2012 Northern California Porfile: Surviving Ups and Downs of Unstable Market
by Kristen Cloud/staff writer
Cautious might be the best word to describe how most feel about the Northern California economy. That comes as little surprise considering recent news of bankruptcy filings, continued soft employment numbers and other financial woes with just slight improvement detected thus far.
Stockton, east of San Francisco, became the largest city in the state to file for bankruptcy on June 28. And Stockton is expected to be just the beginning, according to The San Francisco Examiner.
“More bankruptcies are coming,” the newspaper said in an editorial. “Stockton should serve as a wakeup call for cities and counties, as well as the state itself…”
This is particularly troubling since NorCal is heavily dependent on state and local government jobs. The recession-induced budget crisis hit the sector hard.
A regional economic report from Comerica Bank notes that in the three years from June 2008 to June 2011, approximately 148,000 state and local government jobs were cut from California payrolls.
Unemployment across the state remains high at 10.8 percent compared to the 8.2 percent national average.
“State fiscal conditions are challenging,” said Robert Dye, chief economist at Comerica Bank. “With federal and state-level fiscal tightening, municipal budgets will continue to be stressed in many areas.”
The economy, however, has edged upward in recent months, driven by California’s high-tech sector.
Still, a “broad-based expansion remains elusive…with growth across industries patchy,” said Dye.
Save Mart Supermarkets Chairman and CEO Bob Piccinini agrees. “I don’t think that what’s going to happen down the road is going to be our call,” he told The Shelby Report. “The economy is going to have a big impact, particularly here in the Central Valley—San Joaquin, Stanislaus and Merced counties—which has a huge amount of our stores; they are the No. 1, 2 and 3 toughest counties in the United States around unemployment and public aid and all that. There’s a huge vacuum in these areas.
“Modesto probably has enough empty homes and inventory sitting out there right now that, if they never built another new home for five years, they could probably handle the growth,” he said. “And I would say that the same is true of a lot of these other cites—Stockton, Sacramento. These kinds of problems don’t just overnight solve themselves. People don’t go out and buy homes and people aren’t building facilities to hire people.
“So how long the economy takes to get itself turned around is anybody’s guess. They talk about how the nation is making a turn, as we speak, but they’re not focusing on California.”
Facing challenges head-on
The biggest grocery news currently coming out of NorCal translates to something like “walking a tight rope,” according to Piccinini.
This, of course, refers to the Modesto-based company’s negotiations with its union workers. Members of United Food and Commercial Workers (UFCW) Local 5 employed by Lucky and Save Mart, both banners owned by Save Mart Supermarkets, voted in late June to authorize a strike if necessary. At the time of this report on July 11, however, both sides—as well as UFCW Local 8-Golden State and Local 648—had reached a tentative agreement following a day of talks on July 10 under the guidance of a federal mediator.
Save Mart, prior to reaching the tentative agreement, approved a short contract extension while talks continued with the mediator. Save Mart and the union worked through a three-point process for reaching the settlement. According to the union’s website, these included: conclusion of the agreed-upon audit to justify the company’s claims of need for financial relief; instruction of the union and Save Mart accountants and actuaries to establish a projected cost structure for labor costs based on the audit findings; and empowering of the union and Save Mart bargaining committees to structure a stabilization agreement and memorandum of agreement and allow the union the discretion to design an overall health and welfare plan.
The long and ongoing negotiations, coupled with the tough economic climate and the competitive grocery market in NorCal, has sometimes taken focus away from day-to-day business, according to Piccinini.
“The biggest single distraction for us is that we’re a union operator and have been since the start of the company,” Piccinini told The Shelby Report in April. “And that’s fine because we want that kind of a workforce. We want our people to be successful.”
Nonetheless, many other retailers benefit because of Save Mart’s situation, he says.
The company’s competitors, like Fresh & Easy Neighborhood Markets, Trader Joe’s, WinCo, Target and Walmart, are non-union.
WinCo, for example, has “a 4 or 5 percent advantage on us on the cost of labor,” Piccinini said. “…that’s more than what we’re making. If I had the same labor costs as everybody else, we’d be shooting rockets up because we’re so happy about everything. Our volume has been good, but our expenses have gone up.”
Piccinini believes the union leaders are not unaware of what’s at stake.
“They…understand that if we disappear, they disappear. Yet, at the same time, if they come in and do all the concessions that are necessary to make us a lot more competitive, they’ll upset their workforce.”
In addition, UFCW is in contract negotiations with West Sacramento-based Raley’s as well as Pleasanton-based Safeway.
Albertsons acquisition settling out for Save Mart
Five years after the deal went through, Save Mart is beginning to reap the rewards from its purchase of about 130 Albertsons stores that more than doubled the self-distributing company’s store footprint.
“On a long-term basis, the Albertsons deal was absolutely the right thing to do because, number one, it got us into trade areas that we couldn’t have gotten into otherwise,” Piccinini said. “Sacramento, for example. Sacramento is a big enough town that you can’t go in onesie-twosie. You’ve got to go in with enough critical mass to be able to make an impact.
If we hadn’t bought Albertsons, there was no way we were ever going to get to Sacramento, and yet that would have been a natural extension, is a natural extension, of our existing territory.
“The Bay Area—I could hand you billions of dollars and say ‘go establish a chain in the Bay Area.’ You’re going to be, 10 years from now, wondering why I was not able to get this done. There just aren’t sites available,” Piccinini added. “And, suddenly, in one fell swoop, we were a player in the Bay Area. Obviously not as big a player as Safeway, but we’re No. 2. So it gave us a much bigger, stronger base to then be able to fill in the gaps and make the company really what it was intended to be.”
Additionally, Save Mart has plans to build a new store in Modesto, according to Alicia Rockwell, director of public affairs and communications for Save Mart.
“You can obviously save a lot more money (using acquisitions for growth, like the Albertsons purchase), but when we do them from the ground up we do them right,” Rockwell told The Shelby Report. “And we do them just the way we want them.”
Steve Junqueiro, president and COO of Save Mart, echoes that sentiment, adding that each company banner (FoodMaxx, Lucky, etc.) has a “unique place in the marketplace.
“FoodMaxx, for example, has done very well for us in this economy. I think a lot of focus will be on that banner for the next few years.
“Lucky, I think, we have not enjoyed the full benefit of that equity; I think we need to continue to grow that and, what that looks like, we’ll see,” he told The Shelby Report. “There are a lot of opportunities still to be enjoyed with Lucky.”
The Lucky name was used on the former Albertsons stores in the Bay Area.
Save Mart currently ranks among the nation’s top 100 retailers at No. 75, according to a report released by the National Retail Federation (NRF) in early July.
Other NorCal retailers making the list include Raley’s at No. 100 and Safeway, which rejoins the top 10 (at No. 10) for the first time since 2007. With sales topping $36 billion on growth of 5.6 percent, Safeway’s new programs—like its mobile-driven “Just for U” platform that offers its customers a personalized digital shopping experience—are helping boost the company’s growth.
Walmart, Kroger and Target took the top three spots, respectively, on the list.
Andronico’s focuses on driving business during uncertain times
Andronico’s Community Markets COO Justin Jackson is the first to say that the Bay Area specialty grocer isn’t looking to expand at the moment. Rather, the company with 400 employees is “focused on really driving business in the core five stores.”
Jackson says the company has performed some capital improvements to its store base—“fixing key things, key infrastructure, and we’re just about to embark on a large-scale capital project in our store in the Gourmet Ghetto in Berkeley, our Shattuck (Avenue) store. We’re really going to bring that store completely up to date from an infrastructure standpoint, including cases, display units, all that—and really kind of give that community what it’s been demanding, or deserving, for many years.
“As far as growth goes, I think as we focus on these five stores we’d like to get through this current stage of getting the company completely back up and running and doing the small-scale store improvements; and, if we see it take, I think it would be wise to consider expanding.
Andronico’s filed for Chapter 11 bankruptcy in August 2011 following troubles resulting from debt incurred during the chain’s ambitious expansion in the late 1990s, and after rumors swirled that its suppliers were not being paid. At its height, the company had 14 stores in the Bay Area.
“You know the company had some real challenges over the years, and it took a lot to get through this last year, and now that we’re seeing strong year-over-year growth, it’s made it a lot easier to do all the things that we want to do.”
Jackson explains that, as an independent retailer, one has to be “very cautious,” especially during the tough times like those experienced by the company over the last few years.
“But I think that caution has been rewarded, and I think it has a lot to do with why we’re being able to grow so quickly,” he said.
The NorCal marketplace is seeing some signs of improvement, though a full turnaround remains aloof, Jackson reports.
“We’re not seeing an incredible rebound, but I think things have clearly stabilized and there’s a sense of confidence in the market,” he said. “I do believe that’s part of our ability for the business to do much better.”
Andronico’s stores, with location in Los Altos, San Anselmo, San Francisco and two in Berkeley, average about 18,000 s.f.
Despite their smaller size, Andronico’s considers all fellow retailers its competition.
“I think that’s always been my philosophy: if it’s another retailer, it’s our competition,” said Jackson, who spent 14 years with Whole Foods Market before joining Andronico’s in 2010.
In the meantime, while competing well in one of the toughest U.S. grocery markets, Jackson and his team are simply having fun.
“We’re just having a great time in retail,” he said. “That’s about the best I can say it. We—me and the entire team—are really enjoying what we’re doing. We’re accomplishing a tremendous amount in a short period of time.”
Current legislative news
Right to Know initiative to appear on November ballot
California’s “Right to Know” initiative to label genetically engineered foods will be on the state’s November ballot. The initiative would be the first law in the U.S. requiring labeling of a wide range of genetically engineered foods.
The initiative requires labeling of genetically modified organisms (GMOs), which are meats that have had their DNA artificially altered by genes from other plants, animals, viruses or bacteria, in order to produce foreign compounds in that food. This type of genetic alteration occurs in the laboratory and is not found in nature.
The California Right to Know initiative is backed by an array of consumer, health and environmental groups, businesses and farmers.
“More than 40 other countries—including all of Europe, Japan and even China—label genetically engineered food,” said Grant Lundberg, CEO of Lundberg Family Farms in the Sacramento Valley. “Californians deserve to be able to make informed choices, too.”
Cigarette tax defeated
In June, a California ballot measure to increase the cigarette tax by $1 a pack failed, according to The Associated Press. Proposition 29 supporters said the measure would raise $735 million annually for cancer research and smoking cessation programs. Tobacco companies spent tens of millions of dollars against the measure. Opponents argued that the measure was flawed and lacked accountability and oversight for how the revenues would be spent.
In other grocery-related news:
- Unionized grocery workers in NorCal have come out against the introduction of Walmart Neighborhood Markets into the region. Bentonville, Ark.-based Wal-Mart Stores has said it plans to build up to 30 Neighborhood Market stores averaging between 30,000 and 40,000 s.f. “Walmart’s new move into the traditional grocery store sector is a departure in tactics on their part and a direct threat to our members in the grocery industry,” said Ron Lind, president of UFCW Local 5. “Walmart has built out their stores in rural and suburban areas and has met much resistance to their expansion in more urban areas. That is the reason for this change.” Walmart has proposed building its first Neighborhood Market in Pleasanton.
- San Francisco’s Bi-Rite Market, known for its high quality and organic products, plans to open its second grocery store later this year or early next year in the city’s “North-of-Panhandle,” or “NoPa,” neighborhood, dowjones.com reports. The move will cost about $1.5 million, excluding equipment and inventory, and about 50 staffers will be added, bringing Bi-Rite’s total employees at its two grocery stores to roughly 165. Competition at the new store will be high, with a Whole Foods Market, Falletti Foods and Trader Joe’s nearby.
- Sprouts Farmers Market and its recently-acquired banner Sunflower Farmers Market has been busy opening new stores in NorCal, with several more planned in the coming months. Sunflower opened at 3900 Mowry Ave. in Fremont on June 6 and opened a 32,000-s.f. store at Prospect Road and Saratoga Avenue in San Jose on June 20. It plans to open another San Jose store on Branham Lane on July 18. These stores are expected to be re-branded as Sprouts. On Sept. 5, Sprouts will open on the northeast corner of El Camino Real and San Antonia Road in Mountain View. It also will open a new 35,000-s.f. anchor store at Geary Road and North Main Street in Walnut Creek.
- Modesto-based Paleteria La Michoacana (PLM), a manufacturer of Hispanic ice cream treats, is finalizing the transition of its distribution to independent distributors. PLM signed long-term agreements with independent distributors of frozen food and ice cream—West Pico Foods, Quality Ice Cream and Wonder Ice Cream.
- California ranks high in organized retail crime, according to a recently released NRF survey. The San Francisco/Oakland area was listed among the top 10 metropolitan areas in the United States for such crime.