Oct. 11--Dominick's parent Safeway Inc. said Thursday it will leave the Chicago market by next year.
What happens next for the 72 Chicago area Dominick's locations is still unclear. Safeway said it's trying to sell as many of the stores as quickly as it can, adding that it's likely to fetch multiple buyers as opposed to a single grocer that would take over every location.
Most of the real estate behind the Chicago stores is leased, not owned. Only about 15 to 20 of the buildings are owned by Safeway, the company said.
The decision comes as Pleasanton, Calif.-based Safeway reported third-quarter net income that tumbled to $65.8 million from $157 million a year ago. In the first nine months of the year, the Dominick's unit lost $13.7 million before taxes of $13.7 million.
A source close to the situation said Dominick's, which was purchased by Safeway for $1.2 billion in 1998, has been losing market share in the Chicago area for some time. High-end grocers such as Plum Market and Whole Foods have been gaining ground in the region while discount retailers including Target and Wal-Mart have been increasing their grocery offerings, further intensifying competition.
In the Chicago area, according to a knowledgeable source, Jewel, which also was sold earlier this year, has a 29.1 percent market share; Wal-Mart, 9.4 percent; Dominick's, 8.7 percent; and Costco, 7.3 percent. As recently as the late '90s, Jewel and Dominick's controlled two-thirds of the market, the source said.
Safeway issued a release late Thursday afternoon saying it had already sold four Dominick's to the operator of Jewel-Ocso stores. They are at 1340 S. Canal St. and 2550 N. Clybourn Ave. in Chicago; 14200 S. Bell Rd., Homer Glen; and 1340 Patriot Blvd., Glenview.
"We're excited to grow our presence in the Chicago area with the four stores that we're acquiring now. As additional opportunities present themselves, in Chicago or elsewhere, we'll always take a look." Jewel-Osco said in an emailed statement.
A manager contacted by the Tribune said employees were informed Thursday that the decision whether to sell the stores one-by-one of as a group is still undecided. The manager declined to be identified.
Safeway President and CEO Robert Edwards, speaking on the company's earnings call, said the Chicago market is "fragmented" and noted the increased competition from new companies. Safeway said the Chicago stores are lowest performing in the company.
"We'd love to find a buyer for 72 stores, but it probably will play out in pieces," Edwards said.
Jim Hertel, a managing partner for retail consulting firm Willard Bishop, was surprised by the news.
"If you had asked me yesterday, I would have said that Dominick's would have been one of the strongest of the operating divisions" of parent Safeway, he said. "There's relatively little price competition in Chicago compared to some other cities," which have, for example, more Wal-Mart Supercenters that sell groceries, Hertel said.
"If you think about Chicago, there are relatively few supercenters, and Dominick's major competitor is Jewel, which is in a holding pattern itself given the change in ownership."
In March, Jewel was sold to a group of financial buyers that included Cerberus Capital Management.
In an earnings call on Thursday, Safeway's chief executive said his goal was "to sell all or as many of the stores as we can as quickly as we can."
Hertel said that, when a business talks about selling things as quickly as possible, it suggests that they need to raise cash for something.
Dominick's is challenged in some ways, but I would not have said it was in a significant cash crunch," Hertel said.
Potential winners if Dominick's carries through with plans to pull out of Chicago include Jewel, "which will see a respite from a major competitor, and anyone who lost out to Cerberus when Jewel was sold," Hertel said. "Don't overlook Roundy's, which has successfully opened many Mariano's supermarkets in Chicagoland over recent months."