Using Size to Their Advantage

To compete with huge discounters such as Wal-Mart and Costco, which have begun making inroads into grocery territory, the nation’s large supermarket chains are becoming ever bigger, leaner and meaner. They’ve acquired competitors, slimmed staff and product selection and opened larger stores in an attempt to bolster earnings and build buying clout.

But in the process, analysts say, they’ve strained the loyalty of their customers. And therein lies an opportunity for smaller, entrepreneurial store operators.

Supermarket veteran Roger Hughes and his top managers from Hughes Family Markets hope to woo customers with a chain of smaller, old-fashioned stores with more attentive service and build a profitable niche in this hotly competitive business.

Hughes and partners Mark Oerum, David Wolff and Steve Strickler opened the first two HOWS Markets in Granada Hills and Canyon Country this summer. Another opened near San Marino last month. Some sources say the chain could open as many as 10 more stores over the next five years.

For the neighborhood market concept to work, Hughes executives say, they first have to convince consumers that they’re just plain folks and “not the big guys from the East.” To that end, they have used their own initials to form the stores’ name and splashed their pictures and biographies across its brown paper grocery bags and fliers. HOWS also has resurrected services abandoned years ago by other chains, such as home delivery, free knife sharpening and an on-site butcher.

Although the supermarket industry is abuzz with talk of bringing back neighborhood markets, analysts say HOWS and a handful of other independents are the only ones doing it. None of the supermarket troika--Kroger, Albertsons and Safeway--are building smaller stores or hiring more clerks.

At Kroger, the average store size has continued to increase and jobs have been eliminated with each round of acquisitions, including that of Fred Meyer, the parent of Ralphs Grocery Co.

However, executives with both Ralphs and Kroger say bigger stores and leaner staffing have not compromised their commitment to serving customers. “At a time when many consumers may perceive one supermarket to be just like another, customer service may be the one advantage we have over our competitors,” said Kroger spokesman Gary Rhodes.

Analysts say independents such as HOWS will have to provide a higher level of service along with prepared food and perishables such as meat and produce to compete with the food giants, which can cut better deals with food manufacturers and distributors.

“Food more than any other category lends itself to independents, but it’s getting harder and harder” for small stores to compete, said Gary Giblen, a supermarket analyst with Bank of America Securities in New York. “You have to have a real quality differential.”

HOWS executives built the small stores--which average 20,000 to 40,000 square feet--around the fresh food departments at the perimeter of the store, leaving room at the center for primarily top-name-brand items. Because the stores are smaller and can tailor more of their stock to neighborhood tastes, HOWS thinks customers won’t complain about a slimmer selection of some popular items.

“Everyone can sell the same can of Del Monte corn. But when it gets to service in the meat, deli, produce and bakery,” Oerum said, “that’s where we think we can make our statement.”

Starting the new chain has thrust Hughes and his partners into the unlikely role of mom-and-pop retailer. Despite decades of experience and existing relationships with manufacturers, the chain, like most independents, has to let its suppliers call many of the shots.

Instead of stockpiling items when they find a good discount, HOWS executives have had to rely on what Commerce-based Unified Western Grocers has in its local warehouse.

Likewise, lacking resources, HOWS had to depend on Unified, at least in the beginning, to promote the stores. Until recently, most of the items in the sales circulars were chosen by Unified, and HOWS’ prime steaks and seafood were depicted with less appetizing pen-and-ink drawings rather than color photographs.

And to many customers in these three communities, the HOWS name is unfamiliar. “I thought it was a Chinese supermarket the first time I drove by,” said shopper Sue Kassner outside the Granada Hills store.

Challenges Similar to Those 40 Years Ago

The challenges remind Hughes of when his father was starting Hughes Family Markets about 40 years ago in the San Fernando Valley. It took several years and almost five stores, he said, before word of mouth started to spread and his father, Joseph, began to advertise the stores. The chain, which eventually grew to 57 stores before being acquired by Ralphs in 1997, built a reputation with shoppers for quality, not for price.

Indeed, once a friend told Kassner that the HOWS she passed in the aging strip mall was a new project started by Hughes, she decided to check it out.

“The prices were higher at Hughes, but everything there was top quality,” Kassner said as she loaded up her trunk. “If they have bigger produce here, and it’s nicer and fresher, then sure, I’ll pay more.”

Connecticut supermarket consultant Chris W. Hoyt said focusing on fresh foods and service is a smart strategy to adopt in the rapidly consolidating industry. The big chains are focusing on the packaged foods in the center of the store, slashing prices just to keep from losing market share to club stores and mass merchandisers such as Wal-Mart, which can offer steeper discounts on food.

And yet for all of the price cutting, the discounters appear to be winning the battle. Last year, supermarkets’ share of retail food sales fell in 109 out of 115 nonperishable categories, the third consecutive year of significant drops, according to data Hoyt compiled from Information Resources Inc.

“Consumers aren’t going to food stores [as often] to buy pet foods, paper products or anything in a can,” Hoyt said. “They’re buying those at club stores and mass merchandisers because the prices are so much lower.”

Wal-Mart is expected to make further inroads into grocery territory with a chain of smaller neighborhood supermarkets. The company has opened a handful of these stores in Oklahoma and Arkansas, and 10 more are planned next year in unspecified markets around the country.

So far, this Wal-Mart grocery experiment hasn’t been a raving success, Giblen said. But as the Bentonville, Ark.-based company polishes its Wal-Mart Neighborhood Markets concept, its convenient format and rock-bottom discounts could soon give both the nation’s largest grocery chains and the independents reason to fear.

Supermarket chains and labor unions tried to quash some of the competition from discounters by rushing a bill through the California Legislature in the last session that would prohibit local governments or state agencies from approving stores of more than 100,000 square feet that sell food and prescriptions. It was quickly vetoed by Gov. Gray Davis, who declared it “anti-competition and anti-consumer.”

Despite the low-price pressure from the big operators, analysts say concepts such as HOWS could become increasingly attractive to shoppers. The produce section is the most important section of the supermarket to consumers, according to a 1998 survey by Washington-based Food Marketing Institute. And fortunately for independents such as HOWS, perishables also are where most of the profit is. They generate 80% of the sales from 20% of the space, Hoyt said, and enable smaller chains to cover their higher overhead.

The HOWS approach might not sound that novel, but customers who have begun shopping there say they can tell a difference.

“Here there’s always someone you can ask for help,” said Jackie Morgan outside the Granada Hills store. “People say hi to you. I like that.”