Price Battles Most Likely To Be Localized
It wouldn’t make much sense for any of Southern California’s debt-burdened supermarket chains to launch a price war. That would only make life tougher for them.
Then again, price wars have a way of getting started even when few, if any, of the businesses involved want them.
That’s what is both worrying some supermarket analysts and raising hopes among consumer advocates these days. To be sure, most experts downplay the chance that recent developments roiling the Southern California food store market--including the return of the Smith’s Food & Drug Centers chain--will trigger an all-out price war.
Much more probable, they say, are localized price battles among the individual supermarkets in the neighborhoods that Smith’s enters, at least for the first several months after the new stores open.
Still, if one of the top chains gets jumpy about intensified Southern California-wide competition and slashes prices at all of its stores to hang on to customers, there could be a major chain reaction.
“We’re not going in to start a price war, but if somebody else wants to cause one, we’ll be right in the middle of it,” said Jeffrey P. Smith, chairman and chief executive of Smith’s Food & Drug Centers.
Smith says his chain plans to offer an “everyday low prices” approach in line with that of Lucky supermarkets, which is regarded as having the lowest across-the-board prices among the big Southern California chains. Smith’s will provide face-value discounts on manufacturers’ and competitors’ coupons, rather than the “double coupon” discounts offered at Vons, Ralphs and Alpha Beta.
Salt Lake City-based Smith’s, which plans to build 50 to 60 giant supermarket-drugstores in the area by 1995, says it hopes to attract customers over the long run largely with its “one-stop shopping” format.
If that approach fails, “that’s when they’re going to do something” to undercut competitors’ prices, predicted Brad Freeman, a partner in a Los Angeles buyout firm that specializes in supermarket deals.
By itself, Smith’s won’t be big enough to trigger a price war. Even when all of its proposed Southland stores are built, the company says, it expects to gain no more than a 6% market share. “We’re not looking to cause a total disruption in the marketplace,” Smith said.
Taken together with other changes in the market, however, Smith’s arrival could put pressure on grocery prices throughout Southern California. Vons and Ralphs, two of the top three chains, are now more robust financially after having struggled with heavy debt burdens. They may be in a better position to cut prices than before.
American Stores, having trimmed its debts by selling Alpha Beta supermarkets in June, is expected to focus more attention on its Lucky division. Likewise, the new owner of Alpha Beta, Yucaipa Cos., wants to revitalize its new stores.
Albertson’s, one of the area’s top five or six chains, escalated the local price competition in July when it launched its “rock-bottom” prices format. The move involved scrapping its “double coupon” policy in favor of lower prices across-the-board.
Meanwhile, Lucky, Ralphs, Albertson’s and Stater Bros. Markets, the dominant chain in the Inland Empire, have continued opening new stores during the recession. Although most analysts and executives say Southern California’s increasing population can support the new stores, not everyone is convinced.
“The pressures are building, and one of these days, one of these guys will have to break in price to bring more people in the door,” said Howard Flinker, a New York investment adviser who is betting on a decline in supermarket stocks.
The fact that supermarket executives don’t want a price war, Flinker says, is irrelevant. “I don’t know if there’s ever been a price war where a competitor wanted one,” he argued.
Most industry executives and analysts, however, write off the idea of a full-fledged price war. Gary M. Giblen, an analyst with Paine Webber, points to the experience of market leader Vons, which he says hasn’t been hurt by the recession or by Albertson’s recent price gambit. Further, he says, Vons’ prices already are low when you take its double coupon discount and specials into account.
Jack H. Brown, chairman and chief executive of Stater Bros., also dismissed the possibility of a price war, but for a different reason. Southern California, he said, “is experiencing the deepest price wars . . . that the chains here can survive with.”
Brown maintained that supermarkets already hurt by the Southland’s weak economy aren’t willing to engage in a price war that would pinch their profit margins further.
“From a price standpoint,” he added, “Smith’s brings nothing new to the table. They can’t under-price Lucky.”
Still, Brown said, look for supermarkets competing with the scattered new Smith’s locations to offer more discounts in the form of “in-store specials” and “manager’s specials” to retain customers loyalty. “There’s business to be had (by Smith’s), but it won’t be our business,” Brown said.
Vons, which has 311 stores in Southern California, will “deal with the Smith’s locations, as I’m sure our competitors will, on a location-by-location basis,” said spokeswoman Mary M. McAboy. She declined to elaborate, other than to say that pricing is only one of the chain’s competitive weapons.
Supermarket Market Share Smith’s Food & Drug Centers is entering an already highly competitive Southern California grocery store market. The figures below reflect the percentage of shoppers in Los Angeles and Orange counties who consider a store their “primary” supermarket. Data was collected in the second quarter.
Supermarket Market Share:
1. Vons (includes Pavillions): 19.9%
2. Ralphs: 17.8%
3. Lucky: 16.4%
4. Alpha Beta/Food 4 Less (includes Boys, Viva, ABC, Market Basket and QFI stores): 14.5%
5. Albertson’s (includes Grocery Warehouse): 6.1%
6. Hughes: 5.4%
7. Other: 19.9% Source: Los Angeles Times Marketing Research
