Skip navigation

ANNUAL MEETING

CINCINNATI -- Kroger Co. here said last week it plans to convert its 17 Phoenix-area Fred Meyer Marketplace stores to the new Fry's Marketplace banner -- a move the company said could serve as a model for expanding the multidepartment-store format into other parts of the country.Kroger operates 62 Fry's Food & Drug Centers in Phoenix.The company said it will begin the conversions late in the summer

CINCINNATI -- Kroger Co. here said last week it plans to convert its 17 Phoenix-area Fred Meyer Marketplace stores to the new Fry's Marketplace banner -- a move the company said could serve as a model for expanding the multidepartment-store format into other parts of the country.

Kroger operates 62 Fry's Food & Drug Centers in Phoenix.

The company said it will begin the conversions late in the summer and complete the project before the holiday season. Because of overlaps, it expects to close five to 10 stores, mostly existing Fry's locations, the company told SN.

The company held its annual meeting here last week, during which it touched on some of the following developments:

Kroger said sales rose 6.2% and earnings before merger-related costs rose nearly 20% during the first quarter ended May 20.

The company said it plans to eliminate nearly 500 administrative positions in its Western divisions, primarily in the areas of management information systems and accounting.

It said it achieved post-merger synergies of $198 million in the first quarter -- close to the $260 million in savings it is projecting for the entire year.

The chain was hit with a $4 million breach-of-contract lawsuit by owners of a shopping center, who claim to have lost money redeveloping a 34-acre center to accommodate construction of a 160,000-square-foot superstore for Fred Meyer that Kroger does not plan to move into.

Kroger disclosed it is in litigation with the Federal Trade Commission following the FTC's rejection of its plan to purchase 74 Winn-Dixie stores in Texas and Oklahoma.

The company said it expects to expand the Food 4 Less warehouse-store format to five additional markets this year; it also said it plans to spend $100 million in fiscal 2002 to expand the Food 4 Less and Fred Meyer formats into new markets.

During the annual meeting, Joseph A. Pichler, chairman and chief executive officer, made these points:

The company plans to continue to offer high-ticket general-merchandise items, like DVD players and VCRs, at supermarkets; to open 150 additional "Nature's Market" natural-food sections this year, and to add 500 on-site gas stations.

There is room for private-label growth in Kroger's Western divisions. "Private label currently accounts for 25% of grocery sales in the pre-merger Kroger divisions but only 16% to 18% of grocery sales in the Western divisions. We believe those divisions can substantially increase private-label sales," he said.

Pharmacy will be a key driver of identical-store sales growth. "Our total pharmacy sales have more than doubled in the past five years to $3.2 billion, and we believe pharmacy sales will double again within three years," he said.

Kroger is saving more than $2 million a year by consolidating vendors and pooling volumes. In addition, its 1,400 pharmacies saved $600,000 on prescription containers last year through corporate-wide purchasing -- "big savings on a relatively small item," he noted, "and there's much more to come."

Kroger believes "click and mortar" will be the company's most likely direction in e-commerce. "Our goal is to identify a scalable model that benefits both customers and shareholders, and we are aggressively evaluating the retail Internet models currently in place," Pichler said.

Pichler said in a conference call with securities analysts last week the conversion of the Fred Meyer stores in Phoenix to the Fry's Marketplace banner offers at least three advantages.

"First, the Fry's division will achieve economies in advertising, administration, distribution and working capital," he explained. "Second, the Marketplace stores will gain the benefit of Fry's strong grocery merchandising programs.

"Third, the integration of the Marketplace stores under the Fry's banner is a potential model for introducing the multidepartment-store format of food, pharmacy and general merchandise into other markets where Kroger divisions have established a strong franchise."

Kroger has owned Fry's since 1972; Portland, Ore.-based Fred Meyer Inc. entered Phoenix through acquisition in 1997 and converted stores there to the Fred Meyer Marketplace banner in early 1999, four months before it was acquired by Kroger in May 1999.

One of the casualties of that consolidation may be premerger plans Fred Meyer had to open superstores approaching 160,000 square feet in Phoenix, compared with its norm of 100,000 square feet there. The first of those superstores has already been built adjacent to a smaller Fred Meyer Marketplace, but Kroger reportedly has no plans to open that unit.

That situation has led to a lawsuit against the company by Iger Bypass Trust and Sheffel Family Limited Partnerships, the Phoenix-based owners of the shopping center. According to the complaint, developers incurred expenses of nearly $4 million after terminating the leases of 20 tenants to demolish their stores to make room for the superstore.

Kroger officials declined comment on the complaint last week.

As part of its ongoing consolidation, Kroger said it plans to combine Fred Meyer's regional Arizona office with Fry's corporate office there, with a regional Fry's team coordinating with Fred Meyer's Portland headquarters to operate the general-merchandise departments in the Fry's Marketplace stores.

As a result of the conversions, some stores in close proximity to each other may close, the company said. According to Pichler, the conversions of the Fred Meyer stores will not result in any layoffs in Phoenix.

However, Pichler said Kroger plans to eliminate nearly 500 administrative positions, mostly in MIS and accounting, in its Western divisions following systems consolidation. In a conference call with analysts, he said the accounting processes from two operating units -- Salt Lake City-based Smith's Food & Drug Centers and QFC, Bellevue, Wash. -- will be integrated into Kroger's accounting center in Nashville, Tenn.

Pichler said slightly more than half of the 500 positions have already been eliminated through attrition. Since Kroger's merger with Fred Meyer just over a year ago, more than 800 positions in various locations have been eliminated, Pichler added.

He also told analysts Kroger was "disappointed" with the Federal Trade Commission's decision to withhold approval for Kroger to purchase 74 Winn-Dixie stores in Texas and Oklahoma. "We are currently in litigation and will be unable to comment on the case while it is pending," he said.

Pichler said Kroger's expansion plans this year call for opening 138 supermarkets, 11 price-impact warehouse stores and six multidepartment stores, plus 22 convenience stores and five jewelry stores, with most growth occurring within existing markets. He said Kroger anticipates retail square footage growth of 4.5% to 5% annually.

He also said Kroger has allocated $100 million in fiscal 2002 to expand the Food 4 Less and Fred Meyer formats into new markets, following the launch of Food 4 Less into several new markets in northern and central California over the past few months. Discussing the chain's synergies following the merger with Fred Meyer, Pichler said Kroger remains on track to meet or exceed its combined synergy savings goals of $260 million this year, $345 million in 2001 and $380 million in 2002.

TAGS: Kroger