PHOENIX — It's getting hotter here in the Valley of the Sun, and it isn't even summer yet.
The heat is coming from the recession and its impact on competition here — exemplified by the announcement late last month that Bashas' plans to close a handful of underperforming stores, just months after shuttering five locations and, even earlier, laying off approximately 500 corporate employees.
In a press statement, Bashas' explained its decision to close some of its stores. “With the economy the way it is, we have to make some extremely difficult decisions. In better times we have kept stores open that probably should have been closed.”
For a market that was already considered over-stored, the number of new players here has continued to accelerate — increasing pressure on the more established operators. Those companies include Whole Foods Market, Pro's Ranch Markets, Sprouts Farmers Market, Sunflower Markets, Fresh & Easy and, most significantly, Wal-Mart Stores, with its stable of supercenters, Neighborhood Markets, experimental Marketside locations and an upcoming Hispanic format.
With the weakened economy and Wal-Mart Supercenters close to overtaking Fry's as the market-share leader, what has traditionally been a high-low market is rapidly becoming a lot more price-oriented, local sources told SN.
“This was a market in which Wal-Mart was not expanding very quickly — until acquisitions and attrition reduced the number of large competitors from eight or nine down to only four in the last few years, and Wal-Mart decided the time was ripe for significant expansion,” a local food broker told SN.
According to one retail competitor, “The weakening of the economy has most definitely put Wal-Mart in a desirable position because it is all about price and values, which is what consumers are looking for right now. Wal-Mart is a company in the right place at the right time, and it seems to be inching ahead of Fry's as the market-share leader.”
Wal-Mart operates 54 stores here, including 37 supercenters and 12 Neighborhood Markets, plus four Marketside stores that it is testing.
“Those stores are very much like an independent supermarket from the 1960s,” the broker pointed out. “They're small stores — in former drug store locations — that take a very quaint marketing approach, with food laid out in a very traditional fashion.”
According to another observer, the Marketside stores “are better than Neighborhood Markets and probably do a little bit more business. But though Wal-Mart remains consistent in terms of delivering products and services, it has had some problems with in-stock conditions, which is typical of Wal-Mart.”
Fry's operates 90 stores here in several formats, including combination stores, Signature stores for upscale areas, a single Fry's Mercado in a Hispanic neighborhood and six Marketplace stores at larger units. Kroger developed the Marketplace format here as a solution to the challenge of what to do with the 100,000-square-foot-plus Smitty's stores it acquired a decade ago by creating a smaller version of a Fred Meyer multi-department store.
Local sources credit Fry's with being the low-price leader among conventional operators here, with an aggressive price-and-item marketing program that has intensified with the growth of Wal-Mart Supercenters and the economic downturn.
Since the beginning of the year it has been emphasizing its low pricing with comparison ads every few weeks, showing how its prices compare with those of its competitors rise since they were acquired even including Wal-Mart in the first ad, one observer pointed out. Fry's did not beat Wal-Mart in the comparison, though it was close, he noted. However, he said Wal-Mart has not been included in subsequent comparisons.
The 29 Albertsons stores here have seen their fortunes rise since they were acquired by Boise, Idaho-based Albertsons LLC in mid-2006, the local broker said. “With Supervalu as the stores' supplier, they do not have a lot of infrastructure in terms of buying or information technology, so they're able to operate differently than a typical retailer, which enables them to drive sales more effectively,” he explained.
Another observer said he believes Albertsons is losing volume. “It has pretty much backed off on pricing,” he told SN, “and it runs hot and cold in terms of value promotions.”
Regardless, Albertsons may be hurting the conventional stores operated by Chandler, Ariz.-based Bashas', a local source told SN. Bashas' operates three formats: about 44 conventional stores, 41 Hispanic-focused Food City locations and eight upscale AJ's.
“Historically, two of the formats were able to buffer any problems in the third,” the observer explained. “But with Albertsons cutting into sales at the conventional stores, and with the economy hurting AJ's, which represents a significant part of the chain's profits, and with Food City being hurt over the last 18 months by laws that caused a lot of Hispanics to leave the area, all three formats are suffering at the same time.”
Food City utilizes an everyday-low-price program to cater to lower-income Hispanic shoppers in inner-city areas; since January, Bashas' has re-positioned those units to broaden their marketing appeal, observers pointed out — due in part to the weaker economy and in part to the loss of a portion of its customer base after the state of Arizona began requiring employers to make sure all employees were legal residents, a move that prompted many illegals who were part of Food City's customer base to move away, local sources noted.
For Safeway, Phoenix was one of the first markets where it began upgrading stores to the lifestyle format. Having completed that process locally, “Safeway now seems to be going back to premier locations and adding more products and services that it's learned about in later remodels,” one observer said, including sushi bars, gelato bars and additional chilled entrees.
With 61 stores in the market, Pleasanton, Calif.-based Safeway has advertised since January that it has reduced prices on 5,000 items in the stores, “and that's something it keeps promoting, along with its array of private-label products,” one local source added.
Tesco's 30 Fresh & Easy stores here are having little impact, local sources told SN.
“Fresh & Easy seems to be struggling for sales as it keeps changing its merchandising,” the food broker pointed out. “It's begun advertising on food day in the Arizona Republic with very hot prices, and it's stacking merchandise outside the stores — items like water, toilet paper, charcoal and beverages — trying to get people to notice them as they drive by.”
According to another observer, “Fresh & Easy is still trying to figure out who it is as it continues to reinvent itself.”