NEW YORK -- As benefits from Efficient Consumer Response advances surface, supermarket operators are investing more heavily in meeting consumer needs.
This year, leading companies plan to sharpen their customer focus by bolstering perishables, prepared meals, private-label items and in-store service offerings and stepping up customer service and locally directed marketing, according to executives who spoke at Donaldson, Lufkin & Jenrette's Food Retailing Conference here last week.
A mostly favorable economic climate and slow, steady growth in 1995 -- despite low inflation -- have enabled the industry to concentrate on making its stores more attractive to shoppers as well as continuing cost-cutting efforts, officials said.
In presentations, executives from such chains as Grand Union Co., Vons Cos.,
Albertson's, Penn Traffic Co., Food Lion, Dominick's, Safeway, Kroger Co., American Stores, Fred Meyer Inc., Hannaford Bros. and Stop & Shop Cos. stressed that diligently catering to shoppers has become more important than ever in boosting traffic, sales, earnings and profitability.
Their efforts include updated store formats emphasizing perimeter departments and home meal replacement, better product selection and neighborhood-targeted promotions (attained via frequent-shopper card data), more aggressive pricing and bigger assortments of ethnic, specialty and natural foods. "Our combo stores are continually evolving. Through demographic research, we adapt the stores to fit the needs and demands of consumers in the market," said Joseph A. Pichler, chairman and chief executive officer of Kroger, Cincinnati.
Arcadia, Calif.-based Vons is orienting employee training toward enhancing customer service. "Our plan is to continue to build our relationship with our customer," said Richard E. Goodspeed, president and chief operating officer. "Our goal is to have an energized work force committed to customer service."
Grand Union aims to transform itself into a company that's "maniacally customer-focused and paranoid about becoming an efficient, low-cost operator," said Roger E. Stangeland, chairman of the Wayne, N.J.-based chain.
"Today, all of its energies are focused on giving customers the products and services they demand at appealing prices in easy-to-shop, immaculately clean stores," he said.
Retailers noted that savings from smoother distribution and logistics, reduced inventories, debt reduction and refinancing, administrative consolidation, technology upgrades and other areas are paving the way for improvements that are tangible to shoppers.
Such gains contributed to a solid industry performance in 1995. "Supermarket stocks did quite well," said Edward Comeau, vice president at DLJ, a New York investment firm. "Supermarkets had a good year last year."
Comeau recently moved to DLJ from Lehman Bros., New York, which previously sponsored this event.
A number of other issues also were on the minds of conference speakers, including the following:
Supercenters remain a big concern to supermarket executives. But supermarket combination stores enjoy key advantages: proximity, fresh foods and customer service, Kroger's Pichler said. "The real power we have is in perishables and service. And you can't match those in supercenters," he said. "I'll put my money on the combo stores once you get past a town of 60,000 to 70,000 people."
Operators continue to increase private label's percentage of total sales to drive profits and store traffic, especially by expanding upscale lines. Yet chains must be careful not to overestimate consumer demand, noted Steven A. Burd, president and CEO of Safeway. "Private label has to find its own level," he said. "I think there was a period where we kind of forced private label on consumers."
Implementation of electronic data interchange, notably communication and information capability, is critical for supermarket chains to compete in the coming decades. "Technology affects our industry in every way," said David L. Maher, American Stores president and chief operating officer. "Technology is an important part of our effort to cut costs. We are accelerating our EDI efforts to increase the number of vendors we communicate with."
Chains are striving to balance consumers' demand for value with desire for more fresh and specialty foods, ready-to-eat meals, wider grocery selection and greater customer service. "We think that while providing better service and a better mix to our customers we can still maintain [an identity] as a low-cost operator and of being price-competitive," said Food Lion CEO Joseph C. Hall.
Here are summaries of some of the presentations at the conference:
FOOD LION TO GROW IN-STORE
To increase customer counts and transaction sizes, Food Lion has based its growth strategy on in-store investment. The Salisbury, N.C.-based chain plans to expand private label, to price and advertise more aggressively, to spotlight home meal replacement and to upgrade to larger stores to fit more fresh foods.
"Low prices are the cornerstone on which Food Lion has been built, and we'll continue to make that a focus," said Joseph Hall, senior vice president and chief operating officer.
That will be done, Hall said, by boosting private label from 12% to 15% of sales, adding more items to the MVP frequent-shopper discount program (now accounting for 20% of transactions and 40% of sales) and monitoring prices to meet or beat competitors. Category management, MVP customer data and market-based advertising will play crucial roles, he noted.
Perishables sales will be raised via bigger displays of meat and produce, with more locally sourced items. Hall said Food Lion has a new case presentation for meat and plans a new, bulk-style layout for produce. Delis are being expanded under the "Food Lion & Fast" convenient meals program to regain dollars lost to restaurants. "We think Food Lion & Fast will help in getting [meal] business back into our delis," Hall said.
Food Lion's new and renovated stores will have delis and bakeries (now in 70% of stores) along with more meat and produce, said Dan A. Boone, vice president of finance and chief financial officer. "That's absolutely critical in our business today," he said.
The focus on fresh departments is driving capital expenditures, slated to be $200 million or more this year. Many existing stores are being enlarged from about 26,000 square feet to the new size of roughly 34,000 square feet, and 45,000-square-foot stores are being tested, Boone said. In 1996, 50 new stores and 120 remodels are planned; 22 older stores will be closed.
"In terms of moving to a larger store format, I think that's being dictated by the consumer," Boone said.
Activity-based costing, improved inventory management, and wider use of electronic data interchange and a vendor-maintained replenishment system (to more than 40% of volume) will help cut expenses, Hall and Boone said.
ALBERTSON'S STARTS FIVE-YEAR EXPANSION
This year, Albertson's, Boise, Idaho, is embarking on a five-year plan to open 388 new stores by the end of the year 2000, with openings spread evenly across each year, said A. Craig Olson, senior vice president and chief financial officer.
The 764-unit chain expects to have 1,092 stores by the end of the decade, Olson said. In 1996, 66 new stores are planned, followed by 71 in 1997, 77 in 1998, 83 in 1999 and 91 in 2000. About 60% to 70% of the new stores will be in existing areas, 20% to 30% will be in new markets and up to 10% will be replacements. Olson estimated that Albertson's's wouldn't enter a new market for another two or three years. Total square footage will grow at least 8% a year.
Of the plan's $3.77 billion total capital expenditures, $659 million will be spent this year. Roughly 90% of the funding will come from internally generated funds and the rest from leases.
Store growth will be guided by an emphasis on front-end service, neighborhood marketing, private-label expansion, competitive pricing and promotion, and store-level management training, said Richard King, president and chief operating officer.
Albertson's brand lines will increase in 1996, with 400 items introduced in redesigned packaging. The pharmacy program also will be refined, and prepared meal offerings will be boosted under a meal program called Quick Fixins, King said. "Our focus groups tell us they want items they can prepare quickly and conveniently at home," he explained. Frequent promotions remain a key to aggressive pricing, King noted. "We've found ways to increase our customer count by maximizing our every-day-low-price strategy," he said. "We feel we need to have a combination of EDLP and events planned for our stores."
The chain also plans to cut its operating expense ratio via increased sales, productivity and technology. King said the company is targeting sales growth of 1% to 2% above inflation this year.
SUPERVALU 'ADVANTAGE' CONTINUES
Supervalu, Minneapolis, is continuing to implement its Advantage re-engineering program, part of which involves providing "unbundled" services to its wholesale customers. Mike Wright, chairman, president and chief executive officer, said the program should be rolled out to 75% of Supervalu's customers by the summer of 1997.
Currently being tested in the company's Denver division, the program involves charging retailers on a "cost-to-serve" basis.
"The new pricing system we have developed is an approach that will charge for the actual cost of procurement, service, transportation. Overall, our preliminary results show a lower product cost for our retailers," Wright said.
As other retailers see the savings that have resulted from this unbundling of services, Wright said, he hopes independents as well as small and medium-size chains will switch to Supervalu for their wholesale needs, thereby "dramatically" increasing Supervalu's sales.
Because 25% of Supervalu's sales can be attributed to its retail business, Wright also presented a plan for servicing its corporate retail operations as well as franchisees. Supervalu is concentrating on four "growth formats": price [impact] superstores, supercenters, limited assortment stores and food-and-drug combination stores.
"We intend to grow our retail business in two ways. First, through self-development of these growth formats. This self-development will be complemented by acquisitions that fit the characteristics of our growth formats and that offer a strong management and a strong market position," Wright said.
KROGER ACCENTING RETAIL, DISTRIBUTION
Slicing its debt load, Kroger Co., Cincinnati, plans to devote more resources to retail and distribution, according to Joseph Pichler, chairman and chief executive officer.
This year, capital expenditures are slated to be $810 million, up from $726 million in 1995, Pichler said. That includes 115 planned new stores, remodels and store acquisitions, compared with 83 last year. Square footage will grow 6% to 7% in 1996. The 1,375-unit company, operating supermarkets under seven names, will grow its store base by 110 per year over the next few years, he said. Hot growth markets include Atlanta, Indiana, Denver, Dallas, Houston and Phoenix/Tucson.
Kroger will continue to secure its own real estate, he added. Benefits from that strategy include renovation and refinancing flexibility plus no percentage rent payments.
Combo stores of 54,000 square feet, which generate 70% of Kroger's supermarket sales, will remain the staple growth format. In-store focal points include pharmacies -- "a boom business for us," Pichler said -- health and beauty care and floral departments, private label and home meal replacement, the latter under the Meals To Go program. "We believe there's great potential here. We're trying to bring home meals back into the supermarket," he said.
Supercenters aren't as big a threat as many in the industry believe, Pichler noted. "What we have learned is our combo stores compete even-up with the supercenters. We've learned to compete with them by using the strength of a combo store," he said, citing proximity, variety, convenience and service.
Technology investments in 1996 will focus on computer-assisted ordering, category management and warehouse management systems. "The savings are significant and will flow into gross profit, primarily," Pichler said.
With a big cash flow ($1.16 billion) in 1995, Kroger plans to keep reducing debt and interest payments this year, Pichler said, adding that debt has declined steadily since 1988. The company expects to reach investment grade this year, though a good acquisition deal could delay that.
"For the right acquisition, we'd be willing to put it off," Pichler said. "But it would have to be pretty attractive."
PENN TRAFFIC REPOSITIONING
After being confronted by numerous challenges last year, ranging from new management to competitive pressures, Penn Traffic Co., Syracuse, N.Y., was forced to reposition itself in its New York region in order to remain competitive, said Gary Hirsch, chairman and chief executive officer.
The company developed a strategic plan. It involved "branding" the store, establishing a clear value to the consumer, improving perishables offerings and upgrading customer service.
The company decided to market itself as "Your Best Friend" in a new flight of television commercials featuring Roy Flood, president and CEO of the P&C Food Markets division. Penn Traffic made wide-sweeping changes in-store, such as opening all checkout lines from 4 p.m. to 6 p.m. Monday through Friday and offering a 200% guarantee on the freshness of perishables.
"Our goals for 1996 are clear throughout our organization. We will continue the repositioning of our New York state stores. We will move the very positive lessons that we had from this New York repositioning to our other markets," Hirsch said.
The chain's capital program for fiscal 1997 involves spending $80 million on two remodels, four replacements, 12 expansions and a total square footage growth between 2% and 3%, said Gene Sunderhaft, senior vice president of finance for Penn Traffic.
SAFEWAY CULTIVATING THRIFT
Safeway, Oakland, Calif., has a "culture of thrift," said Steven Burd, president and chief executive officer. The chain remains focused on reducing operating expenses, improving same-store sales and improving capital management.
"If you think about what has contributed to the turnaround thus far -- and we don't think we're anywhere near complete -- we think it makes sense for us to continue to focus on these same basic priorities. That's the way we can increase shareholder value," Burd told the audience.
The chain is attempting to reduce operating expenses by consolidating its information technologies operations.
"The IT consolidation is an effort we have under way to have a single platform and a single set of applications throughout the country. When that is fully installed, which will be in about 12 to 14 months from now, we will be able to achieve further reductions in [operating and administrative] expenses," Burd said.
To improve same-store sales, Safeway lowered prices to become price competitive, cleaned up and uncluttered its stores, improved in-stock positions and enhanced its private-label line.
Burd refused to cite the percentage of overall sales that are private label but revealed that the chain has 400 private-label stockkeeping units.
In order to reach his goal of better managing capital, Burd said, Safeway has devised ways of wisely remodeling stores to "generate much higher returns on those capital projects."