"We're really small potatoes," says Michael Herman, senior vice president of Jumbo Food Stores Inc.

If anyone should know about potatoes, it is Herman. His family has been in the grocery business for more than 57 years.

Besides potatoes, Herman also knows how tough it is to compete in the Washington area, where the grocery business is dominated by Giant Food Inc. and Safeway Stores Inc. Together, these two chains account for 77 cents of every $1 spent on groceries here.

But increasingly, as Jumbo expands its successful Shoppers Food Warehouse chain, this small potato is growing into a larger player in the highly competitive market, where $3.6 billion is spent on groceries annually.

While still a distant third to the big chains, the family-owned Jumbo is forcing changes in grocery competition with its warehouse stores.

Giant, for instance, acknowledged last week that it lowers its prices in stores near SFW units to keep its customers from going to the new rival.

"Giant is never going to allow our customers to be taken away based on price alone," said a company spokesman, explaining why prices near SFW units were significantly lower -- in some cases by more than 30 percent -- than prices charged at Giant stores where there is no warehouse competition nearby.

"An interesting battle is developing," said Thomas McNutt, president of the United Food and Commercial Workers Union Local 400, whose members work at the local grocery chains.

"Jumbo runs a very clean, well-run warehouse type of store. As long as Jumbo isn't everywhere, Giant can compete," McNutt said. However, he added, he expects Jumbo will continue its cautious expansion, adding a few new warehouse stores a year.

"Within a decade," McNutt predicted, the chain could be giving Safeway and Giant a serious run for their money. With Safeway's corporate headquarters in Oakland making it more difficult to respond quickly to increasing competition here, that chain "could well be the big loser," he said.

Jumbo's Market Share Increases

For the moment, however, Safeway and Giant have the clear edge, according to the annual grocery market-share survey just released by Food World, a Columbia, Md., monthly trade publication that keeps close tabs on the food market in Washington and Baltimore.

Giant continued to increase its dominance in the area, ringing up $1.6 billion in sales -- or 43.3 percent of all grocery sales in the area. In last year's survey, Giant accounted for 42 percent of the market, selling $1.5 billion in groceries.

Safeway also increased its share to 33.7 percent of the market, up from 32.6 percent last year, with sales totaling $1.24 billion for the year that ended April 30. Last year, its sales were $1.16 billion.

Meanwhile, Jumbo sold $211.3 million of groceries, accounting for 5.7 percent of the market, up from last year's share of 4.5 percent, when sales totaled $159.2 million.

Food World's annual study of the local supermarket business is considered one of the most accurate assessments of the industry here, with data based on information furnished by retailers and distributors who supply goods to local stores.

"In the entire market, with the exception of Giant and Jumbo's Shoppers Food Warehouse, there really has been no big operational gains," said Jeffrey Metzger, who, with his partner Richard Bestany, owns Food World.

"The entire market was fairly flat, with low food-price inflation and little overall new-store growth," Metzger said. As a result, he said Giant's increase in sales was significant. "By opening new stores and improving existing stores, Giant continues to increase its core business. It's a very well-run company with all of its cylinders working. If it continues to operate in its present form and present structure, there will be no one else coming in to capture the No. 1 title," Metzger said.

Helping Giant increase its share of the market is its recent half-price promotional campaign, launched a few months ago to celebrate the chain's golden anniversary. "There has been a noticeable increase in sales since the half-price promotion began," Metzger said. "It has definitely diluted the momentum of every competitor -- some more so than others -- hurting even the promotional campaigns of other chains."

Safeway, meanwhile, continues to hold its own, Metzger added. "It had another good year. While it didn't increase the net number of stores it has in the area, it has done a good, solid, steady job of minding its customer and its business. It's done an admirable job of turning around its image of having tired, old stores in this market," he said.

"Over the next two to three years, nothing will happen to the No. 1 or 2 chains. They have great store locations, have opened excellent new stores and by their sheer numbers will remain on top."

Jumbo, however, is making some significant inroads, he noted, recording the second-largest growth in sales -- a 33 percent increase -- of any chain.

Only Magruder Inc. posted a higher sales increase -- 37 percent -- and that was due to its acquisition in January of seven of the nine Cook's Supermarkets in the area.

Even so, this acquisition didn't push Magruder's -- which last year ranked sixth in the area survey -- to third place, as many food industry officials had predicted. Magruder's, with sales of $153 million last year, took fourth place, behind Jumbo, accounting for 4.15 percent of the market.

The transition from Cook's to Magruder's has been slow," said Metzger. "Not even all the Magruder's signs were up at Cook's stores at the end of the market-share study" that ended April 30, Metzger added.

Jumbo Filling a Market Gap

Meanwhile, Food-A-Rama (the owner and operator of Basics), dropped from the No. 4 ranking last year to fifth place. Sales were down to $132.2 million from $155.5 million the previous year, and its market share declined from 4.4 percent to 3.6 percent.

"The Jumbo people have come the farthest in the past few years," Metzger concluded. "The chain has defied everything. Ten years ago, they were stagnant, with no new ideas," running a handful of conventional grocery stores. "They decided to go into the warehouse business and have done a better job than their competitors. It is clean, and the stock is well maintained."

The union's McNutt added, "Jumbo is filling a gap in this market." Noting that the other major warehouse chain, Basics, has declined since the chain was sold by Grand Union to Food-A-Rama, McNutt said, "Jumbo is as good a type of warehouse operation as I have seen in this country."

Ten years ago, before the warehouse chain was created, Jumbo was in trouble, McNutt recalls. At that time, the chain came to the union, asking that its employes grant some concessions in their contracts.

Reluctantly, the union agreed. "Now they are back on their feet, they have never forgotten these concessions," McNutt said. "They are more generous to their employes than some other companies in the area."

Jumbo's climb back to health is due largely to the warehouse division. But it also is due to the failure of several of its competitors to succeed in this market, given the stiff competition of Giant and Safeway. Within the past four years, four major chains have left the area: Memco, Pantry Pride, Acme and Grand Union. Meanwhile, A&P, losing market share, closed a number of stores here.

With the void left by the larger chains, Jumbo rose to third place, helped in part by the acquisition of several of the existing stores left by its competitors. These stores were converted to warehouse units.

Jumbo decided to enter the warehouse business in 1978, thanks in large part to computer technology, explained Kenneth Herman, Jumbo's executive vice president. "When scanning came into being, it started the wheels turning and enabled us to put things together we hadn't thought of before."

Among other things, scanning at the cash register enables a company to keep better control over its inventory and prices.

The first warehouse store opened in 1978. Today, there are 11, and by August, two more stores will be added: one in Chantilly and another in Clinton.

The warehouse stores sell only brand-name merchandise -- no house-brand labels and few generic goods -- at prices that are generally about 20 to 30 percent below most regular prices charged by traditional grocers. The chain can offer lower prices, it says, because it handles a large volume in an atmosphere that doesn't have all the frills of a traditional store. Lighting is not as bright and the merchandise is stacked high to the ceiling on simple metal racks, eliminating the need for a large supply room in the back -- or a large staff to stock the shelves.

How Do They Do It? Volume

Additionally, SFW doesn't sell all brands or all sizes of items found in conventional stores. It may sell only six different kinds of dishwashing liquid, instead of the myriad of choices found at a conventional supermarket. And instead of carrying corn flakes in five or six different sizes, it will offer only three sizes -- the sizes that sell the best in that brand.

Also to save on costs, SFW relies on the customer to do much of the work, such as bagging their own groceries (a bag costs 3 cents extra) and loading them into their own cars.

"We're not worried about them," said a Giant spokesman of SFW's operations. "But we don't look the other way either," he added.

That fact is made clear if a shopper compares prices at a Giant near SFW and one farther away. A random survey by The Washington Post last week revealed that on every item compared (except for produce and meat) at Giant's Dale City store -- two miles from a just-opened SFW -- prices were identical to SFW. In fact, unlike other Giant stores, the store's front sign prominently noted that the store was part of Giant's "Warehouse Division," and offered "discount prices."

But at an Arlington Giant 30 miles away from the Dale City SFW and far from any other warehouse store, prices were considerably higher. Five pounds of Domino sugar, for example, was being sold in Arlington at a promotional price of $2.29 (regularly it cost $2.39). But in Dale City, the item cost $1.83 -- the same price charged by SFW.

Similarly, a two-pound box of Uncle Ben's converted rice cost $2.09 in Arlington; $1.82 in Dale City. An 18-ounce jar of creamy peanut butter cost $2.09 in Arlington; $1.72 in Dale City.

"The prices we charge in stores such as the Arlington store are fair prices," said a Giant spokesman, who declined to be named. "But if we have competition, we will always try to be as competitive as we can be. We would rather sacrifice our profit for the short-term than our customer."

According to Metzger, that strategy has not hurt Giant in Dale City, where its store ranks as eighth largest in terms of annual dollar volume in the area, with sales of $27 million a year. Last year, Giant's Dale City store didn't make the top 10 list.

Prices at Safeway's Dale City store are somewhat higher than the Giant and SFW nearby. Yet, like Giant, Safeway's prices are higher still in Arlington and certain other areas.

Safeway's Dale City store was affected by SFW's opening, Metzger said. But even more affected was the Basics store in nearby Woodbridge. "Last year it did about $20 million in sales; this year we estimate they did about $15 million. Dale City is a good microcosm of what's going on in the area."

Jumbo hopes to add about four SFW warehouse units a year to its chain, Michael Herman said.

In the meantime, he added, the chain has no plans to abandon the smaller, conventional grocery formats of Jumbo. In fact, he said, it plans to upgrade the existing stores and, at the same time, keep an eye out for new locations that would be suited for Jumbos. "It would be a heavily populated area where there is not enough room for a SFW," he said.

A family-run organization, Michael's father, 79-year-old Irving Herman, remains president of the chain he and his brother Kenneth built.

Irving Herman started in the food business as a young boy, sweeping floors and stocking shelves in the small delicatessen his Russian-born parents had set up in northwest Washington.

In 1929, Irving -- a George Washington University Law School student -- opened a full-service grocery store on Vermont Avenue and V Street in Washington with $800 -- $500 from a loan and $300 from a wedding present. He and his wife Toby were the only employes.

A year later, when he finished law school, he got ready to pay back his loan and begin practicing law, he recalled. But Herman's loan officer, having monitored his progress over the year, had a different recommendation, Herman said, telling him: "I've seen many unemployed lawyers. Stay in business."