Outsider appetites.

L.A. supermarkets being snapped up

The nation's grocery chains are suddenly displaying a voracious appetite for Southern California.

In recent months, a trio of chains from outside the region have established a presence here through mergers or acquisitions: Austin, Texas-based Whole Foods Markets has taken over Mrs. Gooch's; Bellevue, Wash.-based Quality Food Centers Inc. is acquiring Hughes Family Markets of Irwindale; and Pleasanton, Calif.-based Safeway Inc. has made a bid to merge with L.A.'s Vons Cos.

The flurry of deals is evidence of Southern California's nascent economic turnaround, as well as the strength of the retail food market here - one of the most competitive in the country, according to analysts and industry leaders.

"It's a dynamic marketplace. It's growing. It's a great opportunity," said Stuart Sloan, chairman of QFC, which recently announced it would acquire the 56-store Hughes chain for $360 million.

With 64 stores and 4,400 employees, QFC is the second-largest supermarket chain in the Puget Sound region. Under the pending merger, QFC's stores and the Hughes markets are to be operated as separate business units by a holding company.

Sloan said the deal is part of an.ongoing expansion plan, which could include even more Southern California acquisitions.

"Let's just say we're keeping our eyes open," he said.

Douglas A. Christopher, an analyst at Crowell Weedon & Co. in Los Angeles, echoed Sloan's bullishness about Southern California's grocery sector.

"The market is rebounding," he said. "It wasn't so attractive a couple of years ago."

In recent years past, as a response to the recession, local supermarket chains including Vons, Hughes and the regional leader, Ralphs Grocery Co. - launched sweeping restructurings of their operations, closing under-performing stores and boosting efficiencies at others.

That restructuring has included a trend toward larger markets offering a dramatically expanded assortment of products and services, including banking, video rentals, dry cleaning, take-out foods and more.

The stepped-up competition drove some chains, such as Alpha Beta, out of business. Others, such as Safeway, simply opted to leave the area.

Now, according to Christopher, the shake-out is complete, and the grocery store marketplace is as healthy as it's been in years.

Vons and Hughes, he added, have emerged as two of the region's powerful players - as well as prime takeover targets.

Consider Safeway's recent uninvited $1.7 billion bid for Vons.

Ironically, when Safeway left Southern California in 1988, it sold its local operations to Vons. In the meantime, the 325-store Vons chain has grown into a formidable presence in Southern California.

With 19 percent of the market, it is second only to Ralphs, which has about 27 percent. Vons' stock price has soared from about $15 two years ago to about $54 as of last week.

Vons is studying Safeway's offer - although analysts are predicting it will be accepted. The deal, if completed, would make Safeway the second-largest grocery chain in the country, behind Kroger Co. of Cincinnati.

Natural foods store Mrs. Gooch's, meanwhile, recently disappeared from Southern California altogether. That chain's new owner, Whole Foods Markets - the nation's largest natural foods supermarket chain - changed the name of the stores to Whole Foods.

Industry experts said the recent mergers are not likely to radically alter Southern California's grocery landscape. Because there is virtually no overlap between either Safeway and Vons, Hughes and QFC, or Mrs. Gooch's and Whole Foods, no store closures and few layoffs are expected.

The consolidation of ownership will, however, turn up the heat in what already is one of the country's most competitive markets. The QFC-Hughes and Safeway-Vons mergers will boost both chains' purchasing power, allowing them to negotiate lower prices for items such as produce, meat, and health and beauty aids.

"Safeway brings in a strong balance sheet," said Andrew Berg, an analyst at Bear Stearns & Co. in New York. "It has the potential to make Vons a much tougher competitor."

Some of Safeway's likely rivals seem relatively unconcerned about the proposed merger.

"It makes it harder, but we're still able to compete," said Jon Berberian, CEO of Jons Marketplace, an 11-store independent grocery chain in Los Angeles.

Berberian said that, despite its small size, the chain actually has an advantage over its larger competitors because it can target its merchandise to specific neighborhoods.

"We get closer to our customers. That's our advantage," he said.

QFC's Sloan agreed that the mergers would not bring about wholesale, immediate changes.

"I don't see a major change occurring," he said. "The top four or five stores will pretty much remain the same. I think there will be evolutionary, rather than revolutionary change."

That evolution is certain to include more consolidation. But Southern California is hardly alone when it comes to supermarket mergers.

A week before it announced its deal with Hughes, QFC said it would acquire Keith Uddenberg Inc., a Seattle chain with 25 stores and 2,000 employees, for $65 million.

Similarly, Whole Foods recently announced an agreement to buy its largest competitor, 22-store Fresh Fields Inc. of Rockville, Md., in a stock merger valued at about $134.5 million.

"Supermarkets are a relatively slow-growth industry," said Laura Richardson, an analyst at Pacific Crest Securities in Portland, Ore. "Any chain that wants to grow has to grow by acquisition."

According to the U.S. Department of Commerce, supermarket industry sales grew by less than I percent in 1995. That compares to 3 percent growth for the nation's drug stores and 27 percent growth in consumer electronics store sales.