Grocery store developments could put the squeeze on Roundy’s

The Milwaukee-area grocery industry has grown increasingly competitive during the past decade. Walmart has opened several stores in the area to compete for customers on the low end, and Sendik’s has opened several additional stores to compete for customers on the high end. Woodman’s, Costco, Whole Foods and Trader Joe’s have also entered the market during that time.

The growing list of competitors has reduced the market share for Milwaukee-based Roundy’s Inc., which operates the Pick ‘n Save and upscale brand Metro Market stores. Roundy’s market share has fallen from about 65 percent in 2006-’07 to about 40 percent today, said grocery industry consultant David Livingston.

And the southeastern Wisconsin grocery industry is only going to get more competitive. Grand Rapids, Mich.-based Meijer Inc. plans to enter the market in a big way by opening seven stores, located in Greenfield, Oak Creek, Grafton, Sussex, Waukesha, Wauwatosa and Kenosha. Meanwhile, Costco plans to add three more stores, which will be located in Menomonee Falls, New Berlin and Pleasant Prairie; Whole Foods plans to open a store in Wauwatosa; and Sendik’s plans to add a store in Brookfield. Another new entry, Fresh Thyme Farmers Market, plans to open stores in Milwaukee and Brookfield.

That’s at least 14 new grocery stores, or stores with a major grocery component, that could be added to the southeastern Wisconsin region, which is experiencing modest population growth. It will be interesting to see what impact all of the new stores will have on the region’s grocery industry and just how many grocery stores the region can support.

Roundy’s is facing stiff competition at its Pick ‘n Save stores.

“The market is not growing fast enough to support all of that (additional grocery) square footage,” Livingston said.

As the leader in the region’s grocery market, Roundy’s is threatened the most by the new competition, Livingston said.

Roundy’s has 121 stores in Wisconsin, including 60 in the Milwaukee area, according to a May investor presentation from the company.

Despite the rising level of competition in the region’s grocery marketplace, Roundy’s remains committed to the Milwaukee area, said company spokesman Jim Hyland.

“We do have the number one market share and we compete very hard to maintain that,” he said.

In recent years, Roundy’s has made improvements to several stores in the metro area in an attempt to keep them competitive. Roundy’s also recently opened a Metro Market store in Madison and plans to replace a Pick ‘n Save store in Shorewood with a Metro Market store. The company is comfortable with its current Wisconsin store count, Hyland said.

“We feel our build out in Wisconsin is where it needs to be,” he said.

But as its market share has declined in the increasingly competitive Milwaukee area grocery market, Roundy’s has turned to Chicago to grow its business. By the end of this year, the company plans to have 29 of its upscale Mariano’s brand stores in the Chicago area.

At the same time, the company has shed some of its other operations. Earlier this year, it sold 18 of its Rainbow stores, all in the Twin Cities market, for $65 million in cash, plus inventory proceeds. That deal left Roundy’s with nine Rainbow stores that it plans to sell or close and then exit the Twin Cities market.

Also earlier this year, Roundy’s announced plans to close its Stevens Point distribution center. The company said it will move operations to its Oconomowoc and Mazomanie distribution facilities.

The company reported net income of $34.5 million in 2013 and $8.7 million in the fourth quarter of 2013, significant improvements from a loss of $69.2 million in 2012. But the company reported a net loss of $4.5 million in the first quarter of 2014. It does not break down the performance of its brands, so it’s unclear how much the growth of Mariano’s in the Chicago area has impacted its bottom line.

“During the first quarter of 2014, we continued to see softness in our core markets,” Robert Mariano, chairman, president and chief executive officer of Roundy’s, said in May. “Competitive pressure, weak economic growth and weather-related issues affected our core markets in the quarter. Despite difficult same-store sales comparisons in the first quarter, we remain steadfast with our Milwaukee market renewal initiatives as we continue to implement strategic changes in select core markets.”

Meijer and other competitors that have come into the Milwaukee-area grocery market are gunning for a piece of Pick ‘n Save’s market share, Livingston said. Roundy’s has high union labor costs and a large amount of debt ($713 million, according to the investor presentation in May) that make it harder to compete on price, he said.

“(Competitors) recognize that Roundy’s is in a very distressed situation,” Livingston said.

But Hyland said Roundy’s is confident that its pricing remains competitive. The company’s May investor presentation said it seeks to be priced “at parity or better versus conventional grocers and to maintain a reasonable price gap with (Walmart) Supercenters.”

“We try to be as competitive as possible (on price),” Hyland said.

Meijer’s entry into the Milwaukee-area grocery market could be a game changer for Roundy’s in southeastern Wisconsin, said Livingston, who previously worked for Roundy’s for 16 years as a market research manager.

“Once the Meijer stores open up (Roundy’s) will have to do something,” he said. “You just can’t keep losing sales forever. At some point you pass a critical point.”

But Hyland said the Meijer stores will likely compete more with big-box stores like Walmart than with conventional grocery stores like Pick ‘n Save.

Livingston predicts Meijer’s entry into the marketplace, combined with other store openings, will likely result in the closure of several Pick ‘n Save stores in the Milwaukee area.

“By early 2016 they won’t be (operating in the Milwaukee area) in the same manner that they are today,” he said. “If you want to know which stores they plan to keep or the ones they plan to close or sell, just check to see which ones have gotten a significant remodel, expansion or opened new in the past couple of years. If they haven’t put any capital expenditures back in the store, they are not interested in keeping it.”

Other operators could be interested in acquiring stores that Roundy’s decides to close, Livingston said. Festival Foods, Piggly Wiggly, Walmart, Sendik’s and Albertsons (Jewel) are all possibilities, he said.

“If it’s a good, well-operating store, it will stay in business and be operated by somebody,” Livingston said. “But obviously some stores will have to go away.”

Hyland said the rising level of competition typically is a greater threat to firms in the third or fourth position in the marketplace, rather than the market leader.

Livingston predicts that Roundy’s will continue to focus its growth efforts on the Chicago market.

“That’s where they feel they can do their best,” he said.

But during the company’s first quarter conference call, Mariano expressed little concern about Meijer’s plans to enter the Milwaukee-area grocery market, according to the transcript on Seeking Alpha.

“When I see the first Meijer store has already been pushed from ’14 into ’15, pretty typical of what happens with them when they come into a marketplace,” he said. “They keep pushing it back. I don’t see them as particularly differentiated nor a major effect on the marketplace. I think this is the competitive set and the Wisconsin market is pretty well built out.”

When asked during the conference call why Meijer and Walmart were coming into the Wisconsin market, Mariano said, “I can’t figure it out.”

“I mean, there is absolutely no reason for there to be another 250,000-square-foot general merchandise food retailer opening in southeastern Wisconsin,” he said. “People can say, ‘Well, I’m just a transplanted Chicagoan.’ But a lot of the team here lives and have lived in this community for years and years and years, and they don’t get it either. So I don’t know. I honestly do not know.”

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