An unprecedented wave of new grocery competition in Sacramento is tightening the squeeze on longtime industry leaders Raley's and Safeway, suggesting a dramatic reshaping of the local market.
"All the cards have been tossed in the air," said Bob Reynolds, the head of a Moraga-based grocery business consulting company, "and it will be very interesting to see where they all come down."
Causing the turmoil are the recent and pending arrivals of a half-dozen grocery newcomers. Some of them are discounters; others are more upscale providers. All of them are eating away at the market share of the established chains.
Consider a partial list of the area's new grocery companies:
British-owned Fresh & Easy has opened five stores here this month and has plans for at least a dozen more.
Wal-Mart Stores Inc. recently announced plans to open three of its groceries-only Neighborhood Market stores in this region this fall and it, too, is said to be eyeing many other potential sites.
Fresh Market, a North Carolina-based chain often likened to Whole Foods, reportedly has selected two local sites both of them former Borders Books stores as its first beachheads in a planned major move into California.
Sprouts Farmers Market, an Arizona specialty food chain, opened its third Sacramento-area store last week and will have two more after completing a merger with rival Sunflower Farmers Market.
Sprouts started off its Golden State expansion in Southern California and now has 57 stores there. It has just five in the northern part of the state, and plans to add many more, said the chain's president, Doug Sanders.
"We've just scratched the surface in Northern California," he said. "We've only been there since 2010. It's a very immature market for us."
This push into the Sacramento region comes as the area's traditional industry leaders have been losing market share to other competitors, according to a survey of shopping trends in the four-county region conducted by Scarborough Research.
In 2006, 27.5 percent of respondents identified Raley's or its Bel Air sister stores as their preferred shopping locale. By August 2011, that number had declined to 22.2 percent.
Safeway's market share went from 15 percent to 12.8 percent over the same period.
Meanwhile, Wal-Mart's share rose to 13.2 percent from 2.3. Also rising were Target, Costco, Food 4 Less and other discounters.
An obvious force behind those numbers is the economic downturn that's driven many shoppers to flock to lower-priced stores.
"When the economy is tough, people are willing to sacrifice service for discounts," said Garrick Brown, research director at the Cassidy Turley BT Commercial real estate firm in Sacramento.
At the same time, upscale grocers like Whole Foods and Trader Joe's have been able to maintain and even grow market share.
That leaves mainstream grocers like Raley's, Safeway and Save Mart staking out a shrinking middle ground. It's not a good place to be, according to analyst Kevin Coupe, who writes on retail trends for MorningNewsBeat.com.
"Retailers can't afford to be in the mushy middle," he said. "You need to stand out."
Making matters most challenging for Raley's, Safeway and Modesto-based Save Mart is they have unionized workforces and significantly higher labor costs than their nonunion competitors.
That differential has been a key point of discussion in ongoing contract talks between the three grocers and the United Food & Commercial Workers union, with Raley's in particular insisting it needs to cut health care costs if it's going to remain competitive.
In a March 13 memo to employees, Raley's CEO Michael Teel said the cuts he's seeking in health benefits and the elimination of premium pay for certain shifts are "essential to the viability of our company."
His rival at the bargaining table, Jacques Loveall of Local 8 of the UFCW, isn't so sure matters are that dire. He has asked for an "independent third-party verification" of Raley's financial position.
"We are prepared to address legitimate competitive issues when granted the appropriate level of transparency," he said.
Raley's is privately held and does not release financial results.
Teel declined to speak with The Bee for this story, citing time constraints due to labor talks. But he provided written responses to several questions, saying that labor concessions would go a long way to addressing Raley's problems.
"Once this agreement is reached, we can focus on growing our business," he said.
But he agreed that current circumstances are tough, saying 200 nonunion stores have opened or started grocery sales since 2007 in the Northern California and Nevada markets where Raley's operates.
"As soon as they open their doors," he said, "those competitors have lower operating costs than our union stores, putting us at a disadvantage."
In addition to having lower labor expenses, the newcomers appear to have an advantage when it comes to "occupancy costs" the amount they pay to lease their buildings.
In many cases, the established grocers are in long-term leases negotiated years ago when the economy was booming.
In contrast, companies like Fresh Market can come in and have their choice of empty "big boxes" offered at 30 percent to 40 percent discounts to the rents paid by earlier occupants.
All of this spells opportunity for the newcomers, who may be encouraged, too, by a sense that the current market leaders are especially vulnerable.
"Companies like Wal-Mart and (Fresh & Easy) and some of the others are sharks," said Coupe of MorningNewsBeat. "They smell blood in the water. They can tell there's weakness."
So where does that leave Raley's and Safeway?
Most analysts say Safeway is in decent shape to fight off the newcomers because it has a national network and deep pockets.
"It doesn't mean Safeway is untouched," said Andrew Wolf, a securities analyst with BB&T Capital Markets in Richmond, Va. But having operations all over the country lets it "spread the risk."
But for Raley's, which has most of its 130 stores in Northern California, the challenges are greater, leading several analysts to say the company could wind up being sold.
"Is there a chance they may not be here in a couple of years? I'd say absolutely," said Brown, the Cassidy Turley researcher. "Is there a chance that somebody would see their value and buy them out? Yes."
Those who follow the business say one possible remedy for Raley's is to continue the cost-cutting it started by closing four Northern California stores, downsizing a Nevada store and announcing it would eliminate health coverage for retired hourly employees who are 65 and older.
Brown said he has heard that Raley's has identified 12 more stores for possible closure if concessions aren't granted.
Beyond that, Brown said, the company could try to revitalize its brand by emulating the expanding Woodland-based Nugget Market and taking on a more upscale profile.
But that sort of image transformation takes lots of money, and many Raley's stores are not in neighborhoods suitable for that sort of approach, Brown said.
Teel, the Raley's CEO, said in his statement that more closures and layoffs won't be necessary if the labor issue can be resolved. And he insisted the family-owned company is not for sale.
"Raley's has celebrated over 75 years in business," he said, "and we hope to celebrate many more milestones."