Discount airline company

Albertsons is putting some of its stores on a diet, hoping that scaled-back operations under a new division will let it compete with discounters.

The company is turning over two stores in the Baton Rouge area and five in Dallas to a new division, Extreme Inc., for conversion into a discount supermarket. By September, its stores on Greenwell Springs Road and on Airline Highway will be Super Saver units--a new concept for Albertsons.

The move signals a continuing tidal shift in the grocery business. Consumers are dividing between those who buy at low prices at stores like Wal-Mart and those looking for selection at places like Whole Foods, which is opening a location in Baton Rouge.

"The problem is that most grocery store chains are caught between a rock and a hard place," says Michael Beyard, a retail analyst with the Urban Land Institute, a think tank for development. "They are not gourmet stores like Whole Foods, and they can't compete on price with the likes of Wal-Mart. Their market is disappearing at both ends."

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What's happening in groceries is also happening in other markets. Discount and premium airlines are squeezing traditional carriers like Delta. Discount computer maker Dell is cornering the low end of the computer market, while Apple Computers carves out a niche in the top, leaving manufacturers like Gateway struggling to survive.

But Albertsons, Winn Dixie and the other traditional chains seem to have the most formidable task. They are competing against Wal-Mart, which now sells more groceries than any other retailer.

Sales at Wal-Mart have topped $80 billion and are expected to double by 2007, when the chain will have 35% of the market share, predicts Retail Forward, a consultancy. Wal-Mart has contributed to the demise of 25 regional grocery store chains, according to one report.

At the company's current expansion rate, a Wal-Mart will be within 10 miles of 75% of Albertsons and Kroger locations within a decade, estimates Trade Dimensions.

To counter the onslaught, grocers have trimmed expenses, such as buying pre-packaged food to reduce their higher labor costs associated with unions that Wal-Mart doesn't have to contend with.

Grocery chains also have tried to remake themselves, improving their interiors. Albertsons has even tried using a traveling motivational speaker to pep up demoralized store staff.

The creation of Extreme Inc. is the latest tactic, imitating the airline industry, where the big carriers have created discount brands. Extreme's Super Saver brand will be trying to lure Wal-Mart shoppers.

The new division of Albertsons plans to grow aggressively through acquisitions and store conversions, says division President Mike Clawson.

The stores on Greenwell Springs Road and on Airline Highway in Gonzales will be converted for a September opening. Clawson wouldn't say why Super Saver picked those two, aside from noting that customer surveys indicated people wanted the discount stores. But it appears that the company is opening Super Saver stores in areas where people earn less money.

The first seven stores in the Super Saver chain will offer discounts by reducing service and eliminating some items, such as not offering rental videos. Customers will bag their own groceries and pick from pre-packaged goods in the deli and bakery, which will offer scaled-back service.

What's more, the Super Saver stores will offer fewer brands at lower prices. Stores also will trim back on the more expensive specialty items, which have higher profit margins but move at lower volumes.

Clawson declined to reveal the discounts offered at Super Saver, but says products will be cheaper than conventional groceries and a little more than discount superstores. Surveys have shown that Wal-Mart sells its groceries for at least 25% less than mainline grocery chains.

Given the competition, of course, the survival of the Super Saver concept for Albertsons is no lock.

"The question is: Will they be able to successfully compete with a smaller store?" says Beyard, the retail analyst. "Will they have the quantity of items to compete with Wal-Mart?"

Even with all the questions, don't count the grocery chains down and out. Beyard says grocery chains still have some advantages over the big discounters.

"Since they are smaller, they are easier to navigate," he says. "Secondly, their stores are smaller, so they can operate closer to where people live."

J.H. Campbell, president and CEO of Baton Rouge-based Associated Grocers, says the Super Savers might appeal to shoppers who shop solely for price.

"There is a segment of the population that is totally motivated on price to the detriment of any kind of quality or branding," says Campbell, whose member-owned corporation supplies about 265 independent grocers in several states. "From that standpoint, Super Saver may be able to attract a Wal-Mart shopper focused on price."

But the switch of some Albertsons to discount stores should actually benefit some independent grocers, he says.

Consumers perceived Albertsons stores as competing against independent grocers on quality and service, he says. Turning the Albertson's stores into Super Savers means less direct competition for locally owned groceries.

"It opens a tremendous opportunity for the independent grocery focused on quality and service and variety and selection," Campbell says.

MUKUL VERMA covers technology and commercial real estate. Reach him at mverma@businessreport.com.