Stater Bros. Markets has been the hometown grocer in Southern California since 1936. It is California's largest privately owned grocery chain with 161 stores and sales last year of $3.7 billion. It has survived earthquakes, World War II and the explosive growth of Southern California. The question is, will it survive Wal-Mart?

For now, its 100 stores in fast-growing San Bernardino and Riverside counties have 50 percent market share, says CEO Jack H. Brown. It has carved out a sizeable niche in the Southern California market and has an aggressive expansion plan that includes five new locations in 2006 and ten stores every year after that.

The success of Stater Bros. has not gone unnoticed by competitors. It has stubbornly remained private despite offers from most major grocery players in California, say analysts.

But the lucrative Southern California market is also being sought by Wal-Mart. The world's largest retailer is eyeing a 20 percent share, say analysts.

Stater Bros. is convinced it can stand out by offering low prices, better services (four butchers, for example) and loyalty. “We are the home team,” says Brown. “We know this area without question far better than our competition.” The company plans to stay in its existing trade area, covering the Inland Empire, Los Angeles, San Diego and Orange counties where it is already well-received.

Currently, Wal-Mart only has three super centers in Southern California. But even in a market with a higher resistance than most, Wal-Mart is showing its normal tenaciousness. “We are certainly very interested in the entire state, especially Southern California, as opportunities present themselves,” says Daphne Moore, community affairs director for Wal-Mart. “Stores that we are operating in the area are very successful showing the demand for our product.”

Taking on target, too

Wal-Mart's effects on the market were already felt in late 2003 when grocery store employees went on strike as many companies reduced benefits to compete with the behemoth. “Will Wal-Mart affect them (supermarket owners)?” says Bernie Haddigan, a managing director for Marcus & Millichap Real Estate Investment Brokerage Co. “Sure! Wal-Mart is going to affect everyone.”

And if that's not enough, Target Corp., already a presence in Southern California, announced it's going to expand its food offerings.

One advantage it has is that trucking costs are lower than other supermarkets. A Stater Bros. store is on average about 40 miles from its distribution warehouse, whereas other competitors average 100 miles, according to Brown.

Because of the shorter distances, Stater Bros. executives say they can keep their stores better stocked with about 20 deliveries a week; which helps to set them apart in terms of quality from their bigger competitors. Stater Bros. is also looking to further cut costs by building a new $225 million distribution center right in the Inland Empire, reducing its centers from four to one. The new one will be closer the 100 stores it has in that area.

Pleasures of being private

Analysts that follow the company also say that being a private company gives Stater Bros. a degree of flexibility. For example, the company significantly branched out in 1999 by buying 43 Albertson's, which doubled the company's stores in Orange and Los Angeles counties. It also enabled the company to enter San Diego County. “Had we been public, it would have been quite a challenge to sell this idea to the board,” says Brown.

While many market analysts believe Wal-Mart and Target will eventually be a presence in Southern California, they are optimistic about Stater Bros. ability to survive the rapid rise of the big-box discounters. “I have to tell you I'm in investment brokerage and I sell a lot of grocery-anchored shopping center and historically Stater Bros. has been incredibly tenacious in keeping market share,” says Dixie Walker, senior vice president of Grubb & Ellis Inc.'s Newport Beach office.