CALIFORNIA, HERE COMES WAL-MART SUPERCENTERS

MARK HAMSTRA

BENTONVILLE, Ark. -- Wal-Mart Stores here finally unveiled plans to seed California with supercenters, setting the stage for a new era of food retailing competition in the state.

The company said it would open as many as 40 of the supercenters, which range up to 225,000 square feet and include full grocery stores in addition to a broad array of general merchandise and other services, during the next four to six years. A Wal-Mart spokesman said the company had yet to finalize specific locations, but he did say the stores would be a combination of conversions from existing discount centers and newly built locations. Some of the 16 stores in California that Kmart has slated for closure could also be targets, analysts said.

Wal-Mart already operates 125 traditional discount stores and 29 Sam's Clubs in California, which it supplies from two general merchandise distribution centers and an import center.

Analysts speculated that the few details about the supercenter development revealed last week were just the beginning of what will be a much larger campaign by the discount-store behemoth in the Golden State.

"We could see more [than 40 supercenters]," said Deborah Weinswig, analyst, Salomon Smith Barney, New York. "These guys tend to underpromise and overdeliver, so we'll see what comes out of this as far as future growth."

The more supercenters Wal-Mart opens in the state, the worse it is for existing supermarket chains there, as the company's rock-bottom pricing strategy tends to undercut supermarkets by about 15% to 20%, analysts said.

"I think that they hit everyone; it just depends where they locate," Weinswig said, citing Safeway, Pleasanton, Calif., as being particularly vulnerable because of its inexperience in competing head-to-head with Wal-Mart and its large concentration of stores in Northern California.

She said Kroger, Cincinnati, which has a strong presence in Southern California through its Ralphs and Food4Less chains, has had more exposure to supercenter competition and has a strategy in place to compete, in part by lowering its prices. About 65% of Kroger's stores already compete in markets with supercenters, she said, while only about 34% of Safeway's stores do so. Albertson's, Boise, Idaho, which also has a high concentration of stores in California, has a market overlap with Wal-Mart supercenters of about 59%, she said.

Stacia Levenfeld, a spokeswoman for Albertson's Northern California division in San Leandro, Calif., thinks Albertson's is well-positioned for the new competition.

"We are a different model," she said, citing Albertson's focus on tailoring its stores to individual neighborhoods. The company has 453 traditional Albertson's in the state and 301 stand-alone Sav-on drug stores.

Douglas Christopher, analyst, Crowell, Weedon & Co., Los Angeles, agreed that Safeway could stand to suffer the most from the California supercenter incursion.

"Safeway, without question, but also Food4Less, and any of the neighborhood supermarkets that just aren't paying attention to the customer [could be affected]," he said. He said that Safeway, in particular, appears to have lost its focus on its core operations.

"In the last Safeway [analysts' conference] call, all they could talk about was some technology that's going to give them a leg up on the competition," he said. "You stop and say, 'Wait a minute -- we're talking about a grocery store.' They've really fallen far away from the core business."

Safeway could not be reached for comment.

Analysts said the locally entrenched supermarkets might have some advantages, including the fact that they have been competing for years against Costco, Issaquah, Wash., another price-oriented operator that excels at food retailing. In addition, it might take a while for consumers in California to get used to the supercenter concept, giving local retailers extra time to sharpen their own competitive edges.

One of the prerequisites to Wal-Mart's rollout of the supercenters is its construction of food-distribution centers in the region. According to Weinswig, the company prefers to locate its supercenters within about 300 miles of its DCs, which means developing all of California would require multiple perishables-storage facilities. Each DC can serve 70 to 100 stores, Weinswig said.

Wal-Mart currently has general merchandise DCs in Porterville and Red Bluff, Calif., but neither can be converted to handle perishables, according to Bob McAdam, a Wal-Mart spokesman. He also doubted that the company's planned food DC in Grandview, Wash., would be used to supply stores in California.

He said the company had not yet determined where to site the new distribution facilities.

"The distribution network is key to making sure this all works," McAdam said. "One of the reasons we've allowed ourselves up to six years to get this done is to allow ourselves a sufficient amount of time to develop the distribution network we need to service these stores."

Christopher of Crowell, Weedon & Co. said Wal-Mart's timing is right for developing California, considering recent population shifts from around the larger cities to more outlying areas, in both the San Francisco area and around Los Angeles and San Diego.

"I would say the outlying areas around San Francisco are sure bets," he said. "Those areas have optimal demographics for Wal-Mart."