Food firms get fat on Southland appetites.

Grocery companies grow with local population

Fifteen million people eat a lot. That's one reason food-related companies predominate this year's List of the 100 largest privately held companies in Los Angeles County. With the 15 million-and-growing population of the five-county greater L.A. area, feeding them is big business.

Four of the 10 largest private companies in L.A. County are in the food business, including the largest company on the list, Ralphs Grocery Co. That compares with three out of the top 10 last year, when Certified Grocers of California Ltd. topped the list. Overall, 15 of this year's top 100 private companies are in food-related businesses, compared with 13 last year.

But the region's big appetite alone doesn't account for the size of the companies and their growth. According to Stuart DePina, partner in charge of the food practice at the Los Angeles office of accounting/consulting firm KPMG Peat Marwick LLP, another factor is consolidation. "There is a lot of consolidation going on right now in the food industry, both in the manufacturing side and on the retailing side," DePina said. A prime example is Compton-based Ralphs, which was a public company last year. Earlier this year, Ralphs merged its 168-store chain with 199 Alpha Beta, Food 4 Less and Boys Market stores owned by Yucaipa Cos. of Century City. With its 367 stores, Yucaipa now controls 27 percent of the Southern California grocery market.

Specialty niche

Another source of growth, according to DePina, is the boom in specialty foods.

"Much of the growth in the food industry right now is coming from niche companies that are producing specialty products, such as ethnic foods," he said. "Consumers in Southern California have always bought specialty foods because of our ethnic mix, but there is a huge awareness of these foods developing in the rest of the country now. As a result, producers are developing more specialty foods that retailers can sell at higher prices, which helps their margins."

Those margins need help, DePina explained, because food producing and retailing is a mercilessly competitive business, with overall profit margins of less than 2 percent. Manufacturing is fiercely competitive too, with producers forever introducing new products, precious few of which survive. "Of 33,000 new products introduced in 1994, only 1,200 survived," DePina noted.

Consolidation and intensified competition were also among the factors cited by Certified Grocers, a member-owned wholesale and distribution company, as driving factors in the industry. Like two other ventures that rank among the largest privately held companies - Sunkist Growers and California Milk Producers - Certified Grocers, or Cergro, is comprised of member companies united to pool their buying and marketing power.

Adding stores

Spokesman Tom Schaffner noted that the Company recently added Phoenix-based Megafoods Stores Inc. and San Francisco-based Nob Hill Foods Inc. to its membership roster. Megafoods, a 25-store chain, is expected to generate $150 million per year in additional annual revenues for Cergro, while Nob Hill's 26 stores will add an estimated $100 million.

Cergro has also launched a long-term plan to "re-invent" itself in response to "dramatic changes that are driving the wholesale and retail grocery business," specifically intensified competition and technological changes, Schaffner added.

The plan revolves around four teams - a pricing team, customer team, organizational team and finance team - that are working to redesign the way work is organized throughout the company. The teams' mission is to generate ideas that will achieve the long-term goal of making Cergro as cost-effective and "quality-driven" as possible.

Among the programs Cergro has had in effect for some time for its members is private labeling. In their efforts to boost margins, supermarkets are turning more to private-label items - sometimes called "store brand" products - which they either manufacture themselves or have produced for them by food manufacturers.

Grocery markets can make higher profits on private-label items because they don't incur the huge advertising and promotional costs associated with national brand names. Often, a store will contract with a big brand name manufacturer to produce the store brand product.

"The grocery store will provide its own recipe and contract with one of the big manufacturers, most of whom have excess manufacturing capacity. Then you'll see that manufacturer's brand name on the shelf, right next to the store's private label product," DePina pointed out.

Private-label products are expected to continue growing because they are somewhat new to the United States, representing only about 20 percent of total supermarket sales, compared with 50 percent in Europe and 20 percent in Canada, DePina said.

Being responsive

The biggest trend driving the supermarket industry nationwide is "efficient consumer response," DePina said. In a nutshell, this term refers to efforts by markets and manufacturers to respond as quickly and efficiently to what consumers really want - rather than follow the outmoded philosophy of: If you manufacture it, shoppers will buy it.

Explained DePina: "Traditionally in the food industry, manufacturers would increase production according to sales goals that they established arbitrarily, without really knowing if there was a consumer demand for more of the product. What happened was that they often manufactured too much and had to sell it at big discounts."

Today, using information gathered from computerized checkout scanners, manufacturers and retailers quickly learn which products consumers are buying and use that information to determine future production schedules.