Vons Takes the Offensive in Grocery War : Purchase of Safeway Stores Would Nearly Double Size of Supermarket Chain

For the last several years, Southern California’s supermarket wars have been among the fiercest in the nation.

The big grocery chains have fought it out with coupons and double coupons; low prices and lower prices. They’ve bragged about price surveys by hired accountants. They have built new and bigger stores and have revived their old ones. They have added row after row of exotic fruits and vegetables. You now can buy sushi, pasta and $25 flower arrangements along with Cheerios and Tide.

Still, there has been no clear-cut winner. Contenders like Vons, Ralphs and Lucky have been bloodied as they vied for the title of No. 1.

But in a bold move to capture that title, Vons moved beyond marketing techniques last week and announced Thursday that it will buy Safeway’s 172 stores in Southern California and nearly double in size.

“We want to be the leading food and food-drug retailer in Southern California,” declared Vons Chairman Roger E. Stangeland on Thursday in announcing what he called a “landmark transaction.” And the $408-million deal, which would give it almost twice as many stores as any other chain, seems to give Vons what it wants--at least for now.

“The deal clearly makes Vons No. 1 in Southern California,” says Ronald Rotter, a retail and grocery analyst with Morgan, Kennedy, Olmstead & Gardner in Los Angeles. “They are No. 1 in the nation’s No. 1 supermarket market.”

In a wide-ranging interview Friday, both Stangeland and Vons president William Davila outlined their strategy for operating the expanded company once the deal is completed next summer. And they acknowledged that it is a deal they have coveted and talked about on and off for at least the last two years.

The acquisition, scheduled to become final in July if it is approved by the U.S. Federal Trade Commission and Vons shareholders, would give the chain a total of 365 outlets stretching from San Luis Obispo to the Mexican border. It would boost its annual sales by about 50% to nearly $4.6 billion.

The Vons executives, who said the acquisition is the largest-ever combination of grocery chains in the same market, said their goal is to merge the two operations into a single unit and expand it even more.

Although admitting an unspecified number of stores will be closed due to overlapping service areas, Stangeland said: “The overall objective is to grow the business under the Vons umbrella. . . . We did not buy Safeway to turn around and close and sell locations. We are not in the real estate business.”

Stangeland said discussions with Safeway began in late 1985--before Safeway’s purchase by Kohlberg Kravis Roberts & Co. However, he said “heavy duty” talks began in July, after Vons completed its merger with Allied Supermarkets Inc. and became a publicly traded company.

He also said there were two other bidders for Safeway’s Southern California operations but would not name them.

“We wanted Safeway because it gives us a cost-effective retail network that equips us to compete better,” Stangeland said. “That’s what we’ve always wanted.”

At the corporate level, Stangeland said Vons expects to merge a variety of operations, a move that will produce an unspecified number of layoffs among white-collar workers at Safeway’s administrative headquarters in Los Angeles. In addition, he said he hopes to combine the operations of the Safeway and Vons dairies, ice cream-making plants and bakeries, which will also cause some layoffs. Job cuts will also result from the expected closing of some retail outlets. Although the executives claim they have no firm count yet, they said they know of at least four locations where Vons stores are directly across the street from Safeway outlets. In addition, they said there are at least other three “direct overlaps.”

Stangeland and Davila stressed that no decision has been made on layoffs and said any reductions would be discussed with employee unions beforehand.

Expects More Sales

“We will make a very careful, well-studied evaluation of a store’s potential before we do anything,” Stangeland said, emphasizing that the study will focus on the “potential” sales of a store, not necessarily its past performance.

Stangeland said the real benefits of the deal are not the cost reductions brought on by layoffs but the increased sales that he expects Vons to generate at its new stores.

Davila, who has become Vons’ well-recognized television spokesman, said the company has analyzed the potential and fashioned a strategy it believes can squeeze additional sales and profits from the merged operations.

The strategy hinges on the several grocery “formats,” as they are termed, that Vons has created--and will create--to address widely divergent neighborhoods and life styles in Southern California.

Convert Some Stores

Safeway locations in heavily Latino neighborhoods, he said, could be converted to Tianguis stores--Vons’ relatively new, Latino-oriented supermarkets. Currently, there is one Tianguis in operation, with two more scheduled to open early next year.

Super-sized Safeway stores, such as the 50,000-square-foot outlet on Los Feliz Boulevard in Glendale, will probably be converted to Vons’ Pavilions stores, Davila said. Vons now operates seven Pavilions, which are larger and carry more products than Vons’ typical stores.

Safeway stores with pharmacies could become Vons Food and Drug Stores, joining the 46 already in operation. And, the remaining “just plain” food stores would be eligible to become regular Vons supermarkets.

Furthermore, Davila said, Vons has other formats under consideration, including an upscale specialty market similar to the Irvine Ranch Market and a warehouse-type operation that could compete with the proliferating number of discount warehouses.

“We see opportunities to infuse Safeway with new formats to have a broader appeal across the whole marketplace,” Davila explained.

Davila said that, if the strategy is successful, Safeway’s annual sales per square foot, which were about $425 last year, could approximate the level of Vons, which were in excess of $650. The industry average, he said, is about $404.

Although Safeway sales have lagged behind Vons and other Southern California chains, Stangeland said he was far more impressed with the location of Safeway’s stores in the region because they are, for the most part, not in direct competition with existing Vons stores.

“There is not a lot of territorial overlap,” he said. “Their strength is where we had not developed: in the west side of Los Angeles and in Orange County, where we are under-stored.” In addition, Safeway gives Vons outlets in less-populous areas, such as Inyo, Imperial, San Bernardino, Riverside and San Luis Obispo counties.

Meanwhile, Stangeland said the deal does not increase Vons debt load relative to its equity. He said the cash flow from Safeway “is more than sufficient to cover” any additional debt from the deal.

Still, analysts caution that Vons’ aggressive, costly and highly leveraged strategy does not guarantee it any more profits. “They are taking on more debt and more risk,” Rotter said. “And they are already highly leveraged.”

Sarah Stack, a retail analyst with Bateman Eichler, Hill Richards in Los Angeles, said she is telling stock market investors that Vons shares are for only for those investors who are “aggressive and speculative.”