BOOM TOWNS 2000-08-21 (1)

JON SPRINGER

Though located in disparate corners of the map, and constructed with different building blocks, Austin, Atlanta and Las Vegas share some common characteristics that the supermarket industry can't help notice.

All three are among the fastest-growing cities in the United States during the last 10 years, and consequently have been some of the busiest hubs of supermarket development and expansion. Growing cities are vital for the health of the supermarket industry, which experts say has shown little real growth in recent years when adjusted for inflation.

Supermarket chains in the three cities examined by SN in this article are growing by different means and are affected by competitive pressures unique to each market. The mix of players and their balance of power is different in every city as well.

In Atlanta, an upscale chain moving north from Florida has combined good timing with well-run stores to grow along with the city, and has nearly caught up with a longtime market leader. The success of those two, however, has come at a cost to two smaller operators, one of which has exited the market completely and the other deeply retrenched and closing some stores. Nontraditional food retailers, including fresh-food specialists, Internet service, discount superstores and strategically located downtown locations, are also shaking up the Atlanta market.

In Las Vegas, a recent decision by the Federal Trade Commission has remixed the competitive balance and left four major players scrambling to build on a wealth of new street corners created in the wake of a prolonged resort building boom. With no prominent local players, observers say, the market favors the fastest and most astute movers on the real-estate front, and the best providers of customer service.

And in Austin, Texas, the spoils of explosive growth in the technology industry have largely gone to a similarly innovative local supermarket chain. Though its nationally backed competitors are also growing in Austin, observers there say the race -- made more difficult by a tricky climate toward store development -- is largely for second place.

The spark that set off Atlanta's 30% population boom over the 1990s may have been first struck some 70 years ago, when Hartsfield Airport took flight 10 miles from downtown.

The airport, observers say, helped establish Atlanta over Birmingham and other contenders to become the unofficial "capital" of the Southeast. Hartsfield today calls itself the world's busiest airport and its city is linked to regional growth throughout the Southeast -- most recently, booms in Florida and the Carolinas. "If you want to do business in the Southeast, this is where you have to be," said Ray Uttenhove, senior vice president of the Atlanta office of CB Richard Ellis, a Los Angeles-based real-estate services firm. "It's simply the center of the Southeast."

With 3.86 million people, the 20-county Atlanta metropolitan statistical area is the ninth largest in the country.

In the supermarket industry, Atlanta's 1990s growth spurt has been matched by Lakeland, Fla.-based Publix Super Markets, which observers say has taken the greatest advantage of the area's development. Publix operates 105 stores in Georgia, including 89 in the Atlanta region.

"Up until eight years ago, there wasn't any Publix here," noted John Vaclavik, retail sales manager for Acosta Sales & Marketing, an Atlanta food brokerage. "I think they saw Atlanta as a growth market at the right time."

Aggressive growth in Atlanta vaulted Publix into a tight race for market share with Cincinnati-based Kroger, which today operates 105 stores in the region. As of 1998, Kroger's market share was 26.2% compared with 22.1% for Publix.

In the meantime, Publix and Kroger, along with the growing Target and Wal-Mart supercenter concepts, drove down competitors A&P and Winn-Dixie. Jacksonville, Fla.-based Winn-Dixie, No. 2 in Atlanta with an 18% market share as recently as 1996, fell to third and below 12% by year-end in 1998. Since April, Winn-Dixie has closed 111 stores in a company-wide restructuring. A&P, Montvale, N.J., saw its market share slide from 17% down to 6.6% between 1996 and 1998, and it exited the market completely in 1999. "Winn-Dixie looks like they're folding up the tents, in a real disposition mode," said Gordon Miller, vice president of the Atlanta office of Trammell Crow, a Dallas-based real-estate services company.

Publix picked up nine former A&P stores when that chain left town, further turning Atlanta's supermarket scene into a two-horse race.

"Kroger and Publix are going head-to-head against one another, and between the two of them they pretty much have the market dominated," said Uttenhove. "While Kroger has the largest market share overall, Publix is gaining a very strong in-town position. They've done four or five deals recently and did well for themselves picking up the former A&P sites.

"Both stores are doing well," she added. "They're both good draws and it's been easy to lease up small space around them. Both chains are very creative about getting [real-estate] deals done."

Publix' success at growing along with the market while its competitors faded is due in part to good personnel and well-run stores, said Vaclavik. Competitors including Kroger, he added, were slow to react to Publix' invasion.

"Publix is very customer oriented, with clean stores and good personnel," he said. "I think they do a real good job of recruiting on all levels, from management on down to the store employees. They're a real class organization."

Kroger, said Vaclavik, is responding by introducing expanded selections of beer, wine and perishables in some stores. "They're going after a better customer," he said.

"No question, Kroger and Publix are dominating here, and they're moving into the growth areas, which tend to be upper income," said Miller.

Elsewhere, what Vaclavik called "spillover" chains from the Carolinas have had some success in Atlanta including, Ingles, Black Mountain, N.C., and Harris Teeter, Charlotte, N.C.

Harris Teeter, according to Uttenhove, has made some inroads with a small number of well-received downtown stores, while Harry's Farmers Market is having success with its Harry's in a Hurry convenience-store concept.

Atlanta-based Harry's operates three Harry's Farmers Market superstores of between 81,000 and 132,000 square feet, and five Harry's in a Hurry convenience stores, which carry a streamlined selection and range between 3,700 and 15,000 square feet. The company in June said it would open a sixth Harry's in a Hurry in Atlanta's Peachtree City area in March of 2001. It hopes to open as many as three such stores during 2001.

"Harry's does an excellent job with prepared foods," Uttenhove said.

Harris Teeter, a division of Ruddick Corp., planned to add five stores in Atlanta during fiscal 2000, bringing its total to 13 by year-end, spokeswoman Sonya Elam told SN. Three new store sites are former A&P locations Harris Teeter purchased last year.

Harris Teeter has also gained a small foothold in Midtown Atlanta, which could be a beneficial strategy, Uttenhove noted, citing a renewed interest in downtown residential projects.

"What happened to the Northern part of Atlanta between I-75 and I-85 was dynamic and led the growth in the 1990s, but we've become very spread out, traffic is a problem and now there's a tremendous move back to the city," she said. "We're getting vertical, seeing a lot of mid-rise developments and mixed-use projects being planned around town."

Grocery/discount supercenters are also having an effect in Atlanta, sources said. Wal-Mart Supercenters had a 3.3% market share with seven Atlanta area stores while Target, Minneapolis, is also looking to develop, said Miller. "There's a steady drumbeat of Target development, since they arrived here a little later than Wal-Mart," Miller said. "And Wal-Mart is always looking to improve their stores to the superstore concept."

Though most accounts are still anecdotal, pure-play Internet grocer Webvan, Foster City, Calif., is attracting a lot of attention since its May launch in Atlanta. Webvan, which offers Internet ordering and delivery of groceries and other items, promised to "reinvent the way Atlanta shops," by offering an alternative to trips to the grocery store.

Traffic and other "sprawl" concerns have increased quite a bit in Atlanta due to its booming growth, observers say, issues that play to Webvan's promise of superior convenience. Some analysts suspect Webvan is already taking small bites from sales at area supermarkets, since Kroger and Publix are still in the process of developing their respective e-commerce plans.

Webvan also eliminated its only immediate threat of on-line competition when it agreed in late June to buy HomeGrocer.com, the Kirkland, Wash.-based Internet retailer that was readying an Atlanta launch.

"There's definitely been a lot of discussion about Webvan. Everybody's talking in boardrooms and in meetings about all the trucks they've been seeing," Uttenhove said. "People I've talked to say they've been impressed that their deliveries are on-time. Their prices are pretty competitive and they have a nice presentation."

Atlanta

Population: 3.86 million (1999)

Population Growth (1990-99): 30.3%

Unemployment rate: 2.9% (June, 2000)

Per capita income: $30,778 (1998)

Median household income: $35,607 (1998)

Major supermarket chains: Kroger Co., Publix Super Markets,

Winn-Dixie Stores, Ingles Markets, Harris Teeter

Turning a resort casino into a supermarket sounds like the finishing act of a David Copperfield show, but that's just how growth works in Las Vegas.

"It's a domino effect," explained Kit Graski, senior vice president for the Las Vegas office of CB Richard Ellis, a Los Angeles-based real-estate services firm. "Every new casino turns into more people, which turns into more houses, which turns into more grocery stores. The grocery stores then spark the Costcos and the Best Buys and the malls."

With Las Vegas in the midst of a prolonged resort-casino building boom, the desert city -- which has grown in population by 62% during the 1990s -- has become fertile ground for new homes and the supermarkets that follow them. And thanks in part to the unexpected consequences of a major retail merger, it's also one of the hottest competitive markets, observers told SN.

The Albertson's-American Stores megamerger, announced in 1998, might have created a dominant player in Las Vegas, combining what at the time were the second- and third-largest chains in the Las Vegas metropolitan statistical area, which includes Clark and Nye Counties in Nevada and Arizona's Mohave County. But Federal Trade Commission mandated spinoffs forced Albertson's to divest its Las Vegas area stores before taking control of American's Lucky chain.

While Albertson's took over and converted its former rival Lucky stores, it divested 19 of its Las Vegas Albertson's stores to West Sacramento, Calif.-based Raley's. A new player in the Las Vegas market, Raley's converted the Albertson's locations to its banner last fall. Those two chains also compete with Smith's (a division of Kroger, Cincinnati) and Vons (a division of Safeway, Pleasanton, Calif.) in the Las Vegas market.

Observers say Albertson's came through the market shakeup in fighting shape, with the most stores and busiest development pipeline.

"In terms of strategic locations, willingness to negotiate deals and anticipating where the rooftops are going, I'd say Albertson's has done a great job," said Renee Ryan-Thrailkill, owner of Millennium Partners Real Estate, a Las Vegas-based commercial broker.

"Albertson's definitely has the lead here now," said Graski. "They're filling holes in the market while the others are still trying to get coverage. They understand the market best and it's not hard for them to get deals done."

Albertson's as of late 1999 had 28 stores in Las Vegas, with plans to grow that number to more than 40 over the next few years, reports said.

However, Albertson's is not the only chain in growth mode in Las Vegas. According to the Las Vegas Perspective, a yearly market area study prepared by the local Metropolitan Research Association, there were as of late last year 569,000 square feet of neighborhood shopping centers under construction in southern Nevada, with an additional 880,500 square feet planned. Neighborhood centers are defined as those with grocery anchors of more than 30,000 square feet.

Vacancy in grocery-anchored centers is 2%, according to the report, compared with 3.5% for all retail centers.

Smith's and Vons, which as of 1998 had 22 and 20 stores in the MSA respectively, have also been busy adding new stores, local experts said. Both chains, incidentally, gained deep-pocketed corporate parents in recent years -- Vons became a Safeway subsidiary in 1996 and Smith's was acquired by Fred Meyer in 1998, which was then acquired by Kroger.

Vons is keeping pace with Albertson's in new-store development, said Ryan-Thrailkill. "There's a new shopping center on every corner and you primarily see Albertson's or Vons there," she said.

"Smith's [which also operates stores under the Price Rite banner in the area] seems to have become more proactive recently," Graski said. "They're more aggressive today than they were a few years ago and they'll probably gain some market share as a result."

Newcomer Raley's, meanwhile, created a stir by bringing its concept to Las Vegas for the first time, observers said. As it does in its home base of West Sacramento, Calif., Raley's offers expanded natural foods and in-store specialty shops at its Las Vegas stores and looked to compete on service more than on price.

Raley's debut attracted plenty of attention but mixed results, observers said.

"Raley's initially made a big splash after promising a whole new kind of supermarket," Ryan-Thrailkill said. "I think a lot of people looked in and shopped but that it faded some after the initial push."

Graski, however, said some feeling exists in Las Vegas that Raley's "blew into the market with higher prices before the market really knew what they were about," and that perception has hurt sales.

A Raley's spokeswoman said the chain is in the process of an aggressive in-store remodeling of the former Albertson's, adding new flooring, paint, decor and fixtures. Raley's is remodeling two to three stores at a time until it completes all 19 stores, she said. Raley's officials were unavailable to comment further on its experience in Las Vegas.

Like Raley's, most Las Vegas supermarkets are today putting heavy emphasis on customer service, Rick Mitchell, division president for Los Angeles-based food brokerage Crossmark, told SN.

"The stores I saw on my last visit there seemed to be fighting very hard for business in terms of customer service -- more so than I see in southern California," Mitchell said. "That's a sign it could be over-stored."

Mitchell noted, however, that Las Vegas is a "crossroads" market in which the major players have interests elsewhere.

"All of the operators in Las Vegas are controlled by companies with larger operations somewhere else," Mitchell said. "So it's a good, profitable market for all of the players there, but just a small chunk of their overall business."

Growth in Las Vegas is expected to continue for at least another five years, experts say, starting with a rash of new Strip resorts as well as diversification of the economy, including a number of manufacturing and bulk warehousing concerns.

"We hit the 1 million mark in population a few years back and that sort of made us a major city," said Graski. "We have companies here today like GE Capital, Levi Strauss and Ocean Spray. Now, we have the plastic-bottle supplier for Ocean Spray moving their headquarters here."

While Graski said there are no big environmental issues on the horizon -- even with growth projections there should be no concerns over the water supply for at least a decade, he said -- various communities and agencies have begun butting heads over growth.

"As more people move here it's getting to be a big city, and we're beginning to look at it with big-city eyes. There's a lot of discussion over master plans and commercial areas," he said. "Every entity has got their own planner and everybody has different ideas over the way the place should look. A lot of established communities want to keep their neighborhoods the way they are."

As in California, some Las Vegas communities have opposed the addition of big-box stores. Earlier this year a Clark County ordinance passed that effectively restricted large discount stores from selling groceries. The union-backed ordinance was repealed a few months later, paving the way for the first Wal-Mart Supercenter to open in Clark County this month.

Developers of all stripes are busy watching the growth patterns as well.

"The I-215 Beltway is slowly coming around, and everybody is looking to find the strategic spots around it," Graski said. "They want to figure out how it's going to play out and where the best spots will be."

Las Vegas

Population: 1.38 million (1999)

Population Growth (1990-99): 62%

Unemployment rate: 3.5%

Per capita income: $27,780 (1998)

Median household income: $30,023 (1998)

Major supermarket chains: Albertson's, Raley's Supermarkets, Smith's, Vons

California's Silicon Valley and New York's Silicon Alley are perhaps better known, but neither area has experienced a recent growth spurt quite as dramatic as Texas' "Silicon Hills."

The name refers to the technology firms that have sparked a population growth of more than 35% over the last 10 years in the Austin metropolitan statistical area, which includes Travis, Williamson and Hays counties.

With computer manufacturer Dell Computer leading the way, firms such as Motorola, IBM and Computer Sciences Corp. are locating in the area and creating thousands of well-paid jobs. Support for the tech industry, notably venture-capital firms, is well-represented in Austin now too.

The influx has vastly changed Austin, which until recently was better known as a funky college town and state government hub, observers say.

"The state of Texas and the University of Texas used to be the major employers here, but that isn't the case anymore," said Brad Hardy, retail consultant for the Austin office of Trammell Crow, a Dallas-based real-estate services firm. "Technology companies are projected to bring in some 66,000 jobs here over the next two years -- some paying an average of $80,000, which is a lot of money for Texas. It's been quite a change."

In the supermarket industry, Austin's tech-based growth has been a natural fit for H.E. Butt, the San Antonio-based private chain, which like the city's major employers, is known for its innovations and creativity. With 33 stores in the Austin area, including the prototype for its landmark Central Market concept, H-E-B masters the market with a 46.8% share. Randall's, a division of Pleasanton, Calif.-based Safeway, and Boise, Idaho-based Albertson's are fighting for second place with 12 and nine stores in the area, respectively.

"H-E-B is the gorilla here -- they just dominate," said Greg Blackburn, an Austin-based retail specialist with CB Richard Ellis, a Los Angeles-based real-estate firm. "It's practically their backyard. They have some stores doing $1,000 a square foot. Albertson's isn't doing those kinds of numbers."

Keys to H-E-B's control of the market are a willingness to experiment with new concepts and an alert and active real-estate department, experts say. The majority of H-E-B's stores and centers are company-owned and developed.

"They get an internal rate of return on the real estate they own, and since they're a private, family-owned company and don't have to answer to Wall Street, they seem to be able to move more quickly than the other companies," said Blackburn.

That quickness has allowed H-E-B to thrive in what real-estate experts call a difficult community in which to build. Geographically, Austin is situated on a "watershed," or a series of underground rivers, and its community is sensitive to development and the environment. Legislation designed to protect the environment narrowly passed in the late 1980s, and retail development since then has proven to be an expensive, time-consuming process.

"The biggest enemy to developers here are environmental restrictions and what some consider to be an anti-growth sentiment in the community," Hardy said, noting that Dell took its headquarters to nearby Round Rock in part because the city of Austin proved a difficult locale in which to grow. "The challenge here is to develop without robbing the things that give its Austin its flair -- including the hippies and the musicians."

H-E-B, he added, has done the best job of almost any retailer, in any category, of adapting to the city's attitude toward development. Consequently, the chain is perceived to be on "the good side" of the debate.

H-E-B officials simply say the chain understands the market.

"I guess you call [the development rules] restrictions, but we see it as just being a part of the community," Kate Brown, a spokeswoman for H-E-B, told SN. "We work very hard with the neighborhoods we serve and with the environmental community."

Brown said the chain opened an "environmental-prototype" store in Austin by developing just 9 acres of a 60-acre site, using recycled materials where possible.

Just as innovative from a merchandising angle is H-E-B's Central Market concept store, which debuted in Austin in 1994. The 70,000-square-foot store, featuring an enormous array of fresh and prepared foods and specialty items, is today the second-most visited attraction in Austin behind the state capital, Brown said. H-E-B has since added a second Central Market in Austin.

Competitors Albertson's and Randall's are firing back by adding amenities to their stores and both have eyes on expansion, observers said. "Albertson's and Safeway are feeding developers deals," Hardy said.

Albertson's, which as of 1998 owned a 16.3% market share in Austin, plans adding a store in the growing San Marcos area that would battle with two existing H-E-B stores, reports said. Like many of Albertson's area stores, the new location would include a fuel center, convenience store and in-store Starbucks cafe.

Nontraditional retailers, including convenience stores, supercenters and drug stores, are also going after some of Austin's food dollar, Hardy said. Wal-Mart's Supercenter concept as of 1998 owned a 7.1% market share. Natural-food chain Whole Foods Market, founded here in 1980 and today a 120-store natural chain, operates two stores in Austin and has a loyal local following, observers say.

Internet shopping also appears to hold promise in Austin, which calls itself the country's "most wired city," and spawned one of the giants in direct Internet retailing in Dell. Currently, Randall's offers Internet shopping in partnership with Chicago-based Peapod, but Peapod is being phased out in favor of Safeway's agreement with GroceryWorks, its Dallas-based Internet retailing partner. H-E-B is also rolling out an Internet shopping option in Austin, Brown said, with testing set to begin this fall and rollout early in 2001.

Austin, Texas

Population: 1.15 million (1999)

Population Growth (1990-99): 35.4%

Unemployment rate: 1.9% (June, 2000)

Per capita income: $29,087 (1998)

Median household income: $29,957 (1998)