Winds Of Change

From food culture to regulatory climate, the western states offer challenges and opportunity for grocers.

With its long growing season, diverse agricultural bounties, coastal geography and an eclectic multicultural population, the West Coast — and California in particular — offers grocery shoppers pretty much anything they could possibly want. From meat to seafood, poultry to dairy, citrus and avocados to wine and cheese, the western food industry not only feeds its own folks — it also feeds the nation.

"The West has a rich and diverse food culture, where flavors are bold," says Bob Samples, VP of sales and marketing for Los Angeles-based Farmer John, a Hormel-owned purveyor of local meat products. "Throughout the West, but especially in California, the key insight on food is that local flavor is global flavor. The state's diverse population brings its own culturally influenced flavors to the local food."

The West is unique in that independent grocers still reign powerful, due in part to their ability to match up and connect with the needs of local shoppers. Indies like Nugget Market and Bristol Farms have strong loyal followings as they reflect their communities and offer diverse selections of locally grown and procured natural and organic foods.

"Strong ethnic population pockets offer the independent an opportunity to provide a unique point of difference to the national chains," Samples observes, "inspiring those chains to seek ways to match their product offering, by store, to the shopper in that community," which he notes can also present challenges when managing 40,000 or more SKUs in each location.

California also has some of the worst commutes in the nation, which means more folks want to avoid traffic by shopping closer to home. "This is driving more small-format stores to the West," says Samples, citing a study from Wilton, Conn.-based Kantar reporting a surge of growth in dollar and value-format stores. "Drug stores are also ramping up food offerings to meet that need. But like the chains, both dollar and drug channels can find it difficult to match their product offering to the neighborhood shopper."

Uneasy Landscape

While the West is a robust grocery market, it's also a competitive one, with long-entrenched regional chains and strong independent players making new entries a difficult proposition.

Case in point: Five years after its widely publicized U.S. debut, British supermarket operator Tesco is looking to sell or close its 200 Fresh & Easy stores in California and Nevada. Tim Mason, Fresh & Easy's CEO and former CMO, stepped down after 30 years with Tesco.

Tesco employs about 5,000 people in its approximately 200 Fresh & Easy stores, which have steadily accumulated mounting losses since first bursting onto the West Coast food retailing scene in 2007, when the company projected opening as many as 1,000 locations.

Tesco's U.K.-based chief executive, Philip Clarke, said it has become clear that El Segundo, Calif.-based Fresh & Easy, which also has stores in Arizona, "will not deliver acceptable shareholder returns on an appropriate timeframe in its current form." Although the business maintains "many positives," he added, "the journey to scale and acceptable returns will take too long relative to other opportunities."

The consensus among analysts for Fresh & Easy's failure to launch: Tesco's misinterpretation of the U.S. consumer. "Tesco had an innate desire — an arrogance, if you will — to do things their way rather than make adjustments that catered to the needs and expectations of American shoppers," The Hartman Group in Bellevue, Wash., reported. "Despite Tesco's vaunted success in the European marketplace, the resulting retail experience in Fresh & Easy was artificial, sterile and increasingly without a relevant proposition."

The business climate can be arduous for established players as well. Before its recent sale to Cerberus Capital Management, Eden Prairie, Minn.-based Supervalu's Albertsons Southern California division slashed its store-level workforce by up to 2,500 positions across all of its stores in California and Nevada, amid the parent company's pre-sale efforts to regain its financial footing.

"Albertsons has not kept pace with the changing needs of its customers for a number of reasons," division President Dan Sanders said at the time. Further, despite a reduction in traffic and an overall decline in sales, Albertsons — which at one time operated 445 Albertsons and Lucky supermarkets in Southern California, southern Nevada, Idaho, Montana, North Dakota, Oregon, Utah, Washington and Wyoming — failed to make the necessary adjustments to its store-level operations.

Arizona Slugfest

"The Arizona supermarket industry is considered one of the most competitive in the country," says Tim McCabe, president of the Phoenix-based Arizona Food Marketing Alliance. "More than 90 percent of the stores are run by major chains, and there are very few independents."

Before the recession in 2008, Arizona was one of the fastest-growing states, which McCabe says led to an "overbuilding of stores, with the anticipation of strong, continued population growth." As such, when the crash came, the state was one of the hardest hit, and many stores closed. "Also, due to the changes in Arizona immigration laws and rules, several hundred thousand people left our state, and this had a dramatic impact in the food retail business," McCabe adds.

The biggest opportunities now for the western market, McCabe asserts, are to minimize further federal and state regulations on the industry. "Obamacare creates big challenges, primarily because of the unknown," he says. "As cities continue to look for revenue, there is a concern about more sales tax on food. The growth of online sales and online lottery raises concerns as well."

The overall strategy for Arizona retailers, McCabe says, is to "carefully invest in remodeling stores versus opening new ones, and try to improve margins while being able to maintain market share."

Tight Reins

The West Coast — with California in particular at the forefront — seemingly relishes its position on the cutting edge of regulations over industry, including food retailing and manufacturing. From the environment to animal welfare and food labeling, voters and legislators are in constant motion on the regulatory front.

Most recently, California grocers for the most part cheered last November's rejection of the controversial Proposition 37, which would have mandated genetically engineered foods sold in Golden State supermarkets to be labeled as such. The initiative was defeated after a costly and hard-fought campaign between retailer and supplier groups on one side, and natural food and consumer advocates on the other.

Ronald Fong, president and CEO of the Sacramento-based California Grocers Association, argued that grocery retailers would have been hit the hardest by passage, through lawsuits and higher costs. "These costs would have been passed on to consumers in the form of higher grocery bills," he said.

But some grocers, like Sam Mogannam, owner of San Francisco-based Bi-Rite Market, backed Prop. 37 as an effort to provide complete transparency in the foods offered to consumers.

"As a grocer, it is imperative that I know as much as I can about the food I sell, to ensure that our customers continue to trust us and the food we sell," Mogannam told PG. "If grocery stores care about their customers and the health of their children, like I do, they would support labeling and more transparency in our food system."

In 2010, in response to a ballot initiative two years earlier, California's legislature adopted legislation into law requiring that by 2015, eggs sold in the state must come from hens that are not crammed into cages. The new law threatened to chase egg producers out of the state, due to increased production costs. Meanwhile, the egg industry has been collaborating with animal welfare advocates to adopt nationwide enhanced cage standards that would result in a nominal increase in price per dozen, amortized over several years.

In addition, cities throughout California and other western states have been systematically rolling out local bans on plastic grocery bags, in an effort to reduce pollution, leading many grocers to promote use of reusable bags.

Getting Along

California retailers' contentious relationship with organized labor is legendary. Recent months have seen several showdowns come to a head, with the specter of the four-month walkout in 2003, which saw many shoppers' loyalties shift, looming as a grim reminder of the impact of protracted disagreements (another potentially huge strike was narrowly averted in late 2011).

In recent months, the California Supreme Court sided with labor in upholding United Food & Commercial Workers (UFCW) Local 8's right to picket outside a Ralphs in Sacramento after a lower court granted the Kroger-owned chain's injunction that argued state statutes allowing the demonstration violated the U.S. Constitution. At press time, the company was considering appealing the court's decision.

Meanwhile, UCFW Local 9 struck Raley's for nine days in November after the parties couldn't come to terms following 15 months of negotiations. The family-owned chain argued the union's demands were too expensive. A new labor pact was finally settled, ending the walkout, which Raley's President Mike Teel said provided the West Sacramento-based company with necessary cost savings to fund "our vision and the initiatives to make us more competitive in the 21st century."

Despite the economic pains felt industry-wide, other recent negotiations have been more amicable, such as Pleasanton, Calif.-based Safeway's November agreement with its UFCW locals in northern California, and Modesto, Calif.-based Save Mart's settlement last summer with unionized associates in northern California and northern Nevada. Meanwhile, last year's eight-day strike by union clerical workers at the ports of Los Angeles and Long Beach had more far-reaching implications, with the free flow of imported goods at stake.

Westward Ho!

With a continued soft economy and strong population growth in the West, especially growth in Hispanic, Asian and other ethnic groups, finding ways to reach those shoppers with the foods they grew up with, sold at a great value, will help define the markets in the West.

Because of this, more nimble independent retailers will continue to flourish, says Farmer John's Samples, "but the national chains are getting smarter through efforts around category management and shopper marketing. With such a strong food culture in the West, I think you will see this area lead the nation in exciting new choices and innovative food offerings."

According to the U.S. Census, Samples notes, Los Angeles was one of the top 10 growth markets from 2000 to 2010. With the majority of this growth from Hispanic and other diverse groups, he expects the food culture "to continue to focus on bold flavors, matched to the local shopper. We think the West will be one of the fastest-growing and exciting food markets for the next five years or more."

The West is unique in that the independent grocer still reigns powerful.

California has some of the worst commutes in the nation, which means more folks want to avoid traffic by shopping closer to home.

Safeway's Future, Post-Burd

Safeway Inc. Chairman and CEO Steve Burd will retire in May after 21 years at the helm of the Pleasanton, Calif.-based national chain.

The Safeway board has begun a search for a successor; Burd will help with the search and continue to assist the company after he transitions out of his leadership posts.

"I feel this is the right time to move forward with a transition plan," Burd says. "The company is gaining market share with each passing quarter. We have developed the most sophisticated digital marketing platform in retail, we are implementing the most comprehensive and personalized fuel loyalty program, and we will be rolling out a wellness initiative that has the potential to transform the company."

Burd joined Safeway in October 1992 as president and was appointed CEO in May of the following year. Some of his key initiatives include establishing a culture of thrift and capital discipline, creating an industry-leading customer service program, developing the "Lifestyle" store format, introducing a high level of quality in perishable products, and forming a prepaid payment network that has become one of the largest distributors of gift cards in the world.

Safeway has also introduced innovative design and practice features into its health plans. As a result, Safeway has averaged a 2 percent annual growth rate for both employer and employee contributions.