SYRACUSE, N.Y. -- Penn Traffic Co. here is determined to avoid getting caught off guard. The $3.3 billion chain is aggressively tailoring its expansion and merchandising to shore up positions in local markets and improve performance against a growing number of supercenter competitors and other operators. The supercenter competition currently includes Wal-Mart and Kmart supercenters in New York and Meijer Inc. in Ohio.
"Our balance sheet has enabled us to maintain a very aggressive growth strategy," Gary Hirsch, chairman and chief executive officer, told SN in an interview. "While we remain a leveraged company, we have continually had tremendous flexibility to invest money back into the core business as well as to finance acquisitions.
"Consequently, we are consciously seeking to improve our market position by continuing an aggressive capital investment program over the next several years."
Penn Traffic has completed a wave of acquisitions -- including 45 Acme Markets units in northeast Pennsylvania and north central New York State last year -- and continues to look for additional opportunities in existing or contiguous markets that can solidify its presence, Hirsch said. The hefty capital expenditures program will further fuel square footage growth, he added.
The goal is to build bigger presences within each market and pursue geographic diversity so that Penn Traffic doesn't rely too much on any one area. The retailer's merchandising strategy is also aggressive. Penn Traffic is borrowing merchandising elements from its supercenter-like Big Bear Plus stores to upgrade the mix at all other stores, regardless of size, for better positioning against a host of other operators. In particular, the chain is hoping to make a stronger nonfood statement to pull away some business from competitors including supermarkets, supercenters and category-specific stores.
Besides heading Penn Traffic, Hirsch is chairman and CEO of Grand Union Co., Wayne, N.J., which is proceeding through a Chapter 11 reorganization that will see Hirsch relinquish those posts later this year.
The Grand Union reorganization has been complicated by bond holders who filed an involuntary bankruptcy petition against the chain. Observers said these creditors hoped to force the parent into bankruptcy court to restructure its debt and pay them.
Penn Traffic owns about 17% of Grand Union's stock and operates a joint nonfood buying program with the chain.
However, Hirsch maintains Grand Union's financial problems won't have any effect on the operations or leadership of Penn Traffic, and that he will continue in his roles at that company.
Penn Traffic operates 282 supermarkets -- and is wholesaler to another 242 independent markets -- in a 750-mile swath stretching from the Canadian border in central and western New York state down through western Pennsylvania and from central and southeast Ohio down into West Virginia.
Its operations include P&C Food Markets here; Big Bear Stores, Columbus, Ohio; Quality Markets, Jamestown, N.Y.; Riverside Markets, DuBois, Pa., and Insalaco Markets, Pittston, Pa., which has absorbed most of the 45 Acme Markets the company acquired late last year.
Penn Traffic is allocating $150 million, or nearly 4.5% of sales, to capital spending this year. Since the late 1980s, Penn Traffic has consistently raised the level of capital expenditures as a percentage of sales -- from 2.5% in 1988 to 3.5% between 1990 and 1993 to nearly 4.5% in the past two years, Hirsch said.
It was the company's ongoing commitment to capital investment during the slow economy of the early 1990s "that's fueling our growth and stability today." Penn Traffic spent $100 million on capital improvements last year, supplemented by $75 million to acquire the 45 Acmes and an additional $19 million for the stores' inventory.
Hirsch said the $150 million it expects to spend this year will be used to increase its 10.2 million square feet of selling space by 6% to 8% and to renovate an additional 15% to 20% of space.
That would improve the chain's position against the wide array of conventional supermarket operators it faces. These include Kroger Co. and Meijer in Ohio; Wegmans Food Markets and Tops Markets in western New York state and north-central Pennsylvania; Price Chopper Supermarkets, Hannaford Bros. and Tops in other parts of New York state, and Weis Markets in Pennsylvania (where it eliminated Acme as a competitor). "We're always looking for what we like to call 'organic growth' acquisitions -- acquisitions that are inside of or contiguous to our existing marketplaces and that are financially appropriate, regardless of whether they are small or large," Hirsch said.
Over the last two years Penn Traffic's "organic growth" has encompassed 84 stores: 27 from Peter J. Schmitt Co., Buffalo, N.Y., in fiscal 1993; 12 Insalaco Markets in the Scranton/Wilkes-Barre area of northeastern Pennsylvania in fiscal 1994, and the 45 Acmes in Pennsylvania and New York in fiscal 1995.
According to Bob Lupo, a high-yield securities analyst with PaineWebber, New York, "One of Penn Traffic's strengths is its skill in making attractive acquisitions that amplify its leading market positions and thereby reduce the ability of competitors to enter certain areas.
"The addition of P.J. Schmitt and Insalaco certainly achieved that goal, and the Acme acquisition appears to be off to the right start in terms of saturating the market and giving Penn Traffic a chance to continue to grow cash flow at a rate of 10% to 12% a year."
Howard Goldberg, a high-yield analyst with Smith Barney, New York, expressed similar thoughts. "The Acme acquisition enabled Penn Traffic to add stores incrementally without adding overhead, and it kept someone else from coming into that area." Hirsch likened the Acme acquisition to "buying an orchard full of low-hanging fruit."
"In making the Acme acquisition, we bought a good customer base and outstanding real estate in invaluable locations with very favorable rent structures that strengthened our already strong position in Pennsylvania and New York and gave us a market share of about 33% in the Scranton/Wilkes-Barre area. "We paid about $1.7 million per store, which is a very low price for what we got. Now we will take those assets and try to enhance them significantly.
"The addition of those stores will lower our advertising cost structure and allow us to improve profits in our existing stores in that area by enabling us to close some of the Acmes and to get the benefits of transfer sales at other, existing stores."
The chain has converted all 45 stores to other banners: 25 to Insalaco, 14 to Bi-Lo (part of Riverside Markets) and six to P&C Markets, Hirsch said.
Penn Traffic anticipates closing about 10 of the former Acmes and investing $50 million over the next two and a half years to upgrade the balance through remerchandising and either expansion or replacement, he noted.
Penn Traffic has made some preliminary merchandising changes since taking over the stores in mid-January, Hirsch said -- including expanding the varieties of produce and meat -- "and store employees are telling us that customers seem to be happy with the changes."
Some of the long-term merchandise improvements Penn Traffic will make in the former Acmes will be similar to changes at other stores, many of which will involve broadening varieties of nonfood, perishables and grocery assortments.
The merchandise mix at all stores is being heavily influenced by the mix at the chain's supercenter-like Big Bear Plus units -- stores of 100,000 to 135,000 square feet -- that operate in Ohio.
According to Hirsch, Penn Traffic is "considering" opening Plus stores outside Ohio, though he declined to discuss those considerations. However, he said the company has adapted merchandise elements from the Plus stores to develop "Plus Light" stores at other locations.
Most stores designated as Plus Light (a term used internally by Penn Traffic but not on the stores themselves) will fall into the range of 65,000 to 80,000 square feet.
Penn Traffic opened its first Plus Light stores during the second half of last year at five upstate New York locations: three P&C stores in Syracuse, one in Oswego and one in Massena.
Three more Plus Light stores are scheduled to open in the Syracuse area later this year, Hirsch said, and three other Plus Light units are due to open in Pennsylvania: a Bi-Lo in State College, an Insalaco in Scranton and a Quality Markets in Erie.
"By the end of the year, about 20% of our total sales will come from the 10% of stores that are 65,000 square feet or larger, and that figure will increase to 30% to 35% of revenues over the next two years," Hirsch said.
"It's clear this is what customers want, and we plan to take elements of the Plus and Plus Light stores and incorporate them into stores of 25,000 to 45,000 square feet by adding selected nonfood lines, including cookware, housewares, stationery and hosiery."
According to Hirsch, "Supermarket operators have seen nonfood operators chip away at their businesses by picking up various categories and making their own statements. "What we try to do is identify those categories where we can give our customers a value and a service in terms of convenience and a full assortment or variety, then chip away at the nonfood businesses -- not just supercenters but also Wal-Mart and Kmart discount stores, greeting card stores, hardware stores, office supply stores, clothing stores. Ken Bann, a high-yield analyst with Lehman Bros., New York, said Penn Traffic's decision to upgrade the merchandising in its stores with more nonfood and other varieties will serve it well as the number of competitive supercenters in its area grows. "As Penn Traffic faces more supercenter competition going forward, the benefits of expanding its merchandising scope now will put it ahead of that competition," Bann said.
According to Goldberg, "Penn Traffic's experience competing against Meijer with its Big Bear Plus stores in the Columbus [Ohio] area will position it well for battles with other supercenter operators elsewhere.
"However, the Big Bear stores are larger and more densely located in Columbus, so similar stores in Syracuse, Buffalo or parts of Pennsylvania may not serve other Penn Traffic operations as well -- but they will definitely give the chain something to draw on when facing supercenter competition."
Hirsch said Penn Traffic is using technology to become more customer-friendly, with at least two programs introduced over the last few months.
One program offers a tie-in with MasterCard that allows consumers to accumulate credits with each credit-card purchase, with those credits redeemable at any Penn Traffic outlet for a 2% discount.
The program was introduced in mid-January, and Hirsch said it was too soon to discuss its effect.
The chain is also overseeing a chainwide rollout of a series of front-end programs, including debit and credit options and coupon scanning, that Hirsch said are expected to improve customer perceptions of the stores.
