Winds of change

Safeway’s (Dominick’s) exit from the Chicago market poses new challenges—and opportunities—for Chicagoland residents and operators.

An ill wind blew through Chicagoland on October 10. Safeway announced it was exiting the market and putting its 72-unit Dominick’s chain on the block. There was one caveat—a hard sell-by date of Dec. 28, 2013. Stores not sold by that deadline—more than 50—were permanently shuttered at the close of business, throwing the nation’s third largest city’s supermarket business into turmoil. Chicago Mayor Rahm Emanuel even formed a task force to find buyers for the shuttered stores and to ease the transition of those locations that were acquired.ext1

“I go to Dominick’s all the time,” says Chicago resident Luke Saunders, founder and CEO of Farmer’s Fridge vending machines. “Dominick’s is very convenient for us if we need just a small volume of produce. There is one a block from my house and it is going to be a shame because I go in there a couple of times a week to buy organic kale and coffee.”

While the announcement may have caught residents, aldermen and other politicians by surprise, industry observers say it was a long time coming. Once Chicago’s premiere chain, operating 116 stores and known for its high-quality meats and perishables, Dominick’s lost its way once Safeway acquired it in 1998. Observers say it did not adapt quickly enough to the region’s rapidly changing socioeconomic and ethnic changes and beloved regional brands were supplanted with Safeway’s private label, further driving away shoppers. When announcing its intention to dispose of the chain, Pleasanton, Calif.-based Safeway said Dominick’s lost $35.2 million in the first 36 weeks of 2013.

“Many of us have seen this decline of Dominick’s coming for so many years,” says Dr. David Rogers, president of DSR Marketing, a consulting firm based in Northbrook, Ill. “Under Safeway’s ownership they have taken stores that were doing $1 million a week and brought them down to $400,000. This was exacerbated by Safeway taking out the local brands that Chicagoans love—like Stewarts Coffee—and replacing them with house labels.
“Under Safeway’s ownership the stores have declined dramatically,” Rogers says. “Dominick’s described themselves as a ‘Fresh Store’ when in fact they weren’t. They had wilted lettuce on their sandwiches. They were mixing in last year’s batches of apples with this year’s.”

Chicago’s reputation as a strong labor town may have put the unionized Dominick’s at a competitive disadvantage with some non-union independents, but its labor costs were on par with Jewel-Osco, which basically uses the same unions. Safeway’s exit was for other reasons, observers say.

According to Rogers, Safeway decided to pull Dominick’s plug in 2013 for tax purposes. “Safeway got $5.5 billion for selling their Canadian stores [in 2013] and will be getting a big tax bill,” Rogers says. “They want to take the loss in Chicago to offset that bill, so this deal is being driven by taxes.”

Observers say the move was expedited by Robert Edwards, Safeway’s new president and CEO. “When a new person started getting rambunctious at the Safeway board meetings it became evident that some of the underperforming brands had to be eliminated—and this clearly was an underperforming brand,” says Bill Bishop, chief architect, Brick Meets Click, a consulting firm based in Barrington, Ill.

Officials at Safeway did not return telephone calls seeking comment.

“It is a shame that a company that had so much rich, local history lost its way and got ‘corporatized’ into being a generic, vanilla-type retailer,” says Tony Camilletti, executive vice president at D|Fab Design, a store design and décor firm based in Madison Heights, Mich. “Today’s retailers have to be very aware of what Whole Foods, Trader Joe’s and others are doing from a large chain perspective, while still retaining that community, neighborhood-driven personality and character.”

Camilletti cites Mariano’s, one of D|Fab’s clients, as an example. A banner of Milwaukee-based Roundy’s, Mariano’s is quickly making a name for itself in Chicagoland with upscale stores packed to the gills with service departments including sushi, oyster bars and gelato bars.

“Mariano’s is sort of what Dominick’s used to be, but on steroids,” Bishop says.
“Mariano’s has made some aggressive moves and are certainly doing their best coming from a very chain-oriented company,” Camilletti says. “They are doing their best to create the niche and character of a community-oriented upscale option for people to shop. They are doing a lot of things right. Customers have embraced them quite well.”

There will be a lot more Mariano’s opening up in Chicagoland now that Roundy’s has purchased 11 of the Dominick’s locations. The stores will be closed for at least a month to be cleaned and upgraded, and then further remodeled during the year.

“These key locations will seamlessly integrate into and complement our existing base of 13 Mariano’s locations as well as our five additional 2014 Mariano’s locations now under construction,” Robert Mariano, chairman, president and CEO of Roundy’s, said in a statement. Chicago could eventually support up to 50 Mariano’s stores, he has said.
Jewel-Osco has also picked up four of the Dominick’s stores. In mid-January the stores will close for a few days to be converted.

“We are excited to expand to these four stores and with Dominick’s exiting the marketplace we want to capture as many of those customers as we can,” says Allison Sperling, communications manager, at Itasca, Ill.-based Jewel-Osco. “We are expecting to see an impact after Dominick’s goes dark. We’re hoping to capture a lot of those customers and turn many of those Dominick’s shoppers into Jewel-Osco shoppers.”

Given its new corporate outlook, Jewel-Osco has a pretty good chance of doing that, observers say.

“The new management at Jewel has really made a difference in the stores,” says Bishop. “They’ve cleaned up the stores, improved customer service and certainly improved pricing.”

“This may actually be a golden opportunity for Jewel,” says Rogers. “They are having their arch competitor vacate the middle market.”

According to many, Dominick’s was too slow to adapt to Chicago’s changing demographics.

“The Chicago market has evolved rapidly,” says Tim Nelson, president, TRIS3CT, a Chicago-based integrated marketing agency that specializes in retail. “There are close to one million Mexican residents in the metro area. People like Pete’s Fresh Market, which caters to that community by having a different mix, are stocking a lot of items that would be considered Mexican brands, as well as heavy produce selections and cuts of meat that appeal to that audience,” he says.IMG_0231

Pete’s currently operates nine stores, mostly on the city’s South Side, but has been expanding and will likely take a few of the Dominick’s stores. “Pete’s has been building new stores—big stores—and when you walk into them it is the same footprint that you would expect from a Jewel or Mariano’s,” Nelson says.

Aldi has also been drawing more customers. “Aldi has 140 stores in this market and they seem to be gaining more traction,” says Bishop, who says that he and his wife now shop the limited assortment deep discounter for certain items. “When you go there you see very substantial savings. People have kind of pooh-poohed Aldi, but they have tremendous capacity to sell more through those stores. They are very nice stores today and no one would be embarrassed to go there. Anyone of their stores could add another $40,000 to $60,000 a week pretty easily.”

New operators are also coming to town. Plum Market, a three unit operator based in suburban Detroit with stores on the caliber of a Whole Foods, recently opened its fourth store on N. Wells Street, downtown, marking the independent’s entry into the Windy City. Plum hopes to take advantage of the scores of young professionals and corporations that are moving back downtown from the suburbs.

“Plum’s management studied the Chicago market for a long time,” says Camilletti. “The site they selected is in the middle of a zone that has a very high concentration of University of Michigan graduates. They are targeting the Michigan transplants that have moved to Chicago.”

Bishop expects another Michigan powerhouse, Grand Rapids-based Meijer, to increase its presence in the outer suburbs. “Currently Meijer’s growth is in the suburb and exurb areas because they need such big footprints to operate,” he says, “ but they have invested in a new Sprouts Markets/Wild Oats-type store.”

That would reportedly be Fresh Thyme Farmers Markets, which plans to open its first store in suburban Mt. Pleasant, Ill. early this year and eventually operate 47 stores across the Midwest. “I think you are going to see the tremendous expertise and resources that Meijer has going into these stores,” Bishop says.

Of the remaining Dominick’s sites, Whole Foods may take a few, but the majority will likely be taken over by feisty independents, such as Pete’s, Tony’s Finer Foods, Cermak Fresh Markets and Potash Bros. “The independents have grown significantly over the last 10 years in this marketplace, with the ‘corporatization’ of the grocery store business, and the constant changeover at Albertsons, Supervalu (the former owners of Jewel-Osco) and Safeway,” says Mike Mallon, managing director of DKMallon, a commercial real estate firm based in Elmhurst, Ill. “The independents have been able to get their foot in the door and basically wrestle away market share and customers over the last 15 years.”

A former vice president of real estate at both Jewel-Osco and Dominick’s, Mallon says most Dominick’s stores are well-positioned and well-located. “They are in very densely populated areas and I would say the lion’s share of the stores will be grocery stores going forward. We only see a handful of stores that are probably better suited for non-grocery uses.”

Safeway is retaining the stores that it owns outright. “Of the Dominick’s stores that are actually owned by Safeway, where they actually own the building and the dirt, none of those are being sold,” Mallon says. “Safeway is basically taking back leases with those grocery store tenants because they see the value of real estate only going up in the Chicagoland area.”

One other thing is just about certain. After 95 years, the Dominick’s banner will no longer adorn a Chicago supermarket.

“I don’t see someone buying the Dominick’s name to keep it going,” Rogers says. “It is too tarnished. It is not like Marshall Field’s, which still has a very strong cache. Chicagoans were furious when Macy’s took away Marshall Field’s and many still are. I don’t see them being as concerned with the loss of Dominick’s.”

Special delivery
Chicago shoppers losing their neighborhood Dominick’s need not fret about lugging grocery sacks from that Whole Foods two miles away up and down those steep EL steps. They can simply sit down on their computer and use Instacart, a web site and app that allows consumers to order groceries from their favorite store and have them delivered to their door within an hour.

Instacart employs CrowdSource labor, freelance “personal shoppers,” who enjoy grocery shopping and are paid up to $25 an hour to shop and deliver groceries. When a consumer places an order with Instacart it is matched with a personal shopper in their area who then goes and does the shopping for them and brings the order to their home.

“We launched about one year ago in San Francisco and the traction that we had was just phenomenal, so we decided to expand to Chicago,” says Apoorva Mehta, CEO of San Francisco-based Instacart. “What we’ve seen in Chicago is that the growth has been even faster than in San Francisco. The Chicago market is the perfect opportunity for an app and product like Instacart.”

To facilitate shopping, Instacart equips the personal shoppers with an app that maps out the items on the list in the store. “The shopper app knows exactly where the items are located in the store,” Mehta says. “The shopper can then navigate the store quickly.”
An added benefit is that shoppers are not limited to just one store. “Customers can go to Instacart and choose several stores,” Mehta says. “They can get their organic produce from Whole Foods and their national brands from Mariano’s.”

Initially, Instacart is in 21 Chicago ZIP codes, including the North Side neighborhoods of Lake View, Ravenswood, Avendale and Uptown. Participating stores include Whole Foods, Mariano’s and Costco. The delivery fee is $14.99 for orders delivered within an hour, but only $3.99 for orders over $35 delivered faster than two hours and $9.99 for orders from Costco.

“Initially we were also in Dominick’s, but as we lost that store, what ends up happening is more and more of those customers have to go to other stores, such as Mariano’s and Costco,” Mehta says. “We are going to see more and more traffic going to other stores via Instacart.”

Salad days
A Dominick’s closing does not necessarily mean a food desert is forming—especially if a Farmer’s Fridge vending machine sprouts up nearby.

The innovative automated kiosks offer consumers nine varieties of fresh salads such as the Pineapple Sun Salad of mixed greens, brown rice, sunflower seeds, carrots, cucumbers, golden raisins and goat cheese with pineapple dressing; four kinds of protein: lemon pepper chicken, tuna salad, baked tofu, poached salmon; and sides and desserts including Greek yogurt parfait, sliced apples and cauliflower fried rice.

The machines are serviced at least once daily to ensure that the product stays fresh and all transactions are completed by credit or debit card.

“Our long-term vision is to make the healthy food available through these kiosks be like a grab-and-go option where you can pick up something to make dinner,” says Luke Saunders, the founder and CEO of Farmer’s Fridge, based in Chicago.

The salads come in 32-ounce plastic Mason jars with bright green lids, and can be recycled in a chute on the side of the machine.

Saunders opened the first Farmer’s Fridge in November downtown in the Garvey Food Court, housed in the lobby of an office building on N. Clark Street. Decorated in antique barn wood, a Farmer’s Fridge measures between 6.5- and 7-feet wide, 3.5-feet deep and is up to 10-feet high when signage is factored in. As a result, the machines are highly visible.

“We are looking to place them in high traffic, high visibility areas like train stations, subway platforms, food courts, hospitals, hotels and office building lobbies,” Saunders says.

“Long-term, I think Dominick’s closing does open up some opportunities, but for the short-term I don’t think the landlords will want a 20-square-foot kiosk when they have tens of thousands of square feet they need to rent,” Saunders says. “But in certain areas this can help out as a food option. We have a model for an outdoor space that can even be placed on street corners.” 

 

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