Grocers on defensive as dollar stores rise

By Nicole Maestri and Lisa Baertlein - Analysis

SAN FRANCISCO/LOS ANGELES (Reuters) - When it comes to buying food, Juan Bugueno is shopping around and finding bargains in dollar stores, a worrisome trend for supermarkets.

Bugueno, 42, shops the Albertsons, Ralphs and Whole Foods grocery stores in his Venice, California, neighborhood -- but prefers the dollar store for staples like vegetables and eggs.

"It's cheap and it's good," said Bugueno, who among other things was buying bagged spinach and garlic at a busy 99 Cents Only Store (NDN.N) instead of at a Whole Foods next door.

In addition to heightened competition from top U.S. food seller Wal-Mart Stores Inc (WMT.N), grocers must also defend their turf against scrappy dollar stores that are using food to tempt shoppers like Bugueno, amid the recession.

Family Dollar Stores Inc (FDO.N) has added 200 new food products, like Triscuit crackers and Kraft salad dressing, while Dollar Tree Inc (DLTR.O) is installing freezers and coolers to sell ice cream, sandwich meat and frozen dinners.

The retailers are trying to steal "fill-in" shopping trips from grocers, hoping consumers will pop into their stores mid week when they run out of milk or eggs or pasta.

"Dollar stores... are an increasingly daunting threat to especially regional and neighborhood-type independent grocers," said Gary Giblen, an analyst at Goldsmith & Harris.

With many consumers losing jobs or seeing their hours cut to part time, shoppers have more time and greater incentive to compare prices and scour a variety of stores for deals.

"People in that position have more time on their hands and have more time to seek the opportunistic buys at a dollar store," Giblen said.

TRYING NEW BRANDS IN NEW PLACES

Consumers have been curbing spending on nice-to-have items like clothes or jewelry and focusing on basics, like food.

While that should favor grocers, it has only intensified competition as warehouse clubs, like Costco Wholesale Corp (COST.O), discounters like Wal-Mart and dollar stores are all wooing price-conscious shoppers with promises of cheap food.

Supermarkets ranging from Ralphs owner Kroger Co (KR.N) to Safeway Inc (SWY.N) to upscale Whole Foods Market Inc (WFMI.O) are on the defensive. Among other things, they are investing in their own store brands, which often rival name-brand products in quality and sell for lower prices.

However, Richard Hastings, consumer strategist at Global Hunter Securities, said that strategy has its drawbacks.

"There's the risk that the shopper could swap over to private label anywhere else ... and buy private label at an entirely different company," he said.