Bellingham-based Haggen growing from 18 stores to 164

The little Bellingham grocery chain Haggen is about to morph into a major West Coast retail force with nine times as many stores, reaching from the Canadian border to Southern California.

The unlikely expansion is the result of a $9.4 billion merger between Albertsons and Safeway; the deal closed last week. To pacify federal antitrust regulators, the companies agreed to jettison 168 stores, 146 of which will be acquired by Haggen.

Before this lopsided deal, Haggen (rhymes with “pagan”) operated just 18 grocery stores in Washington and Oregon, plus a stand-alone pharmacy in Bellingham.

The transition of 26 new stores in Washington state starts this month. The entire process of converting scores of Albertsons, Pavilions, Safeway and Vons stores in Oregon, California, Arizona and Nevada, is expected to end in June.

It will be the first time since Fred Meyer’s takeover of QFC in 1998 that a big regional grocer will be based in Washington state.

“It’s a big deal,” says John Clougher, one of the company’s two CEOs, who heads the company’s Pacific Northwest operations.

His domain will expand to some 64 grocery stores, including nine in King County.

A separate CEO, Bill Shaner, was hired to run the company’s new Pacific Southwest territory. That division will be headquartered, for now, in Irvine, Calif.

Haggen is expanding its corporate staff in Bellingham from about 130 to 300 in order to handle the needs of its ballooning workforce — which has quintupled to 10,000.

Clougher, a former Whole Foods executive and one-time CEO of the upscale San Francisco Bay Area chain Andronico’s Community Markets, said that despite the daunting leap ahead, “We’re ready to go.”

Haggen’s sudden ascent into the ranks of large regional grocers underscores the turmoil suffered by the grocery industry, a low-margin business assailed by competition from large discounters such as Costco and Walmart, specialty grocers such as Whole Foods and online retailers.

“There is high risk and possibly high reward,” said Burt Flickinger, managing director of retail consultancy Strategic Resource Group. He estimates that the acquisition will put Haggen among the top five grocers in the Western U.S., with annual sales reaching up to $2.5 billion.

It seemed a surprising step for Haggen, an 82-year-old company that was a struggling family business when it was bought in 2011 by Comvest Partners, a private investment firm from Florida.

Since then the chain has closed 12 underperforming stores and shrunk its payroll from 3,100 to about 2,000. It also added “Northwest Fresh” to its banner.

The amount Haggen’s owners paid for the 146 added stores remains undisclosed. Flickinger estimates that the deal could have cost $1 billion — or even $2 billion, if it included ownership of store real estate.

Haggen focuses on fresh, locally sourced foods, an ample selection of seafood, organic and gluten-free products as well as specialized kitchenware. It’s betting that recipe can work in new areas even as other grocers endure volatility.

“We believe we can compete that way — expanding fresh, expanding natural, expanding specialty,” Clougher says.

Growing so quickly poses a set of hurdles, from distribution to payroll. Grocery stores that employ hundreds of people and stock tens of thousands of items each are complex entities — all the more so if they have different computer systems that need to be integrated, experts say.

Giant grocery distributor SuperValu will be Haggen’s primary supplier in Washington and Oregon, as well as provide information technology and back-office support for the transition.

Unified Grocers, a retailer-owned wholesale distributor that was until now Haggen’s main supplier in the Pacific Northwest, will be the primary supplier for the chain in California, Nevada and Arizona, a deal the cooperative said is worth $750 million in annual business.

A well-known Seattle-based supplier, Charlie’s Produce, will also supply Haggen’s southern region with a newly created Southern California division.

Haggen plans to open a small support center in the Seattle area with 25 to 40 people, and one in Portland as well, Clougher said, adding that the company may end up having close to 4,000 employees in Washington.

But as far as expansions go, rebranding stores is not as difficult as building stores from scratch, because the employees, the managers and most of the hardware will remain in place, Clougher added.

“The two biggest challenges are connecting with the new employees and connecting with the customers, “ Clougher said. “That takes effort, energy and time.”

That challenge will be particularly tough in places like California, Arizona and Nevada, where Haggen is a complete unknown. It hired Pitch, a Southern California advertising agency that has done work for Burger King, Pepsi and NBC, to handle its branding and run a campaign that will include TV, newspaper and radio spots, as well as billboards and digital media.

Haggen’s director of communications for the Pacific Southwest, Moran Golan,declined to divulge the cost but said it would be a “sizable investment to ensure we excite customers, get them into our stores and grow our business in these new markets.”

Adding to the challenge is that Southern California — the nation’s largest food market — is a particularly tough nut to crack. There, Haggen is acquiring 83 new stores currently bearing the Albertsons and Vons banners.

With some of the highest food prices in the U.S., shoppers there flock to discounters like Costco, whose warehouses there are “some of the highest volume stores anywhere in the world,” Flickinger said, adding that Albertsons fared poorly in the region.

He said Haggen can translate into SoCal what has worked well here in the Northwest — good-quality seafood, meat and prepared products, areas in which Albertsons was “mostly mediocre.”

Bigger size comes with perks, too. Foremost is negotiating power with suppliers, which translates into lower costs for Haggen and more promotions for customers, Clougher said. But also it helps establish bigger commitments with local farms and small manufacturers that will help those grow, he added.