Hawai'i supermarkets fighting to survive

By Andrew Gomes
Advertiser Staff Writer

Over the past several years, Hawai'i has seen a slow, gradual disappearance of family-owned supermarkets. This month will mark one of the biggest moves in that direction as the Teruya family expects to complete the sale of its Times Super Market Ltd. to a California-based buyer.

Vance Roberts replenishes produce at the Times Super Market on Beretania Street. A Mainland company is acquiring the chain. Cory Lum • The Honolulu Advertiser

Some analysts and observers see this acquisition as a signal of more sales or mergers to come in Hawai'i, mirroring a trend of supermarket consolidation on the Mainland over the past five years.

But others say the Times deal may not necessarily be an indicator of any trend. They add that other challenges of doing business in Hawai'i will continue to shield Hawai'i from the likes of Kroger, Albertson's and Ahold replacing names like Fujieki, Sullivan and Tamura.

Nearly everyone agrees, however, that the growing competitive pressures from the increasing number of Mainland chains and big-box discounters have never been greater on local supermarket operators — and that one way or another the industry will see more major changes in the years ahead.

"It's a struggle for survival," says Richard Botti, president of the Hawai'i Food Industry Association.

He notes that local supermarket operators, which eke out 1 percent to 1.5 percent profit margins "if they're lucky," have been worn down by increasing big-box competition in Hawai'i's relatively stagnant economy.

"There's a constant pressure to consolidate."

Local flavor persists

Hawai'i's geographic isolation, relatively small market size, expensive real estate and reputation as a difficult place to do business have helped keep many growing Mainland chains at bay since Safeway entered the market in 1963.

Foodland President Abel Porter, who was the former chief executive of a Utah-based grocery chain with nearly 200 stores, agrees, noting that regional and super-regional chains that are hungry to expand have found many Mainland markets to be more attractive than Hawai'i.

Mia Kirchgaessner, a retail analyst with New York-based investment and research firm Sanford C. Bernstein & Co. LLC, said the United States is still one of the least-consolidated countries in the world for grocery retailing despite a five-year spree of mergers and acquisitions.

The top five U.S. grocery retailers have a little more than 30 percent of the total market, compared to 50 percent to 90 percent for the top five grocers in most developed European countries, Kirchgaessner said.

"There are still many players here (on the Mainland)," says Kirchgaessner. "There's a lot of room still for (consolidation)."

Still, the market share of conventional supermarkets is shrinking in the United States, as wholesale clubs such as Costco and Sam's Club grow and discount retailers Wal-Mart, Kmart and Target expand to offer fresh produce, meats and other supermarket staples.

In Hawai'i, conventional supermarkets also face competition from such retailers as Longs, Daiei, Grocery Outlet, plantation-era general stores, ethnic- and health-food markets, superettes, neighborhood markets and convenience stores.

According to research by Willard Bishop Consulting Ltd. and Competitive Edge, the market share of conventional supermarkets is projected to fall from about 20 percent in 1999 to about 15 percent in 2004.

Family ties weaken

Given these pressures, several local supermarket owners say the sale or merger of some of Hawai'i's 15 or so remaining kama'aina grocery operators is inevitable.

"There's going to be consolidation in this market eventually," says Wayne Teruya, outgoing president and chief operating officer of Times.

Officials with California-based Safeway, the country's third-largest supermarket operator and the second-largest in Hawai'i, declined to discuss grocery competition in the state.

But nationally the company has fueled its continued growth over the last five years by merging with or acquiring at least five chains on the Mainland. Some analysts say Safeway has to keep up the pace to meet growth expectations.

Still other pressures face some local supermarket operators.

Ron Shima, president of Shima's Market in Waimanalo, is a second-generation operator of the family supermarket.

Shima notes that his store will be continue to be around, but there is not a third generation waiting to carry on the tradition.

"We're a dying breed," he says.

Too small to compete

The local supermarket industry was relatively stable for roughly 30 years leading up to the late 1980s when big-box retailers began entering the market. The expansion of Costco, Wal-Mart, Kmart, Sam's Club, combined with a stagnant economy for most of the last decade, prompted a painful shakeout of smaller grocery retailers.

Big Island grocer and convenience store operator Sure Save Super Market Ltd. was forced to reorganize under bankruptcy in 1999, and went from 14 stores, including five supermarkets, to one supermarket and five smaller stores.

Others caught in the competitive crunch have shut down completely, such as Lindy's Foods, a full-service market in Hau'ula that called it quits after 37 years last April. Last month, T.K. Super Market in Happy Valley, Maui, closed after 52 years in business.

A primary factor cited by many of the smaller past and present supermarket operators has been that the cheapest price they pay for product is the same price at which big-box retailers sell the item to consumers.

Ken Okimoto, whose family owns Nanakuli Super and Waianae Store supermarkets, said Kmart in Kapolei recently offered to sell him Coca-Cola below his regular cost. "It's overwhelming," he said. "We're exhausted from economizing."

Saturation of stores

Many see little room for expansion in Hawai'i. Foodland, Star and Safeway have opened a total of three stores in the past two years, though Foodland plans one this year in Waimea on the Big Island where there used to be a Sure Save.

"Hawai'i is over-stored in a lot of ways," Foodland's Wall says, as Porter adds: "The only way to grow is to cannibalize your competitor."

The Sept. 11 terrorist attacks dealt the industry another blow, as thousands of residents suffered wage and job cuts, and consumers cut back on grocery shopping.

"Everyone thinks that people have to eat, but people are more careful about what they're buying, and watching their budgets more," Wall says.

Not ready to give up yet

Despite the challenges, many less-efficient supermarket operators have been able to survive because they own their own real estate, which in many cases has been in the family for decades and is mortgage-free.

"They can exist no matter what because everybody else has overhead," Botti said.

Norman Fujioka, operations manager of Fujioka Super Market in Hale'iwa, says it has been easier for his company to compete since acquiring the property under the market several years ago.

But he also says he and his brothers will probably be the last generation to operate the store established by their grandfather nearly 100 years ago.

"We're dinosaurs," he says. "After this generation goes, we're pretty much gone."

Still, not everyone is convinced that more acquisitions or mergers are coming. They note that the Times sale was made, in part, to let members of the Teruya family and other aging shareholders realize a return on their investment in the 53-year-old company.

Wall, who is passionate in her belief that local ownership is better for communities, says the Times sale is sad, but she does not believe more acquisitions are inevitable.

Wall notes that Foodland is not interested in selling its chain. Despite its dominant market position, it also has not been a target for acquisition, she says.

John Fujieki Jr., chairman and chief executive officer of Star, says he also is not considering selling the chain.

But, he adds: "It's hard to do business in Hawai'i," he says. "It's the toughest it's ever been."

Reach Andrew Gomes at agomes@honoluluadvertiser.com or 525-8065.