Heard on the Street: There's Something About Albertsons ... In Southern California

"The Insider" is a new, regular - weekly -to- fortnightly (every two weeks for the non-bilingual) - feature in Fresh & Easy Buzz. "The Insider" will be exploring all aspects of what's happening in - and what he's hearing about - the food and grocery retailing business, with a focus on - but not limited to - California, Nevada and Arizona - the three states where Tesco has its Fresh & Easy Neighborhood Market fresh food and grocery stores.

The Insider: Heard on the Street

The Southern California - and beyond - rumor mill (and I mean informed people, not just the "usual suspects") has been buzzing since late February of this year with talk that Supervalu, Inc. is up to something - or somethings - with its Albertsons chain in Southern California.

Here's a summary of the buzz heard on the street:

1. Supervalu plans to sell its Albertsons chain in Southern California.

The Insider doesn't think that's going to happen.

Why? Supervalu owns and operates about 463 Albertsons banner supermarkets in Southern California, Nevada and the Northwestern U.S. If it sold the Southern California Albertsons chain, doing so would reduce its presence and total store count in the Western U.S. by about 40% - which is a very significant reduction in volume, and would result in a loss of efficiencies for Supervalu in its western U.S. operations, not to mention a dramatic drop in sales. Albertsons also owns the 14 store (13 in Southern California, one store in San Francisco) Southern California-based Bristol Farms upscale grocery chain.

2. Supervalu is looking to sell - and/or close - some of its under-performing Albertsons stores in the Southern California Market.

This is a more logical and likely scenario than number 1 - and really not much of a big deal - unless the number of stores it were to sell is significant.

Supermarket chains sell under-performing stores all the time, to a greater or lesser degree. And Supervalu has been selling some of its stores on the east coast this year. Further, Supervalu closed about a dozen poorer-performing Albertsons stores in Southern California last year, so selling or closing some stores in the region this year wouldn't be without recent precedent

Therefore, unless the number of stores sold or closed (or a combination of the two) is significant - say 25%-30% or more of the total Southern California store-count - I don't see this, if it occurs, as a big story.

Selling 25%-30% or more of the total store-count would be significant because it would reduce Southern California Albertsons' annual sales volume considerably, which would then likely reduce the chain's market share considerably.

Albertsons is the third-largest grocer in Southern California by market share. It has a slightly over 12% share.

Kroger-owned Ralphs is tops (with slightly over 19%), followed by Safeway's Vons (15%).

Trader Joe's is fourth (6.33% share), and Stater Bros. is fifth, with an estimated 6.07% share. There are regional differences though in Southern California. For example, in the Inland Empire region, a huge market area, Stater Bros, which is headquartered in the area and has the majority of its 159 stores there, tops Albertsons, Vons and Trader Joe's, and is neck-and-neck with Ralphs.

Albertsons lost the most business among the large Southern California chains last year. Its market share dropped by almost one-third of a percentage point in 2009, while Ralphs'
increased slightly, and Vons remained steady.

Trader Joe's market share grew considerably, which is what put it into fifth place at the end of last year. Stater Bros share declined just slightly.

Rounding out the numbers, Smart & Final is sixth in Southern California with an estimated 3.23% share, followed by Whole Foods at around 3.1%, and Superior Grocers and Walmart at an estimated 3% each.

Walmart's share is so low because it has very few stores in Southern California that sell food and groceries, a situation it's trying to change as fast as it can by converting about 50-60 of its discount stores into supercenters, along with proposing new supercenters throughout the region.

Although it has about 80 of its 159 stores in Southern California to date, Tesco's Fresh & Easy hasn't registered any significant market share numbers thus far. Significant would be at least 2%.

[Note: Supervalu has converted a handful of the Albertsons stores in Southern California to the Lucky banner, a brand name it obtained when it acquired it's share of then Boise, Idaho-based Albertsons Inc. a few years ago. In January 2006, Albertsons Inc. was purchased by a consortium of investors including Supervalu, Inc., which acquired about 1,100 Jewel, Acme, Shaw’s, and Albertsons stores in Southern California, the northwest, the inter-mountain region, and Florida; Cerberus Capital, which acquired 600-plus Albertsons stores in Northern California (now owned by Save Mart Supermarkets), the Rocky Mountains, Florida and Texas; and CVS Pharmacy, which acquired the Osco, and Sav-on drug chains the company owned and operated.]

3. Supervalu is planning to convert some of its Albertsons stores into its hard-discount Sav-A-Lot stores, owning some corporately and franchising others to independent operators.

This is the scenario - based on the rumors I've distilled into the three summaries above - The Insider believes is the most likely to occur.

For example, I could see Supervalu doing a demographic study of the neighborhoods surrounding all of its Albertsons stores in Southern California, and then selecting a number of the stores best suited for the Sav-A-Lot format, based on the demographics, to be converted into the smaller-format, hard-discount Sav-A-Lot.

In fact, I think this is what Supervalu should do in Southern California: Make Albertsons a slightly smaller (by store count), leaner, meaner and more focused supermarket chain, while building Sav-A-lot as a price-impact player in the region, starting with converting a bunch of the less-performing Albertsons stores into the first batch of Sav-A-Lots - along with opening up new Sav-A-Lot units, both corporately-owned and franchised to independent operators. New Albertsons stores can be built at a low rate when good location opportunities arise.

Doing this also fits nicely into Supervalu's plans to double the size of its hard-discount Sav-A-Lot chain from 1,200 stores to 2,400 over the next five years. [CEO: Supervalu to Open 100 New Sav-A-Lot Stores This Year; Strategy to Double Store-Count to 2,400 in 5 Years in Place

Supervalu should also look closely at opening Sav-A-Lot stores in urban "food desert" neighborhoods in Southern California - and in other U.S. cities - like South and East Los Angeles and other urban areas in the region underserved by grocery stores offering groceries and fresh foods at reasonable prices. Such a strategy fits well with the Sav-A-Lot target shopper, who makes under 45,000 annually, and with the Sav-A-Lot no frills, price-focused retail format.

My model would give Supervalu a three-chain, multi-format strategy in the Southern California market. Albertsons would be its mid-range - but tightly focused - supermarket chain, hard-discount Sav-A-Lot would be its price-impact format, and Bristol Farms its higher-end, upscale play.

I would then focus on growing Sav-A-Lot aggressively, along with tweaking Albertsons in a variety of ways.

Having this option is far superior for Supervalu in a tough, highly competitive market like southern California than having just one horse - Albertsons.

Let's see if any of the above summaries play out with Supervalu's Albertsons over the coming weeks and months in Southern California.

Let's also see if Supervalu employs a strategy in Southern California anything like the three-format, three chain model I've outlined above.