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2011 West Texas Profile: El Paso Has Bright Outlook

West Texas Profile, The Shelby Report of the Southwest
Walmart plans to open four new stores to add to its current roster of seven Supercenter stores and four Neighborhood Market stores in El Paso. It faces strong operators like Pro’s Ranch Market and Vista Markets.

Last updated on August 16th, 2012 at 12:08 pm

[gn_note color=”#ff3333″] The 2011 West Texas Profile originally ran in the February 2011 edition of The Shelby Report of the Southwest. Due to reader requests we will be posting our Profiles from each edition of The Shelby Report. The profile will be published on theshelbyreport.com one month after it has run in print.[/gn_note]

by Terrie Ellerbee/associate editor

Walmart plans to open four new stores to add to its current roster of seven Supercenter stores and four Neighborhood Market stores in El Paso. It faces strong operators like Pro’s Ranch Market and Vista Markets.

Pro’s Ranch Market operates one store in the city and plans to open another one—across the street from a Walmart Supercenter.

Mike Provenzano, president and CEO of Pro’s Ranch Market, told the El Paso Times, “If you can’t compete with Walmart, you better not come.”

Vista Markets has three upscale Hispanic supermarkets in El Paso, two of which were recently remodeled.

Mike Pina with Vista Markets said, “We want to be as different as possible from Walmart.”

But Walmart appears ready to horn in on what Pro’s Ranch Market and Vista Markets offer. It added features usually found in Hispanic-oriented grocery stores when it remodeled a Supercenter near Yarbrough and Interstate 10, the El Paso Times reports. The Arkansas-based mega-retailer added a “concina” or kitchen area with bright colors that includes a tortillera and serves prepared Mexican food, drinks and pastries.

This is the Walmart Pro’s Ranch Market will compete with when it opens in a former Mervyn’s store. The California-based grocer will spend $6 million to $10 million to convert the store into a supermarket, the Times reports. Pro’s Ranch Market plans to open the store in the fourth quarter of this year.

Vista Markets added to its lineup in 2009 when it bought five Quality Food Mart stores. It is in the process of remodeling those stores and work on two has been completed. Pina told the Times that sales tripled in the stores after the remodeling and that the chain may start thinking about further expansion next year.

Meanwhile, Albertsons LLC recently announced that it is closing a store in San Angelo along with six other stores statewide. The San Angelo store on Sherwood Way was to close Feb. 20.

Albertsons LLC remodeled its remaining store in San Angelo and its location in Abilene. Christine Wilcox, public affairs director for the Boise, Idaho-based chain, told the Abilene Reporter-News that the store in that city is performing well.

“I believe, personally, that the independents are going to continue to grow,” said Randy Arceneaux, president and CEO of Affiliated Foods Inc. of Amarillo. “We all know that the mass merchandiser and a lot of the chain operations in the grocery retail business are not having their best years. I still believe there’s a lot of opportunity for the independent retailer to grow in new locations and take over existing locations.”

Affiliated Foods’ has reported more than 6 percent growth in the early periods of its new fiscal year, which began in October.

“We saw this type of growth with same store sales growth, without new business coming on as far as new, completely new customers,” Arceneaux said. “But existing customers have increased their buying.”

Lubbock-based United Supermarkets is celebrating its 95th year in 2011 (see insert accompanying this issue). United operates 50 stores in 30 markets across north and west Texas under three distinct formats: the traditional United store, the upscale Market Street and the culturally specific Amigos United.

Robert Taylor, CEO of United Supermarkets, said the company will continue to focus on the smaller, rural communities it serves as it grows.

“In the larger west Texas markets, we’ll do more differentiation between banners—more that we’ve done in the past,” he said. “We know we have a growing Hispanic population, and we want to provide a product mix they want in addition to the traditional groceries they like to see and buy.”

United Supermarkets got into the upscale convenience business four years ago. It has broken ground on a 3,100-s.f. standalone convenience store called United Express in northwest Lubbock.

It is a departure from previous expansions in that the convenience store will come first and the supermarket later.

United continues a project to expand many of its fuel kiosks into small convenience stores with product offerings directed at people on the go. Three Lubbock locations have been expanded.

The company said standalone United Express stores will be like test labs for the company where it can find what works and how best to serve shoppers.

United Supermarkets continues to add revenue streams to diversify and grow. It now operates an ice plant, and, since acquiring Praters Foods in August 2009, has partnered with other retailers to sell prepared food products. The company also acquired the R.C. Taylor distribution company that supplies numerous convenience stores, schools, smoke shops and other customers with products like candy and tobacco. More than half of that company’s sales are to customers other than United, the company said.

The most recently added revenue stream is real estate. United Supermarkets will develop its own projects rather than hiring an outside company.

Affiliated Foods offers independents many marketing choices

Affiliated Foods of Amarillo is having a good fiscal year. Arceneaux told The Shelby Report that Affiliated Foods had the best week in its history the week before the Thanksgiving holiday.

Affiliated Foods is helping independent operators take the center store back from mass merchandisers, and it is doing that with every day low prices (EDLP), a three-tiered marketing program and a strategy for $1 items.

Arceneaux said independents are not threatened so much on the perimeter of the store—most can beat a mass merchandiser there hands down—but for too long they have let some categories, like paper, detergent and pet slip away.

For Affiliated Foods’ members, that has changed.

“Our paper business is as strong now as it ever has been because of buying the pallet mod (modification), buying the multi-packs and giving the consumer a good price and advertising it and going back and getting that business, fighting for that business,” he said. “And we need to do that in the key categories.”

EDLP has been extremely successful with canned vegetables, frozen and dairy. Arceneaux said even HBC is a category that is growing—and beyond that, Affiliated is stepping out of the box to offer other non-food items like sheet sets, pillows and pots and pans. In addition, holiday and seasonal products sales were up 35 percent vs. a year ago.

“Our EDLP is really, really working for us and we’re going to continue to grow that with our vendors,” he said.

Arceneaux said that while advertising is important—it is like an invitation to a party for shoppers—the real selling takes place in-store. Affiliated Foods’ offers its members a three-tiered marketing program. The standard temporary price reduction (TPR) program is called Smart Buy. Super Smart Buy is an extended TPR program featuring products that match or beat Walmart prices.

“If it doesn’t, it can’t be on that list,” Arceneaux said. “And we guarantee our customers a minimum of 27 percent gross in the aisle.”

The third tier is Smart Price Every Day, and green tags put the spotlight on those items in the store. The Smart Buy and Super Smart Buy items are marked with yellow tags.

To combat shoppers’ inclination to shop at dollar store outlets, Affiliated Foods of Amarillo also offers a dollar aisle program with more than 1,800 SKUs from grocery to HBC/GM/non-foods. It is basically a store-within-a-store. Arceneaux said all the members are encouraged to merchandise all their dollar items on one aisle rather than throughout the store so that they can both cater to a dollar shopper and to more traditional customers.

“You have different consumers that buy dollar products, and by having it in the store, especially if you have that type of outlet in your neighborhood or your area, it gives you another arm to compete, to keep that customer from going to Dollar Tree or Dollar General to buy that dollar product you offer in your store as an attraction to get them to shop,” Arceneaux said.

To combat the smaller margins that often come with dollar items, Affiliated Foods blended the margins on its end so that members are guaranteed a set margin on groceries, a set margin on HBC/GM/non-foods, he said.

He used spaghetti sauce in a jar, a key item in the food category, as an example. On the dollar aisle, retailers may make only 4 or 5 percent gross. What would happen, he said, is that item would disappear out of that category in the store, and that would disappoint the consumer who needs motivation to buy it in the grocery store vs., say, a Dollar Tree.

“So on our end, we guarantee a gross percentage that they all need to live with and accept, and then we just blend our margins on our end, on the wholesale level, to still maintain and manage the growth that we need to have on our side to cover expenses,” he said. “So, and again, in the co-op world that’s a lot easier to do, because at the end of the day, it’s our members’ warehouse. And our dollar program—we kicked it off a year ago in January, and this year, we’re on target to do right at $7 million in dollar deals.”

These programs are all designed to keep up with the ever-changing shopper behavior. Arceneaux said that for the continued success of everyone in the industry, the key is to embrace adaptability.

“As long as the independent operator, with the wholesaler and the vendors, continues to adapt to those changing needs, to keep our cost of goods where we need them to be to compete against the mass merchandisers and the big boxes, I think we’re going to be OK,” he said.

El Paso faces unique challenges

Arceneaux believes the consumer has a bit more confidence in the overall economy than before. He doesn’t talk about a “new normal,” but instead talks about the optimism he senses on the part of the consumer.

“I think that people are going to still be conservative to a point, but at the same time … [they are] feeling that ‘maybe I can step out there and spend a little more money because the economy’s going to start turning in my favor a little bit there.’”

Texans certainly have a right to feel that way. The Lone Star State has a lot going for it. Predictions are that its economy will grow by 2.6 percent in fiscal 2011, 2.8 percent in fiscal 2012 and 3.4 percent in fiscal 2013, the Houston Business Journal reports.

In its current fiscal year, Texas has a shortfall of $4.3 billion, according to the Houston Business Journal, but it also has a rainy day fund twice that size. But, the state may have a Texas-sized hole in its 2012-13 budget. Comptroller Susan Combs said that the budget is $26.8 billion short of what the state needs to maintain public services.

Sales taxes make up 64 percent of all tax revenues, she said, and those have “dipped sharply.” Getting those revenues back up is of major importance to the state, and to get people spending money, they must have jobs.

Combs expects that by the second half of 2012, Texas will have gained back all of the 431,000 jobs lost from the summer of 2008 to the fall of 2009. From then to now, it has added back more than 202,000 jobs. IHS Global Insight predicts the state will gain 1.5 million jobs over the next five years.

But several factors play a role in the unemployment rate for El Paso relative to the state and to cities nearby. When compared to other metro areas across the country, El Paso is doing quite well. As expansion has been completed at Fort Bliss, the base’s population is growing, with those additional soldiers and their families seeking places to live and goods and services to buy.

Another major aspect of the local economy is the employment provided by maquiladoras, or manufacturing plants, in Juarez, Mexico, which has slowed since last year. The Federal Reserve Bank of Dallas, El Paso Branch has expressed concern about the recent lack of hiring by maquiladoras.

“According to our internal estimates, maquiladoras across the Rio Grande stopped hiring in September, after a year of continued job growth,” the Federal Reserve’s Economic Update states. “This now represents a downside risk for the El Paso community.”

El Paso’s jobless rate was 10.7 percent in November 2010, which was double Midland’s (5.3 percent). Amarillo posted a 5.7 percent jobless rate. The Midland-Odessa area is benefiting from high and rising oil prices, the Federal Reserve said. Meanwhile, the state unemployment rate was 8.3 percent in November.

The University of Texas El Paso’s Borderplex Economic Outlook: 2010-2012 states that the unemployment rate is likely to remain high in El Paso because job growth won’t keep pace with the growth of the local work force, reports the El Paso Times.

Census figures show progress in key areas

El Paso is the 22nd largest city in the country. Its population grew 10.7 percent between 2000 and 2009. Projections to 2014 are that it will grow another 9.8 percent.

Families occupy 75 percent of the approximately 219,000 households in El Paso, according to the U.S. Census Bureau’s 2005-2009 American Community Survey.

Nearly three-quarters of El Paso’s population speaks a language other than English at home; for 97 percent, it is Spanish. Thirty-nine percent reported that they did not speak English “very well.”

The median income of households in El Paso was $36,147.

Hispanics make up approximately 60 percent of the market Affiliated Foods of Amarillo serves from its base in West Texas.

Affiliated Foods has a full line of Hispanic products and a specialty food director dedicated to working with vendors, many coming out of Mexico, Arceneaux said.

He sees third- and fourth-generation Hispanic residents who are more accustomed to American-type products. Those shoppers are different from the first- or second-generation, he said.

When the El Paso Times analyzed Census data, it found a paradox. Poverty overall—and particularly child poverty—has increased in the city, while at the same time gains were made in educational levels, home values, homeownership and English language skills.

A quarter of the people in El Paso live in poverty. Twenty-two percent of all families and 42 percent of families with a female householder and no husband present had incomes below the poverty level.

However, the Brookings Institution recently ranked El Paso’s economy second among the 20 strongest metro economies in the U.S. and its housing outlook for 2011 is very bright. Single-family housing starts are forecasted to grow 7.8 percent this year. Apartment starts are projected to increase 30.1 percent to 1,030 units—the most built in one year in at least a decade, according to the Borderplex Economic Outlook.

El Paso home sales increased 12 percent from January to September 2010, but there still was an inventory large enough to handle the demand for 6.9 months, according to the Federal Reserve.

Again marking the contrast with El Paso’s sister cities, the housing market in the Midland-Odessa area appears to have reached bottom and stabilized, and the number of permits for new homes continues to improve.

Census data also show that 36 percent of home owners with mortgages, 14 percent of home owners without mortgages and 52 percent of renters in El Paso spent 30 percent or more of household income on housing.

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