WEGMANS WILL ENTER MID-ATLANTIC MARKET

ELLIOT ZWIEBACH

ROCHESTER, N.Y. -- Wegmans Food Markets here said last week it will expand from its Northeast base into the Mid-Atlantic region in the next year or two when it opens two stores in northern Virginia and one in Baltimore.

The company said the stores, of 125,000-130,000 square feet, will be located in Fairfax and Loudoun counties, Va., and Baltimore County, Md. -- about 350 miles south of Wegmans' headquarters and distribution center here and approximately 200 miles south of its southernmost store in Manalapan, N.J.

Wegmans operates 62 stores, including 52 in central and western New York state, nine in Pennsylvania and three in New Jersey. As previously disclosed, the company plans to move into the Philadelphia market with four stores in the next couple of years, including locations in Bucks County, Pa.; Downingtown, Pa.; Turnersville, N.J.; and Cherry Hill, N.J.

Wegmans officials declined comment on the reasons for its move into Virginia and Maryland.

Industry observers said the chain's expansion into the Mid-Atlantic region, on top of its previously disclosed plans to move into Philadelphia, is aimed at providing a corridor in which Wegmans can grow over the next few years -- in part to escape its reliance on its store base in central and western New York and central Pennsylvania, areas of population decline and increasing unemployment.

"In choosing Maryland and northern Virginia, Wegmans couldn't have picked better markets," Burt Flickinger 3rd, principal in Reach Marketing, Westport, Conn., told SN. "The levels of disposable income there tend to be 35% to 40% higher than in the Buffalo-Rochester-Syracuse area, and the going-in grosses for supermarket operators are 200 to 300 basis points higher than the more price-depressed markets in the Northeast."

Paul Weitzel, vice president of Willard Bishop Consulting, Barrington, Ill., said the Baltimore-Washington marketing area is conducive to a retailer like Wegmans.

"Wegmans is a very progressive company that does a lot of inventive things with fresh products and food service, and that market has always been attracted to unique merchandise and specialty-type supermarkets because of the mix of people who live there -- politicians, the military and people who work late-night shifts or off hours.

"It's the kind of market where a lot of people are looking for food-to-go and prepared meals, and a lot of supermarkets [that] have been successful with those kinds of offerings there have been unsuccessful with the same offerings in other places."

The Mid-Atlantic region also offers broader growth opportunities for Wegmans than other markets might, Flickinger noted.

"Wegmans doesn't want to expand west from New York because it will bump into Giant Eagle in Columbus, Toledo and western Pennsylvania, and both Wegmans and Giant Eagle appeal to the same upscale customer.

"But going south, Wegmans can make a preemptive strike by leapfrogging over Giant Eagle's newly acquired stores in northern Maryland to establish itself farther to the south."

Flickinger said he does not expect Wegmans to have much trouble entering a marketplace where it is completely unknown, "based on its entry into New Jersey two years ago, where it conducted a direct marketing campaign that was so successful, it's been able to take volume at its three stores there to $40 million-$50 million per store per year, which is comparable to the highest volume in the state at any Pathmark or ShopRite.

"If Wegmans follows that same playbook in Maryland and Virginia, it should prove to be a successful formula."

With the introduction last month of an everyday-low-pricing approach on 4,000 grocery items, Wegmans also has the opportunity to use an alternative pricing program to be more competitive with its Mid-Atlantic competition, Flickinger said. On the pricing end, that competition will include Metro Supermarkets and Super Foods Warehouse, plus Costco and BJ's club stores and new Wal-Mart supercenters going into the area, in addition to more conventional players like Safeway and Giant Food.

Expansion in the Mid-Atlantic region and Philadelphia could eventually prompt Wegmans to open a second distribution center, Flickinger told SN. "For a while, Wegmans may have to form a partnership with one of the wholesale distribution companies," he said, "but once it has established itself in the Mid-Atlantic and in southern New Jersey and Philadelphia, it should give the chain enough size and scale to start building another distribution center in eastern Pennsylvania or somewhere in Delaware."

Given a store average of $50 million a year, Flickinger said Wegmans would need only about 16 stores within a 200- to 250-mile radius to justify opening a second distribution center.

Weitzel said he agreed that Wegmans might have to open a second distribution center as it broadens its reach. "It would make sense for Wegmans to expand its points of distribution to make its route more efficient," he said.

The first of the three Mid-Atlantic stores is expected to be a 130,000-square-foot unit located near Sterling, Va., about 12 miles west of Washington. The company said it is awaiting site-plan approval and expects the store to open in late 2003 or early in 2004.

The second store will be located about 15 miles away near Fairfax, Va. Because the land for that 125,000-square-foot store must be rezoned and the site approved, the company declined to estimate an opening date.

The third store, a 130,000-square-foot unit, is scheduled to open in Timonium, Md., close to Baltimore's affluent northern suburbs, at an unspecified date.

Wegmans' 125,000- to 130,000-square-foot prototype includes expanded perishables, encompassing white-table restaurants, takeout foods, sushi bars and European-style patisseries featuring upscale desserts; expanded health and beauty care and general merchandise; upscale cookware; and video and other entertainment components, Flickinger said.

Wegmans began utilizing that prototype when it began its expansion into New Jersey in late 2000, he said.