NW PASSAGE: INDEPENDENTS SEEK TO SURVIVE

MIKE STERNMAN

PORTLAND, Ore. (FNS) -- Supermarket industry consolidation in the Pacific Northwest has turned "business as usual" into "survival of the fittest" for the region's independent operators.

A 1996 study of more than 1,000 retail food companies in Oregon, Washington, Idaho and portions of Montana found the region to have the highest concentration of independently owned stores -- about 40% -- compared with the national average of 25%.

But that figure is declining, said local observers. In western Washington, that 40% figure is being reduced to about 35%, said Terrence Schallich, a principal at Exvere Inc., the Seattle mergers-and-acquisitions firm that undertook the study.

Fred Meyer Inc. here became an even bigger powerhouse in the region with the acquisition of Quality Food Centers, Bellevue, Wash., which closed this month. And Albertson's, Boise, Idaho, is moving ahead with its proposed merger with Buttrey Food & Drug Stores Co., Great Falls, Mont.

New-store activity in Oregon, particularly Portland, which contains a greater number of independents than the Puget Sound market, had been restrained somewhat by stricter land-use laws.

But there's been a rollout of ambitious expansion plans by relatively fresh arrivals from Washington like Zupan's Markets, Vancouver, Wash., and Haggen Foods, Bellingham, Wash., as well as a rash of store updating by Fred Meyer, Safeway, Albertson's and other chains already entrenched in the market.

Consolidation is also affecting other components of the supply chain, including brokers and vendors.

Steve McCoid, president of the Oregon Grocery Industry Association, which represents both chains and independents under its roof, said "There are only about six brokers left in the market and they are all pretty big."

Citing consolidation ripples, deli products suppliers Stone Mill Kitchens Inc., Portland, and Freshmark Foods Inc., Kent, Wash., consummated their union earlier this year.

Independent groups like Thriftway Stores, a $300 million group of some 40-odd supermarkets served by United Grocers here, are being sucked into the consolidation whirlpool. Most Thriftways trade in the Portland designated market area stretching from Vancouver in southwest Washington to Sweet Home outside Albany, Ore., and hold locations that have become increasingly attractive to the chains.

Their turf, inhabited by no less than two-thirds of the state's population, is projected over the next five years or so to fill in substantially with affluent in-migrating households and multifamily dwellings. In past months, Thriftway store owners have seen their $1.3 billion cooperative, rocked by financial troubles and riven by management turnover, announce a joint venture to be called Newco with $1.2 billion Associated Grocers of Seattle.

AG, as the Seattle-based cooperative is known here, stands to lose a significant portion of its sales volume when QFC transfers some of its grocery wholesaling business to Fred Meyer Inc.'s Puyallup, Wash., warehouse.

A spokesman for QFC said the chain will continue to use other suppliers, including Supervalu, Minneapolis, in order to maintain its vast assortment of specialty and regional products.

To ensure real economies of scale, however, some in the Thriftway group told SN a three-way partnership incorporating a larger wholesaler would eventually be needed. Local trade reports have mentioned Supervalu as possibly filling that role, but a spokeswoman for the wholesaler said it would not comment on market speculation.

With no wholesaler mergers per se in immediate sight, and with both UG and AG licensed to use the Thriftway name, the two Thriftway store groups have been given ample reasons to start exploratory talks, according to Bob Komlofske, a multiple Thriftway proprietor who chairs the UG Thriftway board.

Each Thriftway group is shrinking, one way or another. In the Oregon Thriftway group, a handful of aggressive merchants has been buying out their aging, smaller or undercapitalized neighbors at a faster clip.

In the smaller group of Washington Thriftways, a similar evolution is taking place, with some stores lost to QFC, which inherited several Thriftways in its 1997 acquisition of Keith Uddenberg Inc., a Puget Sound independent.

Thus far, Thriftway's retailers have fended off QFC's offers for their better sites in and around Portland, where QFC plans to open about 15 stores.

The push by the chains has meant heavier funding for turf defense on the part of the independents.

"It's been a pretty hectic time for us. We went from three stores to five stores over the last year and a half," said Robert A. (Bob) Lamb, grandson of a Portland grocery pioneer and a UG board member who is regarded as one of the more innovative risk-takers among Thriftway's 25 owners.

The newest additions, existing carriage-trade stores in wealthy Portland enclaves under the Strohecker's and Paradise Market names, enable Lamb to capitalize on upscale trends using a niche format that attracts much less chain competition than a Thriftway would. Lamb has added blandishments like cigar humidors and wine cellars staffed by wine stewards to differentiate the upscale formats, while gradually bringing up all three of his family's Thriftways to about 50,000 square feet.

Pointing to the Lamb's Garden Home outlet in a trendy area of the city that began in 1997 as a 27,000 square footer, he said, "We've redone that store five or six times at least, in two new buildings."

Last September, Safeway's largest store in the state, its 95th, opened a stone's throw from Lamb's Troutdale Thriftway, justifying the improvements made there. The Wilsonville, Ore., Thriftway unit is a Marketplace, a name reminiscent of Safeway's Marketplace, which began popping up in this market about 1990.

The Thriftway Marketplace is a top-of-the-line format boasting expanded produce, service meats and perimeter service departments that UG has recommended for members of the group.

The rapidly growing retailer has taken steps to restructure the family business co-owned by Bob and his brothers Colin and Gary.

"I sold some of the company to the three Thriftway store managers and to Gale Lasko, our director of operations, who is 10 years younger than I am," said Lamb, 57. "The managers are in their late thirties. So we really have a plan of succession here."

Added Colin Lamb: "With our five stores, we have been able to purchase and market more efficiently as a group under a common ownership, with Bob Lamb as the majority shareholder and principal decision-maker."

Recent acquisitions, mostly of other Thriftways, also have expanded the holdings of members Craig Danielson and Matt Marcott. That, in turn, has made possible greater direct buying through truckload and pallet deals and more ad monies for in-store promotions. "What you're starting to see, instead of the Thriftway group dealing as one voice, are the Danielsons, the Bob Lambs, the Marcotts, the ones with five stores or more, making contracts and doing things on their own outside the group," said a local supplier who services independents.

Thriftway chairman Komlofske acknowledged that some members of the collective are buying outside the group. But he said he hoped to end the need for that practice through more unity.

"Better buying and dealing with vendors is something that we, as a group, need to get back into overall," he said. "Now that we have Tim Turner [Thriftway's new marketing director] in place, we are getting more aggressive."

According to Turner, merchandising programs emphasizing fresh products and convenience have been advancing group goals. The newest is a Midwest grain-fed beef program.

"We've started individualizing the departments, and one of the places we're doing that in is the meat section, building around the perception of a good steakhouse where the product is usually a corn- or grain-fed better-quality cut," Turner said.

Thriftway has also put "a lot of money and effort" behind Mary Anne's Meals in Minutes, a home-meal replacement program in the deli department, Turner said. Setting Meals in Minutes apart is its identification with Mary Anne Bauer, an area TV personality and home economist.

The bedrock strength of the group, as different members and even financial analysts who track the chains made clear, is its "community insider" status. That's been built up over a long period of time in a myriad of ways, from buying locally to helping the area girls' basketball team raise funds to go on tour.

Craig Danielson, a fourth-generation insider who traces his grocery lineage to 1909, said touches like customer carryout service and "being part of the community" continue to be vastly popular here in what he characterizes as "a high-low bastion."

Lamb's new Garden Home unit is distinguished by photos of the 1932 Lamb Bros. family store and a six-story bell tower dedicated to a local man who died in Vietnam. Marcott "does a lot of recycling programs that people like that other stores have stopped doing." Komlofske purchased a baseball field near his Pineville, Ore., Thriftway and donated it to the county.

"What is of vital importance is recognizing that every neighborhood in the Portland area is different. The retailer who can really focus on what that microcommunity needs is at a competitive advantage," said Ken Findley, another Thriftway owner facing intense chain competition.

He will face the first two QFC units to enter the Portland market, expected this spring. Findley said he'd just barely finished adding another 6,000 square feet to one of his two 50,000-square-foot units on the West side of town last year when a 53,000-square-foot replacement Safeway and a 32,000-square-foot Albertson's opened a quarter of a mile away.

Boosters like Paula Anctil, a United Grocers' official, praise Findley for doing "a wonderful job preparing his store" at the time. Findley said he's up "a bit from before the remodel" and that "[the extra competition] gets me excited and is a chance to make our stores and people better."

But, he added in somewhat of an understatement, "it's not getting any easier."