Staff Reporter

The parent company of Ralphs supermarkets believes in market penetration.

Just take a two-square-mile area of L.A. that’s bounded by La Cienega and La Brea boulevards on the east and west and Sunset and Wilshire boulevards on the north and south.

In that area alone there are six Ralphs.

Such a proliferation reflects a larger trend on the national grocery scene, in which major chains are building new stores and remodeling older ones to create networks of mega-stores.

But how many Ralphs can L.A. support?

Analysts say the chain can continue to snatch market share away from other chains and even from specialty retail stores including bakeries, delicatessens, drug stores and more. But growth will taper off when the new-and-improved stores reach the point where they start taking away customers from other nearby Ralphs markets.

Also putting a damper on growth potential is the company’s high level of debt the result of its 1995 acquisition by Yucaipa Cos. Analysts say it’s only a matter of time before Ralphs will have to slow down its capital expenditures and pare down some of its $1.2 billion in senior debt.

The company spent about $100 million on capital improvements in 1996 and has earmarked another $100 million for similar improvements in 1997.

The ongoing expansion dates back more than three years and is scheduled to continue for the next few years, said Pat Barber, group vice president of real estate.

“The general plan is to replace all the older stores with newer ones over an extended period of time,” Barber said. “There are approximately 60 stores (statewide) that are relatively small by our standards today.”

Much of the expansion in the last year comes at the expense of its biggest competitor, Vons Cos., now in the midst of a friendly takeover by Safeway Inc., and at the expense of smaller chains and independent single-outlet grocery stores.

The disappearance of smaller chains is exemplified by the Ralphs-Yucaipa merger. In that deal alone, Yucaipa consolidated the Food 4 Less, Alpha Beta, Boys markets, Viva and Ralphs supermarket chains under the Ralphs and Food 4 Less banners.

Three of the six Ralphs stores in the crowded La Cienega-to-La Brea corridor are former Alpha Beta stores that have been converted.

In the process of swallowing up smaller chains, Ralphs’ share of total L.A.-area grocery expenditures has gone from 14.1 percent in 1993 to 21.8 percent today. During that time, the number of Ralphs stores in the L.A. metropolitan area has grown from 75 stores to to the current 144, according to Trade Dimensions, which tracks grocery store market share data.

In 1996 alone, Ralphs opened 26 new-and-improved Ralphs and Food 4 Less stores; closed down 26 older, smaller outlets; and remodeled another 30. The company plans to continue that aggressive campaign into 1997.

Mike Rowan, senior analyst at Moody’s Investors Services, said that the total number of Ralphs stores has remained relatively constant since the acquisition. What’s changed is the growth in the overall square footage of all Ralphs stores.

“Part of what’s driving the stores to larger size is service departments like bakeries, delis, prepared foods and floral departments,” he said.

The recent flurry of new-store development follows 20 years of relative inactivity in Southern California, according to Dick Carter, a real estate broker and retail specialist at Beitler Commercial Realty Services in Brentwood.

“We’ve seen a lot of apartments and condos developed in L.A. over the last 20 years, but we haven’t seen a big increase in the sheer number of grocery stores,” said Carter.

Carter said Ralphs can continue to expand at its present rate for the short run, though it will have to be more selective in choosing new sites within highly developed areas, lest its stores start to compete with each other.

The bigger growth opportunities, meanwhile, will come in outlying suburban areas such as the Santa Clarita Valley and Inland Empire, where Ralphs still has a relatively small presence.

“When you look at a highly leveraged supermarket chain like Ralphs the issue becomes how long can you continue to invest before paying down some of your debt,” said Rowan. “These are huge capital expenses, but at some point it will get to where they have to start to deleverage.”

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