Retail Memo: Los Angeles, CA-Based Smart & Final to Significantly Grow its New 'Extra' Food and Grocery Retailing Format This Year in the Western U.S.

Los Angeles, California-based Smart & Final Stores LLC is planning to expand the number of it's new hybrid supermarket-warehouse-style "Extra" format stores, the first of which opened in August, 2008 in Southern California.

Smart & Final currently operates eight "Extra" stores - six in Southern California (four in Orange County and the one in Bellflower pictured above) and two in Northern California's San Francisco Bay Area, in Pleasanton and Fremont. The stores are nearly double the size of the retailer's non-membership warehouse stores -- 25,000 -to- 35,000 square feet, compared to about 17,000 -to-18,000 square feet for the traditional non-membership warehouse-style stores. Like Smart & Final's warehouse format stores, the Extra stores are non-membership.

The "Extra" stores also carry about 4,000-4,500 more items -- including many more in single-unit sizes -- than Smart & Final's non-membership warehouse-style stores do, which cater to small businesses and restaurants, as well as to individual consumers.

The "Extra" target customer is the individual consumer rather than the institutional customer, which is the primary customer segment for Smart & Final's non-membership warehouse stores.

In addition, the "Extra" format puts a greater emphasis on fresh foods, including produce (the fresh produce departments are in the 4,000 -to- 5,000 square foot range), meats, deli and prepared foods, compared to the non-membership Smart & Final warehouse-type stores. The Extra stores also carry a small assortment of natural, organic and specialty food and grocery products.

The "Extra" Stores are designed to be more appealing to shoppers than Smart & Final's warehouse-style stores are. This includes having an enhanced interior design package and softer colors, more traditional style shelving, improved and more colorful in-store signage, and more shopper-appealing merchandising and displays. The stores are a hybrid supermarket-warehouse store in format but look more like a traditional supermarket in design than they do a traditional warehouse store. Having visited a couple of the stores, we agree they achieve that design enhancement over the traditional warehouse-format stores.

Smart & Final appears pleased enough with the performance of the current eight stores that it's planning to open a number of new "Extra" format stores in 2009 in Southern California, Northern California, and in other states in the Western USA where it operates its 242 non-membership warehouse stores. Those states Smart & Final operates in are, in addition to California: Oregon, Washington, Arizona, Nevada and Idaho. The retailer also operates stores in northern Mexico in a joint-venture arrangement.

Likely look for an "Extra" format test store in Arizona and one in Nevada in 2009 -- and potentially additional stores in both states before next year is out. These are two states where Smart & Final operates its non-membership warehouse-style stores but has yet to open any of its new "Extra" format stores.

In addition, Smart & Final plans to open at least one new "Extra" store in Northern California's San Francisco Bay Area, in the city of Brentwood, and another in the Central Valley city of Stockton, which is about 35 miles from Brentwood, according to a previously published report in the Sacramento Business Journal.

We've also learned Smart & Final is looking for additional locations for 2009 in Southern California and in Northern California, including in the Bay Area and the Sacramento region. The Sacramento Business Journal report mentions this, as have a number of our sources, along with a couple of other previously published reports.

Further, the retailer also has plans to convert some of its existing Smart & Final banner non-membership warehouse format stores into Extra stores in 2009. It's likely some of these stores could be in Arizona and Nevada, along with in California, in addition to the company converting some its traditional non-membership warehouse format stores in Oregon, Washington and Idaho into the new format on a case-by-case basis, since it would make sense to do so wherever the company operates existing Warehouse stores.

We suggest a good candidate for such conversion is the Smart & Final Warehouse store in downtown Oakland, California. Since the store was built many years ago, the neighborhood has changed much. There have been numerous new residential developments built over the last few years, resulting in thousands of new residents in the area. As a result, the downtown Oakland area near Jack London Square where the Smart & Final Warehouse-style format store is built is understored in terms of supermarkets. We believe converting the store into the "Extra" format store presents and opportunity for the retailer, as well as add an important food retailing venue to the understored neighborhood.

Tesco's small-format Fresh & Easy Neighborhood Market was planning on locating one of its grocery and fresh foods stores nearby the existing downtown Oakland Smart & Final non-membership warehouse store. But the company pulled out, siting problems with the building it had panned to convert into one of its 10,000 -to- 13,000 square foot Fresh & Easy markets. It does have two other stores thus far planned for Oakland however.

We think Smart & Final could open as many as 25-35 new "Extra" stores, many of them conversions of existing non-membership warehouse format stores, mostly in California, but also in Arizona, Nevada and the other western states, in 2009.

Smart & Final becoming a multi-format food and grocery retailer

In addition to its now six month month old "Extra" format, the first store of which opened in August of this year in Southern California, Smart & Final owns the Henry's Farmers Market natural and organic foods stores in Southern California and the Sun Harvest Markets natural foods stores in Texas, which it operates as a separate division from Smart & Final, with its own headquarters in San Diego, but also has integrated into the company where synergies makes sense.

There are currently 36 total stores, about 26 Henry's banner stores (all located in Southern California) and about 10 Sun Harvest banner natural and organic foods markets, which are all located in Texas.

Smart & Final acquired the Henry's-Sun Harvest stores from Whole Foods Market, Inc in 2007. The stores were part of Whole Foods' acquisition of Wild Oats Markets, Inc. Wild Oats operated the Henry's and Sun Harvest stores, which were sort of a hybrid natural and specialty foods format, separate from its flagship Wild Oats' banner natural and organic foods stores.

The Henry's and Sun Harvest markets didn't fit into Whole Foods Market's strategic plans for Wild Oats, plus it wanted to raise some cash to aid in its acquisition, so the natural foods grocery chain sold the stores to Smart & Final, which itself is owned by investment firm Apollo Management LLC, which bought Smart & Final in May, 2007. Apollo/Smart & Final acquired Henry's and Sun Harvest from Whole Foods just a couple months later.

The Henry's Farmers Market and Sun Harvest stores were rather run down by the time Wild Oats sold to Whole Foods. However, since acquiring the stores from Whole Foods last year, Smart & Final has invested money in them and improved them dramatically, focusing the stores back into a more focused natural and organic foods format and vastly improving how the stores look, along with their merchandising, product selection and pricing.

Smart & Final is in the processes of remodeling a number of the Henry's and Sun Harvest stores and plans to open a few new Henry's Farmers Market units in Southern California next year.

With its flagship 200-plus Smart & Final smaller-format non-membership warehouse type stores, its Henry's and Sun Harvest natural foods division, and now its Extra format, Smart & Final LLC is strategically branching out into a multi-format and multi-category food and grocery retailer, and is clearly indicating a big part of its future involves being as individual consumer-focuses as it's been institutional customer-focused throughout its history.

Smart & Final is well capitalized in terms of its ability to grow the Henry's and Sun Harvest chains in the natural and organic grocery retailing segment. In fact, it has the ability if it desires to become a major player in the sector, in our analysis.