BACK TO BASICS 2001

ROSEANNE HARPER / ROBERT VOSBURGH / LYNNE MILLER / COELI CARR

Like schoolkids getting a classroom introduction to their ABCs, post-consolidation retailers are spending their days mastering the four Ps: people, partnerships, performance and profits. In the fresh-foods departments, all four have emerged as critical components in developing strategies that help retailers satisfy the business needs of efficiency and department accountability -- and, at the same time, meet ever-changing consumer demand.

People

Newport Avenue Market in Bend, Ore., put its money on its people and hit the jackpot -- with profits that keep climbing.

In an unusual program, owner Rudy Dory ultimately shares 60% of his company's profits with all employees, including part-timers, and he maintains it's one of the best investments he has ever made.

Indeed, taking the profit-sharing concept all the way down to the store's shelf stockers and its part-time clerks, equalizing all department managers' pay, and giving associates regular performance reviews are key elements of a system that has helped this single-unit, upscale independent survive among giants like Safeway and Alberston's, Dory said.

"It's our people that make the difference. Maintaining a core of excellent key people is what keeps our customers coming back. They see the same faces when they come in and that gives them confidence in us. It's a comfort level. And that's our whole life -- our people and our customers."

Each one of the years since the company launched the multifaceted pay/reward system shows it did the right thing, Dory said. Sales volume has grown at least 11% a year, and profitability has risen an average of 25% each year, even as Wal-Mart and Costco moved into the area. Profits in 1999 soared 34% over 1998. Last year, they were up 22% over '99. And the current, cream-of-the-crop work force bodes well for keeping those numbers going in the right direction.

By its very nature, the program -- which has provisions to reward individual employees for performance above and beyond the call of duty -- nourishes the best of the best, and that's particularly important in the fresh departments, Dory said.

In those departments, there is a lot of customer-associate interaction, which creates an opportunity to showcase good service, he pointed out.

The store, an IGA Plus market, also -- in the face of competition -- was transformed over the last few years from a traditional supermarket to what Dory calls a specialty food store with an emphasis on perishables. It's designed to stand out in an over-stored market because of its quality and service. It features in-store chefs, for example, and it employs two full-time "demo moms," who take their jobs very seriously.

"We make our own meatloaf here, and one day when one demo mom was offering customers a sample of it, we sold 40 pounds, and 20 pounds of mashed potatoes to go with it, in less than two hours," said Dory's wife, Debbie.

"We've chosen to have older women do the demos, because they know how to cook. They can answer customers' questions about ingredients and cooking. They're also instructed to help customers if they look like they can't find what they're looking for," Dory said.

All associates at Rudy's Market know how important the customers are to the business' health, and they treat them accordingly. But in addition to the service and the selling sensibilities the profit-sharing system engenders, it also keeps associates cost-conscious.

"They take better care of the equipment, and they're careful about how their department looks, because they want us to do well," Debbie Dory said.

Her husband offered some examples.

"If the deli slicer is making a weird noise, our people tell us about it right away, and that's important. It means there's something wrong that should be taken care of. What might be a $50 repair today could become a $500 repair if nothing is done about it, and it grinds down," Dory said.

"The same goes for those little fans in the coolers. They're supposed to run quiet. If they're making an odd sound, we hear about it quickly."

Dory also recounted an incident in which a motorist ran into the store's pole sign in the parking lot. An employee saw it happen, but the motorist didn't stop and the employee didn't get the license number. The repair cost $3,000.

"We told everybody this was an example of repair and maintenance that affects the profit-and-loss statement. All of a sudden the light went on. By now, we've found that, with this program, we have our whole team [of employees] being policemen of our assets. It's not just me and management anymore."

A drop in turnover, too, has cut training costs, and the retained core group has become immersed in the company culture that puts the customer first.

"Right now, we have the most talented staff we've ever had," Dory said.

The improvement began eight years ago when Dory hired a consulting firm to help find out how to make the business more profitable. The first thing the consultants did was survey every employee to elicit comments, suggestions and complaints. The most common complaint was very telling, Dory said.

"Their No. 1 beef was management's toleration of incompetent employees. Second, they wanted a way to make more money," he said.

Latching onto that clue that employees didn't want to be lumped together with the lowest common denominator, and that they wanted recognition for outstanding work, the Dorys set about -- with the help of the consultants -- devising a system that would address both of those concerns and at the same time boost sales and profits.

Here's how the profit-sharing part of it works:

After the company takes a certain percentage -- comparable to what a bank would pay -- as return on investment, Dory then sets aside 60% of profits beyond that and divides the total using a point system. Employees, including part-timers, are eligible for point assignment 90 days after they've been hired.

All part-time employees automatically are assigned half a point; full-timers automatically get one point. Department heads automatically get 10 points, and the store manager gets 25 points. Then associates who have some responsibility other than clerking or stocking are assigned additional points, depending on what their responsibilities are.

"For example, the head cashier who does some supervising and scheduling, and the dairy order writer, would get an extra point. A good performance review could get you another point, or an employee, for instance, who we just notice is always ready to fill in when he's needed, who goes beyond what we expect of him, could get an extra point," Dory said.

So every employee has at least half a point, and their share of profits would depend on how many points they have. The value of a point is determined each month by dividing the total number of points assigned into the amount that represents 60% of profits after Dory takes a percentage for ROI.

Using theoretical numbers, if 60% of the month's profits equaled $50,000 and 100 points had been assigned, then a point would be worth $500.

The store manager and department managers are given the opportunity to assign points to exemplary employees, but they're reminded that each point assigned dilutes the points' value, Dory said.

At the same time the Dorys launched the profit-sharing system, they also decided to pay all department heads at the same wage rate.

"That was my wife's idea. The meat manager was being paid more, for instance, than the produce or deli manager because the meat department -- the only department that is -- is union. So how fair is it that the meat manager be paid maybe a third more than the deli manager? The deli manager is running maybe 8 or 9 people instead of 3 or 4. So we brought all department managers' pay up to equal the union rate the meat manager gets," Dory said.

The complaint employees had expressed about incompetent coworkers has been taken care of with the review system. Every employee is reviewed at least once a year, "and, of course, problem employees are reviewed more frequently, and dealt with." And salary increases for deserving employees are not subject to departmental ceilings as they had been in the past. What's more, employees now have the opportunity to participate in a 401k savings plan the company instituted around the same time. The company matches their savings 50 cents to the dollar.

"Our system isn't perfect, but it helps," Dory said.

Possibly the best example of the system's worth is that both Dory and his wife can be away from the store for extended periods of time without worrying about the business. The employee team takes care of things.

In fact, while they were away for a period of six weeks, working on an IGA International project in Singapore, the store rang up record earnings and profits, Debbie Dory pointed out.

This year the picture won't be as bright as it has been, but that's not the fault of the system or of the employees.

"Our new store was a misadventure," said Rudy Dory, referring to a new, from-the-ground-up store two miles away that he opened last summer and has since closed.

"We just didn't have the customers, and in the meantime, two other stores opened here, Ray's and Wild Oats. It'll take a little while for us to recover. It will be the first year in I can't remember when that we'll have no growth."

Partnerships

Post-consolidation retailers are choosing suppliers who can help supermarkets leverage newfound efficiencies in the procurement, distribution and merchandising of perishables.

The success of these emerging partnerships, or alliances, depends largely on the willingness of both parties to clearly define goals and share data with one another, retailers and vendors.

"Every one one of us [retailers] basically has the same opportunities at the consumer level, carrying the same products at a good price," observed Larry Taylor, director of produce and floral for Spartan Stores, Grand Rapids, Mich. "We can get customers in with price, or by offering bigger benefits. I like to think the same way about [selecting] our vendors."

Taylor noted that the company, having just bought another retailer, is always on the lookout for "value-added" vendors, who can bring after-sale services to the deal, rather than simple product.

"Logistics and communications have had more and more impact on our success," he said.

Jay Dyer, director of produce and floral for Super Discount Markets, operating 21 Cub Food stores in the Atlanta market, said his company is increasingly looking for vendors who can help the retailer change along with its customers.

"They say that within the next 10 years, the African-American population will be less than the Hispanic population," he said. "So, what are we doing to [manage] that and understand our customers' needs? And do you really know my customer?"

The influx of new national-chain competition is also forcing independents like Super Discount to focus on "winning in your own backyard," Dyer said, adding that suppliers have emerged as the ideal playing partner in the new game. The retailer teams up quarterly with its primary wholesaler, Supervalu, Eden Prairie, Minn., to map out strategies for the next sales period, he added.

Other forward-thinking suppliers have heard the call, and are rewriting their sales strategy to include more of these back-of-the-house services, according to Dave Russell, vice president of sales and marketing for Standard Fruit & Vegetable Co., Dallas.

"It's a combination of growing geographically and developing collaborative strategic relations with our retail customers," he said, describing how Standard has evolved from a simple transaction company to one with greater distribution capabilities and sales-tracking tools -- at the request of retailer customers.

Taylor said price remains a critical component of the total sales formula, but retailers like Spartan have become more flexible if vendors can apply value-added, post-sale services.

"Pricing needs to be an overall part of it -- you can't take your eye off of it," he said. "But there's different ways to leverage it. You don't have to be the cheapest. What we need is support when we want it to run a promotion. And bring in your expertise."

The panel, who spoke at the annual convention of the United Fresh Fruit & Vegetable Association, also agreed that contract pricing is becoming more of the industry standard than an exception. The retailers in particular, acknowledged that the trend is still controversial, and the temptation to take advantage of lower spot prices is still strong.

"You have to be careful, because you can become conservative in your promoting," added Dyer. "The margin goes to the bank, and you lose your image by not promoting the right items."

Standard's Russell said that although contracts are presented as a "win-win situation," the vendor often comes up a loser in the deal.

Performance

Unlike traditional grocery and frozen-food aisles, fresh-food departments offer retailers a dynamic, high-profile way to stand out from competitors, but at the same time, these labor-intensive operations present managers with bigger operating challenges.

To boost performance, retailers have followed different strategies. In recent years, a growing number of supermarket companies have opened small-format stores in urbanized residential areas.

At the same time, some of the country's largest retailers, under pressure to achieve greater efficiencies and improve bottom lines, have done away with unprofitable fresh-food stations or scaled back on selection. In some cases, cutbacks have come in the wake of consolidation.

In a wealthy suburban Indianapolis community, O'Malia Food Markets opened a 4,200-square-foot unit that's essentially a showcase for fresh meats, with a limited selection of groceries and other perishables. This type of store could give the retailer a way to enter markets dominated by large competitors, Danny O'Malia, president of the seven-store independent chain, told SN [see "Steak Out," SN, April 23, 2001].

O'Malia said the company will consider opening more meat markets of this size, although finding enough meat cutters could present a challenge, he added.

One of the leaders in retail prepared foods plans to unveil a small-format neighborhood market this summer in an affluent section of Richmond, Va. Ukrop's Super Markets will open a 12,000-square-foot store, to be called Joe's Market, and it will emphasize fresh meals, baked goods, fresh meat and seafood and fresh flowers [see "Ukrop's Set To Launch Spinoff Concept," SN, April 2, 2001]. Joe's Market will also have a streetside cafe.

Research has shown that consumers like the intimacy of small stores, so retailers who venture into the format could find a receptive audience. Rolling out small stores also gives retailers a way to enter new markets, especially in high-rent areas where space comes at a premium, making it next to impossible to open a full-service supermarket.

At the same time, managing small stores requires a deft hand.

"Mistakes are easy to make with small stores," said Stephan G. Kouzomis, of Entrepreneurial Consulting in Louisville, Ky.

One of the most common mistakes is to take a cookie-cutter approach to merchandising, he said. "In general, supermarkets say, 'If I can create a different format, I should be able to duplicate it in every small city I'm in,"' he said. "Usually that doesn't apply."

Retailers must analyze individual markets first before developing the merchandise mix. "You've got to make sure you've got the right products," Kouzomis said.

Constant replenishment of fresh merchandise is one of the keys to the success of a small store, said Gerald Lyons, a partner in MarCom Communications, a Greer, S.C., consulting firm.

"They'll live and die on how good they are at being perishables marketers," Lyons said. "You've got to have things coming in on a daily basis."

A line of specialty items with gourmet appeal -- products that are not available at a parent company's mainstream stores -- can be used to round out the mix of merchandise, he said.

Even a top gun like Ukrop's can fail in the small-store arena. The retailer's Fresh Express store, a nontraditional deli/restaurant unit, closed in 1999 after six years. The store's location -- in a non-residential downtown Richmond neighborhood with little evening foot traffic -- worked against it [see "Ukrop's Stops Fresh Express, Will Plant a Bank Branch," SN, March 8, 1999].

Consolidation within the industry has led to cutbacks in some fresh foods departments. One of the leaders in the competitive metropolitan Chicago market, Dominick's Finer Foods, has scaled back its selection of prepared foods at some stores, and has done away with its Fresh Cafe departments at certain units, observers told SN.

One source said the change became apparent soon after Safeway, Pleasanton, Calif., acquired Dominick's in 1998. Safeway officials did not return phone calls from SN seeking comment.

"They appear to have significantly retrenched from what used to be a major commitment" to prepared foods, said Bob Goldin, a consultant with Technomic, a Chicago-based food service consulting firm.

Reductions can be seen at the company's service delis, as well as in the Fresh Cafe departments, he said.

"They were strong in that area," Goldin said. "I think that was a differentiator for them."

But the change isn't necessarily visible at all locations. The prepared-foods departments, featuring pizza made from scratch, Asian foods, center-of-plate meals and salad bars, continue to enjoy a high profile at certain stores, said another observer who is familiar with the company's deli operations.

"All in all, if you'd go into a Fresh Cafe, you could get an excellent meal," the observer told SN. "The variety is still there."

Some retailers have taken a hardnosed look at the performance of certain departments and decided the returns did not justify the operational expense.

Winn-Dixie Stores, Jacksonville, Fla., last year announced it would cease to operate melon bars and salad bars, and scale back space devoted to other fresh foods. The departments were not profitable, company officials said.

Profits

Supermarkets need to start thinking on a smaller scale by satisfying customers' needs on a one-to-one basis to increase revenues, according to a national food services consultant who advocates taking a "local grocer" approach.

Gone are the days when all a retailer would have to do is build a store, stock aisles with goods and then expect stampeding customers to make purchasing decisions based on whatever happened to be on the shelves.

"The customer is king now," said Terry Roberts, president of the Pittsford, N.Y.-based consulting firm Merchandising by Design/The Design Associates. "The current attitude, which has been developing over the last several years, is 'This is what I'm looking for and what I intend to buy, and if you don't have it, I'll go somewhere else.'

"Wherever they shop, customers want to feel good about spending money there, whether it's because of a store's quality, service, convenience or selection, especially now that money is so dear," Roberts said.

And with competition so intense, supermarkets can't afford not to meet customer demands, retailers agreed.

"Smart, successful retailers are wise to explore any avenue that helps them understand their customers' needs," Rich Savner, director of public affairs, Pathmark Stores, told SN. "We'll visit or speak with any merchant or consumer to learn about any food product we don't already sell."

And many of those product searches are on behalf of Pathmark's ethnically diverse community of shoppers, whose loyalty the chain wants to keep, he added.

"Since our inception in 1968, we've focused on serving the needs of these divergent customer groups who shop at our stores," Savner said of the 143-store chain, based in Carteret, N.J.

Typically, Pathmark stores feature a power aisle that often covers as much as 5,000 square feet. Here, all mainstream produce, deli, seafood and some meat items are integrated within the appropriate section of that aisle, Savner explained. Smaller Pathmarks contain modified versions of the feature.

Because of the chain's continued commitment to reaching ethnic communities, the retailer recently appointed a 25-year Pathmark veteran in category management to serve as director of ethnic merchandising, a newly created position designed to better serve the chain's African-American, Hispanic, Asian and Jewish customer base.

One of the director's first hires was a rabbi to serve as a kosher consultant in the Kosher Alcove of its Sheepshead Bay store, located in a section of Brooklyn, N.Y., that's home to many Jewish Orthodox, Hasidic and Reform customers. The on-site rabbi -- a year-round, full-time Pathmark employee who works an eight-hour day -- attends to the Jewish shopper's food-related needs and requests. The Pathmark store located in Monsey, N.Y., offers the largest selection of Kosher products in the chain; every Passover, its holy day merchandise doubles when avid customers visit and shop from as far away as Massachusetts.

Another Pathmark -- a 60,000-square-foot prototype store located in N.J.'s affluent borough of Edgewater -- serves many two-income households, as well as a large Asian community. This unit boasts a full-time, on-premises chef who creates fresh meals.

Retailers who believe effecting lower price points is still more important than coddling the customer need to rethink their game plan, Roberts suggested.

"Everything a retailer does has a value perception for the customer," she stated. "Retailers need to think of a customer as an individual with needs to be recognized, and then ask, 'How does the customer think of us?' The goal is to get a customer to think immediately of their store in the same breath as they think 'food shopping."' Finally, she added, retailers must ask themselves how to effect this input from customers.

Pathmark does it through comment cards for rating store categories, as well as by personal requests from customers passed on to store managers.

"If there's enough demand for a new product, we'll get it," Savner said.

Mollie Stone's Markets, a seven-store independent chain headquartered in Mill Valley, Calif., also enjoys a long history of satisfying its customer base's specific needs.

"The way all the independents compete in this region is by listening to the customers, and ours are very educated, demanding and aggressive," said Mollie Stone's owner, Dave Bennett. "We get daily feedback from our customers, who call, write and leave notes in the store about products they want," he said, noting there's "very strong dialogue" between his stores and their customers.

"Because of all the fine independents in our area -- where we're located all the independents compete not with the larger chains but with each other -- the customer here has a tremendous amount of choices," Bennett continued.

That means Bennett welcomes all types of comments, which recently included requests for microwavable packaging for a particular product and the gallon-size container of an organic dairy product; a complaint about a store employee; and even an inquiry about changing the store's hours of operation.

With "employee and customer satisfaction" as the signature of his chain, Bennett wants to please not only shoppers, but the people who work for him. "We have to earn loyalty every day," he said.

Pathmark's Savner also notes the potency of the independent to foster healthy competition, especially those businesses owned and operated by entrepreneurs from the ethnic community who possess an in-depth knowledge of merchandise.

"Those independents have specialties to serve their niche, and we want to provide the same," said Savner, adding that his stores may be bigger than the independents, but may be without employees who speak the language of a particular ethnic shopper.

A retailer's eagerness to interact with and please his customer base to increase revenues may strike some observers as a harkening back to a bygone era, and Roberts favors it.

"Customers are now saying they want to be important to someone's business, and if a retailer really listens to the customer, it evokes a little bit of 'Main Street' shopping," she said. "By being the 'local grocer,' your store becomes important to the customer. A retailer must understand today's perception of value, which is not necessarily the lowest price."

Roberts even advises retailers to design their stores with an eye toward making them a warmer place to shop, just as they once were. But Roberts dispels the notion that a store needs to be physically small to convey a helpful, small-town shopping environment that helps create the kind of customer loyalty every retailer dreams of.

"Customers are evaluating each store in their minds," Roberts advises. "'It was clean. They greeted me. The store is well laid out. I'm not paying a penalty for buying smaller quantities. Good service. Did they tell me how to cook the meat they're selling?"'

"You can be big, and still be small and nice," Roberts said.