ANALYSTS SEE STRIKE ALTERNATIVES RETAINING HEALTHY MARKET SHARE 2004-04-19 (2)

ELLIOT ZWIEBACH

LOS ANGELES -- The labor dispute in Southern California may have changed local shopping patterns forever, industry sources told SN.

Less than two months after the 20-week strike-lockout here ended, it still isn't clear where market shares will end up -- back with the chains where they came from or back with the alternative outlets where they went during the dispute.

Most observers believe it will fall somewhere in between, with Albertsons, Ralphs and Vons regaining the lion's share but with alternative outlets -- Trader Joe's, Smart & Final, Whole Foods and Costco -- holding onto something between 5% and 10%, a share that could be lost to the chains forever.

"It's going to take awhile for the chains to claw their way back to where they were, and I think 10% of their former volume could be gone forever," Jonathan Ziegler, principal at PUPS Investment Management, Santa Barbara, Calif., told SN. "The chains are going to have to be extra pleasant to customers, or they'll go back to the places they found to shop during the strike."

Greg Badishkanian, an analyst with Citigroup Smith Barney, New York, said Albertsons and Vons regained more than two-thirds of the business they lost during the strike in the first month after it ended, while business at Ralphs, which was not picketed, was already back to normal. "But the retailers may be overly optimistic on the potential longer-term gains in sales and customers," he said.

One local executive said he believes 90% of customers will return to shopping at the three major chains on a regular basis, "but I think the chains will lose 10% of their former volume on a permanent basis."

Another executive here said stores that were not involved in the strike-lockout experienced volume increases of 15% to 20% during the dispute, "and about half that volume is remaining and settling in at the replacement stores," he said.

Jack Brown, chairman, president and chief executive officer of Stater Bros. Markets, Colton, Calif., said his company's same-store sales, which were up 5% before the strike, climbed 49% during the strike and are running ahead more than 10% since the strike ended, "so we believe we're continuing to hold some of the business we picked up on a permanent basis," he told SN.

According to Badishkanian, "Most stores are using aggressive promotions to lure customers back, [but] we do not expect the conventional supermarkets to continue this level of promotion, and as a result, Whole Foods, Wild Oats and Costco may regain business once the initial promotions have run their course."

Local observers told SN the chains' promotions have not been as hot as some had expected.

"I don't think prices now are any hotter than they were before the strike," one executive said. "I think what the chains are trying to do is hit a few items hard with blended deals -- two or three for the price of one -- to encourage customers to buy without giving up much margin.

"I think the chains decided they suffered enough sales losses during the strike-lockout and they don't want to suffer any more. But it's clear they're not taking prices below cost, as many of us had feared. Instead, they've decided they can bring market share back without going below cost."

Instead, the chains have "quietly and subtly achieved significant cost savings" by using the terms of the new contracts to their maximum advantage, he pointed out. "For example, they're able to pull higher-priced produce clerks to do the work of lower-paid general merchandise clerks and pay them the lower rate when they do the GM work, so I think retailers believe they can achieve savings on the cost side very quickly," the executive told SN.

Another executive also said the chains are using the new two-tier aspect of the contract to keep costs down. "Implementation has been pretty harsh, with more use of new hires and a loss of hours for senior employees," he said.

The three major chains have run some very hot specials, he pointed out -- Best Foods mayonnaise for 99 cents, "which is a $2 saving," he noted; and beer and soft drinks at one-third the regular price, "when the regular price is usually right at cost," he said -- but not to the degree some people had anticipated.

Although the strike-lockout ended in early March, it took a couple of weeks for the chains to get stock conditions back up, observers said, and shoppers were slow to resume their old habits.

"Many people felt the alternative stores they shopped at during the strike were saviors, and they wanted to express a moderate degree of loyalty even after the dispute was settled, so they stuck with them for an extra couple of weeks," one executive said.

"But going forward, I think most shoppers will return to their pre-strike weekly shopping habits, although I think they'll now add a visit to the stores they patronized during the strike."

The retail executive expressed similar thoughts. "Customers were slow to resume their old habits because they felt a certain allegiance to the new stores they were patronizing. And they didn't like the strike-lockout so they voted with their feet and returned to the chains very slowly," he said.

"As a result, what we have now are shoppers rather than customers. They've discovered companies like Trader Joe and Smart & Final -- entities many of them probably never went to but which were the biggest beneficiaries of the strike -- and they found items there they really liked, and they're not interested in giving up those stores and those items completely."

Badishkanian said upscale operators like Whole Foods, Wild Oats and Costco "are better positioned to retain business given the differentiated formats, compared with smaller, independent grocers or convenience stores, which also benefited from the strike."

Ziegler said he believes customers will use companies like Trader Joe's as secondary stores rather than doing 100% of their business with one of the chains.