Safeway Inc.'s announcement that it was in talks to sell itself is the latest sign from the troubled grocery industry that supermarkets have fallen out of style.
A sale of the nation's second-largest grocery chain would reshape the industry, close stores across California and the Southwest, and transform Safeway into a neighborhood grocer, according to analysts and industry watchers.
Reports indicated that a sale to New York-based private equity firm Cerberus Capital Management could be finalized this week.
"The supermarket was built on the principle of, if you're 8 years old to 80, we carry everything in the store for you," said Frank Dell, president and chief executive of consulting group Dellmart & Co. and a 30-year industry watcher. "I just don't see bigger as being better anymore."
Eden Prairie-based Supervalu had a similar view. Last year, the grocery purveyor sold its five largest grocery chains, including Albertsons and Jewel-Osco, to Cerberus Capital to concentrate on its wholesale and distribution business, its five traditional, regional grocery chains and its national Save-A-Lot banner.
Save-A-Lot, which has more than 1,300 stores, is Supervalu's crown jewel in terms of potential sales and profit growth.
But Save-A-Lot and other major grocery chains are now competing against smaller neighborhood markets that tout locally sourced meat and organic produce and attract customers with friendly service, ambience and one-of-a-kind items, experts say. Trader Joe's has earned a loyal following with its private label. The small-format stores have a limited selection, but shoppers know it's the only place they can get Trader Joe's brand couscous or kale chips.
Safeway has private label products, including organics, which last year reached an all-time high of 28 percent of total grocery sales. But Trader Joe's small and clean stores, lower prices and helpful staff have made it the rising star of specialty grocers.
"When I go into a Trader Joe's, I never want to leave," said Phil Lempert, editor at Supermarket News. "I want to work there …"
Pleasanton, Calif.-based Safeway, on the other hand, has been panned for neglected stores and ranked as having among the worst customer service in retail.
Between discount retailers, drugstores, the local farmers market and the Whole Foods or Trader Joe's around the corner, traditional supermarkets have lost 15 percent of the grocery market, and are expected to cede even more by 2016.
"When people see Whole Foods, they know what the company stands for," said James Patterson of San Francisco, who owns about 150 Safeway shares. "Safeway is a faceless brand; it's a faceless store. I think Cerberus … [is] going to give Safeway a new brand."