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Grocery A-List

The upscale niche grocer Gelson’s Markets, a Los Angeles mainstay since the early 1950s, is mulling a Southern California expansion that would include its first foray into San Diego County.

It’s a testament not only to an improving economy but the attractiveness of an already hyper-competitive San Diego specialty grocery scene, where several players are experiencing growth of their own.

The roster includes locally based Jimbo’s … Naturally and Barons Market, along with several locations of Trader Joe’s, Sprouts Farmers Market, Whole Foods Market and Bristol Farms. Those are in addition to numerous ethnic food markets serving Hispanic, Asian and other communities.

The smaller-format stores are pulling dollars away from the traditional big supermarket chains, deploying various combinations of healthy and organic fare, fresh produce, hard-to-find premium items and personalized customer service. Operators believe there’s room for more expansion.

“I want to put some locations in Orange County, and there should be four or five places in San Diego County that would work for us,” said Rob McDougall, president of Encino-based Gelson’s, which operates 16 stores in Los Angeles County.

Gelson’s parent company, Arden Group Inc. of Compton, was recently acquired for $394 million by Texas-based private equity firm TPG, and it is looking at long-term growth of the stores’ footprint. McDougall said Gelson’s has been studying sites in places such as Carmel Valley, Del Mar, La Jolla, Encinitas and Carlsbad.

“I want to find the best location I can for that first store because I want to establish a brand down there,” McDougall said. “Lots of people in San Diego are L.A. transplants who know us very well, but others there don’t know us.”

Seeking to Save Shoppers’ Time

Among the familiar local players is Point Loma-based Barons Market, which has garnered a loyal following over the past two decades for its convenience-oriented grocery stores — two in San Diego County and two in Riverside County. It plans to open a fifth location later this year in the East County community of Alpine, seen by the company as a relatively untapped market with limited grocery offerings.

Barons, started in 1991 by company President Joe Shemirani, has been operated over the years by his brothers and other family members. Marketing Manager Rachel Shemirani, Joe’s daughter, said the company constantly monitors rivals to stay competitive on pricing, and puts a premium on convenience.

The stores, averaging 15,000 to 18,000 square feet in size, regularly see lunchtime and post-work crowds of time-strapped customers, picking up soups, salads, cooked rotisserie chickens and other prepared meals to take home or to the office.

“We have a goal of getting people in and out of our stores within 15 minutes,” Rachel Shemirani said. “People just don’t have time to wander up and down the aisles looking for things in a 70,000- or 80,000-square-foot store.”

She added that Barons is mulling further expansion, scouting sites for future openings in San Diego and Orange counties — and, in the long run, possibly Los Angeles County.

Jimbo’s Sought by Mall Operators

Jimbo’s … Naturally, based in Carmel Valley, has received strong and steady customer response to its fifth local store, which recently opened at Westfield Horton Plaza in downtown San Diego, founder and owner Jim

“Jimbo” Someck said.

Downtown’s first grocery store focused on organic and natural items debuted following significant alterations to a former department store space. Specialized grocery-cart escalators, among other elements, were installed to help customers navigate between the second-floor store and its parking lot on the mall’s fourth floor.

Someck said the positive response has spurred Westfield Group and other operators to invite Jimbo’s into its malls. His company, started in 1984, has thrived in the face of rising competition in his home markets — including from Whole Foods (Nasdaq: WFM), which recently opened new stores near his Carmel Valley and Carlsbad locations. But he is carefully weighing long-term expansion, especially outside San Diego County.

“If it’s got my name on it, it’s got to live up to certain values that are near and dear to my heart,” Someck said. “It’s tough to break through with just one location in a new market, where you’re essentially looking for a slam-dunk from the start.”

‘Hottest Segment’ in Grocery

Stephen Polanski, senior vice president of sales at retail consulting firm Buxton, said specialty players continue to expand nationally in what is now “the hottest segment in the grocery space for sure.”

Traditional chain supermarkets — including Albertsons, Kroger Co.’s Ralphs and Safeway Inc.’s Vons — are by no means on the verge of extinction, and will likely continue to grab the largest chunk of grocery spending for the foreseeable future.

Nevertheless, the supermarkets are having to adjust to generational and behavioral shifts, including the trend toward healthier eating — especially among younger shoppers. While shoppers regularly alternate among several stores for various needs, they are willing to pay a premium for specialty items perceived to be of higher quality.

“The supermarkets might have a few shelves of a certain item that this consumer is looking for, but a specialty grocer will probably have full rows of that same item,” Polanski said.

Also, the smaller footprint of niche stores makes for a wider choice of potential sites to open them, given the dearth of new retail center construction in San Diego and other metro regions.

Grocery Revenue Down Last 5 Years

Amid rising competition, the grocery store and supermarket industry continually struggles to maintain slim profit margins and revenue growth.

The industry saw U.S. revenue decline by an average of 0.4 percent annually over the past five years, falling to an estimated $517.8 billion in 2013, according to market research company IBISWorld Inc. Revenue is projected to grow by just 0.8 percent annually over the next five years.

The industry’s profits totaled about $6.7 billion last year, with the profit margin declining from 1.5 percent in 2008 to 1.3 percent in 2013. Economic recovery has enabled stores to raise prices, but researchers said increases in food, labor and other costs continue to suppress profits.

And although rising household disposable income has enabled consumers to spend more on premium-brand products, researchers note, it has also encouraged them to spend more on restaurant meals, which cuts into grocery shopping trips.

Traditional and specialty grocers now do battle not only against warehouse clubs and big-box supercenters, but also a rising number of small-format, convenience-oriented grocery stores operated by major retailers.

In San Diego County, Wal-Mart Stores Inc. (NYSE: WMT) has opened two locations of its growing Walmart Neighborhood Market, with three more announced for 2014, including a planned Jan. 29 opening in Oceanside. The local region also has 15 locations of the struggling Fresh & Easy Neighborhood Market, originally opened by British retailer Tesco PLC but recently sold to Yucaipa Cos. of Los Angeles.

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