BOISE, Idaho -- Albertson's here is once again sailing on smooth waters after negotiating the choppy seas of integration in its California operations late last year.
Having gotten over its short-term "mal de mer," the chain is moving ahead with the integration of the other former American Stores Co. divisions: Acme Markets in the East, Jewel-Osco in the Midwest and Osco and Sav-on drugstores in the Midwest and West, respectively.
According to Peter Lynch, president and chief operating officer of the $38 billion chain, the formal integration of Acme began in July, with the drugstores scheduled for integration next year and Jewel expected to be completely integrated by the end of next year or early 2002.
"The original schedule was a little faster, but what we learned from California is that we need to slow the pace and do a better job of training, and I doubt we'll see any more bumps in the road as we move ahead," Lynch told SN.
"We realize now there's no need to hurry things. We want to spread the integration out and do it a step at a time so we have a smooth transition. There was a need to get California done as quickly as possible because we had to change the name on the Lucky stores, but with that completed, there's no big rush now."
The key to the post-merger Albertson's is flexibility, Lynch said.
"To be successful, companies must be willing to explore new ideas and listen to what customers, the local community and their employees are saying, and that's what we're doing at Albertson's," he explained.
The chain's neighborhood marketing program, which preceded the American Stores acquisition, reflects its flexible attitude, Lynch pointed out. "We're willing to operate a variety of formats and store sizes so we can tailor each location to the needs of its neighborhood," he said.
As Albertson's proceeds with the integration process, it is focusing its efforts on several developments at store level, Lynch said, including the following:
Putting local names on certain stores to establish a neighborhood identity while also including the Albertson's name as a tag to reinforce the chain's national identity.
Opening stores in inner cities, not only in former American Stores' markets like Chicago and Philadelphia, but also moving into new urban locations in Dallas and New Orleans.
Developing hybrid formats for its newly acquired drugstores as well as for older, smaller supermarket locations.
Working with vendors on initiatives to improve center-store sales.
Expanding its e-commerce activities.
Albertson's completed its merger with American Stores Co. in June 1999, more than a year after the $12-billion transaction was announced.
Besides being hit with a 145-store divestiture to get government approval for the merger, the company also lost a key executive with the unanticipated resignation of Richard King as president and COO just after the merger was completed. That title was not filled until March, when Lynch was named to succeed King after serving as executive vice president, operations, for the combined company.
Lynch, 48, came to Albertson's from the American Stores side of the merger, serving as general manager of Acme and, before that, senior vice president, operations, for Jewel. His elevation to president of Albertson's is indicative of the way the company has deliberately mixed executives from both sides of the merger at the top level.
In purely human terms, blending the two large companies into one "has gone a lot smoother than I thought it would," Lynch said.
"The managements of both companies had looked forward for quite a while to coming together and working hard, and while we did things a little bit differently at the two companies, we are all looking for the same things -- sales, profits and taking care of customers."
Because the old Albertson's was competing with American Stores' Lucky chain in California and Nevada, one of the company's first post-merger challenges was what to call those stores. Within less than six months, it opted to convert the Lucky stores to the Albertson's banner. In the process, Albertson's dropped Lucky's loyalty card program.
Converting the stores was the right move, Lynch pointed out. "The numbers show we made the right decision, and we see tremendous opportunities to add new customers and build our business as we remodel the former Lucky units."
But the move created problems because, until the conversion process was completed, Albertson's had to operate both banners and separate information systems, "and not all of our systems were in place [at Lucky during that period], so we were missing some reports and tracking information," Lynch said.
That short-term indigestion, which resulted in a hit on sales and earnings, was resolved by the end of last year, he added, "and things are moving ahead very nicely in California. The integration there is now basically over. It was a difficult transition, and we're pleased with the progress we're making and proud of our associates."
Jonathan Ziegler, San Francisco-based managing director of Deutsche Banc Alex. Brown, New York, told SN Albertson's deliberately disrupted its business to get the Lucky integration done quickly.
"Albertson's put the Lucky integration on a fast track instead of spreading the costs out, and getting that integration behind it was the biggest challenge of the integration process," he said. "Everything that follows will be less dramatic. And the integration process at Lucky helped Albertson's develop a skill set for the integrations that will follow."
Lynch echoed that remark when he told SN Albertson's will be a better company for what it learned in California.
"One thing we learned was that we need to do more training," he said. "You can't train the new people once and then walk away. We need to train them a second, third and fourth time. It takes multiple sessions to pick up on the new systems."
Albertson's is unlikely to encounter California-type integration problems in the other former American Stores divisions because it wasn't competing with either Acme or Jewel, "and because our systems are all in place at those operations," Lynch said. "As integration proceeds, our plan is to set up pilot stores in each division before we launch the integration of the entire division."
The company began installing systems and training programs at four Acme locations earlier this year, several months before the integration commenced in July, he said.
While it continues to digest the American Stores merger, Albertson's is not ruling out another large acquisition if the opportunity presents itself, Lynch told SN.
"Although we are focusing right now on our existing store base and on getting the integration done, we're still capable of doing a lot of things, and we're always looking," Lynch said.
Among the companies Albertson's may be looking at, according to observers, are two Fleming-owned retail chains -- Sentry Foods, Waukesha, Wis., and Rainbow Foods, Minneapolis.
However, Lynch declined to pinpoint any specific properties. "There are a lot of 'for sale' signs all over the country, and if the right deal comes up in terms of sales, profits and shareholder value, we would look at it," he said.
As it focuses on its existing store base, Albertson's is trying to figure out how to establish a national identity while keeping its neighborhood credentials intact. One solution is tagging local store banners with the Albertson's name.
In Memphis, where Albertson's acquired the long-established Seessel's chain in 1998, the stores are now called Seessel's By Albertson's; in the Philadelphia and Chicago markets, respectively, the company's advertising refers to Acme By Albertson's and Jewel-Osco By Albertson's.
The chain also tries to retain a well-established identity on stores with more localized market names, Lynch noted, such as Oak Park Market By Jewel in Oak Park, Ill., and Broadway Market By Albertson's in the chain's home base here. "When you can make customers feel like the store they shop at is their store, they win and you win," Lynch said.
"Besides, consumers move around a lot, and if they see a market with a familiar name attached, then tagging the stores makes a positive connection. Our plan is to retain the original name on stores, along with our tag.
"However, we have no plans to convert all our stores to the Albertson's banner."
Albertson's expects to utilize its localized approach as it moves into more urban centers around the country, Lynch said -- not just in Philadelphia and Chicago, where it acquired established urban chains, but in other urban markets, where it is opening neighborhood stores in underserved locations, Lynch said.
For example, the company plans to open its first store in New Orleans late next year in a rundown inner-city neighborhood less than two miles from the French Quarter. The store will be called Felicity Street Market By Albertson's.
"In New Orleans, Dallas and elsewhere, we will open inner-city stores at a time many other companies are running away from those locations," Lynch told SN. "The reason for our interest can be summed up in a single word: opportunity.
"There are a lot of people in those neighborhoods who are not being served, and as we build our business from sales and earnings, those are the kinds of locations we should be in."
During his years at Jewel, Lynch said Jewel became very involved in the local community, and Acme got more involved during his tenure there, he added.
Part of Albertson's post-merger philosophy has been to reinforce its urban credentials with the local community, he said. "Albertson's needs to be involved and to be a good corporate citizen," Lynch explained. "When consumers are in your stores two and three times a week, they need to see you involved. And we need to be part of rebuilding cities."
Albertson's also is working to make better use of the properties it has, regardless of size, Lynch said.
While it prefers to operate combination stores of 60,000 square feet, "there are some locations where 70,000 feet would be better if volume demands it and others where 50,000 feet would be sufficient," he explained.
Albertson's is also looking for ways to make smaller stores work, Lynch said, including the following:
Broadway Market By Albertson's, a 40-year-old store of 27,000 square feet here that was remodeled and reopened in 1998 with an expanded service deli; an extensive line of pre-made entrees, individually packaged desserts and cold single beverages to go; a coffee bar; a full-service meat and fish counter; expanded wine; a pharmacy; and automated self-checkouts. The store serves as a prototype for Albertson's neighborhood store format "in older, smaller stores where we have a great location and a loyal customer base but can't expand," Lynch explained.
Sav-on Drugs here, a new name in the Intermountain region, which opened in June in a 26,000-square-foot store -- about 10,000 square feet larger than most free-standing drugstores, Lynch noted -- that was downsized from a 36,000-square-foot supermarket. The location includes a full-line drugstore and pharmacy, with a drive-through prescription window; a full-service delicatessen; the chain's largest grocery department in a drugstore, with expanded frozen foods and dairy items; the largest video department in the company; expanded beer and wine, and a large nutrition department.
A remodeled Albertson's in Corona del Mar, Calif., a 16,500-square-foot conventional store in an upscale beach community whose customers were demanding more perishables. "So we downsized groceries; expanded meat and produce; added gourmet wines, cheeses and prepared meals; and made the decor more upscale, and we've done very well there since we reopened in May," Lynch said.
He estimated that approximately 20% of Albertson's stores are 33,000 square feet or smaller. "Since opening the Broadway Market prototype two years ago, we have remodeled 12 Acmes and two Jewels and added the one store in southern California, and we see several opportunities going forward for these types of stores across the country, in addition to building larger combo stores. So we have a lot of flexibility in our format development."
That flexibility is something Albertson's was beginning to explore before the merger but is certainly benefitting from since the merger, observers told SN.
"More so than some other operators, Albertson's tended to be very standardized in its store presentation and lacking in a lot of individual store pizzazz, and that was OK as long as it wasn't going into more competitive urban areas," Gary Giblen, director of research, C L King Associates, New York, told SN.
"But when it realized it needed to make a change, it adopted a neighborhood approach in which it began tailoring stores to the demographics of a given area, and it's done a very effective job developing destination departments, based on what is right for each neighborhood.
"That approach was already under way before the merger, but it was turbo-charged after the merger with American Stores because American had expertise operating in the kinds of urban areas where a store needs local color.
"Albertson's had things figured out before the merger, and then it picked up more expertise through the merger, particularly with the influx of management people from American, including Peter Lynch.
"Lynch is one of the most visionary, forward-thinking executives in food retailing, and he brings a great deal of imagination and creativity to the neighborhood concept," Giblen said.
According to Ziegler, the increase in urban locations should enable Albertson's to better withstand the proliferation of Wal-Mart Supercenters. "With its new mix of smaller box stores and larger combination stores in both central city and suburban locations, plus the drugstores, Albertson's has a good variety of formats and locations that will enable it to avoid bumping into Wal-Mart too often," he pointed out.
"Operating stores closer to urban markets will provide a great opportunity to grow sales shielded from Wal-Mart because the traffic and population density in those areas is really great, and those locations should enable Albertson's to reach deeper into the marketplace."
Asked about Wal-Mart, Lynch told SN, "Wal-Mart is a very good retailer, and the food industry can learn a lot from them. Over the past few years they have taken a lot of sales away from a lot of food retailers, and at Albertson's we need to drive those sales back.
"We believe that as long as our stores are updated and the management team is focused on customers, we do fine against them. As we move ahead and tend to our stores, we will be a tough team for Wal-Mart or anyone else to beat."
Lynch said Albertson's is particularly excited about adding free-standing drugstores, preferably in shopping centers where it can secure corner locations, "because we think that's the best way to serve consumers."
Plans call for opening 65 new drugstores in 2001 after adding approximately 50 this year.
At Acme, which operates in Philadelphia, New Jersey, Maryland and Delaware, Albertson's is investing some long-needed capital. "For years, American Stores didn't give Acme the capital to compete," Lynch said, "and the stores became old and non-competitive, and they weren't as profitable as they should have been.
"Over the last year Acme has been very successful. We've put capital into the stores and turned them around, and we now have the right formats in place -- a mix of combination and neighborhood stores."
He said 14 of the 159 Acmes have been remodeled on the Broadway Market prototype.
Lynch said Jewel, which operates in Illinois, Wisconsin and Indiana, "continues to be one of the healthiest companies in the U.S."
Programs in place prior to the merger are working well, he said, "and we are continuing with an aggressive capital program, expanding into both the suburbs and the inner city with combination stores and free-standing drugstores."
One area for expansion, he noted, is the 30-mile stretch between Milwaukee, where Albertson's operates 12 Jewel-Osco combination stores and 19 drugstores, and the Kenosha-Racine, Wisc., area to the north, where it has a single combo and two drugstores. According to Lynch, Albertson's is looking at opportunities to fill in the gap between the two cities.
In Memphis, Albertson's is in the process of upgrading its 15 Seessel's stores, adding perishables and more upscale departments where appropriate, including coffee bars, video sections and dry cleaning, Lynch said.
Albertson's also plans to try to improve its center-store operations in the next few months, he noted.
"The industry has done a wonderful job making the store perimeter exciting to enhance sales and earnings," he said. "But we need to go back to the center store and make it more vibrant for consumers.
"It's an opportunity for us to partner with the trade and develop win/win situations for retailers, vendors and consumers," he said.
"The center store is one place in our business where we've lost sales, but we expect to bring those sales back. We've got to take the confusion out of the store and make it more exciting and less boring."
Lynch said Albertson's is working with the trade on plans for the centers of its stores, with new concepts likely to begin showing up next year.
In the area of e-commerce, Lynch said Albertson's plans to expand on its two existing programs: a combination fulfillment center-retail store in Bellevue, Wash., and a dedicated fulfillment center in Fort Worth, Tex.
In Bellevue, customers are no longer limited to picking up Internet-ordered groceries at the store fronting the fulfillment center, Lynch said; as of June, the company has established pickup locations at 36 stores in the Seattle area, he said.
"We view this as a great opportunity for consumers, and we anticipate this is the answer to making Internet shopping more convenient -- and it gives us greater flexibility to move forward. We are now well-positioned either to expand or contract our offerings, and we see this as a growth opportunity.
"Unlike other e-commerce ventures, ours in Washington is not losing money."
In Texas, Albertson's has been offering deliveries of dry groceries from its warehouse in Fort Worth. Lynch said the offerings will be expanded to include perishables in the fall.
The Texas operation offers only home delivery and no customer pickup, "but we will learn from Seattle," Lynch said.
The company has already disclosed plans to add store pickup locations in Texas, although it has not indicated a starting date.
Albertson's is also testing the waters on selling drug items over the Internet, through Savondrug.com, which is available only in the Las Vegas and Kansas City, Mo., marketplaces, "and we're considering expanding that service," Lynch said.
