Ethnic Markets Capture Communities’ Tastes

“The first rule,” Justo Frias was saying: “You always enter the store by the fresh produce department. Latino shoppers want very fresh produce, and a lot of variety.”

There were tomatoes and peppers, and vast bulk bins of beans and rice. Along the nearest wall, a dozen types of fresh chili peppers were arranged beneath a chart showing each one’s heat content on a scale of 1 to 10. (Habaneros, the hottest chilis known, earn a 10+.)

A few other signs showed that we were standing not in a conventional Albertsons, Ralphs or Vons, but rather in the new Grupo Gigante supermarket in inner-city Los Angeles, the day before its formal grand opening. Among them were signs proclaiming Gigante’s policy of everyday low prices: “Precios Bajos, SIEMPRE!” But as Frias, the president of the Mexican company’s Gigante USA division, puts it, the company’s goal is for its stores to meet the design standards of the major American supermarket chains, while casting aside the chains’ insensitivity to their shoppers’ regional tastes.

“We try to be very similar to Albertsons or Vons or Ralphs,” Frias says, “as far as appearance and look and lighting.” Escorting me toward the rear of the store, he shows where 11 bakers staff a full-service panaderia. At the other corner is the store’s full-service meat department, with about a dozen butchers working behind plate glass. The display here similarly reflects neighborhood appetites; the top-selling cut of meat is beef tripe for menudo soup, so the store offers three varieties.

Is this a sustainable business model? Gigante, which opened its first U.S. store in 1999 in Pico Rivera, now has six outlets in the area and will be up to eight by the end of the year. Those who have seen its master plan say it calls for 55 stores, and Frias is thinking ahead to when he might have the critical mass locally to expand out of Southern California.

It’s worth studying how Gigante and other independent grocers such as Santa Fe Springs-based Superior Super Warehouse manage to thrive in the inner city because the big supermarket chains place them high on the list of competitors threatening their survival. Independent markets, the chains complain, are cutting into their revenues in ethnic communities. Combined with the looming threat from Wal-Mart Stores Inc., this is supposed to explain why they have to shave the cost of their own union contracts.

If I were a figure skating judge I’d give this argument low marks for technical merit. Independent supermarkets are eating the big chains’ lunch (so to speak) in ethnic communities and the inner city largely because the chains didn’t bother to learn how to respond effectively to their own shoppers’ special tastes. Once they started losing sales, they abandoned those communities to anyone who would have them.

Ethnic and inner-city neighborhoods in L.A. had long been underserved by major retailers, but the trend became especially pronounced after the 1992 riots, which destroyed numerous neighborhood supermarkets, among other properties. In the riots’ aftermath, executives of Safeway Inc.’s Vons, Kroger Co.’s Ralphs and Albertsons Inc. pledged to build 32 new supermarkets in the devastated area.

But once the TV cameras recorded these eloquent promises, the chains turned their backs. Vons itself had promised to spend $100 million building a dozen stores in the inner city and surrounding communities. Ten years later, the one store it had opened in the riot-torn district had already been shut down. Cueing up its broken record, the company blamed union wage rates for the flop.

It’s true that most of the independent chains are non-union. But Gigante signed a contract in 2001 with the same union that represents the retail clerks currently picketing the big local chains. The Gigante accord, which was the result of a bitter 2 1/2-year battle, gave the company lower wage rates than at the American chains in part because Frias argued that without a break he couldn’t staff the larger bakery and meat departments he needed to serve his customers effectively.

In any case, the differential in labor rates between the big chains and the independents is only part of the story. The big chains never seemed to understand why they should cater to their minority customers, even after it became clear that ethnic groups such as Latinos wouldn’t be minorities for long in Southern California. Steve Soto, the executive director of the Mexican American Grocers Assn., remembers that when he first joined the organization in 1982 he was approached by Byron Allenbaugh, then the chairman of Ralphs.

“He asked if we knew a retailer who would buy their six stores in Latino neighborhoods,” Soto recalls. “I said I’d check, but then I asked him what he would do when 35 or 40 of his stores were in Latino neighborhoods.”

One factor hamstringing the chains was their size. Anxious to protect their thin profit margins, they had developed highly centralized systems to manage volume buying and distribution of stocked items. At Ralphs, individual store managers had permission to customize only 5% of their stock to serve their neighborhoods. The company’s fear was that if too much of the inventory varied store to store, it would lose the pricing power it acquired from volume purchasing. But by turning centralized inventory management into a defining principle, it also surrendered its right to whine about the flexibility of smaller competitors.

“From the chains’ perspective, the great thing is efficiency of scale,” Frias told me from the floor of his new market at the corner of Gage Avenue and Compton Boulevard. “It’s hard to ask a buyer to call Juanita Hominy a basic item” -- he tapped a display of six-pound cans of the corn product with a knuckle for emphasis -- “because it’s not just a question of how much can you sell, but how can you be sure your buyer got it at the right price?”

Even when they made a genuine effort to appeal to their Latino shoppers’ tastes, the big companies muffed the play.

Tianguis, a Latino-themed chain launched by Vons in 1987, was an instant success but a longer-term disaster. It lured Latino shoppers with imported Mexican products, full-service panaderias and butcher departments -- then ticked them off with high prices. By 1994, all nine Tianguis locations had been closed or converted to warehouse-style stores, partially at the urging of impatient Wall Street analysts (few of whom would be mistaken for adept corporate strategists).

Such missteps did at least provide incoming retailers with ready-made facilities to take over in the abandoned communities, much the same way that small mammals first moved into the biological niche vacated by dying-out dinosaurs. Of Superior’s 16 L.A.-area stores, 12 occupy the former sites of other supermarkets.

The independents try to make the most of their stores’ ability to reflect their neighborhoods.

“Part of our blueprint is that when we move into a community we hire local residents,” says Phil Lawrence, senior vice president of operations at Superior. “They’re pleased to have a job, and they tell us how to merchandise in the community. People are called Hispanics, but there’s a whole diverse culture out there, and we try to be receptive to what they like.”

Soto puts it another way: “Superior does their homework. If they’re in a 95% Mexican community, they’re not carrying 40% Cuban food.”

The independents also understand that they’re building long-term relationships with shoppers. There’s more to this than the perception that, as Frias observes, personal income among Latinos is growing at three times the rate that it is in the Anglo community. The inescapable fact is that Latino households, money and culture are spreading throughout Southern California.

Savvy retailers know what it means to be carried along by a loyal customer base. They also know that by building on this loyalty, they can expand this base well beyond its original limits.

The major chains have begun to absorb the lesson. Food4Less, the warehouse-style chain that is a corporate sister of Ralphs, started installing full-service carnicerias, or meat departments, in many of its stores a couple of years ago. That was after it realized that its Latino customers were going elsewhere for meat and seafood. “We were losing sales to Hispanic markets,” says Terry O’Neil, a Kroger spokesman. Now there’s reason to wonder whether they can ever catch up.

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Golden State appears every Monday and Thursday. Michael Hiltzik can be reached at golden.state@latimes.com.