Many major supermarket companies are spending more on capital expenditures this year but earmarking funds very prudently.
Some companies are significantly ramping up funding, such as a 38% gain at A&P and a 20% increase at American Stores, according to an SN survey of spending plans. While most companies aren't accelerating quite so fast, a large number are continuing to increase budgets as replacement stores and remodels remain key priorities, according to company reports and securities analysts.
When new stores figure into expansion plans, most retailers
are filling areas in their existing markets instead of entering new territories. If chains venture into new areas, analysts said, they are more likely to focus on acquisitions rather than trying to overcome zoning requirements to build new units.
Although retailers are spending prudently, they aren't cutting corners. American Stores will likely be the biggest spender this year at $900 million.
American Stores has budgeted $150 million more than last year and A&P budgeted $80 million more than last year. Safeway plans to spend $550 million in 1996, $50 million more than last year, and Albertson's plans to spend $659 million, $49 million more than last year.
Among the priorities of chain approaches are:
Spending money to keep existing stores updated as numerous alternative formats continue to proliferate and steal market share.
Upgrading information and logistics systems.
Emphasizing one-stop shopping by concentrating on food-and-drug combination concepts and focusing on specialty departments and services.
Edward Comeau, vice president of Donaldson, Lufkin & Jenrette Securities Corp., New York, predicted there will be more acquisition activity in 1996 because it is increasingly difficult to obtain desirable real estate.
"It's cheaper to buy than to build," he said.
Bob Lupo, managing director of B.A. Securities, Chicago, said that he expects capital expenditures and acquisition activity to continue to be heavy this year.
It is necessary for retailers to spend money to keep their stores in good condition to guard against losing share and to prevent themselves from becoming acquisition targets, Lupo said.
"Supermarkets continue to want to expand their square footage, modernize their store base and better position stores to withstand the increasing competition. The watchwords of the day are going to be competitiveness and efficiency," he said.
"I think cap ex trends will continue to rise for most as they remodel and renovate and expand their franchises in an effort to continue to build market share in their primary market regions."
Although the million-dollar sums being spent in this industry may seem high, retailers are spending practically, said Comeau.
"They're using a more cautious approach to expansion and investing in the business," he told SN. "Many companies are re-evaluating their capital
[spending] programs with a very close eye toward making sure their capital is spent wisely and productively."
Retailers developed this sense of cautious spending when the long-range expansion plans they chartered in the late 1980s and early 1990s became impractical as economic conditions changed, analysts said. Companies that did not anticipate the low levels of food inflation, the highly competitive retail environment or the proliferation of alternative-format retailers that exist today have had to re-evaluate their plans.
"There's a very high level of scrutiny based upon how much capital food chains are putting into the business and you're seeing less blatant expansion into new markets with the assumption of unmitigated success. There have been instances where capital being deployed into expansion has been less productive," Comeau said.
What follows is a description of the capital expenditures of several prominent supermarket chains along with comments from analysts.
Kroger: Continuing Expansion
Kroger Co., Cincinnati, has been on an aggressive capital expansion program since 1993, said Paul Bernish, director of public relations, and capital expenditures have increased each year since then. Kroger spent $625 million in 1995 and plans to spend about $650 million this year.
"We're expanding in our major markets. Our strategy is two-fold: to modernize older stores or replace them with combination stores and then we're also trying to fill in gaps. If we do expand into a new market, it would be through an acquisition but we don't have anything on the horizon right now," he told SN.
Kroger plans to built 25 new stores, relocate 20 and expand 28 to finish the year with a total square footage growth of 5%. Three markets -- Atlanta, Dallas and Phoenix/Tucson -- will receive special attention, said Bernish.
In 1997, Kroger plans to spend roughly as much as it will in 1996. Plans call for 50 new stores, 37 relocations and 39 expansions for a total square footage growth of 7.7%.
"Much of their expansion there is in management information systems and efficiency-oriented equipment," said Lupo of B.A. Securities.
Safeway: Remodels Proceed
Safeway, Oakland, Calif., cut back on capital expenditures several years ago because of management shifts within the company that made it necessary to "regroup and to review various projects," said Debra Lambert, spokeswoman. In 1995, the chain had $500 million in capital expenditures for 32 new stores and 100 remodels for a total square footage growth of 1.5%. In 1996, Safeway plans to spend $550 million, but Lambert did not have any numbers on specific new storing plans.
"There will be MIS-related expenditures. We're making greater use of standardized store layouts and centralized purchasing agreements for building fixtures and equipment," Lambert said.
"Safeway is one that will continue to spend on the business and do those things that are margin-enhancing, like the remodeling of stores," Lupo said.
American Stores: Upgrading Condition
American Stores Co., Salt Lake City, plans to spend $900 million this year. The company plans to build or replace 100 stores this year, said Judy Barker, vice president of public and investor relations, but she could not be more specific. She noted that the company is undergoing a "shift in focus from remodels to new stores."
In 1995, American spent $400 million on new stores, $200 million on remodels and $60 million on miscellaneous projects in addition to $90 million on technology.
"American has a chain of supermarkets that are probably older and need a lot of remodels. [They've got] great locations but require a little tender loving care," said Jonathan Ziegler of Salomon Bros., New York.
Comeau added, "American is spending a boatload on the infrastructure of the company as part of their re-engineering process."
Food Lion: A 3-Pronged Plan
Food Lion spent $200 million on 47 new stores and 121 renovations in 1995 and plans to lay out about the same amount for 50 new stores and 120 renovations this year, said Chris Ahearn, corporate communications manager at the Salisbury, N.C.-based chain. Total square footage grew 9.9% last year and is expected to grow 7% this year.
"Food Lion is taking a three-pronged approach to expansion: new stores, remodels and acquisitions where appropriate," she said.
Vons: Boosting Remodels
Last year Vons built 12 stores and acquired four stores from Smith's Food & Drug Centers. Of those 16 new stores, 10 were replacements. The Arcadia, Calif.-based company expanded or remodeled 55. Capital expenditures totaled $225 million, said Mary McAboy, vice president of corporate communications.
This year the chain plans to spend about $200 million on 60 remodels and 12 new stores, including eight replacements. Capital expenditures will decrease this year because the company spent a large portion of capital funds acquiring the Smith's units.
"Part of the capital budget does include allocations to systems and other support issues but the vast majority is [allocated to] new stores and remodels," McAboy said. "We have a preference for replacement stores because [they enable us to] increase services and attract new customers."
"They moved away from four store formats to two . . . and it seems to be working really well. They obviously have turned the corner on earnings and sales momentum," said Chuck Cerankosky, senior vice president of Hancock Institutional Equity Services, Cleveland.
Winn-Dixie: In-Store Focus
In fiscal 1996, Winn-Dixie Stores plans to open 75 new stores, close 65 and enlarge or remodel 90. The Jacksonville, Fla.-based company is placing an emphasis on pharmacies, banks, photo labs and dry-cleaning services and expanding store hours.
The chain also plans to enter the Chattanooga, Tenn., market with eight stores, according to its 1995 annual report.
"Winn-Dixie had ignored its store base for 10 years in terms of capital and, three to four years ago, they turned on the tap. They're undertaking a very smart restoring of their operation, replacing a lot of their older, smaller stores with their Marketplace [format] stores," Comeau said.
Albertson's: Big Growth Plans
Albertson's, Boise, Idaho, is one of a select group of supermarket chains that is expanding aggressively on a number of fronts, from entering new markets to building new distribution centers.
The chain has crafted a five-year plan that calls for opening nearly 340 supermarkets and expanding about 265 by the end of the century, with capital expenditures totaling $3.8 billion, said Michael Read, director of public relations and government affairs.
The chain, which currently has 764 stores, is expecting a total square footage growth of more than 8% for each year from 1997 through 2000.
Albertson's opened 58 new stores in 1995, not including one unit it was set to acquire from Smith's Food & Drug Centers, Salt Lake City. The company also closed 11 stores for net square footage growth of 7.6%, said Read.
For 1996, Albertson's plans to open 66 new stores for a total square footage growth of 8.5%. The company is placing special emphasis on its expansions in Texas, particularly south Texas, and Florida. The company also plans to enter Jackson, Miss.
"Our long-term strategy has been filling in current operating areas. We have had well over 100 stores in Texas for some time but we are filling in our current operational area," Read said.
"We are looking to go into the Jackson, Miss., market within the next year or two. That would be a new state of operation for us but it borders on current states of operation. We would like to have five to six stores in that area. We should begin construction there before the end of fiscal 1997." Albertson's fiscal 1997 year ends Jan. 30, 1997.
"That signals a pretty aggressive store opening trend. It's [got] a management team that's continuing to try to grow the business," said Cerankosky.
A&P: Filling in Blanks
A&P, Montvale, N.J., opened 33 new stores and enlarged or remodeled 78 in 1995, said Michael Rourke, senior vice president of communications and corporate affairs. In 1996, the chain plans to open 44 new stores. No further information was available.
A&P's expansion strategy, said Rourke, is to "fill in key market areas."
"Certainly they will be growing their store base in stronger markets and filling in there," Lupo said. "Their weaker markets are in Georgia, the Carolinas, Virginia. The New York metro area and Canada are pretty good markets."
Giant: A Northern Push
Giant Food, Landover, Md., spent about $150 million last year on the opening of seven new stores, of which one was a replacement and four were remodels. The chain plans to open eight stores and remodel eight stores this year, said David Sykes, senior vice president of finance.
Giant Food is focusing on its expansion into what it calls the northern region -- New Jersey, Pennsylvania and Delaware -- as well as its current markets.
"We do everything we can to make us more efficient not only in headquarters but also in stores. We will spend money on technology to help to run our stores more efficiently," Sykes said.
Comeau called their plans "fairly aggressive" but he added, "it's not like that [northern region] is a well-stored market."
Spending Plans for Some Major Chains
Following are capital expenditure plans for supermarket companies along with specifics on store remodels and expansions. When possible, the dollar spending is compared against the prior year.