Stifled by the recession-bound economy and rocked first by earthquake losses and now by mergers and competition, one of the most competitive U.S. grocery markets has become even more cutthroat.
"It's a zero sum game," where the only way for one player to increase share is at the expense of other players, said Jonathan Ziegler, an analyst at Salomon Bros., New York.
Federal and state officials are considering whether to approve a proposed merger that would transform one supermarket chain into the state's largest.
Grocery mogul Ron Burkle's Yucaipa Cos. has reached a $1.5 billion agreement to buy Ralphs Grocery Co., the venerable southern California chain, and merge it with Yucaipa's Food 4 Less Supermarkets. The new entity, with annual sales expected to be $5.3 billion, would have 27% of the estimated $20 billion southern California market.
Under the merger plan, the surviving entity would be called Ralphs Grocery Co. and would operate about 280 supermarkets under the Ralphs name and 80 Food 4 Less warehouse stores, all in southern California.
The move would eliminate Yucaipa's secondary area brands, including Alpha Beta and Boys', and its Viva stores targeting the Hispanic market.
Davis, Ball & Colombatto, Los Angeles, handles Ralphs, which uses an upscale strategy and special promotions. Yucaipa's agency is Heil-Brice, San Clemente.
The Yucaipa move would unseat Vons Cos. as the market leader, with 320 stores and an estimated 19% market share. Sales have dropped by 12% since 1992 to less than $5 billion, with only Vons' upscale Pavilions stores reporting steady sales through the area's recession.
Vons closed 17 poorly performing California stores, launched a "VonsValues" program touting its low price merchandising strategy and shook up its management team. Two executives were hired from American Stores Co.'s Lucky Stores chain: this spring Larry Del Santo, former president of Lucky's, became Vons vice chairman and CEO, and Dick Goodspeed, president and chief operating officer. One of their first moves was to put agency DDB Needham Worldwide, Los Angeles, on notice and begin an agency search for its estimated $20 million account. Among shops in the review are McCann-Erickson Worldwide, Dailey & Associates, and Lintas Campbell-Ewald, Los Angeles, and Saatchi & Saatchi DFS/Pacific, Torrance.
Lucky, long advertising itself as the low price leader, last month changed direction in its new campaign from Grey Advertising, Los Angeles. Upcoming ads will focus on remodeling and other store face-lifts.
American Stores, with 214 Lucky outlets in the region, also is creating a warehouse type format in a separate division called Food Price Advantage. Five of the stores are opening this year in remodeled Lucky locations in southern California.
Each store will carry individual-size packages as well as warehouse sizes and about 15,000 stock-keeping units instead of the 18,000 to 22,000 SKUs of traditional stores.
Recent rumors have American Stores negotiating to acquire the southern California retail operations of Salt Lake City-based Smith's Food & Drug Centers, but an American spokeswoman denied those reports.
Smith's, a chain with 134 stores in eight states, has put its area expansion plans on hold. The chain now operates 31 large combination food and drug units, and continues to hold approximately 30 additional sites on reserve.
The chain's southern California agency is Mendelsohn/Zien, Los Angeles, while Harris & Love, Salt Lake City, handles advertising for the seven other states.
Even independent supermarkets are determined to stay in the fray. Suppliers co-op Certified Grocers of California, expected to see sales drop 27.2% from 1992 to just below $2 billion this year, has a new president in Al Plamann. The former Atlantic Richfield Co. oil executive is aggressively helping develop a format offering limited meat and produce selections as well as a new decor package.
Southern California supermarkets also are facing challenges familiar to chains in other regions. Discounters Kmart Corp.'s Super Kmart Centers and Wal-Mart Stores and warehouse club Price/Costco are eating into their business. And an erosion in sales of traditional stock items comes from chains such as Toys "R" Us, for disposable diapers and baby formula, food and supplies.
"The traditional grocery business is splintering to other non-traditional stores," said Bill Bishop, president, Willard Bishop Consulting, Barrington, Ill.
Some supermarket analysts question whether Yucaipa has enough financial wherewithal to pull off the $1.5 billion deal, which includes assumption of $960 million in Ralphs debt.
When considering the leveraged positions of Vons and Yucaipa, "I have always thought that if Albertson's [a Boise, Idaho-based chain that is in solid financial condition and has a small presence in the area] concentrated all of its growth in California, all of these [other] stores would go broke," said Robert Kahn, editor of Retailing Today.
Emily DeNitto coordinates Grocery Retailing News.