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For supermarket operators in Hawaii, paradise is just a memory. Hawaii is a tough place to do business, Barry Taniguchi, president and chief executive officer of Hilo-based KTA Super Stores, told SN. People think we live in paradise, but the cost of living is higher than on the mainland, we have to import a lot of product, and the supermarket business is very competitive. With a full slate of conventional

For supermarket operators in Hawaii, paradise is just a memory.

“Hawaii is a tough place to do business,” Barry Taniguchi, president and chief executive officer of Hilo-based KTA Super Stores, told SN. “People think we live in paradise, but the cost of living is higher than on the mainland, we have to import a lot of product, and the supermarket business is very competitive.”

With a full slate of conventional chains, discount stores, mass merchandisers and drug stores vying for the food dollars of an expanding but changing population base, operating in Hawaii is no longer much different than operating anywhere else in the U.S., observers said. “Hawaii is a small market,” said one, “and there's so much overlap among different channels today that we all carry virtually the same merchandise.”

With an expected drop in tourism from Japan following the earthquake and tsunami there, the competitive climate could become even more difficult, they told SN.

The Hawaiian economy has suffered during the recession, with unemployment rising as high as 7%. The outlook had been improving of late, however, as tourism began to pick up, giving a boost to the incomes of foodservice employees — until the twin disasters in Japan last month.

“The economy was looking pretty good a couple of months ago,” Gary Hanagami, executive director of the Hawaii Food Industry Association, told SN. “We were seeing gains in tourism dollars, the economy was projected to grow, and things were looking fairly bright.

“But now we anticipate a slowdown in Japanese tourism, which will mean a lot of workers will be hurt, including some who had secondary part-time jobs in the service industries to supplement their incomes,” he pointed out.

Japanese tourists tend to stay longer and spend more than other groups, Hanagami added, “so the overall economy will be hurt — first in the neighbor islands and then in Oahu.”

According to Hanagami, it's in the nature of the Japanese culture to let some healing take place before they resume normal travel. “The Japanese were very sensitive to 9/11, and they stopped coming to the U.S. out of deference, to let feelings heal. Now the situation is reversed, and they are likely to stop traveling to give their country time to heal and bounce back.”

Natalie Berg, an analyst with Planet Retail, London, also said she believes tourism in Hawaii will be negatively impacted. “With Japanese tourists accounting for nearly 18% of Hawaii's visitors, this is clearly going to be a major blow to the economy,” she told SN.

At its peak, the recession had resulted in a 25% drop-off in the hotel and restaurant businesses, one industry observer noted — “very similar to what's been happening in Las Vegas,” he explained — “and the disasters in Japan are going to have quite a negative impact on tourism.

“In fact, I suspect Hawaii will be affected more than any other locale in the Western Hemisphere, with business potentially dropping another 10%,” he said.

That could open the way for Wal-Mart to get approval to begin opening supercenters in the islands, Berg noted.

No Wal-Mart Supercenters

Over the last few years, Wal-Mart Stores [4] has been boosting the grocery assortment at the eight discount stores it operates in Hawaii. But although it has two Sam's Clubs in the state, it does not operate any supercenters there.

“Hawaii and Vermont are the only two states without Wal-Mart supercenters,” Berg pointed out. “But considering the impact from the anticipated drop in Japanese tourism, combined with rising food and fuel prices, local governments that previously shunned Wal-Mart might have a change of heart about the effect Wal-Mart can have on the local economy, both in terms of job stimulation and delivering lower prices to consumers.

“If Wal-Mart gets approval to open supercenters, it could be the final nail in the coffin for local grocers in Hawaii.”


Hanagami said he agreed that the impact of the drop in tourism “could spur whatever consolidation is likely to happen.”

Two of the islands' major local players, Times Supermarkets and Star Markets, merged a few years ago under the Times banner.

“Consolidation is inevitable, given the strength of Costco and, in the near future, Target, which will hurt a lot of smaller operators,” Hanagami said.

One of the state's remaining independents, Big Save Markets, with 12 stores, is a likely consolidation target, local sources said. One source said the chain has discussed a possible sale to Times Supermarkets, which “would be a natural fit.”

Berg said she believes there is room for additional operators to enter Hawaii, “but only at the expense of other, weaker retailers. The market is small, and there is already an over-proliferation of retailers, so future growth will have to come via acquisitions,” she said.

Competition is expected to heat up this summer when Target [5] opens its third Hawaii store — and the first with a P-fresh grocery assortment — with plans to retrofit its two other stores with the expanded grocery assortment.

“That will certainly make competition more vigorous,” Burt Flickinger, principal at Strategic Resources Group, New York, pointed out.

Added another observer, “Target's grocery departments are going to cut into everyone's business in a big way.”

Statewide market-share figures were not available. Among key cities in Hawaii, Metro Market Studies, based in Tucson, Ariz., cited market shares as follows:

• In Honolulu, on the island of Oahu, Foodland Super Market [6], with 18 stores, leads the way with a 21% share, followed by 19% for the four Costco Wholesale Corp. [7] warehouses there; 17% for 14 local Times Supermarkets; and 14.5% for 10 Safeways [8].

• In Hilo, on the big island of Hawaii, KTA Super Stores dominates, with 27% for its six stores; followed by 21% for Safeway's five stores; and 17% for Foodland's five stores, with Costco's single warehouse there accounting for 13%.

• In the Kahului-Wailuku area on Maui, two Foodlands control 30% of the market, followed by 24% for a single Costco; 23% for Safeway; and 13% for Times.

Home-grown operators once dominated the Hawaii marketplace, but they have become the exception rather than the rule over the last 20 years, as the arrival of a growing number of companies from the mainland — none more than Costco — have changed the retail mix in Hawaii.

“Hawaiians and Asians were once the primary demographic group here,” KTA's Taniguchi explained. “But the general population today is very different, with a lot of people moving from the mainland. As a result, Caucasians now comprise the largest population base, which has made local ownership less of a selling point.”

According to Flickinger, “Hawaii has become much more diverse than it once was, and it will continue to evolve with greater diversity and higher levels of competition.”

He also said the presence of more executives from the mainland — including Abel Porter, formerly of Smith's Food & Drug, who is president of Foodland, and John Quinn, chairman of Northern California-based PAQ, Inc., parent company of Times — means that Hawaii is becoming “a better market in terms of formats and department designs, and that has made all food operators in the state better as both chains have turned up the heat.”

Hanagami offered similar comments. “The executives who came over from the mainland were able to add significant value to their companies because they had stronger backgrounds and a better understanding of how to deal with aggressive competitive challenges,” he said.

Berg said pricing pressure from mainland operators has put more pressure on locally based retailers.

“The large mainland operators are in an advantageous position to leverage their scale to deliver lower prices at the shelf — which has forced local supermarkets to raise their game in such areas as customer service, promoting Hawaii-grown foods and reinforcing their role in the local communities,” she said.

“In addition, mainland supermarkets have raised the game in terms of store environments and layouts.

“The longer-term challenge for local operators is that mainland retailers can continue to utilize their buying power to undercut local operators on price — a situation that could lead to further consolidation and ultimately to the demise of local Hawaiian players.”

Costco Dominates

Leading the way on price is Costco Wholesale Corp., Issaquah, Wash., which has become the dominant factor in Hawaii since opening its first store there in 1988, observers agreed.

In fact, Costco's highest volume warehouse in the U.S. is the one located in Iwilei, near downtown Honolulu, with daily sales approaching $1 million, observers noted.

Richard Galanti, Costco's executive vice president and chief financial officer, confirmed the sales numbers, telling SN the Iwilei store is tied with one of Costco's locations in South Korea for highest volume in the chain worldwide.

“Though our prices in Hawaii are a little higher than on the mainland to reflect shipping costs, the gap between our prices and those of other retail outlets is greater over there,” he explained. “Plus, the Iwilei warehouse is in a very densely populated area, and a lot of the owners of small businesses that service the tourism trade discovered us pretty quickly.”

The amount of groceries and other consumables sold in Costco's Hawaii stores is slightly higher than the chain average, Galanti added — in the range of 60%, compared with 50% to 55% at other units.

Costco has seven locations in Hawaii: four on Oahu and one each on Kauai, Maui and the Big Island.

“Those stores have the highest sales penetration among Costco locations in the U.S. for fresh foods and for the food courts,” Galanti said. “In fact, at the warehouse in Maui, which is located about a mile from the airport, it isn't unusual to walk through the parking lot and see a lot of rental cars with luggage still inside while the drivers are in the Costco stocking up on the way to their condos or timeshares.”

Flickinger said Costco's prices are even lower than the military commissaries in Hawaii, and another observer declared, “Costco just keeps getting stronger.”

According to KTA's Taniguchi, “The box stores have had a bigger impact in Hawaii than some of us ever expected. When Costco started opening stores here, it revolutionized retailing in Hawaii.

“Initially, we could see the appeal of Costco in Honolulu, where the population is so large, but we couldn't figure out what they were doing when they expanded to Maui and Kauai, which have much smaller populations. But they have deep pockets, and they seem to do well wherever they open.”

According to one observer, “When Costco opens a warehouse, it takes a lot out of the marketplace. With its cost disciplines, limited assortments and tight margins, Costco offers great grocery values — and the treasure-hunt angle adds to the attraction of shopping there.”

Safeway Adds Share

Safeway, based in Pleasanton, Calif., has been operating in Hawaii since 1963.

With 19 stores, it's been able to pick up market share over the last few years — partly as a result of its lifestyle remodels — at a rate of 0.5% to 1% a year, Flickinger noted.


Safeway's chainwide lower-pricing program, which was instituted in Hawaii last July, is also helping, he added, “though the growth that results from that will be more evolutionary.”

As part of the chain's Northern California division, the Hawaii Safeways are participating in the chain's “Just 4 You” program, in which consumers can download manufacturer coupon offers onto their loyalty cards or receive special pricing based on previous purchases.

Safeway is also three months into testing a program exclusive to Hawaii called “Deal Match,” in which consumers looking at ads from Foodland, Sack N Save (Foodland's warehouse format) and Times can click on a lower price, which is then stored in the loyalty card until a purchase is made at Safeway at the stored price.

One local observer said Safeway's loyalty card program has been “pretty effective,” though its in-stock position has been spotty. “Because Safeway doesn't have a local warehouse, it brings in everything from the mainland, which means it requires long lead times, and that created serious out-of-stock problems for a while, though the supply seems to be more steady now,” he explained.

Foodland's Multiple Formats

Foodland competes with a diversity of formats, including 23 conventional markets, six Sack N Save warehouse stores and three upscale Foodland Farms units.

The chain has also established a beachhead with five small neighborhood stores called Malama Markets that it's opened over the last few years, and it also operates three Food Pantry locations that sell tourist-oriented foods, along with apparel, beach items and related merchandise. (Both Malama and Food Pantry share some common ownership with Foodland but are independently run businesses).

At the top of the Foodland organization is Jenai Sullivan Wall, daughter of the chain's founder. “She's really been very active in driving and building the Foodland organization,” one observer told SN. “Under her leadership, the company has recognized where opportunities are and has been able to take advantage of competitors' weaknesses.”

One of the chain's strongest programs is the loyalty card it has offered for approximately 15 years. The card — referred to as “maika'i,” the Hawaiian word for “excellent” — offers shoppers daily discounts, plus a 5%-off coupon for every $250 spent.

Foodland has gradually added more value to the card, including a mileage program with Hawaiian Airlines earlier this year. “It's simply been a process of adding more and more tiers to the card over many years,” one observer told SN.

Foodland has made an effort to lower prices with a modified high-low approach, one industry source pointed out. At the same time it's been seeking to maintain a strong market position by upgrading the quality and variety of its perimeter departments, particularly produce, seafood and meat, and offering a high level of store services by investing more in training store personnel “to make sure it can back up its service guarantees,” he added.

Service programs include an ongoing effort called “End Long Lines” — a promise that, during peak hours, the chain will open additional check-stands when more than three people are in line or else give customers a $5 gift coupon. That kind of service orientation has enabled Foodland to achieve steady growth in its comparable store sales, industry sources pointed out.

Foodland has also continued to expand its store base gradually, with at least one new or replacement store and a couple of remodels a year, observers said.

Times Competes on Price

Besides Safeway and Foodland, the state's other primary conventional operator is Times Supermarkets, a 20-store chain owned by PAQ, Inc., based in Stockton, Calif. Times is very aggressive on pricing, Flickinger pointed out. “The management team is aggressive in its buying, with good cost-control disciplines, and as a result, it's very competitive in its pricing,” he said. “In terms of promotions, it's a lot like ShopRite in the Northeast, and it tends to be the low-price leader in Hawaii.”

According to Flickinger, Times is investing capital at a rate of 4% to 5% of sales a year to upgrade its store base.

“Times is spending a lot of money remodeling each store,” one observer said. “It's not afraid to spend money fixing them up. It's already finished updating the original Times stores and now it's beginning to remodel the former Star Markets.”

Times, under the ownership of PAQ, began running Hawaii-based Star in 2002, and in 2009 PAQ put both operations together under the Times banner.

The original Times stores operated only on Oahu, but when it added Star, which operated on Oahu and Kauai, it was able to expand operations to a second island. “And now it's looking seriously at making an acquisition so it can become a statewide chain,” one observer said.

“With the economy becoming more stable in Hawaii and with population growth accelerating, it makes sense to grow, and Times has the capital for acquisitions,” Flickinger said.

Various sources told SN Times reportedly has its eye on Big Save — the 12-store operator based in Eleele, on the island of Maui. Those stores, ranging from 18,000 to 22,000 square feet, are said to be in good condition, with sales estimated at approximately $8 million a year.

Representatives of Times and Big Save could not be reached for comment, but observers said talks between the two companies are ongoing and a deal could be reached later this year.

KTA operates six stores of 10,000 to 30,000 square feet, all on the Big Island, with volume reportedly running at about $15 million a year. It is a promotional operator with high-low pricing that is reportedly strong on produce and seafood.

Other Players in Paradise

“KTA immerses itself within the fabric of the local economy more than any other chain in Hawaii,” said one industry observer. “That's part of how it continues to hold such a strong share on its home island.”

Though it relies on Los Angeles-based Unified Grocers as its primary wholesaler, it prefers to buy most of its product on a direct basis, Taniguchi told SN.

“We import a certain number of items — meat, eggs and milk, for example — to get the best price points, but we'd rather buy locally. However, Hawaii has a sustainability problem because our agricultural industry is not at a level to be self-sustaining.

“We also carry a lot of Japanese product, and we'd like to carry more products from other Asian countries. But we prefer to buy only from established wholesale sources that sell products with a UPC, which makes it difficult sometimes to source product from places like the Philippines or China.”

KTA has been in business for 94 years and, with the family's fourth generation filling some executive positions, it has no intention of selling, Taniguchi said. “We do get inquiries to see if we're interested in selling, but the answer remains no.”

Don Quijote, a Japan-based discount chain, operates four big-box stores of 70,000 to 80,000 square feet in Hawaii, offering a mix of foods, general merchandise, and health and beauty care items, Flickinger said.

Whole Foods Market [9], Austin, Texas, has a modest presence in Hawaii, with two stores — one each in Honolulu and Kahului — and a third on the way.

Hawaii's retailers are served by two primary wholesalers. C&S Wholesale Grocers [10], Keene, N.H., took over most of the state's supermarket accounts after Fleming folded in 2002 and currently services 70 stores that do about 43% of the state's volume. Unified Grocers [11], Los Angeles, serves 30 stores and has an 11% share.

It's unlikely supermarket operators will be able to find warehouse space to run their own distribution centers, one observer told SN. “There's no space to lease or if there is, the costs are prohibitive,” he explained.