Phoenix-area market has grocery chains in battle

Fry's Food Stores and Walmart Supercenter are the biggest players in the hyper-competitive business of selling groceries in the Valley, with both retailers clawing out double-digit shares of the market.

But the merger of Albertsons and Safeway, announced earlier this month, offers up a stronger combined competitor that could vie for second place in the market. It would cut the gap in the number of stores with market leader Fry's and could give it a double-digit market share closer to Walmart.

Local shoppers are watching the changes closely.

"I'm concerned that the prices could be (higher) and there will be less competition," said Vicky Sacchini, a Safeway shopper at a northeast Phoenix store.

But although the Albertsons-Safeway merger promises to shake up local shopping habits, it is just one of many shock waves altering the landscape of the Valley's more than 400 grocery retailers. The Valley has always been a desirable market for national chains, something that has resulted in more choices for consumers.

Traditional grocers are increasingly going up against an even more varied lineup of players that ranges from big-boxers like Walmart Supercenters and Costco to specialty- and natural-foods markets like Sprouts Farmers Market, Trader Joe's and Whole Foods. How it all plays out will affect not only consumers, but also Valley real-estate interests and merchants dependent on grocery-store anchors.

At stake are billions of dollars local consumers spend annually on groceries.

An average family of four with children ages 6 to 11 spends between $7,700 and $15,000 annually on groceries, according to the U.S. Department of Agriculture.

Lots of grocery options

Valley consumers benefit from having lot of competition and shopping choices, according to retail analysts.

"I've been here since 1969, and it's always been that we are 'over-retailed' in the Valley," said Robert Kammrath, a Valley retail analyst. "Everybody wants a piece of it because it's considered a growth market."

Supermarket growth slowed following the recession but should pick up now that homebuilders are busy again in the outer suburbs, he said.

Tesco, a British retailer, stumbled with its Fresh & Easy neighborhood markets, launched in 2007, and pulled out of the U.S. market.

Yucaipa Cos., Los Angeles-based private equity firm, bought Fresh and Easy from Tesco in September and has 17 stores in the Valley.

WinCo Foods, based in Boise, Idaho, has had better luck than Tesco since entering the Valley market more than two years ago. It has four of its discount grocery stores here and in May will open an 860,000-square-foot warehouse in west Phoenix.

It's just more options for Valley consumers who can shop at one or more stores based on their prices, product quality and store brands.

In his Mesa neighborhood of Red Mountain Ranch, Kammrath said he has a choice of Albertsons, Bashas', Fry's and Safeway, and each has its strengths.

Diverse market

Retailers are eager to be in the metro Phoenix market because it's growing and the demographic mix, with a large Hispanic population, "is sort of similar to what America will look like in the future," said James Prevor, a food-industry publisher based in Boca Raton, Fla.

Another reason for a glut of supermarkets is the relatively low price of land here compared with places like Chicago or the Northeast, said Tim James, an economics professor in the W.P. Carey School of Business at Arizona State University.

A supermarket chain can build a store for roughly $5 million, he said.

Combining Albertsons and Safeway, meanwhile, should lower operating costs with savings from shared warehouses and trucking.

"That's a big reduction in overhead" that could lead to lower prices, he said.

Splitting market

The $9 billion merger by an investment group led by Cerberus Capital Management will give the combined company 88 Valley stores — 59 Safeways and 29 Albertsons. It would have a combined Valley market share of roughly 11 percent based on a study last year from Scarborough Research of Durham, N.C.

Fry's, a division of Cincinnati-based Kroger Co., has 92 stores in the Valley and a market share of 14 percent. That is down 2 percentage points from five years ago.

The company, which serves 3 million customers each week, is adding a store later this year at the former Sundome site in Sun City West and is rebuilding a Scottsdale supermarket with parking above the store.

Walmart Supercenter, with more than 50 Valley stores, has the second-largest market share at 10 percent, up 1 percentage point from 2008.

The much smaller Walmart Neighborhood Market stores add another 4 percent to the company's market share here.

Walmart has 65 Valley stores, including its Supercenters, Neighborhood Markets, Sam's Club and general merchandise stores, spokeswoman Delia Garcia said.

The Bentonville, Ark., company is rebuilding a former Great Indoors store in Chandler into a Supercenter, set to open next year.

"We're also revitalizing a former (Food City) and will be opening a new Neighborhood Market in Sunnyslope in the summer," Garcia said.

Chandler-based Bashas' has a 4 percent market share and its Food City brand has another 4 percent. AJ's Fine Foods, the company's high-end brand, has a 1 percent share.

Bashas' has emerged from its Chapter 11 bankruptcy filing in 2011. It has repaid its creditors and lenders and saved the jobs of 8,000 workers, said Bashas' spokeswoman Kristy Jozwiak.

Bashas' has 72 Valley stores under its three brands.

Phoenix-based Sprouts has grown to 21 Valley stores with a 4 percent market share. It has 171 markets nationwide and plans to add up to 24 stores nationwide this year. That includes one in Prescott Valley and one in Atlanta, its first store in the Southeast, both opening this summer.

Grocers scrap

Nationally, Albertsons, based in Boise, Idaho, and Safeway of Pleasanton, Calif., will have more than 2,400 stores, 27 distribution warehouses and 20 manufacturing plants.

Kroger, Fry's parent company based in Cincinnati, has more than 2,600 stores and $96 billion in annual sales.

Supermarket News lists Walmart as the leading U.S. food retailer, followed by Kroger, Costco and Target. Safeway is fifth and Albertsons is No. 9.

Walmart has been gaining market share with low prices, but Supervalu and Aldi, a German discounter that owns Trader Joe's, are underpricing Walmart, said Prevor, the Perishable Pundit publisher.

Prevor's pricing study from October showed that Sprouts had lower produce prices than Walmart in Tulsa.

In the Phoenix market, the study showed that Fry's produce prices were 15 percent higher than Walmart's. Safeway's prices were 17 percent more, Albertson's 22 percent and Bashas' 25 percent.

"Safeway hasn't competed but they just tried to get out of Walmart's way," Prevor said. "They made their stores more upscale with wood floors, spotlights and better produce sections."

Other pressures for traditional retailers include Amazon Fresh, online grocery shopping that is rolling out on the West Coast, along with epicurean concepts like Trader Joe's and Sprouts, he said.

"If each one takes 1 percent (of sales) it could kill the (traditional) store," Prevor said.

Not tied to just 1 store

Katie Brammer of Deer Valley is not atypical of many Valley consumers in shopping at multiple stores for her family of four children ages 4 to 16.

"With four kids I shop every place," she said.

Brammer said she primarily shops at Sprouts because the store's produce and meat are better than what she can get at Walmart or Safeway, and she buys non-perishable items at Walmart, Safeway and Costco.

Zacchini, the northeast Phoenix Safeway shopper, said she sometimes shops at Sprouts for specialty produce like kale or buys from Walmart for cleaning supplies.

Zacchini said she likes Safeway for the discount points she earns for buying gasoline and its smartphone app that offers bargains.

Zacchini's neighborhood Safeway at 4857 E. Greenway Road is across Tatum Boulevard from an Albertsons that closed in February, a few weeks before the Albertsons-Safeway merger was announced March 6.

Albertsons said at the time it did not plan to close stores or lay off store-level employees following the merger.

The grocery retailers declined to make their local executives available for interviews.

Although no store closures are planned for Albertsons and Safeway, shopping-center landlords and other merchants are nervous about that prospect.

"When you lose your anchor your whole center goes dark," said Kammrath, the retail analyst. Closure of the Albertsons southwest of Greenway Road and Tatum Boulevard has clearly hurt traffic at that shopping center over the past six weeks.

"We've been hurt big time," said tax accountant Kusam Behari of Liberty Tax Service, in business for eight years. "I may have to close the doors."

Albertsons spokeswoman Christine Wilcox said she had no information on the disposition of that store.