Rainbow parent focuses on Chicago for niche grocery stores

Roundy's Supermarkets is at the confluence of two trends that are reordering the U.S. supermarket industry.

Its conventional grocery stores, including Rainbow Foods in the Twin Cities, have been hit hard by low-price competitors from Wal-Mart to Target to Costco. Once the Twin Cities' No. 2 grocery chain, Rainbow is now fourth, and in the past 13 months it has targeted 15 percent of its stores here for closing.

At the same time, a shift toward higher-end, niche stores has created opportunity elsewhere. Roundy's is attacking the Chicago market with a new kind of store, Mariano's Fresh Market, that mixes the best of a Rainbow with higher-end touches more associated with chains like Whole Foods or Lunds and Byerly's.

"Mariano's is kind of an updated version of what the best supermarket should look like," said Scott Mushkin, a stock analyst at Wolfe Research in New York. "It's gotten a lot of buzz."

Last month, Roundy's closed the Rainbow in Columbia Heights and is slated to shut down its Brooklyn Park outlet Sunday. Rainbow supermarkets in Forest Lake, Robbinsdale and Plymouth were shuttered last year, and the chain will have 27 stores in the Twin Cities after Sunday's closing in Brooklyn Park.

Classic conventional grocery stores that serve a broad middle market have come under intense pressure in recent years. Discounters apply continual pricing pressure, while higher-end competitors cater to the more affluent and bigger-spending segment of a store like Rainbow's potential customer base.

"I think [Roundy's] would sell that asset in a heartbeat," Mushkin said, "but I don't think anyone wants to buy [Rainbow]."

In Milwaukee, Roundy's runs another conventional chain, Pick 'n Save, that is also under competitive fire but is the market leader.

The company says it isn't giving up on the Twin Cities. Roundy's said in a statement to the Star Tribune that it remains committed to its current Rainbow locations.

However, it said the grocery market is very competitive with "constant competitive and promotional activity taking place."

"As a result of those factors," the company said, "there are situations that have occurred both in our Minnesota and Wisconsin markets where, despite our best efforts, we could not remain competitive in certain locations."

Rainbow was launched in 1983 by veteran Twin Cities grocery executives Sid Applebaum and D.B. Reinhart. The chain became a big hit within a decade, taking share from market leader Cub Foods.

Rainbow was long ranked second in the Twin Cities to Cub, which still has leading market share. But in the past year or so, Rainbow has slipped and is now fourth after Cub, Wal-Mart and Target, according to Mushkin and Twin Cities supermarket consultant John Dean.

Cub, another middle-market player, has been hurt by the same trends that have afflicted Rainbow. But Cub hasn't closed any stores in recent years, and Mushkin said Cub and its corporate parent, Supervalu Inc., have helped put the squeeze on Rainbow.

Eden Prairie-based Supervalu and Cub "have a huge economy of scale advantage," Mushkin said. Supervalu is a major food wholesaler, and not only does it supply Cub stores, it's the distributor to local chains Byerly's, Lunds and Coborn's.

Roundy's core business — both at Rainbow and Pick 'n Save — "has been declining rapidly," said Karen Short, a stock analyst at Deutsche Bank. But in Chicago, Roundy's is a growth story with its Mariano's banner, named after the company's CEO, Bob Mariano, a Chicago native.

"Mariano's stores are definitely unique," Short said, "and they are making a big bet on those."

Dominick's had long been a major presence in the Chicago market, but its corporate owner, California-based Safeway, opted to pull out of the market late last year.

Roundy's has so far been the biggest buyer of former Dominick's stores, aiming to make Mariano's a larger presence. "That's market share that's ripe for the taking," Short said.