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The end of the traditional supermarket

Private equity firm Cerberus Capital Management LP is acquiring the supermarket chain Safeway in a deal worth about $9 billion. (Photo by Justin Sullivan/Getty Images)

Say goodbye to the traditional supermarket.

Safeway announced Thursday that it was being acquired by the private equity firm Cerberus Capital Management in a deal worth about $9 billion, part of an industry-wide shake-up that is transforming how consumers shop for their food.

Effectively a merger between Safeway and supermarket chain Albertsons, already owned by Cerberus, the deal is an attempt to compete in the increasingly tough grocery business, which is now crowded by a gamut of retailers, from drugstores and Wal-Mart to local neighborhood farmers markets.

Over the past decade, supermarkets have lost about 15 percent of their market share to other retailers, according to Phil Lempert, an editor at Supermarket News.

“The traditional supermarket that we grew up with and that we love needs to evolve,” Lempert said.

The supermarket, which rose up in the 1930s and had its heyday in the 1980s and 1990s, has long relied on its convenience and size for its popularity. It’s the place where you can find five different brands of peanut butter or 10 different kinds of olive oil.

These stores also have long relied on advertising and promotional fees paid by their suppliers. So the peanut butter brand you’re seeing at the end of the aisle isn’t necessarily there because consumers are clamoring for it. Instead, it’s because the company that manufactured the peanut butter has paid Safeway to put it there.

By contrast, stores like Whole Foods and Trader Joe’s work on a different model: relentlessly present only what you think the customer wants. Trader Joe’s, for instance, is especially brutal in its decisions about what to put on its shelf space. If the product doesn’t sell well enough, it’s rotated out for something else.

“It’s gotten a lot more competitive, and the ones who are going to win, and who are winning now, are focused on the consumer,” Lempert said.

Safeway, much like its rival Giant Food, has struggled to remain competitive in a rapidly changing industry. After years of gobbling up market share from mom-and-pop grocers around the country, Safeway is facing the same threat from Wal-Mart and CVS. Big-box retailers and drug stores have been barreling into the grocery segment. In the past five years, Wal-Mart has opened a crop of “super” stores with fresh produce and dry goods, while CVS has stocked its aisles with eggs and ice cream.

The continued expansion of Wal-Mart, which has more than one-third of the national grocery market, into urban areas poses a threat to traditional supermarkets.

Safeway said in a statement Thursday that none of its 1,335 stores nationwide are expected to close. Safeway executives said Thursday, though, that if government regulators evaluate the deal for antitrust issues, some stores may need to be spun off. Albertsons, which has 1,075 stores, has no locations in the Washington area.

“There is a clear and compelling rationale for this merger,” said Safeway chief executive Robert Edwards on a call with analysts Thursday.

Safeway is one of the few grocers in the country with a unionized workforce. Pressure from non-union shops has in the past prompted the company to try to reduce labor costs. There’s no sign of how the new ownership will handle the issue, or if they will try to dismantle the union.

Analysts say the two companies need to combine in order to compete— and that no matter what happens, the future of grocery shopping will not be the same.

For one, supermarkets will probably need to shrink and focus their efforts. Out of 128 categories of items carried by supermarkets, the stores have a 50 percent or more market share in only 60 of them, according to an analysis by consultant and president of Dellmart, Frank Dell. Much the way department stores evolved by no longer selling televisions, Dell said, supermarkets will also have to be more selective about what they put on their shelves.

Customer habits are also changing. With the rise of two-income families, there aren't as many women shopping during the day. And so busy families are hurrying after work to the store so they can easily throw together a meal. During the week, people don't want to wander through aisles of endless pantry items; they increasingly want prepared foods and other quick options.

Already, the median size of the supermarket is declining, according to data from the Food Marketing Institute. 

“We are seeing smaller experiences,” Lempert said. “And as a result, we’re not going to need to walk into a supermarket and see 100 different brands of olive oil that are basically all the same.”

Danielle Douglas contributed to this report.

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