Albertson’s Still Finding Its Footing in California

When Albertson’s Inc. moved into California last year, promising everyday low prices without a club card, some shoppers were skeptical. Now, almost a year after the Boise, Idaho-based chain changed the nameplate on 480 Lucky supermarkets, some have made up their minds.

Albertsons, they say, isn’t their store.

Sluggish sales at the former Lucky locations Albertson’s acquired in its purchase of American Stores Co. last summer have put a drag on Albertson’s corporate earnings, forcing the company to miss profit estimates and undertake some major belt-tightening.

Although sales have been weakest in Northern California where shoppers are less familiar with the Albertsons name, Southland customers also have been slow to warm to the store’s new look and “Bonus Buys.”

“I come less often than I used to when it was Lucky,” said shopper Vee Arabian as she headed into an Albertsons store on Hillhurst Avenue in Los Angeles. “It’s a nice, clean store, but the service and the prices aren’t as good.”

“Prices are subtly higher,” said freelance writer Pat McDonnell, who lives a few blocks from the store. “You used to get two of those stuffed salmon for $5; that’s the price it always was. Here it’s $7.”

To win the confidence of customers such as Arabian and McDonnell, analysts say Albertson’s prices are going to have to be “noticeably lower.” And the chain is going to have to promote its bargains much more aggressively, like rivals Vons, owned by Safeway Inc., and Kroger Co.-owned Ralphs chain.

“They haven’t gotten the low-price message over [to consumers],” said Merrill Lynch Global Securities analyst Mark Husson. “If they want people to believe that this is an inexpensive place to shop every day, they’re going to have to be really aggressive on price.”

Albertson’s Chief Executive Gary Michael denies that prices in California stores are higher than its rivals. “People will say that our pricing is different, but the fact of the matter is, we were better priced [than Lucky] before the merger,” Michael said.

Nevertheless, he said, the company intends to do things, as he put it, “a little differently,” including diverting some money from the bottom line to step up its sales and promotions and enable it to cut prices on popular items.

Analysts say that Albertson’s prices had been edging up and costs escalating as it tried to digest its $12-billion purchase of Lucky’s parent, a more complex and costly deal than originally anticipated.

The company, which operates more than 2,500 retail stores in 36 states, reported net earnings of $194 million, or 46 cents per share, for the quarter ended Aug. 3, well below consensus estimates of 62 cents a share.

“They lost some focus, and as a result, expenses creeped up and they didn’t have as good a handle on pricing as they would have liked,” said Asma Umani, a grocery analyst with Edward Jones in St. Louis. “They’re not as competitive in some markets as they would have liked to have been.”

Wall Street had raised concerns last year about Albertson’s decision to change the name of all of the Lucky stores so soon after the merger. Although Lucky’s reputation as “low price leader” had been tarnished a bit in recent years, the name and wholesome image cultivated by longtime spokeswoman Stephanie Edwards had become a familiar part of the Southern California landscape.

But California consumers haven’t been Albertson’s only challenge. The supermarket business has gotten much tougher in recent years as rock-bottom operators such as Wal-Mart Stores Inc. and Costco Wholesale Corp. have moved in on grocery territory, selling packaged goods, and in Costco’s case, frozen foods, fresh meat and produce as well.

Although supermarket chains such as Albertson’s have fought back by expanding their delis and bakeries and offering more prepared meals, some haven’t gone far enough in countering slipping sales of center-of-the-store items such as paper towels, soda and macaroni and cheese.

“Food stores are committing suicide by trying to mark up these items,” said Christopher Hoyt, a Scottsdale, Ariz.-based supermarket consultant. “The average family has caught on and they’re going in every eight weeks or so and stocking up on hernia-sized coffee and as much frozen food as their freezer can hold.”

These lost sales will have a double impact on the chains, Hoyt said, as food manufacturers stop paying as much in marketing allowances, also known as slotting fees, to win space on their shelves.

Michael admits that super-centers have begun to eat into sales of products sold in the center of the store, but says he thinks supermarkets can compete with discounters by offering a greater selection of brands and sizes, by offering convenient, easy-to-fix meals and by offering lower prices on the items that Wal-Mart and others stock.

“We’re getting very competitive on key items and categories from frozen food to cleaning supplies,” Michael said. “We have got to regain that business.”

News of Albertson’s financial woes and problems in fending off Wal-Mart helped send shares of the grocery sector spiraling down in recent weeks. And Thursday’s announcement that Great Atlantic & Pacific Tea Co., better known as A&P;, would miss analyst estimates and post a quarterly loss dealt another blow to the industry.

But analysts say the outlook isn’t all bleak. Kroger, the nation’s No. 1 grocery retailer, says it expects to meet its profit goals when it releases its earnings in coming weeks. And Safeway, which owns Vons, posted a second-quarter profit that was 20% higher than last year.

To get Albertson’s back on track, company officials have reduced their earnings estimates for the year and will put more money into promotion. Expansion plans have been cut in half, and the company has promised to slash operating and interest expenses by $250 million and reduce capital expenditures by $500 million over the next couple of years.

In California, the chain has already closed one of Lucky’s warehouses in Buena Park and begun reducing its staff, which it says was too large after the company divested the 117 stores requested by the Federal Trade Commission.

“Did we do too much at once?” Michael said. “The answer is ‘Probably.’ ”

But, he said, after a little promotion and cost-cutting to lure customers back, “I think we are going to do more than we have been doing. We’ve got a great base to build on.”