BOISE, Idaho -- Albertsons here is moving forward again.
After 18 months of rethinking the company, shrinking its asset base and reassuring associates that it's going to go the distance, executives of the nation's third largest food retailer say they have turned the corner and are poised to take control of the company's destiny again.
"Albertsons is getting stabilized, and we're able to see our way much more clearly toward the future as we refocus the entire organization on growth, customer service and all the other positive qualities we need to pursue," Larry Johnston, chairman and chief executive officer, told SN.
The goal, he said, is to make Albertsons the nation's No. 1 food and drug retailer. "The journey to that goal has become our passion," Johnston declared.
"Business turnarounds are not easy but they are achievable. Right now Albertsons is standing on the threshold of something great, and we intend to exploit our strengths as we move forward."
Peter Lynch, the company's president and chief operating officer, echoed Johnston's optimism. "We have installed a culture of constant improvement, and our approach is, don't look back, always look forward."
After just 18 months at Albertsons, Johnston is still getting his bearings, but he acknowledged the supermarket industry continues to fascinate him.
"This is an interesting industry to me because the major players control only 50% or 60% of the market," he said, "and there are few industries left of this size that are not yet consolidated and not yet globalized."
He declined to say whether he hopes to take Albertsons global. But while he may be dreaming globally, he's acting locally, focussing on a multitude of activities that include the following:
Developing dual-branded stores that utilize the company's Osco and Sav-on drug store brands to drive traffic.
Developing reverse combination stores that expand food offerings at drug stores.
Investing $1.7 billion in new stores and remodelings over the next 12 to 18 months.
Pursuing a neighborhood marketing approach to serve varied demographics, including Hispanic stores and kosher merchandising programs.
Looking for "bolt-on" acquisitions to strengthen its position in existing markets.
Preparing a marketing effort to increase its market penetration of private label.
Johnston joined Albertsons in April 2001 after a 28-year career with General Electric Co. His mission, he said, was to find new ways to maximize the chain's operation.
In his 18 months there, Johnston has sought to strengthen Albertsons' foundation by restructuring its administrative operations, exiting four markets -- Nashville and Memphis, Tenn., and Houston and San Antonio, Texas -- with 95 stores, and closing 157 underperforming stores in other parts of the country.
"We've taken a company that was carrying around a $3 billion albatross that made no money and cut that part of the company out so shareholders can get the right return-on-invested capital," Johnston told SN.
Adding Dual-Branded Stores
One of Albertsons' primary strategies going forward involves operating more dual-branded stores -- complete food and drug stores under one roof, based on the Jewel-Osco model that has been in operation since 1961.
But dual branding means more than operating combination stores with pharmacies and expanded drug assortments, Johnston told SN. "It's a matter of adding an entire drug store into a supermarket, including a broadened selection of nonfoods," he explained.
In addition, where combination stores have a single manager overseeing the entire store, dual-branded stores have separate managers for the food and drug operations, "which provides expertise on both sides and allows each to focus on the separate businesses," Johnston said.
Dual branding boosts sales of the entire store, he added. "The average pharmacy customer buys 30% more food than the average food customer," he pointed out.
According to Lynch, "Pharmacists are among the most trusted people in America, and with the population aging, anytime a customer gets involved with a pharmacy, he usually stays there."
Albertsons' drug operations are called Osco Drugs in all areas except Southern California and Reno, Nev., where the stores are called Sav-on Drugs.
Since opting to expand the dual-branded format last year, the chain has opened 36 Albertsons-Osco stores in Phoenix and seven in Tucson, Ariz.; nine Albertsons-Sav-ons in Reno and a single Albertsons-Osco store in Omaha, Neb.
The company is in the process of rolling out additional dual-branded stores in Omaha, with Southern California as the next area scheduled for a major conversion to dual-branding, Johnston said. The goal there is "to convert as many freestanding stores as possible to the dual-branded approach," he explained, although he declined to cite specific numbers.
He said Albertsons intends to start opening Albertsons-Sav-on stores before the end of this year in Southern California, where it operates 270 supermarkets and 306 freestanding drug stores.
Albertsons expects to introduce dual branding in most markets in which it operates, Johnston indicated. However, in markets like Philadelphia, Dallas and Florida, where it does not operate drug stores, the company has three options, he told SN.
"We can bring Osco or Sav-on into the market, or we can acquire or license a locally based drug brand, or we can find a drug store brand that has a strong identity in each area and form a joint venture, as Albertsons did years ago with its Skaggs-Albertsons combination stores in the Southwest.
"In fact, although it's been many years [since that partnership ended], the Skaggs-Albertsons alliance has left a lot of people in Dallas still perceiving Albertsons as having a drug store identification."
Johnston said Albertsons has not yet decided which of the three options to pursue in markets where it does not have a drug store brand. "We'll take it one market at a time, and as we convert one, we will do research in the others to get the right answers," he explained.
Testing Reverse Combos
While it seeks to develop dual-branded stores, Albertsons is also exploring the option of converting freestanding drug stores into reverse combination stores -- drug stores with expanded food offerings -- and operating the two formats in tandem in a market, Johnston said.
Albertsons has been testing reverse combination stores for the past nine months at a handful of Osco Drug locations in the Chicago market, he pointed out.
"Over the years, the footprint of drug stores has changed dramatically as they've gotten much larger than necessary for optimal efficiency," Johnston said, "and we believe several thousand square feet can be set aside for food items, which will make it possible for a drug store to become a one-stop-shopping destination."
Albertsons is satisfied with the initial consumer response to the reverse combos in Chicago, Lynch noted. "We're seeing that we can extend the offerings with more items, including refrigerated product, and that's the direction we're moving in now."
''And we're moving into more fresh product as well," Johnston added. "We're determining what to add now, and we anticipate making fresh products available within six months."
Now that it's shrunk the company's size, Albertsons intends to invest in new store growth and remodeling activities over the next year and a half, at a cost of $1.7 billion, "and we're making sure that money goes into all the right places," Johnston said.
With the sale of underperforming stores and the four market exits, "we can focus on markets of choice, which means we can double-down in places like Los Angeles, where we'll invest $1 billion over the next three years, and San Francisco, where we'll invest $180 million this year," Johnston said.
Albertsons has also disclosed plans to invest $500 million over the next three years in its Southwest division; $184 million over two years in the Dallas-Fort Worth metroplex; $100 million over four years in Austin, Texas, and $100 million over four years in its Oklahoma operation.
Focusing on Neighborhoods
Part of the remodeling effort will involve gearing stores to the needs of their specific neighborhoods. Toward that end, the company has developed specific Hispanic, African-American, Asian, kosher and organic marketing programs, featuring expanded offerings throughout the stores to serve those demographics, Johnston pointed out.
One outgrowth of those programs is Albertsons' new Hispanic format -- SuperSaver Foods -- which debuted in late August at three pilot units in Southern California. According to Johnston, the concept is still a work in progress.
"We don't know how long it will take [to get the concept right], but we look at the Hispanic format like we did our online business, which we established in Seattle and continued to test there before expanding it to other marketplaces.
"We feel we need to be very careful with the product mix, but we think we did our homework well, and we believe we've hit a home run with the first three stores."
According to Lynch, all three are doing well, "and all have exceeded expectations," he said. However, he declined to be more specific.
Albertsons utilizes its kosher format at stores in Florida, Philadelphia, Chicago and Dallas, with full-time rabbis at some locations, "and we've had a lot of success with that format," Johnston said.
"Our goal is to match the ethnicity of the neighborhood to the assortment in a store's deli, bakery and meat sections. The more we focus on ethnicities and neighborhoods, the more we learn. The kosher program is just one example."
The kosher program is aimed at a broader audience than just Orthodox Jews, Johnston pointed out. "Of all the kosher food sold last year, 30% was purchased by Jewish people but 70% was purchased by vegetarians, lactose-intolerant consumers or those concerned with sanitation. So as we drive deeper into various consumer segments, we're finding out more about the communities we serve and more about neighborhood marketing."
Looking for Acquisitions
Despite disposing of more than 250 stores during the past 18 months, Albertsons has its corporate eye out for acquisitions, Johnston said. "We're looking at deals every day. There's a lot of stuff out there, and we're not afraid to be an acquirer."
He declined to pinpoint where an acquisition might occur, but he said Albertsons is more likely to seek out fill-in purchases -- what Johnston termed "bolt-on acquisitions" -- "and we expect to see something happen in the next 12 months," he said.
Albertsons also has plans to boost its private-label penetration, which Johnston said stands at 16% to 17%, compared with 25% to 26% "at the best-in-class in the industry, and we plan to be best-in-class in private label eventually, though we haven't set any timetable to get there," he noted.
Albertsons recently hired a new vice president of corporate brands -- Terry Lee, who helped Safeway develop its Select line of premium private-label products. "We're not looking just at developing a premium tier -- we want to enter the private-label fray, which has been an underdeveloped area for Albertsons," Johnston said.
Analysts: Albertsons on Right Track
Wall Street analysts are generally upbeat about the directions Albertsons is moving, though they have some ongoing concerns.
According to Chuck Cerankosky, an analyst with McDonald Investments, Cleveland, "Johnston came in and took a real hard look at the business and compared what Albertsons was doing with what was working for others in the industry. The management team took time to see what was going wrong before it got there, then pulled out of markets where it was weak and applied improved operating strategies to its other stores, and now it's trying to grow from that base."
One of Albertsons' strengths, Cerankosky said, is its willingness to differentiate its stores on a market-by-market basis. "Albertsons has proven it has the ability to cater to an upscale or downscale customer, depending on the specific marketing area, and that's the direction it's moving," he explained.
One of the company's weaknesses -- which is now being addressed, Cerankosky noted -- is store remodels, particularly in California, he said. He also praised Albertsons for its willingness to offer loyalty card programs -- something Albertsons' previous management deliberately chose not to do.
Gary Giblen, senior vice president and director of research for C L King Associates, New York, also praised the chain for adopting frequent shopper cards, as well as for setting its sights on expanding the dual-branded store format.
"But Albertsons still has a lot of work to do," Giblen said. "What it's doing now is applying intelligent Band-Aids instead of really going in for major surgery. Management says there are no sacred cows, but we've seen only a handful of cows gored so far.
"To be successful, it must make more decisive cuts and retreat from additional markets where it won't be competitive so it can put its resources into markets where it can be competitive. For example, it should just give up in markets like Austin, where H.E. Butt and Whole Foods are strong, and Florida, where Publix is a better operator.
"And all the evidence indicates that it's not addressing the most competitive thing, which is that prices are too high. You can have all the kosher merchandise and all the Hispanic stores you want, but you must cut costs in a more structural way, and until now, Albertsons has pressed only short-term cost-cutting."
Meredith Adler, managing director for Lehman Brothers, New York, also said she believes Albertsons should exit Florida, "though with the population growth there, I can understand their reluctance to leave, and they're going to try to make that operation work. But one consequence of selling underperforming stores and exiting markets is that the company's cost structure is too high, and that's a real challenge going forward."
She also said Albertsons has a competitive advantage operating both supermarkets and drug stores, "and the dual-brand strategy is a good way to leverage that advantage."" But I'm concerned the company is not as aggressive on pricing and promotions as Safeway and Kroger, and that could hurt Albertsons in the long term, maybe even as soon as next year."
Jonathan Ziegler, San Francisco-based managing director for Deutsche Banc Alex. Brown, New York, said Johnston took the right approach when he joined Albertsons. "He took a page out of Safeway's playbook from the early 1990s by rationalizing assets, getting rid of those that won't work and sticking with markets with good real estate and good population growth, with a focus on remodeling stores instead of building new ones and on getting productivity improvements and employee participation.
"As a result, Albertsons looks like a long-term winner because it's capable of doing what it set out to do -- getting rid of underperforming assets and figuring out how to market to the demographics around each store."
The analysts said they see Albertsons' decision to roll out dual-branded stores as a positive development. "Jewel-Osco is the most successful division in the company," Giblen said, "so it would be very positive if Albertsons can replicate that success elsewhere."
According to Ziegler, "The dual-branded concept helps Albertsons differentiate itself, particularly among an aging population that's interested in healthy living and eating."