Action Plans

For supermarket operators seeking to gain an edge on the competition, the following pages offer some suggestions to help reduce costs and drive sales.

First, as companies like Stater Bros. and Unified Grocers have already discovered, the current environment offers an opportunity to refinance debt at low rates. It's “a real opportunity that shouldn't be passed up,” said Susan Anderson, an analyst with Citigroup, New York. “The markets are open, and you can get great deals now.” (See below.)

(In subsequent pages:) The slump in the real estate market also presents opportunities for retailers to explore alternative site locations, such as regional malls, and to look for ways to renegotiate lease terms. “There is no better leverage to go to a landlord and say, ‘This is what I am doing, and I am doing it down the street,” said Andrew Graiser, co-president, DJM Realty, Melville, N.Y.

Some retailers, including Kroger Co., Cincinnati, and Toronto-based Loblaw Cos., have also begun paying closer attention to employee engagement — an asset that can help retain both workers and customers. “If you can create an engaged employee, that person can have an enormous influence on the customer experience,” said Bob Kelley of Pure Culture Consulting, Midlothian, Va.

Retailers should also begin trying to figure out how to leverage new credit-card interchange regulations — it might be more difficult than they had hoped.

Refinance Debt to Capitalize on Low Rates

UNIFIED GROCERS and Stater Bros. Markets, two Southern California companies, refinanced debt late in 2010, choosing to lower their leverage while the iron was hot and interest rates were low.

“While interest rates remain near historic lows, this is a very challenging environment in which to seek credit — perhaps tougher and more restrictive than ever before,” Al Plamann, Unified president and chief executive officer, said. “Banks continue to be very careful and cautious about lending money — they prefer to do business with companies that have strong balance sheets.”

For retailers looking to ease their financial burdens, it's not clear how long the iron will remain hot, analysts told SN.

“Rates are low right now,” Susan Anderson, an analyst with Citigroup, New York, said, “and that's a real opportunity that shouldn't be passed up. The markets are open, and you can get great deals now.”

That wasn't the case a year ago, she noted, “but companies that might have had trouble refinancing a year ago can get some pretty good rates right now, and that could be the difference between success and bankruptcy.”

How long low interest rates will prevail depends on the economy and the Federal Reserve, Anderson said. “Rates are definitely likely to move up. In fact, they're off the bottom already.”

Bryan Hunt, a high-yield analyst with Wells Fargo Securities in Charlotte, also said the time to act would be sooner rather than later.

“The outlook for interest rates is they should be higher by the end of 2011, and they are likely to gyrate between now and then. From a refinancing perspective, today's rates are the lowest they've been in a year, with an average of 7-3/4% on six-year borrowings for ‘single B’ bond issuers.”

Stater's interest rate on the eight-year bonds it issued last month was 7-3/8%, Hunt pointed out, “which are the cheapest of any bonds Stater has ever issued.”

The Well Fargo Food Retailing Index for high-yield companies, which stood at 9% a year ago, is currently at 8.5%, “though it would be tighter if not for companies like A&P and Rite-Aid whose bonds have traded lower over the last year,” Hunt explained. “And the ‘single B’ index has tightened by about 2%, which is at the low point in the cycle, so a good time to refinance would be the near term because rates are likely to go up in the next 12 months.”

At investment-grade companies like Kroger and Safeway, borrowings tend to correlate with interest rates on Treasury bonds, which are currently available at a 10-year rate of 2.99%, compared with 3.5% a year ago, “but they've gone up a half-percent since October,” Hunt pointed out.

In November, San Bernardino-based Stater completed a private offering of $255 million worth of 7-3/8% senior notes, due in 2018, as part of a plan to refinance some of its existing debt at a lower rate.

A month earlier, Unified Grocers, the Los Angeles-based member-owned cooperative, completed two long-term credit agreements.

The company said a new five-year revolving credit facility would be used to refinance its existing line of credit, explaining it felt it was prudent to refinance the agreement a year before it matured to eliminate future risks “that could develop during these uncertain and volatile times”; the new three-year credit line for Grocers Capital Co., Unified's wholly owned finance company, has a borrowing capacity of $15 million and was made so the company could extend loans to its retail members.

— Elliot Zwiebach

Seek Opportunities for Non-Traditional Locations

PUTTING supermarkets in non-traditional locations can yield unexpected rewards, retailers told SN.

When Bristol Farms opened its first Northern California store in a regional mall in San Francisco four years ago, it merchandised it like its other stores, with an upscale mix of fresh and packaged goods and some foodservice offerings, Kevin Davis, president and chief executive officer, pointed out.

But that store has seen its business evolve in unexpected ways, making it the chain's highest-traffic store, albeit with the lowest average sales per customer — and with over 80% of sales consumed on the premises in the adjacent mall food court — he noted.

The store is located one level below Market Street, downtown San Francisco's main artery, next to the busiest BART subway station in the city — a site that attracts 25,000 people a day. Combined with another 35,000 people who patronize the upscale food court daily, that's 60,000 potential customers a day, Davis said, which is more people each day than Disneyland attracts — and that number jumps to 80,000 daily during the holidays, he added.

The store sells more coffee, sushi and individual baked goods than any of the other 13 stores in the Bristol Farms chain, plus a lot of pizzas and paninis, Davis said, “so it's a monster business, but very different from what we expected.”

Bristol is removing more and more canned and packaged goods, “and we're thinking of scaling back on the store's 27,000 square feet by 3,000 to 5,000 square feet as we eliminate more traditional merchandise,” Davis added.

The company — which was recently sold by Supervalu to its management team — is looking for other high-traffic mall locations in Southern California, he noted.

Whole Foods Market, Austin, Texas, has its flagship store in New York City in a high-end mall near Lincoln Center and another store at a regional mall in Paramus, N.J.. And Aldi, Batavia, Ill., is planning its first venture into an indoor mall in Chicago.

Costco Wholesale Corp., Issaquah, Wash., has opened eight warehouses in regional malls over the last few years in Virginia, Georgia, Arizona, Southern California and Quebec. Although some are located in the middle of the malls, the company prefers anchor locations with easy access to parking, David Messner, vice president, real estate, told SN.

“In some cases early on, we had to accept a configuration that made access to parking difficult, but we learned that the more difficult you make it, the less of a preferred shopping destination we become.”

To get into markets where sites are hard to find, Costco has been willing to try other non-traditional locations, Messner said, including a former car dealership in Burnsville, Minn., and a former children's amusement park in Melrose Park, Ill. In both cases, the cost of the land was lower, he pointed out, “because the less improved the property, the less expensive it is.”

Milwaukee-based Roundy's Supermarkets also opted for a site on land that was previously a car dealership when it opened its first Mariano's Fresh store just outside Chicago earlier this year.

According to Bob Gorland, Harrisburg, Pa.-based vice president for consulting firm Matthew P. Casey & Associates, Clark, N.J., supermarkets are beginning to look at such non-traditional locations as former car dealerships, former driving ranges and former bowling alleys as potential store sites because those areas are already zoned for commercial properties.

He said he believes regional mall locations are more likely to work for companies like Wal-Mart, Target or Costco, which have lower frequency of visits than conventional supermarkets, “though several conventional operators are starting to look at recycled boxes in regional malls. But they have to be locations that have good visibility to passers-by, good accessibility for cars and large local populations in addition to rents that are below market rates.

“The key is doing feasibility studies in advance to make sure non-traditional locations are right, regardless of how low the rents may be,” he cautioned.

— Elliot Zwiebach

Examine Leases, Relocation Opportunities During Slump

THE ONGOING RETAIL real estate slump gives supermarket operators more opportunities than ever to renegotiate their lease terms, according to some in the industry.

However, that window might be closing up, as many in the real estate industry feel the high vacancy rates that have plagued local malls might have bottomed out. The third quarter of 2010 marked the first time since 2007 that retail vacancy rates improved, or declined, according to a report this month in SN sister publication Retail Traffic.

The magazine cited data from New York City-based research firm Reis Inc., which found that the third-quarter vacancy rate for community and neighborhood shopping centers was flat at 10.9%, the same as the quarter prior, while the vacancy rate for regional malls fell slightly, to 8.8%.

Those rates are still higher than historic norms, however, and some observers have predicted that early 2011 could bring another increase in retail closures, especially in some parts of the Midwest.

In an interview with SN last week, Andrew Graiser, co-president of DJM Realty, Melville, N.Y., said retailers with leases coming up soon should take advantage of the glut of available space and use it as leverage in their negotiations.

“They really have to spend time looking around in their marketplace to understand where there are other opportunities,” he said. “There is no better leverage to go to a landlord and say, ‘This is what I am doing, and I am doing it down the street.’”

Although site relocation can pose challenges for supermarkets, the current environment might make such moves more appealing than they might have been a few years ago, Graiser said, and supermarkets remain in high demand as mall anchors.

Supermarkets also should take this opportunity to examine their leases and look for clauses that can be eliminated in exchange for concessions from landlords.

“There are so many things that supermarkets have in their leases that are non-rent issues,” he said. “They might have pad rights, or expansion rights — things that might have been important when they signed the leases years ago, but now they might be willing to trade off for rent concessions, or capital for remodeling.”

In addition, supermarkets that have the cash available might consider entering joint ventures on their mall properties, taking advantage of the fact that landlords overall have been strapped for cash.

Kroger Co., Cincinnati, last year invested more than $100 million in buying mall properties where it could become both tenant and landlord.

Asheville, N.C.-based Ingles Markets has long had a strategy of buying the neighborhood shopping malls where it operates, and currently owns 76 such sites, most of which contain Ingles supermarkets.

Graiser noted that the financial squeeze landlords have endured in recent years has in many cases led to another layer of ownership at mall operators, as lenders and other investors have stepped in.

“The banks are playing a much more prominent role than they have in the past,” he explained. “While before, if a supermarket wanted to make a change, they could talk directly to the landlord, now sometimes they have to go to the joint venture partner or their bank.”

Graiser also sees opportunities for small, family-owned supermarkets to market their sites to larger operators looking for locations.

“The fact is, there's not a lot of new development going on, and there a lot of bigger operators out there that have cash and are looking for places to grow.”

— Mark Hamstra

Build Customer Loyalty Through Employee Engagement

DAVID DILLON, Kroger's chief executive officer, recently recalled popping in on a front-end training session for the retailer and remarking to the attendees that they were learning skills they could apply to their “real job.”

“They look at me like, what are you talking about, we are learning about how to do our real job,” Dillon said, “and I said, ‘No, you're really not. Your real job is to make sure the thousands of customers who come through the store that day feel just a little bit better about the world around them than when they came in the door.’”

The effort at Kroger Co. is about more than wishing their customers a nice day. Studies show that companies with “engaged employees” — defined as workers who feel connected with their employer and as a result put forth discretionary effort to help the company succeed — can help build and support customer loyalty. While some companies in the supermarket industry including Wegmans Food Markets are known for strong support of employees, more recently larger companies including Kroger Co. and Loblaw Cos. have undertaken efforts to make hourly employees a part of their identities.

While Kroger's tactics in pricing and promotions have gotten much of the attention during its recent run of success, its 334,000 employees can have a powerful effect, officials noted. Engaged employees — referred to as a “great people” initiative by Kroger — is one of four elements of the retailer's “Customer 1st” strategy, joining efforts around price, products and the shopping experience.

A 2007 study by Towers Perrin (now Towers Watson) indicated that just one in five companies had a fully engaged workforce, but those that did tended to outperform their peers financially, and had a more stable workforce with less turnover.

Bob Kelley, a former Ukrop's executive who today heads Midlothian, Va.-based human resources practice Pure Culture Consulting, said supermarket companies in particular stand to gain a lot if they can develop an engaged employee base, but he emphasized it requires a strong commitment from a management team willing to integrate it into all areas of the business.

“In the supermarket industry, customers are interacting with the employees constantly. So if you can create an engaged employee, that person can have an enormous influence on the customer experience. And if it's a positive experience, that will increase the likelihood that the customer comes back and remains loyal, and is less likely to defect.

“Employee engagement has an absolute cause-and-effect relationship with customer loyalty, customer love and customer satisfaction,” Kelley added. “But you have to have a fundamental belief in it, or it isn't going to work.”

With the economy showing signs of recovering, retaining employees figures to be more challenging in the months ahead, giving retailers another reason to pursue engagement strategies, Kelley noted. Effective programs require infrastructure around recruitment and training as well as ongoing performance management.

At Kroger, an integrated effort to develop “great people” has the company working to acknowledge, reinforce and reward positive interactions with customers, according to Katy Barclay, Kroger's senior vice president of human resources. Collaborative training involving all employees at the company supports this effort, she said.

“Communication and training keeps our associates really connected to the business and it recognizes and reinforces behaviors that make a positive impact on our customers,” Barclay said in a presentation.

Kelley said he was working with smaller retailers on similar engagement programs, including Brown's Super Stores, a Philadelphia-based ShopRite operator, and Buehler's Fresh Foods, Wooster, Ohio. For employees, he said engagement boils down to a feeling that what they do matters to the organization.

“The No. 1 driver of employee engagement is knowing the boss cares about you,” Kelley said. “They care about your progress, and they care enough to give you tough feedback when you need it.”

— Jon Springer

Look for Opportunities to Reduce Credit-Card Costs

THE FINANCIAL reform legislation that passed through Congress this year included provisions that will increase government oversight of the interchange fees — but now what?

While the legislation, which only affects debit cards, goes through the regulatory process that will determine how it is implemented, retailers can begin thinking about how they might leverage this development to reduce their operating costs. That could be a bigger challenge than some might expect, according to one industry expert, who noted that past efforts to persuade consumers to use certain types of cards in the past have not been effective.

“The supermarket industry has been at the forefront of creating consumer loyalty, just as card issuers have created loyalty to the specific value proposition of a specific card,” said Patricia A. Lenti-Crane, an executive advisor at TermNet Merchant Services, Atlanta. “Consumers carry a specific card for this perceived value, and they will shop where they receive this perceived value.”

While some retailers have been successful without accepting American Express — and others, such as Costco Wholesale, only accept that card and its own cards — for the most part traditional supermarkets might end up having to abide by whatever choices consumers make.

In addition to the financial reform legislation, MasterCard and Visa both agreed to a proposed settlement of a civil antitrust action against them that would allow merchants to begin steering customers toward lower-cost methods of payment.

For the first time — once the suit is finalized — retailers would be able to steer customers toward using lower-cost types of cards within the Visa or MasterCard system. Currently retailers are bound by their agreements to accept all cards issued by Visa or MasterCard if they accept any at all, and the interchange fees on the various cards can vary widely. Retailers often don't know what the fee is on any particular card until they receive their statement.

Technology will likely allow retailers to determine what type of card is being used when it is swiped, Lenti-Crane said. “The real question is, how will the supermarket utilize that information to its benefit?

“Are they going to deny that transaction? Request another card? Anything other than allowing that card to be accepted is going to hold up the line and cause confusion — all of the things that supermarkets have spent millions of dollars on improving.”

Even if retailers are successful in offering incentives for consumers to use certain types of cards because they have lower interchange fees, the card issuers could simply find ways to make it more expensive for the consumer to use those cards.

It could present a dilemma that supermarkets will soon have to wrestle with.

“I believe that as the supermarket industry works with their processors to develop a plan for these options, the focus will continue to be on maximizing profitability of the transaction and increasing consumer loyalty and gaining market share,” Lenti-Crane explained.

In addition, the card companies are likely to take their long-standing fight to preserve the fees to the state level.

“They will try to get as much state jurisdiction back for banking and credit as possible, because they think they can affect the outcomes better at the state level than at the federal level,” Joe Kefauver, managing partner at consulting firm Parquet Public Affairs, and a former vice president of public affairs with Wal-Mart Stores, told SN.

Meanwhile, some retailers have begun to reduce their card-processing fees — which can total about 1% to 3% of each transaction — by shopping around for lower-cost processors.

United Supermarkets of Lubbock, Texas, for example, was able to reduce its costs for processing credit-card interchange fees by between 60% and 70% by aggregating its processing with other retailers through TopSource, Braintree, Mass., said Scott Attaway, director of service and supplies procurement at United.

“TopSource has the opportunity to see the good, the bad and the ugly in terms of the cost and the fees that are charged,” he said.

— Mark Hamstra