Safeway escalates food fight
It’s cart vs. cart as rivals roll into region
Blanca Torres / San Francisco Business Times
Safeway Inc. is feeling the pinch of competition from smaller, scrappier rivals adding stores in the Bay Area, but the Pleasanton-based supermarket chain isn’t planning on giving up its turf so easily.
Besides adding and renovating several stores in the Bay Area in 2011, Safeway created a real estate development arm last year called Property Development Centers LLC that is bringing in additional revenue.
Meanwhile, the grocery landscape has changed dramatically, with competitors such as Wal-Mart Stores Inc., Target Corp., Sprouts Farmers Market, Mi Pueblo Foods, Fresh & Easy Neighborhood Market and Grocery Outlet Inc. opening new stores or expanding their grocery offerings.
“There are lots of ways to build loyalty, some of which are fully activated at Safeway,” said Steve Burd, Safeway’s chairman and CEO, during an investor conference earlier this month. “One is to provide a superior shopping environment.”
In the previous year, the chain opened stores in Pleasant Hill, Castro Valley, El Cerrito, Burlingame, Pleasanton, Los Gatos, Campbell and a new store in Petaluma will open in May.
It expanded a store in Daly City and is now remodeling or renovating stores in Berkeley, Oakland and Millbrae.
Overall, Safeway operates more than 1,700 stores in the United States and Canada with more than 500 in California.
Safeway has enjoyed a strong base in the Bay Area for decades, said Jeff Green, a retail and real estate consultant with Phoenix-based Jeff Green Partners, but the market has become more competitive than ever during the last decade.
“Safeway has had huge marketshare for a long time,” he said. “They know what they need to do to try to shore themselves up. Does that mean they will be able to hold on to all of that marketshare? No.”
Fresh & Easy, a unit of U.K.-based Tesco, has grown to 18 Bay Area stores, including two in Antioch and San Jose that opened last week.
Sprouts, based in Phoenix, calls itself “an independent natural foods grocery store” and has stores in Dublin and Sunnyvale up and running, with another in Walnut Creek on the way. Wal-Mart recently confirmed plans to open Neighborhood Market stores, a smaller grocery-focused concept for the mega-retailer, in Pleasanton, San Ramon, Hayward and San Jose.
Berkeley-based Grocery Outlet, which offers discounted groceries at more than 170 locations in seven states, recently opened two stores in San Jose and one in South San Francisco.
“We still see a lot of Bay Area markets where we do not have a store today where we would like to have a store tomorrow,” said MacGregor Read, the company’s co-CEO. That includes San Francisco, Santa Cruz and East Palo Alto.
Bay Area real estate is more expensive and harder to come by for prime locations, Read said, but is worth the extra cost and effort.
“We look at Bay Area sites a little differently than other markets,” he said.
Both Sprouts and Grocery Outlet boast of annual sales in excess of $1 billion, which may seem paltry compared with Safeway’s $43.6 billion in sales in 2011.
Still, their growing presence is nothing to overlook, Green said.
“The industry is getting more fragmented,” he said. “But it’s not just supermarket versus supermarket. The new stores are trying to be different.”
Fresh & Easy, for example, touts convenience, a wide selection of ready-to-eat meals and fresh produce as its main advantages. Grocery Outlet and Wal-Mart strive for value-driven shoppers.
Small grocers are the trend
What’s left to be seen is which of the players will last, said John Cumbelich, principal of Walnut Creek retail brokerage John Cumbelich & Associates.
“A lot of enterprising entrepreneurs are trying to compete to be in the next generation of the grocery business,” he said. “It will be a bit of a chess game to see who will be the consolidators and who will be acquired.”
What many of the new concepts have in common is that they are smaller than a typical full-service grocery store like Safeway, which is an average of 46,000 square feet.
“The grocery business is evolving,” said Susan Houghton, a Safeway spokesperson. “There has been an influx of new retailers while many traditional retailers have left the market.”
The new crop looks for spaces as small as 13,000 square feet for a Fresh & Easy and 20,000 square feet for a Grocery Outlet.
“We are able to move into a lot of areas a traditional grocer wouldn’t be able to move into,” said Brendan Wonnacott, Fresh & Easy’s director of neighborhood affairs. “Anytime you have a very established urban area, there is going to be a lot of work to find available locations.”
Numerous retailers shut down or retracted during the economic recession that hit in 2008, allowing other merchants to expand in the Bay Area.
Safeway also took advantage of the downturn, snapping up two former Mervyns stores sites in San Jose and Petaluma. Then Wal-Mart took over a site in San Jose that Safeway had vacated when it moved into the former Mervyns.
Strategy to fight back
In some ways, Safeway has been ramping up for the boost in competition for several years.
It launched its Lifestyle store concept in 2004 that gave its stores a new look and feel with softer lighting, warmer color tones and expanded selections in deli, bakery, produce, meat and seafood.
Safeway has rebuilt or remodeled about 87 percent of its stores to feature the Lifestyle concept. In 2011, it spent $1.1 billion on capital projects and plans to spend about $900 million this year.
With Property Development Centers, the retailer is focusing on reaping bigger profits from real estate by owning and developing retail and distribution centers as opposed to serving as an anchor tenant.
“Keep in mind the anchor is the draw, and so the bigger that anchor’s draw is, the more valuable the real estate,” Burd said while presenting to investors. “We were allowing developers to get all of that upside, and we decided to take that upside for ourselves.”
In Pleasanton, Safeway bought a 12.3-acre parcel from South Bay Development and built a 125,000-square-foot shopping center that includes a 58,000-square-foot Safeway store at 6790 Bernal Ave.
The shift toward real estate is part of a larger effort at Safeway to bring in more revenue from what Burd calls “noncore” business, which is basically anything other than selling products.
“We’re creating a meaningful and, we believe, reliable income stream,” Burd said.