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Grocery Mergers No Bargain for the Southland

October 21, 1998|JAMES FLANIGAN

Consolidation causes casualties. Hundreds of small food companies in Southern California know their businesses will be hurt by the $8-billion deal in which giant Kroger Co. of Cincinnati is buying Southern California supermarket chains.

Minnows in the shark tank, the small businesses are afraid of speaking out publicly. "We have to sell to them, so it's not in our interest to get our names in the paper," says the head of one local company.

But all say that supermarket mergers exact a toll on small businesses. "They'll raise the slotting fees again to pay the debt they incur with these mergers," says the marketing manager for a local food processor.

Slotting fees are the upfront money grocers demand from suppliers to stock their products. Shoppers may not realize that every item in the supermarket is there because manufacturers or farm produce distributors have paid a hefty fee. For a single item--a variety of canned vegetable, say, or of cereal, in a Ralphs, Vons or Lucky--the food processor has paid $74,000 a year to have the chain stock the item. Smaller chains and even some independent grocers also charge fees, a food processor says. "If you're paying the big guys, they say, you have to give me something too."

The fees are recovered in the prices consumers pay. And the fees keep going up while the grocery outlets keep shrinking.

Only a few years ago, this area's 600 small food-processing companies, many of them producers of ethnic specialties, had a variety of regional chains to sell to--Hughes, Ralphs, Vons, Lucky, Safeway, Albertson's. Indeed, a long time ago, 40 different chains served Southern California.

Now there are three giant chains--Fred Meyer Inc., which owns Ralphs, Hughes and Food 4 Less (and soon will be owned by Kroger); Safeway, which owns Vons; and Albertson's, which owns Lucky. Smaller chains do survive--Stater Bros. serves eastern areas, including San Bernardino and Riverside counties, and Top Valu stores serve parts of Los Angeles and Orange counties. And there are numerous specialty markets, from Trader Joe's to Jons markets, Whole Foods to R Ranch Markets, and scores of independent groceries.

Supermarket experts admit that consolidation lessens variety. "The big chains say they pay attention to regional and neighborhood differences, but that's hard to do," says a retired supermarket executive. "The computer rules today and kicks out any item moving slowly. The No. 1 brand and maybe No. 2 brand in any item plus the store's own label survive."

The head of a family-owned food processor says this costs the consumer. "Variety is reduced and the consumer ends up paying higher prices."

If all this is true, shouldn't somebody take notice? Somebody is. California Atty. Gen. Dan Lungren's office is reviewing the mergers of Albertson's and Lucky and the stores being sold as part of the merger settlement between Ralphs and Hughes. The intent is to make room for new owners of such stores and thus foster competition in the field.

But in the larger sense, antitrust issues in the supermarket industry were settled long ago. Consolidation has been going on for decades, with major companies reaching out to new territories, as Kroger has done, or focusing their energies regionally, as Safeway has done.

It's an industry that has used technology wisely to compile information on its customers and give them what they want, from larger produce departments to deli counters. The supermarket chains' ability to charge suppliers for access to their stores comes from their closeness to the customers.

And specialty markets, catering to health-conscious customers or ethnic tastes, have also grown, particularly in California.

Now, however, consolidation is reaching a new stage. Kroger is a national chain coming into California's rich market. Wal-Mart is going into the supermarket business, a looming threat to all the regional store chains. And Ahold, a Netherlands-based giant with $28 billion in annual sales and markets on four continents, has bought up several chains in the Eastern U.S. and is planning to come west.

The problem for Southern California small businesses is that local brands tend to be at a disadvantage trying to sell to national chains geared only to leading or company-owned brands.

National food-processing companies, such as Kraft Foods and General Foods, divisions of Philip Morris Cos., pay for exclusive licenses to be in a chain's stores nationwide.

"We can't afford to pay hundreds of thousands of dollars for exclusive licenses," says the head of a local family-owned company.

And national reach by itself can be a potent weapon. Taco Bell, the restaurant chain, for example, is now bringing out a retail line of taco shells and sauces. That will threaten several Latino specialty producers in this region.

What, if anything, can be done? Consumer agencies could look into slotting fees to determine the costs to consumers. State government could ask whether exclusive licenses, which freeze out local producers, restrain trade.

Otherwise, customers and their preferences will decide many issues. It's not inconceivable that national chains could stumble in this region if their computers don't know how to appeal to Southern California's many tastes. "I think the food-distribution business will ultimately break down to 80% supermarket and 20% specialty stores serving the top and the lower-priced segments of the market," says a supermarket executive.

Still, the fact remains that supermarket mergers are no bargain for Southern California, a region that thrives on the success of small businesses--the more the merrier.


James Flanigan can be reached by e-mail at

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