BAKER SEEKS TO PROLONG STATER BROS.' GOOD FORTUNES

ELLIOT ZWIEBACH

COLTON, Calif. -- Stater Bros. Markets' new president is taking the post at a time when the company seems to be at the top of its game.

Its sales and profits are at all-time highs; the chain is two years away from opening a new distribution facility combining nine warehouses into one; and it has become a major player in the Southern California market once dominated by the three major chains -- in large part as a result of the labor dispute involving those three chains. Sales for the year ended Sept. 26 are expected to be approximately $3.6 billion, up nearly 30%, with same-store sales for the fourth quarter up an estimated 16%.

In a interview with SN, Don Baker, who assumed his position last week, said he doesn't expect any shift in the way the 158-store chain is run now that he is president. "[Chairman and Chief Executive Officer Jack Brown] and I are on exactly the same page, and I don't anticipate much change in the way this company will operate," he said. "I've been with Jack for a long time, and in my opinion, he's one of the great visionaries among independent operators in this business. He took this little company and stuck up for it, and look at us now."

Baker, 63, has been with Stater Bros. since 1982, and he's worked for more than 25 years with Brown, who relinquished the role of president to focus on the company's move to a new headquarters and distribution facility.

Brown, 65, told SN Baker's elevation to president does not signal any succession plan "because I have no plans to retire [as chairman and CEO] now or in the distant future."

Baker acknowledged that Stater owes much of its recent financial upswing to the 141-day labor dispute in Southern California that ended in March, during which consumers seeking alternatives to struck and locked-out chains discovered Stater Bros.

"No one could really foresee the magnitude of what happened," Baker told SN. "The movement of customers [to Stater] was overwhelming, not necessarily because consumers supported the striking employees or the union but because they didn't want to deal with picketers.

"We were pretty overwhelmed for the first week or so, but once we got our distribution support moving and ramped up our scheduling in the stores, we were able to handle it, and after three weeks we were basically settled in for business as usual."

He said Stater's ability to give customers a reasonable shopping alternative emanated in part from its acquisition in 1999 of 43 Albertsons and Lucky stores. "That deal changed our company forever," Baker said, "because all of a sudden we added $600 million a year and a group of larger stores, and operating those stores made us into a real player."

Within 30 days of taking them over, Stater had added service meat cases and new front-end systems and reopened all 43 for business under its own banner, he recalled. "And it changed the way we went to market at all our stores because it gave us the opportunity to move more aggressively into service departments with knowledge of how to buy better and operate better in service fish, service bakeries and service floral."

Stater has always offered full-service meat at its stores, with about 75% of its meat sales coming through the service case, Baker said. "We feel it gives us a point of differentiation, and we like our customers to be able to talk with a butcher.

"Among new customers we picked up during the labor dispute, many have told us they stuck with us after the dispute was over because they like our service meat department," he told SN.

Another thing they like about Stater, Baker said, is its everyday-low-pricing program. "They tell us they like our simplified savings program and the fact we have no games, gimmicks or cards. Many new customers tell us they didn't realize how much difference there could be in pricing."

Stater Bros. has for years been the dominant operator in the Inland Empire -- the San Bernardino-Riverside County market that is considered the fastest-growing region in the U.S., Baker pointed out.

Of its 158 stores, 89 are in Stater's core markets, with 30 in southern Orange County, 27 in Los Angeles County, 10 in northern San Diego County and two in Kern County. Baker said he doesn't anticipate much expansion in Los Angeles County "because of distribution issues relating to time and traffic. Riverside and San Bernardino still have a lot of good retail sites, and there is still plenty of room for fill-in locations, and we're also looking for additional sites in south Orange County. But right now we think a lot of our future growth should be in San Diego."

Stater moved into San Diego County in 1999 with 10 of the 43 stores acquired from Albertsons. "We've been very well received there, and there's a lot of growth in that area, but we want to be in the right growth areas," Baker said. "We will have more stores in northern San Diego County for sure," he declared.

After opening three new stores during the fiscal year that ended last month, the company plans five new units between now and August -- two in Riverside County, in Beaumont and Wildomar, and three in San Bernardino County, in North Fontana, Adelanto and Apple Valley.

New stores average 44,000 square feet, Baker said.

Stater Bros. has been distributing products out of nine separate distribution centers here. However, it plans to move its operations seven miles west in 2006 to a 1.8 million-square-foot distribution center on the site of the old Norton Air Force Base in San Bernardino, and once that facility opens, "it will be easier to maintain our low-price leadership by becoming more efficient," Baker pointed out.

To help maintain its EDLP program in a market dominated by the three major chains, Stater opted to join the Topco cooperative nearly two years ago, Baker said, to give it greater buying clout, more on a par with Albertsons, Kroger and Safeway. "With combined sales among Topco members of $50 billion, we're able to buy with some of the same leverage as those chains," Baker said.

Asked how Stater maintained its EDLP program before joining Topco, Baker replied with a laugh, "We thought we were doing a pretty good job [on buying] before, but we found out once we joined Topco that we weren't."

Historically, Stater competed with Ralphs, Vons and Albertsons, but with the former two now part of Kroger and Safeway, their competitive positions have changed somewhat, Baker told SN. "One thing that is evident to me is that they each put more emphasis on private label than they did when they were locally run. We prefer to stress national brands, so we see their positioning as a positive thing."

Stater's private-label penetration is 20%, and that's where the company wants it to be, Baker said.

Baker started his industry career with Thriftway Markets in Richmond, Ky., in 1960. In 1967, he moved to Kroger Co., Cincinnati, and in 1972, he joined Hinky Dinky Supermarkets, Omaha, Neb., a division of The Cullum Cos., Dallas, as senior vice president, store operations and distribution.

Baker met Brown when Brown was president of Hinky Dinky, and after Brown moved to Stater and Cullum decided to sell Hinky Dinky, Baker told SN he was faced with the choice of buying some of the Hinky Dinky stores to operate as an independent or to move west to Stater. "I was tired of shoveling snow," he said, so he joined Stater in 1982 as vice president, warehousing and transportation.

He was promoted to group senior vice president in 1986, executive vice president in 1992 and executive vice president in 1998. Baker added the title of chief operating officer in 2001.