PLEASANTON -- The days of the conventional supermarket are numbered.

Safeway's announcement last month that it was in talks to sell itself is the latest sign from the troubled grocery industry that supermarkets have fallen out of style. A sale of the nation's second-largest grocery chain, with a stronghold in the Bay Area, would reshape the industry, close stores across California and the Southwest, and transform Safeway into a neighborhood grocer that more closely resembles Trader Joe's, according to analysts and industry watchers.

Reports Wednesday indicated that a sale to New York-based private equity firm Cerberus Capital Management could be finalized this week.

"The supermarket was built on the principle of, if you're 8 years old to 80, we carry everything in the store for you," said Frank Dell, president and chief executive of consulting group Dellmart & Co. and a 30-year industry watcher. "I just don't see bigger as being better anymore."

Smaller neighborhood markets that tout locally sourced meat and organic produce and attract customers with friendly service, ambience and one-of-a-kind items are pulling customers away from mainstream supermarkets, experts say. Analyst Scott Mushkin of Wolfe Research said Arizona-based Sprouts Farmers Market is "firing on all cylinders" with huge sales growth.


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Trader Joe's has earned a loyal following with its private label. The small-format stores have a limited selection, but shoppers know it's the only place they can get Trader Joe's brand couscous or kale chips, which industry experts say keeps them coming back.

Safeway has private label products, including organics, which last year reached an all-time high of 28 percent of total grocery sales. But it's also Trader Joe's small and clean stores, lower prices and helpful staff that has made it the rising star of specialty grocers.

"When I go into a Trader Joe's, I never want to leave," said Phil Lempert, editor at Supermarket News and a longtime industry analyst. "I want to work there. I want to wear the shirt and ring the bell."

Pleasanton-based Safeway, on the other hand, has been panned for neglected stores and ranked by industry publications as having among the worst customer service in retail.

Even Wal-Mart has pivoted, from big-box to neighborhood market stores -- about a quarter the size of its Supercenters -- that emphasize groceries. Between discount retailers, drugstores, the local farmer's market and the Whole Foods or Trader Joe's around the corner, traditional supermarkets have lost 15 percent of the grocery market, and are expected to cede even more by 2016, according to industry reports.

"At one time the supermarket was the place to shop four times a week," Dell said. "Then along came Costco, and along came this little guy named Sam Walton, then when I see them open a Trader Joe's in this town a line forms around the block."

A Safeway deal with Cerberus is not final and neither will comment on the matter. Bloomberg has reported that supermarket company Kroger has contacted Safeway and Cerberus about joining the deal; Kroger declined to comment.

If a sale is finalized, some Safeway stores and distribution centers would probably be closed or sold, industry experts say. Karen Short, an analyst with Deutsche Bank, said she expects Cerberus would spin off most of the Safeway stores in Colorado, Texas and Arizona -- states where Safeway is outperformed by competitors.

Cerberus already owns several grocery chains, so buying Safeway would create antitrust issues and probably force Cerberus to spin off several stores in California, said Samina Karim, a corporate restructuring expert at Boston University.

"Cerberus would be the dominant grocery holder in California," Karim said. "They are judging which locations make the most sense to hold onto."

Under a Cerberus deal, the remaining Safeway stores and Albertsons stores -- which Cerberus bought in two buyouts, in 2006 and 2013 -- could be combined to form regional grocery operations throughout the Western U.S., transforming Safeway stores into neighborhood-style markets with local flair and more selective offerings, according to some experts.

"Do you really need 100 brands of olive oil staring at you?" Lempert asked. "We want fewer choices in certain things."

If Kroger bought into the deal, it also would probably have to close stores to meet antitrust regulations.

Although Kroger is the nation's largest grocery chain, it acts more like a regional grocer. The company has outperformed Safeway, Dell said, because it allows each store to tailor its offerings to local shoppers, and stock stores with local brands. Dell said that's the direction Safeway needs to move in -- more gluten-free items in San Francisco stores and more locally made barbecue sauce in Georgia.

Safeway has tried to tailor stores to customer preference, such as adding more Latino or Asian food in places with larger ethic populations, said spokeswoman Teena Massingill. And Safeway in 2012 began reorganizing stores to make them easier to shop, placing ingredients in categories and lowering shelves. The company remodeled 177 stores with this new design and expects to complete 200 more this year, Massingill said.

Safeway profits have been consistent -- between $10 billion and $12 billion each year for the past few years -- although many think former CEO Steve Burd's strategy of penny-pinching and discouraging experimenting and creativity held the company back, Short said.

Since news of the sale was announced, Safeway stock has jumped from about $34 a share to more than $39, giving the company a market value of about $8.9 billion.

"When people see Whole Foods they know what the company stands for," said James Patterson of San Francisco, who owns about 150 Safeway shares. "Safeway is a faceless brand, it's a faceless store. I think Cerberus knows what's it's doing, and I think it's going to give Safeway a new brand."

Contact Heather Somerville at 510-208-6413. Follow her at Twitter.com/heathersomervil.