Shopping around: supermarkets will survive only with creative approaches.

THE next time you visit a local supermarket, ask yourself this question: How is this store different from those in any of the other two major chains that serve Los Angeles and Southern California?

If you're candid in your response, you'll answer: There isn't any difference.

That's why the supermarket industry, locally and nationally, is in turmoil these days, fighting for its very survival.

The decision by Albertsons to sell itself off in three parts was just the latest development in the downward spiral of the supermarket business. It's a result of the homogenization of food retailing; nothing differentiates stores in one chain from those of competing companies.

Look at what's happened in food retailing over the past decade or so. Costco and Wal-Mart have drawn many consumers away from supermarkets by offering rock-bottom prices that the supermarkets can't match. At the other end of the spectrum, specialty stores such as Trader Joe's, Whole Food Markets and Bristol Farms have proved that customers will pay higher prices for quality, selection and service, turf that is beyond the pale of the mass merchants.

Not too many years ago, supermarkets were considered recession-proof. No matter how bad the economy gets, the argument went, people have to eat. Well, they still have to eat, but they now have a lot more choices of places to shop.

It's not just that times have changed. The reality is that they're not going to get any better until supermarkets can figure out a way to differentiate themselves.

As an investment banker who has been closely involved in the food retailing industry over the past decade, I don't believe the Big Three--Kroger, Albertsons and Safeway--will be able to achieve that objective with their present strategy. Albertsons tried valiantly, bringing in a "graduate" of the Jack Welch School of Management several years ago. Eventually, though, he threw in the towel, and the company broke apart.

Two scenarios

The problem isn't going to go away. So the question becomes, who will be the next to fall? Kroger, which owns Ralphs and other chains; Safeway, owner of Vons; or some other chain?

There are two scenarios. In the first, one or more of the big chains will follow the lead of Albertsons, selling off all or parts of its business.

This could have a beneficial effect for consumers. In buying the Sav-on and Osco drug chains from Albertsons, CVS drug stores becomes a much bigger player. As a result, they'll have even greater buying power than they did independently, so they'll be able to offer lower prices and simultaneously reduce their general and administrative costs as a percentage of sales, bettering the bottom line.

The second scenario has supermarket chains doing what Albertsons was poised to do before it split itself up. In 1999, Albertsons was forbidden by California's attorney general from buying another supermarket chain without state approval. Despite this obstacle, Albertsons, a company with revenues of $40 billion, sought and received approval to buy upscale grocer Bristol Farms, tiny by comparison at $200 million in sales.

The plan was to take smaller, less successful Albertsons markets and Sav-on drug stores in demographically appropriate (i.e., affluent) areas and convert them into Bristol Farms outlets--a sort of man-made metamorphosis process. There are only 11 stores in the Bristol Farms chain, and this could easily be increased to as many as 50 in Southern California and thousands nationwide.

This plan made good sense to me. Bristol Farms stores have done well in upscale areas served by supermarkets. But competitive pressures had already sealed Albertsons' fate, so this strategy was never tested.

Supervalu Inc., the Minnesota-based supermarket chain that bought the Albertsons markets in Southern California and elsewhere, has announced that it plans to refurbish many of those stores. But that's not likely to be enough to make them as profitable as Supervalu certainly wants them to be.

So it will have to look to other means of achieving that goal, and one obvious way would be to implement the metamorphosis strategy conceived by Albertsons' previous management--a strategy that was on the verge of being implemented before the breakup.

If it does, it will in effect be adopting a new brand for itself. Vons and Ralphs face a more difficult challenge. In my estimation, Vons is not going to benefit much from its current efforts to rebrand itself as the place to obtain "ingredients for life"--products that are natural, wholesome, etc. Ralphs, as far as I can see, hasn't created, or at least hasn't announced, any rebranding. But both of these companies must deal with the age-old question: Can a leopard change its spots? That's not likely to happen, even with a major advertising campaign.

It won't be simple, and it won't be easy, but creative management can come up with ideas to help supermarket chains survive and prosper in the brave new hyper-competitive word of food retailing. And, in the process, metamorphosing from caterpillar to butterfly can benefit shareholder and consumer alike.

Lloyd Greif is president and chief executive of Greif & Co., a Los Angeles-based investment banking firm specializing in mergers, acquisitions and leveraged buyouts. The firm represented Oaktree Capital Management LLC in its sale of Bristol Farms to Albertsons.