, it has opened two more units, including one in mid-March, with one more slated to open shortly at a site originally intended for a Sunflower Farmers Market location

“Sacramento is part of our growth strategy in Northern California,” Doug Sanders, president and chief executive officer of the Phoenix-based natural foods chain, told SN. “One determining factor for expanding there is the availability of space.

“We also believe there’s a definite need for a natural foods operator like Sprouts in that region. Trader Joe’s is there, along with Whole Foods, but there are a lot of pockets in the area that are underserved in terms of natural foods, especially natural foods at a value prices.”

Sacramento consumers have a variety of other shopping options:

• Nugget Markets, which is giving fellow conventional operators Raley’s and Safeway a run for their money at the high end of the market, observers said.

Nugget is a family-owned business that operates 10 of its 12 stores in the Greater Sacramento area, with a market share of 4.5%, down slightly from 4.7% four years ago.

While industry sources told SN Nugget has the area’s highest prices, along with the highest quality, highest service and cleanest stores, Stille said the stores are “aggressive on price” — a strategy that’s been particularly important the last few years, “because shoppers have been more price-sensitive due to the economy,” he pointed out.

In fact, for the last 10 years it’s been challenging consumers to do their own price surveys — select 25 items, price them at another conventional supermarket and then compare those prices with Nugget’s — “and we promise that our prices will be lower eight out of 10 times,” Stille told SN.

• WinCo Foods, Boise, Idaho, whose five stores account for a market share of 6%, up from 5.7% four years ago.

WinCo led the way in introducing a low-price format to the Sacramento market in 1999 — getting there ahead of Wal-Mart. According to a WinCo spokesman, “Sacramento has been a good, solid market for us.

The company often gives Wal-Mart fits, with the cheapest cost of goods available, one industry source noted.

“WinCo is not afraid of Wal-Mart,” Quinn said. “It’s one of the best retailers out there, and its EDLP approach is the real thing. Plus, being an employee-owned company means the people there are behind it all the way.”

• Wal-Mart, Bentonville, Ark., which operates 13 supercenters and seven Wal-Mart stores with expanded food offerings in Sacramento.

According to one local, “Wal-Mart is really close on price to WinCo., but they have different strategies. Wal-Mart always has the same prices, with no promotional deals, whereas WinCo will have better prices on deal merchandise.”

According to Quinn, “Wal-Mart is particularly slow to react to local changes. Plus, they are so large that they don’t give a lot of autonomy to their store-level people, and that gives local operators a big opening.”

Wal-Mart plans to open at least three Neighborhood Markets in Sacramento, including one later this year, “and they should do well there because of pricing,” Quinn noted.

Coyle said the Neighborhood Markets are slated to go into solid locations “because Wal-Mart has a strong broker in Sacramento who does a good job for them.”

• Grocery Outlet, a chain of 170 extreme-value discount stores, whose 12 Sacramento stores are maintaining a market share of 1.4%.

The company’s business is based on purchasing surplus inventory directly from brand-name manufacturers, with products typically selling for 40% to 60% below conventional retail prices, according to the company’s website.

The chain was Sacramento’s original discounter 30 years ago, when the stores featured more limited assortments in secondary locations. “But now we carry a full assortment, including perishables, though the brands may vary from time to time, and all stores are in A-grade locations,” Coyle said.

In late 2009 Grocery Outlet received an estimated $400 million investment from Berkshire Partners, a Boston-based private-equity firm.

Other competitors include FoodsCo, the local name for Kroger’s two Food 4 Less-style stores; Whole Foods Market, Austin, Texas, which operates two stores in the market; and Trader Joe’s, Monrovia, Calif., which operates six.

Sacramento has never been much of a market for independents, observers told SN. “The independents that once operated there tended to be small — maybe 15,000 square feet to 20,000 square feet — and were designed to serve local neighborhoods,” one source said.

“But as the population moved to more outlying areas, the chains and mass merchandisers began eating up the real estate at the same time the independents weren’t putting much money back into their stores, and many simply went out of business.”