Smart & Final opens 12 stores in San Diego in 2016

December 16, 2016

By Phillip Molnar, San Diego Union-Tribune

In the wake of two major grocery chain bankruptcies, no outlet rushed to fill the void in San Diego County more than Smart & Final.

The Los Angeles County-based chain opened 12 new stores in the San Diego region in 2016, bringing their total workforce to just under 1,200 employees.

Smart & Final’s footprint in the county is now 26 stores, making it one of the biggest food operators here — second only to Vons with more than 40.

It will take time to see if the company’s strategy works, but short-term indications are positive. Smart & Final had an 11.9 percent increase in its third quarter sales, $1.4 million, compared to the same time last year. Net income was $7 million, down 43 percent from a year ago, which the company said was, in part, because of new store cost development.

Sean Mahony, vice president for Smart & Final’s southern region, said the company has more plans for further expansion in San Diego County.

“When we look at San Diego, while we grew a lot, we still believe there’s neighborhoods we have the opportunity to serve that we’re not today,” he said.

He said the company is aiming to increase its store count by about 10 percent each year. But in 2016, the number of store openings surged, up 86 percent in the county.

The combined bankruptcies of Haggen and Fresh & Easy left open 39 store locations in San Diego County, and led to an explosion in new grocery stores in 2016. In addition to Smart & Final, other grocers snapped up stores: Jensen’s Finest Foods, Albertsons, Bristol Farms and Gelson’s.

Burt Flickinger, managing director of retail consulting firm Strategic Resource Group, said Smart & Final benefits a lot from Costco’s business model of offering bulk items at low cost. Because Smart & Final is like a Costco-without-a-card, it makes up for all the spots Costco can’t get to.

He said Costco has been racing to add stores in the Midwest, East Coast, Florida and Texas, while other similar operations like Sam’s Club have struggled.

“It’s really been Costco against itself,” he said.

Flickinger said Smart & Final is able to get into smaller spots Costco can’t, like open locations in a mall or shopping centers.

The county’s biggest chains, Ralphs and Albertsons/Vons, hold about 35 percent of the grocery market share in Southern California. But, Flickinger said low-cost outlets will likely continue to show growth as costs go up in other areas and people search for ways to save money.

Mahony said Smart & Final has responded to customer feedback in Southern California by adding more organic and gluten-free options.

The grocer has only offered organic products for about five years, so adding about 100 different organic produce items per store was a big change.

“It’s something we heard from the San Diego market and responded to,” he said.

Most of Smart & Final’s new local stores are its Extra! format, which has more products than typical stores, such as expanded sections for frozen, deli and meat products and a full produce department.

Mahony said it notices a ramp up in sales the longer one of its stores stays open. Consumers who try it seem to come back, but much of the company’s effort goes into telling shoppers exactly what Smart & Final is.

“I think ultimately what people are after is value for their dollar,” he said. “We get a strong rate of acceptance of people that return. But, just getting them in the door to give it a shake has been our biggest opportunity.”

Mahony said its most popular stores are in La Mesa, Santee and Mira Mesa.

Despite its growth, he said said deflation in the food industry has made revenue growth more challenging.

Flickinger said the drop in food prices, while good for consumers, has affected all grocery stores. Low grain prices led ranchers to create a surplus of beef, milk, eggs, butter, pork and poultry.

However, he said Southern California grocers are willing to fight it out, largely because of three consecutive years of population and income growth. Also, he said rising restaurant prices may present more opportunities as consumers skip eating out.

The grocery sector made up the majority of big box activity in the first half of 2016 said Cushman & Wakefield’s mid-year retail report, keeping retail vacancy at 4.2 percent.

While Smart & Final may be catching on with more shoppers, Mahony acknowledged it has areas it can improve.

Regular shoppers might have noticed slow checkout lanes on occasion being backed up, in part because of only one or two cashiers working.

Mahony said they have heard from customers and are working on speeding up the process, starting a program that aims to have a maximum of two customers in each line and a supervisor on the front end to help manage lines.

“We recognize there is a need for improvement,” he said. “The biggest opportunity for us is speed of check-out. The quicker we can make that happen and end the experience as a positive one is really essential to our growth.”