Monday, June 30, 2008

Southern California Region Market Report: The Coming 'Store Wars' in the High Desert Market; Kroger Co.'s Ralphs Lowers Prices, Ups Value Proposition

From the Fresh & Easy Buzz Editor's Desk: Retail grocery competition is set to seriously heat up in the Southern California high desert market region of Victor Valley.

The market region is a key one for Tesco's Fresh & Easy Neighborhood Market, which has its corporate headquarters and distribution center nearby. The U.S. division of the world's third-largest retailer is adding three new stores in the market in the next few months, with more planned after that.

But Tesco's Fresh & Easy isn't alone in targeting the market for new stores. Employee-owned discount supermarket chain WinCo, which operates big supermarkets featuring low everyday prices, is opening two new stores in the market, after just opening a new store recently in the region.

A SuperTarget, Target's Wal-Mart Supercenter-like combination food, grocery, hard and soft goods format, also is set to open in the high desert region market in Southern California. Target is making a major push into California with its SuperTarget format stores, after having little presence with the format in the nation's largest state since developing the mega-store format some years ago.

Speaking of Wal-Mart, the mega-retailer also is on its way to the market with plans to open five of its big box Supercenters featuring discount food and grocery products in the region. The stores will average about 180,000 square feet, with some being smaller and others exceeding 200,000 square feet in size.

Lastly, not to be outdone, Inland Empire and high desert region food and grocery sales market share leader Stater Bros. supermarkets says it plans to add new stores in the market as well. Stater Bros., which operates about 160 supermarkets in Southern California and is headquartered in the Inland Empire region, is considered to be one of the most price-competitive supermarket operators in Southern California. Stater Bros new stores average 55,000 -to- 70,000 square feet.

Grocery store wars in this Southern California market (Victor Valley) it will be.

The high desert region's daily newspaper, the Daily Press, has a piece this morning which talks about all the new stores from these various players set to open in the market. The piece is reprinted below:

Grocery store wars looming
Expert predicts grocery prices will drop with addition of Wal-Mart Supercenters
June 30, 2008

With the planned introduction of two more WinCos, five Wal-Mart Supercenters, a SuperTarget and three Fresh and Easy Neighborhood Markets - and little population growth predicted - competition between Victor Valley grocery stores is getting intense.

"I suspect that we will see in the upcoming two to three years a very serious grocery store war," said Joseph Brady, High Desert director of the commercial real estate group Colliers International Bradco.

In addition to its locations in Hesperia and Apple Valley, Fresh and Easy recently announced plans to build a store in Victorville at El Evado and Palmdale roads.

WinCo recently opened a store in Apple Valley, where manager Jill Ponder said business has been strong, and the chain has projects under way in both Victorville and Hesperia. The store offers highly competitive prices and bulk foods and is open 24 hours.

With the addition of the Wal-Mart Supercenters, spokesman John Mendez said, High Desert residents can expect to see prices drop at other major grocery stores.

"When you bring a Wal-Mart Supercenter into the equation, we introduce competition into that sphere," Mendez said, describing what has come to be known as the "Wal-Mart effect."

This includes affecting existing chain stores such as Vons, Albertsons and Stater Bros., which has the highest number of local stores, with seven in the Victor Valley.

"We've been serving desert kitchens for 30 years and we don't plan to go anywhere," said Jack Brown, president and CEO of Stater Bros. and a Victorville native himself.

Brown added, "One thing I've learned with the Mojave Desert is that you'd better bring your own water. As far as our competition goes, there's no water to spare."

While there are no current plans to add new Ralph's or Food 4 Less stores to the five existing stores in the Victor Valley, the chain's corporate spokesman Terry O'Neil said the quality, variety and pricing of their food keeps them more than competitive with the newer stores.

Still, O'Neil said, "We always look at what our competitors are doing, whether that means opening new stores, remodeling existing stores or the way we market our merchandise."
Brown said Stater Bros. also plans to continue building new stores as growth dictates.

"One of the great things about America is that the customer will always decide who the winner's going to be," he said.

Brady added, "Hopefully, at the end of the day, the consumer is the one that wins."

Southern California's high desert region market isn't the only part of the geographically diverse and heavily populated Southern California region where competition--especially from a price perspective--is heating up.

The Los Angeles Times is reporting Kroger Co.'s Ralphs supermarket chain, which is neck-to-neck with Safeway Stores, Inc.'s Vons chain for market share dominance in Southern California, is upping its value proposition by lowering the everyday prices on thousands of items, along with initiating other value-based programs. Ralphs currently operates 262 supermarkets in Southern California.

Ralphs also is changing its famous--and hugely successful in the past--double coupon program in Southern California, capping the total amount of savings a shopper can obtain from doubling the manufacturers' coupons in-store.

It seems odd in the current, poor U.S. economy, of which Southern California is currently one of the hardest hit regions in the country, that Ralphs would change the double coupon program while at the same time announcing a new value proposition retail program which includes lowering the prices of thousands of items, along with other everyday and promotional price-oriented programs. After all, coupon use is way up among consumers, and doubling those coupons as in the past with oout capping the shopper total savings would seem to be a strong value proposition as well as competitive tool for the chain in these times.

Therein lies the rub though. Southern California consumers have been increasing their use of manufacturers' coupons dramatically (and their doubling of them at Ralphs) during the current spike in food prices. Word is Ralphs has been hit pretty hard from a margin standpoint from this increase in use and doubling. Therefore, the retailer hopes that by capping the total amount a shopper can save under the program, it will still get a solid bang for the buck in terms of using the double couponing tool as a marketing strategy, whileat the same time also steming its margin hits from it a bit by limiting the overall savings of the most extensive users of the coupons.

Therefore, it appears the retailer (Kroger Co. corporate) decided it was a good time to eliminate the program (the Southern California market is one of the few remaining U.S. markets where double coupon programs still on), and instead adding a multi-pronged new value-based program to the Ralphs' stores.

Kroger Co. just turned in strong sales and profit numbers however for its latest quarter. The retailer's income in the first quarter that ended on May 24 increased by a solid 15%, to $386 million. Quarter sales increased 11% to $23.1 billion. Same store sales for Kroger Co. increased an impressive 5.8% for the first quarter.

Numerous analysts say they believe item price reduction and value propostion programs, similar to the one being initiated at Ralphs, Kroger Co. has initiated in a number of its other U.S. chains or banners played a big part in these solid first quarter sales and profit numbers.

It's important to note this is a Kroger Co. banner-wide and region-wide program overall, with certain tweaks to the value proposition depending on the chain and region. However, many of the elements of the Ralphs' program are specific to the white hot price competition currently going on in the Southern California market.

As we reported in this June 25 piece, Tesco plans to open at least 30 new Fresh & Easy Neighborhood Market small-format, combination basic grocery and fresh foods grocery markets in Southern California, Arizona and Nevada in the next 90 days, beginning on July 2, when the first new Fresh & Easy store opens in Manhattan Beach in Southern California.

About half of those 30 new stores to open in the next three months will be in Southern California. Since Fresh & Easy's positioning is to be a everyday low-price leader on the basic grocery assortment offered in the stores, the addition of these approximately 15 new grocery markets in Southern California, all premised on a value proposition, is only going to heat up the already price competitive environment in the market more so.

Look for more value-oriented programs and item price-lowering by the region's food and grocery retailers throughout the rest of this year. Food price inflation isn't going away soon, which means consumers are only increasingly going to be looking for even better deals, and shopping accordingly.

Further, with more new supermarkets coming online in the market--not just from Tesco's Fresh & Easy but also new Wal-Mart Supercenters, Stater Bros. supermarkets, new Vons' and Ralphs' stores, a couple new SuperTarget mega-stores, and many others--that competition is only going to further intensify throughout the Southern California food and grocery retailing landscape.

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