TESTING THE YANKEE SPIRIT

Katherine Bowers

BOSTON -- Ed Roche, president and chief executive officer of Roche Bros., figures what he doesn't know can certainly hurt him. That's why, as Wal-Mart builds its first New England food-distribution center, Roche and a handful of his top lieutenants are taking a trip to Texas to meet with executives at H. E. Butt Grocery Co. to learn how the San Antonio retailer preserved its market share despite 135 Wal-Mart supercenters in the state.

"The more you know, the better," said Roche, the second generation at the helm of the 14-store Wellesley, Mass.-based independent grocer. "We want to know what H.E. Butt did and how they did it. We aren't looking to 'win' against Wal-Mart, but we believe you can carry on doing business if you put yourself in the right position."

Wal-Mart's supercenter push into New England has been like Alka-Seltzer dropped into still water. It's gotten things fizzing.

The region's heavy-hitting trio -- Ahold's Stop & Shop, Delhaize's Hannaford Bros. and J Sainsbury's Shaw's -- have been moving aggressively to secure new leases, unveil spiffy new prototypes, partner with branded service providers, and back-fill territories they already control. Some are plunking new stores as close as a half mile down the road from existing units.

It's all part of a "good offense is the best defense" philosophy -- a reasonable approach now that Wal-Mart has broken ground on a 485,000-square-foot distribution center in Lewiston, Maine. When it opens in 2004, the center will be capable of supplying 100 supercenters throughout New England. Many supercenters -- the 120,000-plus square-foot format combining groceries and general merchandise -- will be conversions of existing Wal-Mart discount stores, analysts predict.

Currently, there are eight supercenters in the region. Most are in New Hampshire; Vermont and Rhode Island have none, according to Wal-Mart's 2002 annual report.

The Bentonville, Ark., retailer did not return calls.

New England Shakeup

The mass arrival of supercenters will "change the whole dynamic of the region," predicted Gary Giblen, director of research at C L King Associates, New York. "New England has historically been pretty uncompetitive and very profitable. But the comfortable price umbrella will be made impossible with the arrival of the supercenter."

Edouard Aubin, analyst for Deutsche Bank Securities, New York, predicts Wal-Mart will deflate food prices between 3% to 8% across the region and create destabilizing ripples across large and small players alike.

"There has been a lot of fat in the pricing in New England," he said, pegging profit margins at 8% vs. the industry standard of 5%.

Wal-Mart isn't the only catalyst for change. Several key independent players -- Roche Bros. and 47-unit chain Big Y Foods -- are making forays into Boston's suburbs, widely considered one of the jewels in the New England crown.

Springfield, Mass.-based Big Y declined to comment for the story, but did confirm it foresees bowing at least a dozen metro Boston stores. Its first such store, in Walpole, Mass., is slated to open this spring. It's also filling in home turf in western Massachusetts with three leases snapped up from retreating A&P.

In cost-cutting measures announced earlier this year, A&P, Montvale, N.J., said it would sell some of its New England assets. Besides Big Y, GU Markets, Clifton Park, N.Y., and Stop & Shop Supermarket Co., Quincy, Mass., are picking up A&P stores.

Roche Bros., which shares Big Y's focus on service and premium perishables, is pushing toward Cape Cod, with leases for new units in Easton, Marshfield and Mashpee, Mass.

"I'll be keeping an eye on [Big Y], too," Roche said. "They're an operator doing business much the way we do."

Connecticut's metro New York suburbs, the other regional golden goose, is also flapping with activity. Costco, Shaw's and Big Y have all encroached on territory that "practically used to mint money for Stop & Shop," Giblen said.

The Connecticut crowd has jostled at least one player out of key locations. Adams Super Foods recently closed three units because too many new stores were draining the locations' profitability, according to Executive Vice President Joe Kelley. To break away from the pack, the 17-store Cheshire, Conn.-based chain is planning to try smaller stores -- scouting 15,000 to 28,00-square-foot spots.

Market Overview

New England is an unusual market in many ways. Although it remains one of the most lucrative regions for grocers, land and labor costs make it one of the priciest to operate in. According to Aubin, a 50,000-square-foot store costs about $13 million to build, including a $7 million tab for land. In comparison, the national average is $8.7 million to build, with a $3.5 million land tab.

Closures of local department store chains Ames, Bradlees and Caldor have relieved the congestion somewhat, but most vacancies were immediately absorbed by the big three supermarket players, by Wal-Mart, and by family-apparel chain Kohl's, which has made a major push into New England.

The remaining Kmart doors -- there are 18 in eastern Massachusetts alone -- may become a real estate opportunity, noted William Beckeman, partner in commercial real estate firm Finard & Co., Burlington, Mass., which specializes in the region.

Another regional peculiarity: unusually vociferous opposition from grassroots community organizations and NIMBY (Not-In-My-Backyard) groups, which have blocked Wal-Mart supercenters in Vermont.

"The Yankee mentality permeates most of New England," said Beckeman. "People do want to see a traditional landscape preserved to the greatest extent possible. They look at big boxes as a blight."

There are, of course, exceptions.

Wal-Mart, dangling the jobs and tax-revenue carrots, reportedly got Lewiston, Maine, to donate the 130-acre parcel for its distribution center, along with tax refunds and pledges of road improvements.

To date, consolidation hasn't been as prevalent in New England as in other regions. That's mostly because each state has had one or two stable, dominant players -- Hannaford in Maine, Stop & Shop in Massachusetts and Shaw's in New Hampshire. Underneath the dominant chain, a dozen or more small, independent players have been protected by long-term leases in areas with virtually no open commercial real estate. One example is the affluent burgh of Wellesley, Mass., where Roche Bros. has a store that has less than 1% vacancy.

Retailers Take the Defensive

What the independents have in quantity, they lack in clout.

Most have fewer than 20 stores. The two biggest independents are Tewksbury, Mass.-based Demoulas, which operates 58 stores under the Demoulas and Market Basket banners, and Big Y, with 47 stores.

In a report titled "Ahold, Delhaize, Wal-Mart: New Rival for New England's Crown?", Aubin describes the New England marketplace in 2001 as an "oligopoly." Stop & Shop has 336 stores and a 26.7% market share; Shaw's has 185 stores and a 21.7% share; and Hannaford has 119 stores with a 9.3% stake.

Independents have 18.5% of the market, down from 28.7% in 1996, according to the report.

Once the supercenter rollout is under way, Aubin thinks it's possible for Wal-Mart to capture as much as 30% of the food market.

The question on all players' minds: at whose expense?

"With Wal-Mart aggressively looking to expand in New England, we're focused on what has made our stores first choice with the customer and how we can continue to differentiate ourselves from the competition," said Stop & Shop spokeswoman Faith Weiner.

Expect Stop & Shop to look for more branded retail partnerships, observers said. The company has Dunkin Donuts stores in more than 100 stores and is continuing to roll out toys and office supply aisles stocked by Toys R Us and Office Depot, respectively. They are also testing Boston Market restaurants in three stores.

The company has made its mission to cater to time-pressed mothers all-encompassing. During a week when Brown, Harvard and numerous other New England colleges were on spring break, Stop & Shop radio ads lamented how tough it is keeping the fridge full while hungry kids are home and touted one-stop convenience.

The company also is playing with a pair of technologies aimed to smooth shopping and checkout. Exxon Mobile's Speedpass wands are being tested in two stores in Framingham, Mass., and one in Natick, Mass. An as-yet-undisclosed Massachusetts store will test Shopping Buddy, a touchscreen tablet that clips onto the cart and allows shoppers to view specials and their list of favorites. The test should start shortly, said spokeswoman Kelly O'Connor.

Stop & Shop is also making its first forays into Maine and New Hampshire. The company picked up two former Ames leases in Maine and will bow five stores in southern New Hampshire -- Peterborough, Hudson, Bedford and two in Manchester -- starting this summer.

Brokers said the quintet is just the opening salvo in Stop & Shop's New Hampshire rollout and that the chain has been scouring the state for locations. The southern part of the state is particularly attractive because of higher-than-average population growth vs. the rest of New England.

Shaw's, which has 10 stores in southern New Hampshire, is also adding stores in Nashua, Manchester and Merrimack, according to Finard's analysis.

In a coup for Stop &Shop, the Quincy, Mass.-chain scooped up A&P's two leases on Martha's Vineyard. A&P had operated on the island, a grocer's gold mine, since the 1920s.

Even as Stop & Shop pushes north in New England, analysts speculated that its parent company's fiscal woes -- a $500 million accounting deficit -- might cost the chain its expansion into the New York metro area.

"It's a quixotic move which might be called off," C L King's Giblen said.

In contrast, Shaw's parent company, U.K.-based J Sainsbury, is rife with cash from the divestiture of its Home Base chain. It is eager to invest in Shaw's, a star performer, according to Giblen.

"They've proven they can integrate acquisitions," he said, citing Shaw's purchase of Star Market in 1999. "And they've got a billion dollars sitting in their treasury. That has to be for something."

Potential targets could include Big Y, which has a dominant position in western Massachusetts and strong management, or the 144-store Carteret, N.J.-based Pathmark chain, concentrated in prime New York and Philadelphia metro areas.

Shaw's has been "just as active as the other chains, but it has been working behind the scenes," said Finard's Beckeman. "They've really been focusing on sprucing up their presentation and renovating existing stores."

The East Bridgewater, Mass.-based company declined to comment, waiting to discuss strategy when it bows a new, upscale prototype at the Prudential Center in downtown Boston later this month.

Hannaford also declined comment, but several analysts said Wal-Mart's Maine distribution center could be tricky for Hannaford, which pulls most of its revenues from its 46 stores in the state.

"The precursor for this conflict is upstate New York," explained Giblen. "Hannaford expanded there a while back because of population growth, and then it became a very difficult market for them because of supercenter competition. Now, the supercenters are following them back into their home territory. It's a shame for Hannaford."

In addition, defunct Ames vacated 20 prime spots in Maine, opening holes for competition to slip in. Stop & Shop picked up the Orono and Waterville leases. Shaw's has reportedly signed up for spots in Saco, Wiscasset and Lewiston.

If Hannaford has significant expansion plans, it's keeping them a secret. The company appears to be adding modestly to its store base, as well as continuing to convert Shop 'n Save stores to the Hannaford banner and format.

With all the activity, what's an independent to do?

Most are betting on location, service and perishables.

"Smaller operators have two positives," said Adam's Super Food's Kelley. "We can react faster to what the market dictates, whether its weather patterns or customer requests. Also, we can locate in smaller places, in neighborhood corners."

New kitchen equipment and fixtures are part of Adam's plan to boost its perishables sales by 20%.

Kelley believes the reengineered chain could conceivably reap 45% of its revenues from perishables, an area he said Wal-Mart "hasn't mastered yet."

Roche of Roche Bros. also considers premade food, currently comprising about 15% of the chain's overall sales, a key way to keep customers loyal. Nearly half of Roche Bros. stores have catering departments.

Focusing on perishables is a strategy that's served novelty grocer Stew Leonard -- the so-called "Disneyland dairy" -- beautifully. Seventy-five percent of its inventory is made in-store or brought in daily, said spokeswoman Meghan Flynn. In many ways, the Norwalk, Conn.-based company is the Fred Segal or Barney's New York of food retailing -- the first to get trendy products and services. They were the first to carry Paul Newman salad dressings, for instance, and had just stocked Wyman's Wild Blueberry juice when a leading newspaper ran a piece touting the antioxidant benefits of the berry.

Stew Leonard's fourth store is scheduled to bow in 2004 in East Farmingdale, Long Island. The company also owns a parcel of land in Orange, Conn., but the acreage needs to be re-zoned before plans can go any further, Flynn said.