OKLAHOMA CITY -- Fleming Cos. here said it plans to open as many as 100 Food4Less warehouse stores over the next two years -- four times the number it operates now -- as part of its new emphasis on value retailing.
Mark S. Hansen, chairman, president and chief executive officer, said the expansion will be based "on a prudent rollout schedule" that will take shape as the year evolves.
According to Hansen, "We see substantial nationwide growth potential for the warehouse format, with up to 25% of consumers in many markets indicating they want a price-impact store."
He said Fleming is developing a new Food4Less prototype "with lower operating costs and more operating efficiencies that will do a better job of product handling and display, put a stronger emphasis on making a price impression and enhance the selections in the produce and liquor departments."
The decision by Fleming to concentrate exclusively on a single value-oriented retail format came in the wake of the distributor's decision to sell 161 conventional stores operated by five corporate-owned chains: Abco Desert Markets, Phoenix; Baker's Supermarkets, Omaha, Neb.; Rainbow Foods, Minneapolis; Sentry Markets, Waukesha, Wis.; and Thompson's Food Basket, Peoria, Ill. Those stores combined in 1999 for sales of $2.6 billion, Hansen said.
Fleming's 26 Food4Less stores, which operate in central and northern California, Arizona and Utah, account for annual sales of approximately $650 million, with each unit accounting for $25 million per year, Hansen said in a conference call with securities analysts.
Cash flow at the stores is up 6% to 8%, with sales per square foot of $9.50 to $10, Hansen added.
He said the format's biggest marketing area is central and northern California, "and we have a nice business in Utah and Arizona as well. And we're also franchising stores in California, and it's been a very successful format for the franchisees."
He said he expects further expansion within the same general West and Southwest region "for the next several years in markets where Food4Less, Home Depot and Costco have done well."
Among his other comments to the analysts:
Fleming's decision to sell the conventional stores was internally generated.
Retaining the conventional stores' volume within Fleming's distribution segment will not be a prerequisite for a sale.
Fleming will use the proceeds to pay down debt and invest in Food4Less expansion.
Hansen also said the cost of remodeling warehouse stores is typically 25% to 30% less than for more upscale formats. "Major remodels are less than $2 million events -- they tend to be more brush-ups or clean-ups, and there's not the same huge need for re-investment in facilities maintenance," he explained.
"These stores are all semi-industrial facilities, more like a Home Depot than a Safeway, and they're built to withstand great stress."
Asked whether the decision to sell its conventional stores was a result of offers from potential buyers, Hansen replied, "This is a company-initiated activity, and we're under no stress to sell these properties."
He said Fleming came to the decision to sell the stores as part of its strategic planning, "when we asked ourselves how we can be relevant with consumers and recast our operation from a mature business to a growth business, and this is a logical extension of that thinking.
"The conventional supermarket segment offers local-market growth potential for independents and national growth potential for consolidators, but Fleming is a 'tweener,' and the middle ground does not have the potential to meet our aggressive targets for shareholder value."
He also said Fleming sees negative growth for traditional supermarkets, with a decline of 10% to 12% likely in the next five years as consumers opt for alternative classes of trade. "But we find the growth potential in the value-marketing segment very appealing," he said.
"We think we'll see substantial interest from both strategic and financial buyers," he said, "and we find that very encouraging."
