CAPITAL IDEAS 2004-10-11

JON SPRINGER

STERLING, Va. -- Before even entering the new Wegmans store here, the first in the Washington, D.C., metro market, shoppers encounter two anecdotal indications of its impact: The 800-space parking lot is nearly full, and there's a sign out front advertising jobs available for another Wegmans store set to open in February in nearby Fairfax.

That store, sources said, will include another 50 to 100 parking spaces and will be the third Wegmans to have opened in the area in 12 months. (The Sterling store opened Feb. 29 of this year, and a second store opened in Hunt Valley, Md., in June.) The Rochester, N.Y.-based chain declined to comment on additional openings, but according to local real-estate sources, Wegmans has its eyes on at least three or four additional locations in the Washington metro market.

That's a lot of parking, even before considering the reported plans of another relative newcomer to the area, Harris Teeter. That chain opened its first six stores in Northern Virginia between 1999 and 2002, but reportedly has more ambitious plans for Washington's growing western suburbs. Sources revealed Harris Teeter has made commitments for at least 12 new stores in Northern Virginia. The move would represent a major expansion for the upscale chain, a division of Matthews, N.C.-based Ruddick Corp.

Other stores selling food have been active in the area as well. Minneapolis-based Target has opened two new SuperTarget grocery-general merchandise combination stores. Supervalu's area price-impact chain, Shoppers Food Warehouse, is piling up market share under a revamped format offering sharp pricing and broad selection. Alternatives on the natural side (Whole Foods Market and Trader Joe's), as well as warehouse clubs and drug stores that are expanding their food offerings, are charging into the region, too.

A baseball team isn't the only thing moving to Washington.

Why so much recent activity? The simple answer is strong demographic and population growth, combined with a relative lack of price pressure from supercenters, has created a perfect storm for supermarkets. "This is a market where you can still make money," said one observer.

Beyond that, some believe the upstarts are encouraged by perceived weakness among the area's top two supermarkets, which have dominated the market for the better part of 75 years. Market leader Giant of Landover, a division of Quincy, Mass.-based Ahold USA, has seen its parent company sinking in debt as the result of an accounting scandal and, some say, has been distracted by its recent administrative consolidation with Ahold's Stop & Shop division. There's a further impression that the leaders' size and experience could work against them: Giant, along with No. 2 Safeway, are fighting the insurgents with a cadre of old stores that lack many of the amenities of the newcomers.

To be sure, there are those who strongly dispute that last notion -- Giant and Safeway among them -- and each of them have sprung to action with store renovation efforts and active development pipelines.

What all parties will agree on is that the Washington-Baltimore food retail market is changing, and quickly. In its entirety, it offers a snapshot of broad trends in food retailing nationwide: the move toward service-oriented stores on one end and price operators on the other, bringing pressure to the middle in the search for sales and growth.

"In the past few years, we have seen more competition than I've seen in my 38 years with Giant Food. We've never seen so many new competitors in the market, and they're all working very aggressively to take away our cookies. It's unprecedented," Barry Scher, spokesman for Giant Food, Landover, Md., told SN.

"The development appetite for supermarkets is consistent, but the landscape is definitely changing," Michael Patz, principal for Towson, Md.-based commercial real-estate broker KLNB, told SN. "Before, if you had an 'A' site, you knew it would be either a Giant or a Safeway. Today, that's not necessarily where the landlord is looking first.

"If the site's big enough, they look to Wegmans. If the area's affluent enough, Harris Teeter, and if the market makes sense, it's Shoppers," Patz continued. "I'd say Harris Teeter and Shoppers are the most aggressive right now, and Wegmans is the most sought after."

Harris Teeter's Expansion

A Harris Teeter spokeswoman, as well as the firm's local real-estate representative, declined comment to SN on expansion plans in Northern Virginia. Yet multiple sources indicated they have quite a story to tell. "I understand they have 12 to 15 deals in the Northern Virginia market and that they're close to signing leases," Michael Zacharia, first vice president for commercial real-estate brokerage CB Richard Ellis, McLean, Va., told SN. "That's a very big statement in this market."

Harris Teeter opened its first Washington-area store in Arlington, Va., in late 1999, and followed with five others in the next two years. However, a plan to expand to Southern Maryland was scrapped, according to Zacharia, because the retailer decided that state laws limiting beer and wine sales would impact its business plan. Harris Teeter summarily sold leases in Gaithersburg and North Potomac to Whole Foods and Giant, respectively, and there was a sense that Ruddick had put the brakes on further expansion.

Evidently, it was only a pause. Harris Teeter is eyeing three sites in Alexandria, three in Loudon County, as well as stores in Gainesville, Arlington, Falls Church and Washington, D.C., sources said. A Harris Teeter that opened in Arlington two years ago -- directly across the street from an older Safeway -- takes on its neighbor with a lively, hip design including a second-floor wine section accessible via a glass elevator.

"They definitely have a funkier feel than the store across the street," noted Andrew Wolf, a supermarket analyst with BB&T Capital Markets, Richmond, Va., who toured area stores with SN recently.

Observers expect more of the same as Harris Teeter erects additional stores. Harris Teeter has already been announced as an anchor tenant in Ashbrook Commons, a community shopping center now under construction in booming Leesburg. "If I were a betting man, I'd say Harris Teeter will have a big impact," said Steve Boyle, a Bethesda, Md.-based vice president for Edens & Avant, a grocery-anchored shopping center developer and manager based in Columbia, S.C. "I think what they've noticed is that not only are the demographics and growth attractive, but that this market was ready for a better product than it had."

Safeway Upgrades

Safeway for its part intends to meet the challenge by rolling out new stores, and redesigning many of its older units with a store featuring a greater depth of fresh departments and produce. These "lifestyle" stores that premiered recently on the West Coast are en route to Safeway's Washington area now. The Arlington store neighboring the Harris Teeter, which originally opened in 1958, recently got such a makeover -- one of the first in the pipeline (two others in Ellicott City, Md., have also been completed, said Greg TenEyck, Safeway spokesman).

"Our shoppers will see a point of difference in these stores," TenEyck predicted. "We feel the customer service and each of the perishable departments far surpasses that of the competition."

A colorful 12-page brochure available at the courtesy desk at the Arlington store introduces shoppers to "What's New at Safeway," including organic products, a revamped wine section, private-label Rancher's Reserve branded beef and full-service meat, seafood, deli and bakery departments. The spacious produce section features low-profile shelving and design incorporating faux-wood floors, and various baskets and farm carts displaying 80 varieties of organic fruits and vegetables.

According to TenEyck, Safeway is working on an "aggressive program" in the area to roll out the redesign to other stores. All new stores will include the expanded organics section as well, he added. Three opened in the market so far this year; an additional one is scheduled late this year in Fairfax, Va.; and at least seven new stores are planned to open in 2005.

Wegmans' Buzz

The region's most talked-about new store is undoubtedly Wegmans, which blasted into Sterling in a 130,000-square-foot former Wal-Mart site near Dulles Airport. On a recent Friday afternoon, the store was crowded and lively, with wine-tastings and product samplings along with a busy lunch trade, including many diners from the nearby headquarters of America Online.

One local expert estimated the store was doing around $2 million in sales per week. "Wegmans is probably the best pure merchant in the food business and one of the best I've ever seen in any sector," stated Wolf.

According to Scher, Wegmans' opening impacted business at several surrounding Giant stores. Added Rick Rodgers, senior vice president of merchandising for Shoppers Food Warehouse: "They're a totally different animal than what we're used to seeing here." Area real-estate representatives said Wegmans' presence in the area will be limited only by its ability to find the kinds of sites it demands.

"Wegmans wants super-regional trade areas with high income, a strong road network and a strong daytime population," said Patz of KLNB. "The way they trade is much different than a traditional supermarket. It's more like that of a Costco or a Sam's Club."

Demographically, the Washington suburbs fit the bill for Wegmans, particularly those outlying the I-495 Beltway in Virginia and Maryland. Sterling's Loudoun County is the fastest-growing county in the United States in terms of residential growth, observed Zacharia. According to the Loudoun County 2003 annual growth survey, population is expected to grow 83% between 2000 and 2010; 33.9% between 2010 and 2020; and another 10.7% between 2020 and 2030, eventually counting 462,000 residents overall. In 1990, Loudoun County had just 86,100 residents.

More than 50% of the workforce in Northern Virginia is in management and professional occupations, reflecting the government and high-tech sectors. Unemployment was just 2.5% as compared to the national average of 6%. Nearly 7 million square feet of retail space for 18 shopping centers larger than 100,000 square feet had been approved in 2003 in Loudoun County.

In the Loudoun County seat of Leesburg, a visitor could encounter thousands of new rooftops and retailers -- all within miles of one another, including a new Giant, a Food Lion and a new SuperTarget directly adjacent to a new Costco.

Much of the shopping activity during a recent visit to the Leesburg SuperTarget remained in the store's general merchandise area. "SuperTarget is still finding its identity as a food retailer," said Wolf. Next door, the Costco featured its usual array of bulk food items and fresh samples. The Leesburg store also features a chilled room for fresh produce.

Giant Defends Turf

The large new Giant in Leesburg includes a set of natural/organic products, full-service meat and seafood departments, a well-stocked wine aisle with backlit shelving, and self-checkout lines. Employees informally discussed the recent systems change to Stop & Shop, which they noted caused disruptions, including some instances where unaligned product codes gave department heads sales credit only for the sale price of items they sold. "Speaking to employees, I got the impression they lacked a certain espirit de corps they'd been missing since Izzy Cohen [a former Giant president and chairman] died and since Ahold took over," said Wolf. "One said, 'It's not the same Giant it used to be."'

Ultimately, change will be a good thing, according to Giant. In an interview with SN, Giant's Scher said that while the integration with Stop & Shop mainly affects back-room functions at this point, the combination will eventually produce merchandising and technology advances that will help the $5.5 billion, 200-store chain grow its market share -- estimated at 42% -- and benefit shoppers. Early signs of this are more self-checkout lines (which have particular appeal to educated, affluent shoppers, Scher pointed out) as well as in-store price verification scanners, new shelf tags and receipts.

Scher acknowledged that competitors may have been emboldened by the issues facing Ahold and Giant's integration, but he added Giant never lost focus on competing. "We've had to become more creative in our game plan," he said, "but we continue to be as aggressive as ever." Giant has plans to open seven new stores, and complete between six and eight major remodels, by September of 2005.

Scher added that Giant's strength as a local icon -- driven mainly through its charity and community affairs programs -- remains unaffected by the integration with Stop & Shop. "Here in Landover, many of the job functions have gone up to Quincy. But public affairs, consumer affairs, labor relations, real estate, store operations and distribution -- all the things that are local -- are still here, and Stop & Shop has said what is local will stay local."

Supervalu's Shoppers Ups the Ante

Shoppers Food Warehouse has met Washington's changing competition by doing some changing of its own. The Supervalu-owned price-impact division based in Lanham, Md., prefers that its 59 stores go by the Shoppers Food & Pharmacy name now.

"People were caught up in the enigma of what we used to be -- a warehouse," explained Rick Rodgers, senior vice president of merchandising for Shoppers, which was acquired by Supervalu in the 1999 Richfood deal. "But now that they see what we've evolved into, they've really opened their arms to us and told us, 'You're what a supermarket should be."'

Shoppers has managed to keep its value image while improving the look, layout and merchandise mix at its stores, some of which can reach $1 million in sales a week, Rodgers said. Perishables make up more than 40% of the sales at Shoppers. The chain has added in-store pharmacies, natural products, prepared food and ethnic specialities that appeal to specific neighborhoods. "It's value with a twist," Rodgers said. "We still have that price impact, and we want to capitalize on the fact that we're known as the value leader in this market. But our facilities today are equal or better than our competition, and we've been one of the few chains who have grown our market share in the last three years."

In addition to the Baltimore remodels, Shoppers opened a new location recently in Manassass, Va., and has four new stores on the calendar for 2005.

Food Lion beat many of the newcomers to the area with its first stores arriving in the mid-1980s. Its 80 stores in the area account for around 9% of the market share. "As with all our markets, we look for opportunities to grow," said Jeff Lowrance, a spokesman for the Salisbury, N.C.-based chain. The company has a new store on tap for Columbia, Md., later this year or early 2005.

Whole Foods has captured a 3% share of the metro area with its 16 stores. In addition, it has locations under development in Alexandria, Va., Fairfax, Va., and Chevy Chase, Md. That chain first arrived in the area when it bought a competitor based in Rockville, Md. -- Fresh Fields.

A Suburban Mom's Viewpoint

How do consumers perceive the changing food retail scene in Washington? SN asked one shopper in the Fairfax, Va., area:

"I've shopped just about every chain in this area at one time or another. There is one Wegmans open, and they are getting ready to open a second right near me. I've heard it's pretty awesome, but whether I shop there or not will depend a lot on price.

"As a mom, my primary consideration is convenience. With screaming brats in the cart, I need to go shopping as seldom as possible -- and get in and out of there quick, which means using a store close by where I'm familiar with the layout and can count on the selection. Price is becoming a much bigger consideration, too.

"Right now, I shop at the Giant. There are two near me: One is kind of older and smaller; the other is a bit further away, but it is bigger and newer and seems to have the best selection. I'm used to Giant.

"There is also a recently renovated Safeway that is closer to my house. I like this store, and it's definitely more convenient. [It] has a branch of my bank and a Starbucks in it, but doesn't seem to carry as many different items and brands as Giant. Also, I think it's a bit more expensive. They do seem to have slightly nicer quality fish and more types of produce than Giant. On the other hand, there are always long lines because they never seem to have more than two or three checkers open. When you have kids, it is essential to get through the checkout line as fast as possible because that's when they really act like animals.

"When I was making plenty of money, I shopped a lot at the Whole Foods for the nice fish, meat and produce and good wine selection. But in those days, I could just throw anything in the cart and not worry about how much it cost. I would supplement this with trips to the Giant for basics, paper products and diapers. Now I buy diapers and a few staples from BJ's. My husband buys beer at a Total Beverage place near his office. For quick errands, I go to the old Giant, or the Food Lion -- which is cheap, but has a very limited selection.

"A lot of people around here seem to shop at Trader Joe's at least some of the time. I love it and wish I could use it more, but I find it not very kid-friendly. It has narrow aisles, and is basically not very practical because then I still have to go to Giant for other stuff. But they are great for fish, cheese and wine -- with good prices -- which is just where the Giant and other chains seem to conk out.

"There's a fairly new Harris Teeter near here, too. That's where I loved to do all my shopping when I lived in North Carolina, but here they seem to be going for a more upscale thing and the prices are just too high.

"I think I'm probably pretty typical -- at least in terms of middle-class suburban moms -- in using Giant or Safeway based on convenience and price, with the occasional foray to Trader Joe's or Whole Foods when I need decent fish or wine or fancy cheese or stuff for a party. You just can't get that stuff in the regular supermarket, even in the so-called gourmet aisle. There are also a lot of pretty well-off people around here who can afford to do all their shopping at Whole Foods, which is I guess why they're locating down here."

Washington, D.C., Metropolitan Area Grocery Store Market Share

Giant of Landover is the clear food retail leader in this fast-developing food market. However, the landscape is quickly changing as newcomers like Wegmans, Harris Teeter and Whole Foods Market enter with new and different shopping choices.

Giant 42%

Safeway 26%

Shoppers Food Warehouse 13%

Food Lion 9%

Whole Foods 3%

Magruders 2%

Wegmans 1%

Other 4%

Source: CB Richard Ellis.