If supermarket outlets ever dominate branch banking, California giants Wells Fargo & Co. and BankAmerica Corp. will get credit for leading the change.

The two San Francisco-based banks are opening more in-store branches than any other institutions in the country. In the process, grocery stores are becoming the front line of their battle for market share and profits in California and elsewhere in the West.

Bankers around the country are watching closely, even as they move ahead with their own in-store expansion plans.

BankAmerica and Wells "are very much at the forefront of a boom that is becoming more and more pervasive in the industry," said Merrill Lynch & Co. analyst Sandra J. Flannigan.

What has banks moving into grocery stores is the growing belief that in- store branches cut costs and boost sales - provided they are used more for selling than for handling teller transactions.

One specialist in supermarket banking, International Banking Technologies, figures that in-store branches grew 25% last year to more than 3,100. Rival National Commerce Bank Services Inc. - the marketing arm of a Memphis bank that pioneered the strategy - expects there will be about 7,500 in-store outlets by the year 2000. Among those noted for big in-store networks are two Ohio banks - Banc One Corp. of Columbus and Fifth Third Bancorp of Cincinnati.

But no bank is opening as many in-store outlets as quickly as BankAmerica and Wells.

For example, at the end of 1994 Wells had 37 in-store branches and 578 traditional branches in California, the only state in which it currently operates. By the end of this year it plans to have about 775 in-store outlets and 325 traditional branches.

The tally is in flux because of Wells' pending acquisition of First Interstate Bancorp, expected to close in April or May. Wells plans to shutter about 350 of First Interstate's 405 California branches, but keep all the Los Angeles-based bank's 735 branches in 12 other western states. Sixty-seven of these out-of-state branches are in supermarkets. Wells said it expects to expand the supermarket network outside California as well.

BankAmerica last year boosted its California network of in-store branches from 14 to 51. The bank plans to open 37 additional outlets this year and another 37 next year, bringing its total to more than 100 in the state by the end of 1997. All of these branches are in Lucky grocery stores, with which BankAmerica has an exclusive arrangement.

BankAmerica has another 132 in-store branches in other states, including 35 in Washington, and 28 in Arizona. It has 1,791 traditional branches.

Last year, BankAmerica also opened 323 ATMs in Lucky grocery stores in California. On most days, these machines are visited by bankers who sell bank products to shoppers.

BankAmerica also opened 170 ATMs in Jewel-Osco stores in Illinois, Michigan, and Indiana, adding a retail touch to the corporate banking presence it obtained through its 1994 acquisition of Chicago's Continental Bank Corp.

To test the feasibility of turning many or all of its Jewel-Osco ATM sites into full-service branches, BankAmerica launched two such outlets in Joliet, Ill., this month and plans to open two more - in Chicago and suburban Mount Prospect - in the next few weeks. In preparation for such a change, the bank in December received Office of Thrift Supervision approval of its petition that all the ATM locations be licensed as full-service branches of its thrift subsidiary.

One important difference in approach between the two banks is that BankAmerica tries to work with one retailer per market, while Wells isn't so exclusive. Both the Jewel-Osco and Lucky chains are owned by American Stores Cos., of Salt Lake City, BankAmerica's primary partner at the moment.

Kim P. Burdick, a senior vice president at the bank, said this focus allows it to market jointly with the retailer and makes it easier for customers to find a BankAmerica branch or ATM. Nearly every store in the Jewel-Osco and Lucky chains has one or the other. BankAmerica and Lucky plan to start a joint marketing campaign in California this month.

Wells is working with four big grocery store chains - Ralph's, Vons, Safeway, and Albertsons - which collectively have more than twice as many stores in California as Lucky.

Another important difference in approach between the two banks is that while Wells is committed to closing traditional branches as it opens in- store outlets, BankAmerica is still weighing such a strategy.

The payoff is obvious: It cuts costs. But the risk is losing customers.

Wells chairman and chief executive Paul Hazen, who is also a director of Safeway Stores Inc., of Oakland, Calif., clearly believes that closing traditional branches is the way to go.

"There's a tug and a pull in these kinds of things," Mr. Hazen said in a recent interview.

But he also noted that fewer than half of Wells' customers regularly visit its traditional branches. He predicted that customers will embrace in-store banking just as they have embraced ATMs and telephone banking.

"As they (customers) do it, and that's what they want, they're pulling you along," he said.

Other bankers aren't so sure. During the hostile takeover battle, First Interstate chairman William E.B. Siart characterized Wells' headlong rush into supermarkets as a "radical restructuring" that could alienate customers.

BankAmerica's top brass, including chief executive David A. Coulter, is taking a more conservative approach. The bank's executives haven't yet decided that traditional branches should be closed as in-store branches are opened. But they are doing tests of customer behaviors in San Diego to see if they can come up with a model for that one transition. "We are trying to revise the model for the future and insure we use capital wisely," Mr. Coulter said.

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