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Parent of Gelson's Markets explores sale

Arden Group, which owns the 16 upscale Southland markets, hires advisors to help it evaluate its options.

July 15, 2013|By Tiffany Hsu
  • Gelson’s Markets, which has 16 stores in Southern California, is known for its pricey imported foods, specialty brands and sushi. Above, the chain's Santa Barbara store.
Gelson’s Markets, which has 16 stores in Southern California, is… (Richard Derk )

The swanky Gelson's Markets chain may be sold, another sign of the intense competition for the food dollars of stubbornly cautious consumers.

The 62-year-old brand's Compton-based parent, Arden Group Inc., said in a statement Monday that it had "initiated a process to explore and evaluate strategic alternatives, which may include a possible sale."

The 16-unit chain, headquartered in Encino, has developed a reputation for celebrity clientele and locates its stores in well-to-do areas such as Santa Barbara, Pacific Palisades and Newport Beach; certain ones feature red-carpet-quality service such as valet stands.

The company is known for its pricey imported foods, specialty brands and sushi. Some stores host gelato bars and meat carving carts. While less upscale grocery chains such as Vons offer prepared-food counters licensed by Panda Express, Gelson's customers get celebrity chef-inspired meals from Wolfgang Puck Express.

But the Southern California chain has felt pressure from similar rivals Whole Foods Market and Bristol Farms as well as middle-market chains such as Vons, Trader Joe's and Ralphs.

"The problem for a lot of these companies is that they're going up against Whole Foods, where scale is a big competitive advantage they have lock, stock and barrel," Motley Fool analyst Jason Moser said. "I see more consolidation for these higher-end regional players — their growth is going to be limited otherwise."

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Analyst Andrew Wolf sees a more systemic problem at Gelson's.

"Gelson's could maybe benefit from new ownership that could run the store better and freshen the merchandising," said Wolf, an analyst with BB&T Capital Markets. "Execution has been lackluster at best, and store conditions weren't exactly stellar. If they can get a decent valuation, it might be a good idea to sell it."

Customer David Drexler, 49, frequents the deli counter and the produce section of the Gelson's in Century City, where the attorney picks up chunky French fries, macaroni and cheese, sandwiches and Jessica's Kale Salad during his workday. But he said he does the bulk of his grocery stopping among the wider selection of healthful options at Whole Foods and the more affordable offerings at Ralphs.

"I know the prices at every single store, and at Gelson's it's too expensive overall to do my shopping there," the Brentwood resident said. "The exact same container of $4 blueberries at Gelson's would go for $2 at Ralphs."

Brothers Bernard and Eugene Gelson opened their first namesake supermarket in Burbank in 1951, a 25,000-square-food space partially inspired by their parents' grocery store in Iowa.

Arden Group, which began as an El Monte dairy founded in 1904, swallowed up Gelson's in 1966. The holding company's slimly traded stock has risen 56% over the last year. In the quarter ended March 30, sales were up nearly 6% to $113.7 million. Arden's profit nearly doubled in the same period to $4.4 million, or $1.42 a share.

Arden shares closed Monday up $18.80, or 16.9%, at $130.05.

Gelson's has struggled in some locations. The store in Pasadena closed last month, a decision "based purely on economic and business reasons," a statement from company President Rob McDougall said. The Northridge Gelson's closed last year. Still, Gelson's is planning to open a new branch in Long Beach this year.

In a May regulatory filing, Arden noted that Gelson's "faces competition from regional and national supermarket chains (most of which have greater resources and a larger market share than Gelson's), stores specializing in natural and organic foods, specialty and gourmet markets and grocery departments in mass merchandise and club stores."

The document also blamed "weak economic conditions" in recent years for more intense rivalry in the grocery sector.

"As discretionary income has declined, some consumers have reduced their spending and are making more price conscious decisions which has caused us to compete for fewer customer dollars and offer more promotional discounts as our competitors have also done," Arden wrote.

The local supermarket industry has been roiled this year by major competitive shifts.

British giant Tesco said in April that it would abandon its 5-year-old Fresh & Easy grocery experiment. The short-lived El Segundo chain, which is still seeking a buyer, failed to make any money during its run.

Discount supermarket company Aldi USA said last month that it was "in the initial stages of discussions to potentially locate a warehouse" in Moreno Valley. The Inland Empire site would be the chain's first entry into Southern California and serve as a launchpad into the Southwest.

Also in June, online retail giant Inc. said it was expanding its AmazonFresh online grocery delivery service from Seattle to Los Angeles.

Traditional supermarkets are facing threats from farmers markets, such as the Urban Radish indoor space in downtown Los Angeles. Up the coast, a collection of booths selling local artisanal foods dubbed the Santa Barbara Public Market is replacing a Vons store.

Local upscale markets such as Gelson's are being forced to consider growth strategies as Whole Foods continues to expand. The chain, a giant in the organic and health-foods industry, has a nationwide distribution network, more than 340 stores and the potential to operate up to 1,000, according to analysts.

Gelson's parent Arden said it retained Moelis & Co. as its sole financial advisor during the review of strategic alternatives.

Declining to comment further, Arden said it hadn't made a decision to pursue any specific moves and said it had "no defined timeline" for its evaluation.

Twitter: @tiffhsulatimes

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