SALT LAKE CITY -- Smith's Food & Drug Centers here said it has reached an agreement to lease its Riverside, Calif., distribution center and dairy facility to Ralphs Grocery Co., Compton, Calif.
According to observers, the deal should generate significant savings for both companies. But it could also be another sign that Smith's intends to exit a southern California market that has been problematic for the chain, observers said.
The terms of the agreement were not disclosed. The changeover is expected to take place in early February.
"The disposition of the Riverside distribution center will eliminate a big obstacle in our quest to reach profitability in California caused, in part, by under utilizing this facility," said Jeffrey P. Smith, chairman and chief executive officer of Smith's.
Byron Allumbaugh, CEO of Ralphs, added: "This new facility will meet the needs of Ralphs and Food 4 Less [which merged with Ralphs in June, as reported] far into the future. It will also substantially reduce previously projected capital expenditures." Smith's said it will supply its 34 combination food and drug stores in southern California from its 1-million-square-foot distribution facility in Tolleson, Ariz. -- which supplied those stores before the 1-million-square-foot Riverside facility opened last year.
According to Ralphs, the transaction will "modify and delay for several months" the integration of its Ralphs and Food 4 Less warehouse facilities. "However, the transaction will result in increased operating efficiencies, cost offsets and reduced capital expenditures," the company said.
Smith's entered southern California in 1991 with an ambitious expansion program that anticipated 60 stores in the region by 1994 and 60 more in central and northern California by 1997. However, the southern California recession forced the chain to lower expectations for the region, and the company halted expansion there in early 1994.
The slowdown of expansion for Smith's in southern California -- combined with continued weak operating results in the area and a September announcement that the company is looking to sell numerous unused real estate properties in northern California -- has prompted persistent reports that Smith's is laying the groundwork for exiting the state.
Mark Husson, vice president of J.P. Morgan Securities, New York, said this latest move by Smith's to lease the Riverside facility means that "now they'll be hitting their heads against the wall [in southern California] slightly more softly."
Husson said the deal "cleans up southern California" for Smith's because it would be easier for the chain to sell its retail stores to another operator without the distribution facility to complicate matters.
But he also said he believed the company would be "foolish" in the long term to exit a market "it has emotionally invested so much in."
According to Husson, the lease agreement should save Smith's $5 million to $6 million annually in pretax profits. He said he expects the company to achieve profitability in southern California in late 1996.