By NOLA L. SARKISIAN
Roger Hughes is back in the supermarket business.
The former chairman and chief executive of the 56-store supermarket chain that bore his name has teamed up with three former Hughes Markets executives to open the first HOWS Markets outlet on May 5 in Granada Hills. In June, the retailer will open a store in Santa Clarita, and Hughes and his partners plan to open two stores annually in Southern California for the next five years.
Though any new chain is likely to have a difficult time competing with the giants, some analysts believe that consolidation in the grocery business actually provides a chance for boutique operations like HOWS.
“As you have consolidation, there’s still an opportunity for a niche player,” said Todd Strassman, vice president of investment banking firm Houlihan Lokey Howard & Zukin. “Any given chain focuses on certain markets, and other opportunities aren’t addressed.”
At 21,000 square feet, the Granada Hills store is about half the size of the average Ralphs, though it will be stocked with a general assortment of merchandise and include a deli, bakery, seafood and meat counter. To better compete with Ralphs and Vons Grocery Co., the partners plan to focus on ethnic goods, such as kosher and Asian specialties, and offer customer-service extras like free knife sharpening, home delivery and online shopping.
But there are significant hurdles. Supermarkets run on very low profit margins, and the giants are usually able to undercut smaller players on price because they can wrest lower prices from food manufacturers by buying in bulk.
“On average, the industry runs a post-tax net profit at 1 percent, so the store needs to be confident that it will generate the volume to compensate for the smaller margins,” said Michael Sansolo, senior vice president with the Food Marketing Institute, a trade organization.
Mark Oerum, one of the HOWS partners who was formerly responsible for converting Hughes markets into Ralphs, says the company plans to keep overhead low by maintaining its headquarters at the Granada Hills store and keeping the ranks of middle management small.
“Our employees are empowered and will wear lots of hats,” Oerum said. “A customer won’t have to go to a guy in a white shirt to return a 69-cent can of Del Monte corn. He will be able to go to any cashier for the return.”
Oerum also promises that the new stores will offer competitive prices to the big chains. HOWS (an acronym of the four partners’ names) has signed up with Commerce-based Certified Grocers of California, which is a member-owned co-op that provides wholesale goods to smaller grocery stores and chains such as Bristol Farms, Fedco Inc., Gelsons Market and Jons Markets. The company also supplied Hughes when it first began.
“HOWS is being run by four of the finest in the business. There’s no doubt in my mind that they will succeed. They did it before and they will do it again,” said Tosh Nishimura, who represents the HOWS account at Certified.
The venture is financed entirely by the four partners, who declined to discuss how much they are spending to open the new stores or how much each individual is contributing to the start-up costs.
Sansolo says that the median cost of building a new supermarket, including equipment and interior design, is $81.44 per square foot. But for metro areas like L.A. it would likely be 10 percent higher meaning the 21,000-square-foot Granada Hills store would have cost about $1.9 million (not including merchandise), while the coming Santa Clarita store might cost about twice that.
Oerum says future stores will be built throughout Southern California, but most will likely be in the vicinity of the San Fernando Valley. “We’re trying to go where Hughes had a following. We had a strong presence in the San Fernando Valley,” Oerum said.
Hughes Family Markets was founded in 1952 by Joseph Hughes. Son Roger took over as chief executive in the early 1970s, more than doubling the size of the company during his tenure by acquiring smaller chains and opening new stores.
The 64-year-old Hughes officially retired in 1997, a year after Bellevue, Wash.-based Quality Food Centers purchased Hughes for $360 million. In turn, Portland, Ore.-based Fred Meyers Corp. acquired Quality Food, along with Food 4 Less, the parent of Ralphs Grocery Co., for $3.1 billion. The ultimate deal occurred last October when Cincinnati-based Kroger Co. bought Fred Meyers for about $13 billion in stock, eventually converting the Hughes stores into Ralphs.
By April 1998 Roger Hughes was preparing to launch the new enterprise along with his partners. And Hughes did not sign a non-compete agreement after leaving Fred Meyers, allowing him the chance to start a new grocery business.