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California is a magnet — and a graveyard — for supermarket competitors

California is a magnet — and a graveyard — for supermarket competitors
Shoppers wait in crowded lines to purchase groceries at the grand opening of Aldi on April 21 in Inglewood (Gina Ferazzi / Los Angeles Times)

It's grocery day, so I load a bunch of canvas shopping bags into the trunk and set out.  

First stop, Trader Joe's, for a couple of jars of Better'n Peanut Butter and to replenish our supply of its frozen palak paneer ("authentic Indian recipe"). Then it's across the way to Lazy Acres, for a half-dozen Honeycrisp apples and a small wedge of Humboldt Fog goat cheese, and up the road to Gelson's for a couple of pounds of Canadian-roasted Kicking Horse whole bean coffee. (I skip the store's sit-down wine bar because it's a bit too early for Cabernet.) 

The home stretch: Sprouts for cantaloupes, grapes and a few scoops of whole cashews, then Costco for a pallet of paper towels. Finally, to Ralphs for butter, milk and Bumble Bee solid white albacore (a staple at our house), skipping the eggs at $3.49 a dozen.

This turns out to be the right play, because my wife, just back from picking up gardening supplies on deep discount from the nearest Aldi, 10 miles away, reports that a dozen can be had there for $1.99.

Is there anywhere in the country with as many food retailing choices as Southern California? 

While industries all over the country are merging and consolidating, the region's grocery market remains a model of how vigorous competition can serve the consumer. A 2014 merger brought the full-service supermarket chains Vons, Safeway and Albertsons under one corporate roof.

The depth and range of competition is unique (in Southern California). You've got the best of regional, national and international retailers, serving a United Nations of consumer constituencies.

Supermarket consultant Burt Flickinger III

But that still left the landscape littered with rivals and failed to scare off the newest regional contender, Aldi, a German chain that offers low-price house brands out of drugstore-size 10,000-square-foot stores.

Virtually every sector of the food retailing business is represented in the region -- from high-end full-service stores such as Gelson's, Whole Foods and Lazy Acres; to the epicurean chain Trader Joe's (a corporate cousin of Aldi's); to warehouse stores such as Costco, Sam's Club and Wal-Mart; the quasi-warehouse retailer Smart & Final; and expanding ethnic chains such as Northgate, Ranch 99 and Super King.

"The depth and range of competition is unique," says food industry analyst Burt P. Flickinger III, the descendant of a family that owned what was once among the largest food wholesaler and retailer in the East. "You've got the best of regional, national and international retailers, serving a United Nations of consumer constituencies."

Flickinger predicts that Aldi's expansion will spark a price war that could shave 30% from the annual food bills of budget-conscious families. That's important because of the factors that drive up the region's cost of living, including the cost of food -- taxes, real estate and fuel prices among other things. 

As my colleagues James F. Peltz and Shan Li reported last year, the siren call of the greater Los Angeles market, with its population of more than 20 million, often has lured ambitious retailers onto the rocks. In part that's because the grocery business is generally one of razor-thin margins of 1% or 2%, leaving little cushion against missteps.

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But some of the most spectacular damage has been self-inflicted. That was the case with Haggen, a 16-store Bellingham, Wash., chain that expanded vastly beyond its Pacific Northwest home turf by picking up 146 stores -- including 83 in California -- divested by Albertsons and Safeway as a condition of their merger. Within six months, Haggen had declared bankruptcy and closed the acquired stores.

The firm filed a $1-billion federal lawsuit accusing Albertsons of "sabotaging" the transition, but industry observers tended to blame the debacle on the hubris of Haggens' controlling shareholder, the private equity firm Comvest Partners.

"How can a company that size take on 150 stores?" asks Jack Brown, who as the 77-year-old CEO of Stater Bros. may be the dean of Southern California grocery executives. "It's impossible."

Haggen did minimal advertising and almost instantly acquired a reputation for high prices that it couldn't shake. It eventually settled its lawsuit for $5.75 million.

The British firm Tesco suffered a similar fate with Fresh & Easy, the chain of convenience store-size food shops it brought to Southern California in 2007.

"They told consumers that they'd offer Whole Foods quality at Wal-Mart prices," recalls supermarket consultant David Livingston. "They created such high expectations that the consumer was underwhelmed."

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Customers wandering into the chain's dank, understocked and understaffed locations "found out it wasn't fresh and it wasn't easy," says Brown.

Ex-supermarket magnate Ronald W. Burkle's Yucaipa Cos. tried to revitalize 150 stores with financing from Tesco after the chain's 2013 bankruptcy, but Burkle couldn't turn around a business that was "in a free fall," he told The Times last November, after Fresh & Easy filed for bankruptcy a second time. 

Still, Southern California is so big that even its niches are sizable enough to beckon retailers. Says David G. Hirz, who joined Smart & Final as chief operating officer in 2010 and became CEO in 2012 after heading the Food4Less and Ralphs divisions of Kroger Co., "At Ralphs we targeted middle-income shoppers and above, and at Food4Less middle-income and below."

At Smart & Final, which dates to the 1870s when it specialized in sheepherder supplies and gunpowder, about 30% of sales are of club-size quantities going to small businesses or organizations like Little League groups. The selection and stores are smaller and easier to navigate than, say, Costco's cavernous warehouses.   

The region's shopping centers, Flickinger says, are suffering their highest level of vacancies in years. Closures of Sport Chalet and Sports Authorities stores will open up even more space and lower the cost of entry for supermarket competitors.

Stater Bros.' Brown, who has led three supermarket companies in his 65-year career, says these would-be entrants would be wise to tread carefully. Southern California consumers are skeptical of imported concepts, he says.

That includes Aldi's low-priced but unfamiliar house brands, sold out of relatively small stores in which customers must bag their own groceries and leave a 25-cent deposit to unlock a cart.

"Someone is always trying to create a better mousetrap," he told me, but food retailing is still a local business. "It wouldn't make sense for me to expand in New York, because I don't know the territory." 

Brown keeps a private list of chains that have come and gone from his territory. Many of them, like Alpha Beta, Food Giant and Lucky, are long forgotten brands that once were household names in Southern California. "The graveyard," he says, "filled up pretty quick."

Keep up to date with Michael Hiltzik. Follow @hiltzikm on Twitter, see his Facebook page, or email michael.hiltzik@latimes.com.

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