STATER'S PROGRESS

DAVID GHITELMAN

COLTON, Calif. -- Stater Bros. Markets here is leaving home.

The company that has long referred to its base as the "Inland Empire," a realm centered in San Bernardino and Riverside counties just east of Los Angeles, has begun a dramatic march toward the sea.

Not that Stater Bros. is abandoning the region it dominates. It has a 27.8% market share in San Bernardino and Riverside counties, which puts it well in front of its second-place rival, Kroger Co., Cincinnati, which has 21.0%.

But Stater Bros. is now expanding westward into fiercely competitive territory closer to Los Angeles and San Diego. Industry analysts interviewed by SN said the new, 40% larger company has a good chance of succeeding on this foreign turf. However, they also said the largest independent supermarket chain in southern California has no shortage of challenges ahead of it.

These include:

Remodeling 43 stores acquired in June, a task the chain doesn't intend to begin until January, and switching them to Stater Bros.' every-day-low-prices format, a task the chain began as soon as the ink dried on the acquisition agreement and had completed by Labor Day.

Competing against more aggressive operators, such as Safeway, Pleasanton, Calif., and Kroger, Cincinnati, in a region Stater Bros. doesn't dominate.

Running a larger company.

And whether, in this current age of consolidation, the company should try to grow on its own or be acquired by an aggressive, national company.

In June, Stater Bros., which for several years had remained relatively stable around the 100-store mark, acquired 43 stores and one development site from Albertson's, Boise, Idaho. Stater Bros.' haul was part of the nearly 150 units Albertson's was required to sell to win federal antitrust approval of its purchase of American Stores, Salt Lake City.

Thirty-three of the stores Stater Bros. acquired were flagged Albertson's and 10 were flagged Lucky Stores, an American Stores banner. These additional stores won't give Stater Bros. any beachfront property, but will bring the chain into San Diego County for the first time as well as increase its presence in Los Angeles County.

Jack Brown, Stater Bros. chairman, president and chief executive officer, said he doesn't expect the expansion to change the way the company does business. The additional units will emphasize low prices and cheerful service, as Stater Bros. stores have for more than 60 years, he said.

Brown, who joined the company as president and CEO in 1981 and added the title of chairman five years later, also has no intention of changing his very personal, hands-on approach to management.

Between the mid-June announcement of the Albertson's deal and the early August rollout of the acquired stores under the Stater Bros.' banner, Brown said, he had met with 2,100 of his 3,000 new employees.

While some of these sessions had the CEO speaking before large audiences, Brown said there were a great many one-on-one encounters as well. "They knew they were important because I am the president and CEO of this company, and I was there to talk with them," said Brown.

Meanwhile, Brown had informed Stater Bros.' other 10,000 employees of the deal through the company newsletter.

Industry analysts told SN Brown's people-centered style of management is one of the company's key assets.

"Stater Bros. is a very good operator," said Ted Bernstein, an analyst with Grantchester Securities, New York. "They do a good job on low margins because Jack Brown keeps his hand on the pulse of the market.

"He takes great pride in the company. I know it sounds trite, but he considers it a family enterprise," he added.

Bob Lupo, a high-yield bond analyst at BancAmerica Securities in Chicago, said, "The service that Stater provides is probably the best in southern California, in terms of friendliness, courtesy, helpfulness and knowledge."

Brown said the workers at the stores he acquired from Albertson's will be the determining factor in whether the expansion succeeds. To keep the stores' customers, Brown said, you need to keep the stores' staff, and Stater Bros. has so far retained 95% of the workers at the acquired units.

"We offered employment to all the people who'd been working in the stores with the same wage, seniority, job and benefits," he said.

"The employees are the key contact when you're acquiring something new," Brown added. "The employees are the ones who have to introduce us to their customers."

Brown has worked to retain supervisory personnel as well. "Nearly half the managers and nearly all the assistant managers came with us," he said. "The assistant managers in particular saw that the chance of their being promoted in the newly merged Albertson's was pretty distant. But we've already promoted two of them to store manager."

Last month, Stater Bros. reflagged all the former Albertson's and Lucky Stores it had acquired. The chain has also cut prices -- 5% at the former Albertson's, 2% at the former Lucky Stores -- to bring them in line with the Stater Bros. every-day-low-prices format. The chain is spending $6 million to replace the information systems at the acquired stores with its own NCR systems. Also, Stater Bros. has started selling its private-label products in the converted units.

Early results of the reflagging have been extremely promising, Brown said. The company had originally expected sales to decline 10% at the former Albertson's units, as customers went off to sample other stores. Instead, sales were up 10%, according to Brown.

"We had projected sales of $540 million at the acquired stores in the first year, but it looks like we'll do at least $600 million," Brown told SN.

As a result of the sales increase, the company is considering moving up its remodeling plans. "We had said we would wait until January because we didn't want to interfere with holiday sales," he explained. "However, we're in the process of deciding now whether we should move more quickly and start before the holiday season. We have our own construction company, so we can move as quickly as we need to."

Beyond remodeling, Brown said, the company will take a wait-and-see attitude about whether additional changes are needed at the recent acquisitions. In any case, Brown does not expect Stater Bros. to remove any amenities at these stores, which means the chain will have to expand its efforts in service departments, which are not part of the company tradition. Before the acquisition, "We had only three fish departments," said Brown. "Now, we've added 43 more. We had only 40 bakeries and 89 delis. All the stores we acquired have bakeries and delis.

"You've got to give the customer the whole package," Brown said. "Service departments are what everyone wants."

Size has been the principal factor keeping Stater Bros. out of giving its customers more service. The chain's average store size is roughly 30,000 square feet, although its new constructions average 43,000 square feet. The acquired stores average 42,500 square feet.

Even with the acquired stores, Stater Bros. units will remain among the smallest on average in the industry, according to figures from Grantchester Securities. On the other hand, the chain is one of the industry leaders in terms of annual sales per square foot ($749 per gross square foot), according to Grantchester.

Along with knowing how to sell a lot in a little floor space, Stater Bros. has also mastered the art of keeping its stores close to its distribution centers. Before the acquisition, according to Brown, the chain's average haul from warehouse to store was 30.5 miles. Although the newly acquired units will increase that average to 40.5 miles, Brown said, "our average remains at least half what anybody else's haul is."

Keeping all costs down is an important part of maintaining low prices. "Even our competition acknowledges that we are the low price leader in southern California," Brown said. "We've had to ensure that we could cut every dime of expense."

Another low-price factor in Stater Bros.' favor is it did not go deeply into debt to buy the 43 stores from Albertson's. "When this deal came to us, we were sitting on $60 million in cash," said Brown. "We were prepared for something to come down the road, maybe Ralphs, maybe Vons. When Albertson's started talking to us in December, we were in a strong position to move ahead."

Ultimately, to pay for the deal the company had to raise $525 million -- $450 million through an issue of senior notes, $75 million through an unsecured senior credit.

Still, analysts said the deal was a good one for Stater Bros., and the company's debt is far from excessive.

"They acquired these stores relatively cheaply," said Bernstein. "They paid a very, very attractive price."

Lupo, the analyst at BancAmerica Securities, said, "Debt at Stater is five times net income. That's a manageable level.

"The company is not as leveraged as Jitney-Jungle," he said, referring to the Jackson, Miss., food retailer. "And it's not in anywhere near as much a competitive environment as Jitney. Stater has its home base to fall back on."

But will the newly expanded company need to retreat to its Inland Empire? Analysts said it's a distinct possibility.

They noted San Diego and Los Angeles counties are a more competitive environment than Stater Bros. has been used to. "The company has been very aggressive on the price front," said Bernstein. "But if a large operator -- a Kroger, Albertson's or Safeway -- were to compete with it in a price war, it would be difficult for Stater Bros. to keep up."

Bernstein also said the expansion will test Brown's managerial acumen: "It's much more challenging to run a larger company. Everything about it is more challenging, from financial controls to getting food on the shelves."

And yet, Bernstein gave Brown and Stater Bros. a vote of confidence. "It's been a company I've liked for a long time, and a management team I respect," he said.

As for Stater Bros. long-term prospects, the analysts expressed little doubt: It is a prime candidate for a takeover.

Brown told SN, as he has said often before, he will not sell Stater Bros. to a company that is not in the food business. "Over the last five years, there have been several leveraged-buyout type investment groups that have expressed interest in buying the company," he said. "I told them what I'm telling you: This company will always be in the hands of someone in the food industry."

This means, according to Lupo, "Brown is making his list of suspects. He wants to sell to a strategic buyer, but one who's an industry participant, one that would protect his employees.

"Safeway could buy Stater," he added. "Kroger could still do it. Ahold could, perhaps, at some point in the future."

Bernstein also said he saw a merger in Stater Bros.' future. "Brown has said he will not sell to a financial buyer, but if a supermarket operator came on with a big enough bag of money, he would probably take it," he said.

Brown, in contrast, does not see the acquisition of the company as a done deal. And if Brown doesn't want to sell Stater Bros. to someone, the deal won't happen. The company is entirely owned by him and two partners, with Brown controlling a majority interest.

Yet, he is very aware of industry trends. "There is a tremendous amount of consolidation going on among the majors," Brown said. "Hughes was bought by Ralphs. Ralphs was bought by Fred Meyer. Then, Fred Meyer was bought by Kroger. It's like Pac Man.

"It's an ever-evolving industry," he continued. "In 1980, there were 20 chains in Los Angeles. Today, there are four. We're not just the largest independent chain in southern California, we're the only remaining independent from the 1950s and 1960s."

Brown said he envisioned a long and prosperous future for Stater Bros. "I think the future is bright for regional chains. They know the customer the best."

He proceeded to list a half-dozen regional chains, and, when asked if they weren't all likely takeover targets, replied defiantly and without hesitation, "The majors might acquire them, but they won't defeat them."

Meanwhile, Brown said, he is ready for the next deal. "I would like for our company to continue to grow," he said. "I think more stores will become available through consolidation, and we would look at them if they fit into our low-price image.

"Other than going to college and being in the Navy, I've worked in supermarkets since I was 13," said Brown, who's now 59. "I grew up in San Bernardino. My father was deputy sheriff. People knew him and they knew his boy. They know our word is good."