The Southern California supermarket landscape is bursting at the seams as dozens of grocery brands, from Wal-Mart to Ralphs, jockey for a cut in a $44 billion marketplace.
In Orange County, the top traditional players – Vons, Pavilions, Albertsons, Food 4 Less and Ralphs – have closed 38 stores since 2006. The contraction, along with the recent $9 billion merger of Safeway-Albertsons, has left the door open for niche brands like Haggen and Aldi to rattle the fragmented region even further.
“It’s about to become intensely competitive,” grocery strategist Burt P. Flickinger said.
The latest newcomer: Haggen, a small chain from the Northwest that’s nipping at the heels of Whole Foods.
To satisfy federal regulators, the parent company of Albertsons and Vons, Cerberus Capital Management, was forced to unload 168 stores when the two brands completed their merger earlier this year.
Seeing opportunity, Haggen nabbed 146 of the Safeway/Albertsons-owned stores, including 11 in Orange County. The move grew Haggen from 18 to 164 stores overnight.
The 82-year-old Haggen (pronounced hay-ghen), bills itself as a cross between a traditional grocery and a Whole Foods Market. Its Pacific Northwest stores sell a blend of national brands, premium foods and farm-fresh produce.
Chief Executive Bill Shaner said Haggen, with its regional headquarters in Irvine, fills a missing niche.
Locally, three Haggen conversions have been completed, with the remaining makeovers expected by May 9.
So far, customers seem underwhelmed.
After shopping at the Haggen in Yorba Linda, Robyn Petillo of Anaheim Hills said the store resembled the former Albertsons, but with higher prices.
“It’s not doing anything to differentiate itself,” Petillo said. “It makes me think that they have no intention of keeping it open.”
Based on similar complaints, Shaner said local stores have lowered prices on dozens of items.
Industry watchers say it is going to take some time for Haggen to build momentum in a region smothered with supermarket choices.
“There’s more and more players trying to get a chunk of the pie,” said Craig Rosenblum, a partner at retail consulting company Willard Bishop in Illinois.
Top players in the $44 billion market, from Los Angeles to Orange County to the Inland Empire, include Ralphs, Target, Costco, Whole Foods Market, Trader Joe’s, Vons, Wal-Mart and Stater Bros. Dozens of boutique chains and independents make up the rest – from Northgate Market to Bristol Farms.
FAILURE COMES QUICKLY
Rosenblum, who tracks supermarkets in the West Coast, said Haggen is getting off to a bumpy start by not delivering on its promise of fresh food offerings.
“The integration has not been going as smoothly as everybody hoped,” Rosenblum said.
Haggen better correct its course quickly. History shows that local shoppers are unforgiving and that misunderstanding them can be fatal.
In late 2013, Assi Natural Market closed less than a year after its much-publicized debut in Irvine. The chain had touted itself as an Asian version of Whole Foods Market. Last month, Virginia-based The Fresh Market pulled out of California. The European-inspired marketplace had one store open less than a year in Laguna Hills.
Target also is working to overhaul its food strategy by 2016 with a wider selection of better-for-you food and craft beer, the company said. Of the 30 Target stores in Orange County, 29 offer groceries, including perishables.
Analysts say Wal-Mart, which offers a full line of groceries at 16 of its 22 Orange County stores, also hasn’t moved the needle with its expanded grocery selections.
But the biggest missteps have come from Fresh & Easy.
When it entered the market in 2007, the British-run concept set out to seduce shoppers who frequented Trader Joe’s, Whole Foods Market and convenience stores.
That was its first mistake, analysts said.
“One size fits all doesn’t work. You can’t compete against everybody,” Rosenblum said.
Shoppers were disappointed from the start, complaining about the chain’s no-frills look, lack of produce variety and unfamiliar private label goods.
Last month, the chain, now owned by supermarket magnate Ron Burkle, closed 30 stores in Southern California, including four in Orange County. Under Burkle, the El Segundo-based company is retrenching.
Its 111 stores are now targeting a healthful-minded shopper looking for convenience and value, company spokesman Brendan Wonnacott said. Changes include adding Wild Oats organic foods and expanding store hours, with some locations open around the clock.
NEXT UP: ALDI
Though Haggen is certain to steal some market share in Southern California, industry experts say the real threat – Aldi – has yet to arrive.
The German-owned chain has nearly 1,400 stores concentrated in 32 East Coast, Midwest and Southern states. It plans to conquer the West with its unique assortment of knockoff national brands.
Roughly 650 new stores are expected to open by the end of 2018, including locations in Southern California. The chain, which has U.S. headquarters in Batavia, Ill., says it saves shoppers up to 50 percent on their grocery bills.
“That’s really going to shake up the marketplace, even more so than when Fresh & Easy came,” said Flickinger, managing director of Strategic Resource Group, a New York-based retail consulting company.
Aldi, short for “Albrecht Discount,” is owned by the Albrecht family of Germany. Its parent company also has ties to the operators of Trader Joe’s.
Aldi has won the pocketbooks of budget-conscious shoppers by selling private-label copycats of the 1,300 most frequently bought national brands – such as Frosted Flakes and Velveeta cheese. Every item is designed to match the quality and taste of its name-brand equivalent.
To keep costs down, the low-cost store displays groceries on stacked boxes to avoid labor-intensive shelf stocking.
“It will put a whole new focus on price and value,” Rosenblum said. “It will give traditional grocers a run for their money.”
VETERANS SURVIVING
Supermarket sales have remained relatively flat in the past five years. Last year, revenue, excluding warehouse club stores, grew less than 1 percent, to $574.1 billion, according to market research by IBISWorld.
In 2014, the supermarket industry saw roughly 50 mergers and acquisitions involving more than 800 stores. The most significant merger was the marriage of Albertsons and Safeway-owned stores Vons and Pavilions. The combined company is the second-largest grocery chain in the U.S., behind Kroger.
The Vons, Pavilions and Albertsons banners are expected to remain the same. No conversions are planned. The only changes might be “the introduction of the O Organics and Open Nature lines into Albertsons stores,” company spokesman Carlos Illingworth said.
In Orange County, the combined brands account for 58 stores. That surpasses the 43 operated by Ralphs, the longtime Orange County leader. The Kroger-owned chain also operates five Food 4 Less stores in the county.
Despite closing eight stores since 2006, Ralphs has been one of the few traditional markets to fare well in the face of multiple foes.
Its speedy service, low-price strategy and expanded assortment of high-quality private label foods have been critical to its survival.
In March, Ralphs’ parent company Kroger recorded its 45th consecutive quarter of positive same-store sales. Fourth-quarter profit rose 23 percent to $518 million. “They’re killing it,” Rosenblum said of Ralphs.
One of its biggest successes has been the introduction of Simple Truth, an organic and natural foods line. The 400-item Simple Truth brand, which challenges the 365 Everyday Value line by Whole Foods, addresses growing consumer demand for organics.
U.S. retail sales of organic foods and beverages are projected to reach $59.9 billion in 2019, up from $34 billion in 2014, according to market research company Packaged Facts.
Rosenblum said Simple Truth has become a “billion-dollar brand” for Kroger in less than three years. With that momentum, he said Kroger could oust Whole Foods as the nation’s top retailer of organic and natural foods in the next two years.
PLAYING UPSCALE
Whole Foods is not going down without a fight.
In October, the chain launched its first national ad campaign – a move made to remind shoppers that Whole Foods is the pioneer of the natural foods and organics category. In Orange County, store officials are creating buzz with the Local Forager program, which appeals to shoppers who prefer locally sourced food.
Designated employees scout farmers markets, farms and indie commissaries like The Hood Kitchen in Costa Mesa for products made by food artisans. Items discovered through the program and sold in Orange County stores include craft beer from Barley Forge in Costa Mesa, honey from Backyard Bees in Santa Ana, vegan chili from Montana Ed of Newport Beach and French confections by Laguna Hills-based Rocq Macarons.
For its first quarter that ended Jan. 18, Whole Foods recorded quarterly sales of $4.7 billion, a 10 percent increase from the prior year.
Analysts said premium brands like Whole Foods and Bristol Farms are performing well by targeting a specific shopper, one who doesn’t mind paying more for specialty goods.
“You have to understand the one or two things that you stand for” to survive, Rosenblum said.
STEADY STATER BROS.
Another veteran chain rising above the fray is Stater Bros.
The 168-unit chain, with a reputation for offering lower prices on national brands, has grown its private label offerings, added more fresh produce and increased its selection of take-home family meals.
Stater Bros. CEO Jack Brown said the privately held company has seen positive annual sales for the past 35 years. He declined to offer revenue figures, but Rosenblum pegged the chain’s 2014 sales at $3.5 billion, nearly 8 percent of the regional market share.
Understanding its customers has contributed to its sales gains, Brown said.
“We believe we know our territory better than anyone,” he said.
As new brands blanket the region, Brown said he’ll stick to his survival strategy: listening to shoppers.
“The bottom line: Customers will always decide who is going to be successful.”
Staff writer Hannah Madans contributed to this report.
Contact the writer: 714-796-6756 or nluna@ocregister.com
