THE PRESSURE IS ON H-E-B AS CHAINS INVADE TERRITORY

ELLIOT ZWIEBACH

SAN ANTONIO -- A major battle in the Alamo city is intensifying and may pose one of the strongest assaults ever on H-E-B Grocery Co.'s hometown dominance.

The latest maneuver occurred this month when Megafoods Stores signed a letter of intent to acquire all 21 Handy Andy stores here.

The stakes get higher next month when Kmart will invade with its first San Antonio Super Kmart Center, a move that follows the unveiling of Super Kmart units nearby in recent months.

While observers expect H-E-B ultimately to retain its strong market share position, they predict it could cost the chain a lot of money to meet competitive pressures from an expanding number of Super Kmart Centers, an enlarged Megafoods operation and its always potent traditional rival Albertson's.

"H-E-B is probably as strong as it's ever been," one local observer told SN. "But it's never

had to compete with a company with as big a bag of money as Kmart has, and that's going to force H-E-B to shell out a lot more in advertising and promotions than it's used to." H-E-B is the clear leader here. By appealing to medium-income consumers, it has gained control of just under 50% of the market, compared with about 17% for Albertson's, based in Boise, Idaho, which tends to appeal to a higher-end consumer.

Both H-E-B and Albertson's picked up market share when Kroger Co., based in Cincinnati, sold its 15 local units last fall to Megafoods, Mesa, Ariz. By the time Megafoods got the stores reopened under the Texans' Warehouse Foods banner, its market share had slipped to only about 6%, an observer told SN.

Meanwhile, Handy Andy Supermarkets holds a 9.5% share, and is expected to bring a big Hispanic customer base to Megafoods once the acquisition is final.

San Antonio is not an easy market to do business in, stressed local observers. "There's a strong Hispanic influence here, and a lot of people close to the poverty level," said one. "And with the high population of military and retired military personnel, the local commissaries do a large share of local business.

"But H-E-B grew up here and they know the consumers well, while everybody else has had to learn." H-E-B, anticipating the arrival of both Megafoods and Super Kmart Centers, beefed up its media advertising last fall to pound home its everyday-low-price message. And H-E-B continued to react fast as conditions changed. When Megafoods converted the former Krogers to the Texans' Warehouse Foods banner, it bettered H-E-B's prices on most items by a penny. H-E-B subsequently lowered its prices within 72 hours.

But H-E-B's competition is also getting tougher. One local source said Megafoods' acquisition of Handy Andy was nothing less than a "masterful deal."

"Handy Andy will give Megafoods the kind of local knowledge it needs but lacks," the source said.

"The Handy Andy stores are small [25,000 to 30,000 square feet], but the people at store level have been the same for years and years, and they know a lot about micromarketing in this area.

"Handy Andy's problem has been that it hasn't had the weapons to employ. But it will have that with Megafoods."

Some observers contend that Megafoods ought to retain the Handy Andy name on the stores -- and to convert the existing Texans' stores to that name as well -- because of its equity with Hispanic consumers. Chain officials said they haven't decided what they plan to do.

Megafoods has already dropped the "Warehouse Foods" name from its banner "because the warehouse label wasn't appealing to consumers there," Jack J. Walker, the chain's chief financial officer, told SN.

The stores are being redubbed Texans' Supermarkets, and Megafoods is planning a series of new promotional activities to win over local consumers while introducing its new name, Walker said.

If the arrival of Megafoods last fall boosted the level of competition, then the pending entry of a Super Kmart Center is likely to keep things hot.

Kmart, Troy, Mich., opened its first Super Kmart Center in the area last fall in Victoria, Texas, about 100 miles southeast of here, then moved into Corpus Christi in January with a similar unit. It plans to open a Super Kmart Center here in March and another in the Rio Grande Valley this spring.

The 130,000-square-foot Super Kmart Center here is undoubtedly going to have a major impact on H-E-B's 35 San Antonio stores.

"With opening prices like a 12-pack of Coca-Cola for 99 cents, Super Kmart is going to cost H-E-B money right away," one observer said.

Meanwhile, Albertson's continued to follow its game plan without reacting in any significant way to the promotional jabs being tossed around by its two competitors. "H-E-B and Albertson's have coexisted here for 12 years, and they seem to get along because Albertson's doesn't aggressively go after H-E-B with price or by making derogatory comments in its ads," one local source noted.