PORTLAND, Ore. -- The pending merger of Fred Meyer Inc. here and Smith's Food & Drug Centers, Salt Lake City, could result in multiple mutual benefits, according to both companies.
or outsourcing by both companies by installing the information systems used by Fred Meyer at Smith's and supplying Fred Meyer stores in Utah and Idaho from Smith's distribution and manufacturing facilities in Utah.
Providing opportunities for both companies to improve their private-label programs.
Allowing Fred Meyer to improve its buying clout and share Best Practices information with other retail chains controlled by Yucaipa Cos., Century City, Calif.
According to Ronald W. Burkle, principal in Yucaipa, "I've never seen a merger where one company was not doing something better than the other, so there are a lot of things we can learn from each other.
"For example, we have 40,000 square feet of nonfood space at each Smitty's store that we have not merchandised as well as we would have liked, while Fred Meyer has a tremendous amount of depth and great procurement ability in general merchandise that can improve that aspect of those stores."
Robert G. Miller, chairman and chief executive officer of Fred Meyer, said his company carries approximately 225,000 stockkeeping units of nonfood items, "and we know what assortments will work best at certain stores. So we will put in various general merchandise items at Smitty's, test them and measure what customers want, which we think has tremendous upside."
Miller also said the two companies face a challenge in the area of private label "to make both programs better and to work with other Yucaipa companies to share ideas."
Although Fred Meyer and Smith's will operate separately from other Yucaipa-controlled companies, "they will be able to benefit from sharing ideas and information about Best Practices cooperative buying programs with Ralphs and Dominick's," Burkle said.
Jonathan Ziegler, a securities analyst with the San Francisco office of Salomon Bros., New York, told SN the merger provides Smith's "with a great opportunity to upgrade general merchandise at Smitty's. And Fred Meyer does a better job in private label, so there could be buying efficiencies and upgrades of Smith's private-label line."
However, both Ziegler and Gary Giblen, managing director of Smith Barney, New York, expressed concerns about the degree of potential synergies, noting that the companies remain vague on specifics.
According to Giblen, Fred Meyer and Smith's declined in a conference call with analysts to quantify the cost savings or synergies achieved through sharing of Best Practices at other Yucaipa chains, "which, together with the deferral of specifics at this time, leaves largely unsubstantiated the critical $65 million in targeted synergies."
He said those targeted cost savings "could prove challenging [because] operational overlap is limited to Salt Lake City, and it is not clear whether the better buying brackets and other cross-fertilization benefits within the Yucaipa-affiliated chains have proven effective to this degree.
"While Smith's has been progressing strongly on the savings front from a base of a deeply troubled company, it is hard to see how Fred Meyer can further the savings or lift the erratic sales momentum at Smith's." However, the merged company "would be a purer play," with 75% of its mix in food rather than a 50% to 50% food-general merchandise split, Giblen said.
