Small-Format Food Retailing Memo: Breaking News: Safeway Negotiating For Second 'The Market' Location in San Jose, California

Safeway Stores, Inc. is negotiating with the developer of the 88, a new 22-story high-rise condominium tower in downtown San Jose in Northern California's San Francisco Bay Area (pictured at left), to put on of its new "The Market" small-format grocery stores on the ground floor of the urban residential tower, Natural~Specialty Foods Memo (NSFM) has learned.

NSFM received an email last week from a regular reader who lives in San Jose. The reader said in the email he was recently touring the new high-rise as he's considering buying a condo in the building. While touring the new residential tower, the reader said the property leasing agent told him Safeway would be putting an "upscale mini-Safeway" on the building's ground floor.

The 88 high-rise residential tower, located on San Fernando Street in downtown San Jose, is being developed by a partnership of San Francisco-based Wilson, Meaning Sullivan Group and CIM Group. The residential tower will open this month.

Despite the residential housing bust hitting most parts of the U.S., downtown San Jose is experienced a boom, with about 1,000 new residential units coming on line in the last year. There are about 4,000 more in various stages of development for the downtown.

Safeway isn't confirming the negotiations with the high-rise condominium developer. However, NSFM has checked with two commercial real estate industry sources in the region--one was the one who gave us the initial tip about Safeway looking for locations in the San Jose area for a small-format grocery store concept which we published in a piece in December, 2007--and both confirmed Safeway and the developer of the 88 urban residential tower in downtown San Jose are negotiating over Safeway's putting a "The Market" small-format grocery store on the building's ground floor to serve as the retail anchor of the project.

As we reported last year, Safeway Stores, Inc. hired the Cornish & Carey commercial real estate firm to find the grocery chain up to an initial five locations in the South Bay Area region for its "The Market" format stores. It looks like the new 88 condominium high-rise residential tower in downtown San Jose will become one of those five sites, based on the information our sources have provided.

Unlike Trader Joe's and Tesco's Fresh & Easy Neighborhood Market small-format grocery stores, both which sell nearly 100% pre-packaged produce, Safeway's "the Market by Vons" merchandises most of its produce in bulk, except for some common packaged items and value-added ones like salad mixes. Also notice the store has high-profile shelving rather than warehouse-style shelves like Trader Joe's and Fresh & Easy both have. Each gondola end-cap also has a dark-stained wood end-cap fixure as you can see in the photograph above. (Photo: Courtesy Los Angeles Times.)

As we reported here from the store's grand opening, Safeway opened its first small-format "The Market" format store in Long Beach in Southern California on May 15. That 15,000 square foot store, called "the market by Vons" because Vons is the banner Safeway operates in Southern California, is located in a former Vons supermarket building which the grocer decided not to convert to its Lifestyle supermarket format--which it's doing to all of its supermarkets in the U.S.

Tesco's Fresh & Easy Neighborhood Market plans to open 18 of its small-format, combination grocery and fresh foods grocery markets in the San Francisco Bay Area beginning either at the end of this year or more likely in early 2009. The leases for the 18 stores are inked, and the stores are being either built or empty buildings the retailer acquired for the stores are in the process of being renovated for the Fresh & Easy format.

Four of the 18 Bay Area Fresh & Easy stores will be in the South Bay region: two in San Jose, one in nearby Sunnyvale, and one in Mountain view.

Any wonder Safeway is opening four -to- five of its small-format grocery stores in the same region. [Read these previous NSFM pieces for some analysis.]

Inside "the Market by Vons" in Long Beach, California. The 15,000 square foot store opened on May 15. Some are calling it a "mini Whole Foods." It's a logical small-format extension or version of Safeway's Lifestyle format though.

During the grand opening of "the Market by Vons" in Long Beach on May 15, Safeway Stores' Rojan Hasker, president of Lifestyle stores and new concepts for the grocery chain, said the retailer is currently looking at an initial 25 locations to start for its small-format "The Market" format grocery stores. Not all those locations will be in California. Some also will be in the food retailer's other market regions such as Arizona, the Pacific Northwest, Colorado and elsewhere where it has supermarkets operating under various banners like Dominicks, Genardi's and Carrs.

The way "The Market" format stores will work is they get their full name based on the banner Safeway operates in a particular market, hence "the Market by Vons" in Southern California. In Northern California, as well as in the Pacific Northwest, Colorado, Arizona and the Washington D.C./Maryland/Virgina region, all markets where Safeway operates under the "Safeway" banner, the small-format stores, which average about 15,000 -to- 20,000 square feet, will be called "the Market by Safeway." In Chicago they will be "the Market by Dominick's;" in Alaska "the Market by Carrs," and so on.

The Long Beach "the Market by Vons" is getting a generally positive but also somewhat mixed reaction by customers. Most store shoppers we've spoken with say they like the format, it's design, feel and ambiance. Most also said they liked the product selection: a combination of basic store brand and national brand grocery items, specialty, natural and organic foods, fresh produce and meats, cheeses, wines and some non-foods items. "The Market" format also has a cafe called the "Signature Cafe," which is the name of Safeway's upscale store branded fresh, prepared foods items. The cafe features fresh, prepared foods for take out.

The "Signature Cafe" inside the Long Beach, California "the Market by Vons" store.

A number of customers of "the Market by Vons" weren't too pleased with the pricing however, saying it is much higher than Trader Joe's or Tesco's Fresh & Easy in their analysis. A few even mentioned they thought the pricing higher than a traditional Vons supermarket in Southern California.

We compared the prices on some items from "the Market by Vons" with those at a Trader Joe's outlet and a Tesco Fresh & Easy store not to far away from the Long Beach store. The prices on "the Market by Vons" items were higher; about 13% higher than the comparable items at Trader Joe's and about 15% higher than those comparable items at Fresh & Easy.

However, "The Market" format is much more upscale than either Trader Joe's or Fresh & Easy. It's a small-format extension of Safeway's evolving Lifestyle format, which is looking more like a Whole Foods Market store with each new Lifestyle format store the retailer opens. Therefore, we aren't sure of Safeway is too concerned that their prices are 15% or so higher than the two small-format food and grocery retailers mentioned above. While we were in the store, a number of shoppers referred to it as a "mini Whole Foods market."

In fact, Safeway's communications vice president Brain Dowling told us the positioning of "The Market" small-format stores is as secondary, "fill-in" shopping venues rather than as primary ones like Tesco wants its Fresh & Easy small-format grocery stores to be, or as specialty and natural foods category-killer store like Trader Joe's markets are.

And of course, the first store, "the Market by Vons" in Long Beach, has only been open about two weeks, which gives Safeway plenty of time to play around with its retail pricing scheme, as well as the format's merchandising selection.