Come Together

ELLIOT ZWIEBACH

Jack Brown is going home, and he's taking Stater Bros. Markets with him.

The chairman and chief executive officer of the 163-store chain was born in San Bernardino, Calif., and that's where Stater is moving its operations beginning next month — six miles northeast of its 71-year home base in Colton to newly constructed facilities in an industrial park in neighboring San Bernardino.

The move will occur in increments — the offices in September, grocery distribution early next year and perishables distribution in June — but it will ultimately bring the company together physically as it hasn't been for years, Brown said.

“While leaving Colton after all these years brings up a lot of nostalgic feelings, it is particularly fulfilling for me to come back to San Bernardino, the community that helped my widowed mother raise a child alone, and to repay it with the economic stability a new distribution center will bring to the city,” he told SN.

Prior to the move, Stater is operating out of 11 buildings in seven locations in four cities, all within 10 miles of each other, covering a combined 1.6 million square feet.

The new facility will boost Stater's distribution space by 40%, to 2.1 million square feet — probably the largest distribution center in the U.S. grocery industry, Brown pointed out, and equivalent in size to 50 football fields.

It will also raise the number of loading docks by 60% — to 256 from 160 — and, most significantly, he said, it will boost warehouse cubic space nearly 250%, from 2 million cubic feet up to 6.7 million cubic feet, because the ceilings will be 45 feet high instead of just 20 feet.

The larger space will mean Stater will be able to do more forward buying, Brown said, “which is making our marketing department very happy. We plan to utilize the top two pallet levels — levels five and six — at the warehouse strictly for forward buys.”

The distribution center is expected to save the company $20 million in calendar 2009, the first full year after opening, he indicated — savings he said will come from eliminating double-handling of product as it's moved from backup storage to the shipping warehouse; cutting back on the use of fuel and drivers moving product back and forth; eliminating the cost of round-the-clock security at multiple locations; and improving shipping efficiencies.

“In the past, if we ran out of an item on the picking line, the warehouse couldn't move it immediately from backup so we had to short orders to the stores,” Brown said.

“As we begin shipping orders from the new facilities, it will mean people at the stores will get fuller, more complete loads on a more consistent basis and a better percentage of shipped-to-order.”

With the new efficiencies and improved service levels, “we won't have to raise prices one penny, so we'll be able to maintain our price leadership for a longer period,” he noted.

That could be a significant factor in the Inland Empire — the Riverside-San Bernardino area 70 miles east of Los Angeles in which Stater is the dominant market factor. “We are very lucky that the founders of this company, Cleo and Leo Stater, positioned it in 1936 in Colton, in the middle of an underserved marketing area that has since become very valuable,” Brown told SN.

Although the region is the 11th fastest-growing area in the U.S., he pointed out, there's been a recent drop in sales of new homes, at the same time median prices on new homes have gone up — a situation one observer said could ultimately balance out in Stater's favor.

“As many homeowners become more cost-conscious, it will be interesting to see if a recognized everyday-low-price operator like Stater Bros. will benefit,” an industry analyst, who declined to be identified by name, told SN.

Sales at Stater were $3.5 billion a year ago, and industry observers anticipate a boost of approximately 7%, to $3.75 billion, for the fiscal year ending late next month.

According to Brown, the company plans to move into the new 130,000-square-foot office building the middle of next month; to move into the grocery distribution facility two weeks before commencing shipments in February; and to shift the refrigerated inventory to the new warehouse two weeks before shipping begins in June.

“We're purposely not going to ship groceries out of the new warehouse during the holidays because we don't want to take a chance on some sort of failure in the new system,” Brown said.

Construction on the grocery portion of the warehouse will continue through the balance of the calendar year, he added, with construction of the refrigerated warehouse scheduled to end in May.

Once it's in full operation, the new facility will enable Stater Bros. to double its pace of annual expansion — from five stores a year to 10 — Brown said.

Stater is scheduled to open five stores this year and five more next year, “but once the new distribution center comes on line, we could go as high as 10 new stores a year,” he pointed out.

It couldn't handle that rate of expansion today, he said, “because we're operating beyond capacity now — probably 25% over capacity. It's amazing how our people do it.”

Stater has been operating above capacity since 1999, when it acquired 43 Albertsons and Lucky stores from Albertsons, he said. The new facility will be able to serve 400 stores, he noted.

Brown said there are enough locations available in its operating area to accommodate 10 openings a year, “and it'll be a judgment call, once we see how smoothly things are running at the new facilities, as to when we'll begin expanding at that pace. But we don't want to distract our managers during the first year beyond seeing that the new distribution operations come on line smoothly.”

Asked where its expansion will take it, Brown said, “We'll position ourselves in communities that need a Stater Bros. Market — generally areas within 15 miles of where our stores are today, in places with working families who spend a large portion of their income on food.”

Bryan Hunt, a high-yield analyst with Wachovia Securities, Charlotte, N.C., said the new distribution center should boost the chain's ability to grow across its geographic area. “Once that facility is operating, the company will have the capacity to open anywhere from 60 to 100 stores over the next 10 years and ultimately to double the size of its store base,” he told SN.

“It's clear Stater has not reached a saturation point in its operating area, and it's also clear the market there approves of what Stater is doing, so there's plenty of room for it to grow.

“And while it's growing, it will have sufficient excess capacity at the warehouse to seek out distribution business with other operators if it so chooses.”

Beginning in the new fiscal year, Brown said, new stores will be larger.

The company has opened two new stores so far this year, in North San Jacinto and Temecula, with three more to come — in Palm Desert in September and Moreno Valley and Cathedral City in the fall — four of which fell in the 44,500-square-foot range, the chain's prototype for the last six years.

However, Stater plans to launch a 50,000-square-foot prototype next year after successfully opening a test store of that size at the Temecula location in June, Brown said.

The expanded prototype will incorporate additional floor space for larger promotional displays, he indicated. “Our people felt we were losing sales because we couldn't floor-stock certain products, like soft drinks or snacks, during holiday seasons, but after they showed me what they could do at the Temecula store, I liked what I saw and approved the larger footprint,” Brown said.

Most of the expanded display footage will be located at the back of the stores, in front of the dairy cases, he pointed out.

Brown said he expects the larger prototype to help Stater become more competitive with Albertsons, Ralphs and Vons, whose stores average 55,000 square feet.

“When we were operating stores of 36,000 square feet, we were at a bigger disadvantage than we have been at 44,500 square feet, but with our new prototype, we'll be on a more solid footing with those larger players,” he pointed out.

According to the analyst who asked not to be named, “With competition likely to intensify, the cost savings from the new distribution center should provide Stater with improved pricing flexibility as it goes up against Wal-Mart Supercenters, the growing presence of Tesco's new Fresh & Easy Neighborhood Markets and the three major chains — Albertsons, Ralphs and Vons — now that they're not distracted by labor negotiations.”

Hunt said the only potentially serious challenge he sees to Stater's ongoing dominance in the Inland Empire could come from the Fresh & Easy stores. While Tesco has yet to indicate that it will open stores in that area, the fact that its distribution center is in Riverside makes stores close by almost inevitable, he pointed out.

“While the major chains have not added a significant amount of square footage in that area in the last five years, Tesco could pick up business there that challenges Stater's strength,” Hunt pointed out. “But given Stater's reputation for clean stores, quality offerings and low prices, it should continue to be in a very healthy competitive position regardless of what Tesco does.”

Brown said he expects Tesco to open at least 25 stores that will impact 35 Stater locations over the next year or so.

“We used to be in a share group with Tesco, and we know their stores in the United Kingdom, including the smaller ones. And while anyone who sells what we sell is competition, including the gas station that sells cases of Coke, Tesco will probably be a more direct competitor to Trader Joe's, Bristol Farms and Smart & Final than it will be to us.

“But we will be watching them, and when they open their doors, we'll be among the first lookie-loos,” Brown said.

Stater's new facilities will encompass the office and warehouse, plus smaller buildings for human resources, transportation and maintenance, driver dispatch and salvage, bakery distribution, and store construction.

The operations are being built on a 200-acre section of the 4,000-acre site of the former Norton Air Force Base, which closed down 12 years ago and is now being developed as an industrial park, where Stater's immediate neighbors will be the existing distribution centers for Mattel, Pep Boys and Kohl's.

Stater purchased 168 acres on the site and leases an additional 32-acre parcel adjacent to the runways at San Bernardino International Airport, a regional airport that borders the site. “You can't build structures adjacent to the runways, but we can park trucks there,” he noted.

The facilities are within 40 miles of all but about 40 of Stater's stores, Brown said, with access from five off-ramps on several freeways “so if there's a slowdown on one, there are other ways in and out.”

“Congestion on the road was an important consideration, given the continuous population growth in this area, as we looked for maximum accessibility to our site,” he explained.

As it moves into the new facilities over the next nine months, Stater will gradually abandon the 11 warehouses it's leasing, Brown said.

Four of those distribution points are in Colton: a 700,000-square-foot grocery warehouse, facilities of 300,000 square feet and 250,000 square feet for backup grocery storage and a 130,000-square-foot refrigerated warehouse for produce, deli and bakery.

There are also a 130,000-square-foot HBC facility in Redlands, an 80,000-square-foot liquor and backup grocery storage warehouse in Bloomington and a 70,000-square-foot frozen foods warehouse in Riverside.

“Five years ago I had a vision we would move, so I renegotiated all our leases so they would expire at the end of 2008,” he indicated. “The locations are so desirable that all the landlords have told us that, if we want to leave earlier than we plan to, to just let them know.”

When Stater began looking for sites to relocate its operations, Brown promised employees he would not move the company more than 30 miles from Colton “so no one would have to uproot his family,” he recalled. “Finding a site so close by [to the existing location] is one way of rewarding them for their loyalty to us.”

Besides enabling Stater to combine inventory at one location, the new facilities will make it possible for all of Stater's personnel to come together at one site for the first time in years, Brown said.

Currently, the corporate and administrative staff is spread out in four locations, “so having all team members in one spot will be a tremendous advantage for us,” he noted.

“We've been taking people out to the new facilities in groups so they can see where they will work, and at a time a lot of employees at other chains are not really happy with their companies, it's a big plus for us that our folks are so excited.”

In deciding to move the company, Stater is taking a financial risk, Brown acknowledged. “As a private company, we have no big brother or rich uncle to back us up, so we have to be very sure of what we're doing,” he said.

Not all the savings will drop to the bottom line, Brown said, “but we expect a big portion of the savings to assist us in repaying our debt.”

The price tag to build the new facilities is $300 million, “which is a big hit for a company like us,” Brown acknowledged.

Stater financed most of the project by borrowing $700 million at 8.25%, then paying down a prior debt of $450 million and using the balance of $250 million, plus cash on hand, to finance construction of the distribution center.

The chain signed a preliminary development agreement more than two years ago, then had to deal with three federal agencies — the Department of the Air Force, the U.S. Forest Service in the Department of Agriculture and the Federal Aviation Commission — “but since construction started last September, everything has run on schedule,” Brown said.

In designing the warehouse, Stater called on friends in the industry, Brown said, “who sent some of their distribution people to help us with our planning. We could not have done it with just our own people because they didn't have the design experience, though we did add some of our own touches, such as installing structures for pallet storage above the shipping doors, to keep them off the floor.”

Stater anticipates most warehouse positions will be relocated when the operations move, “and during the early stages, our employee count will go up because we'll be working out of two facilities for a time,” Brown said.

Stater Bros. CEO Brown Sees Challenges, Opportunities in Next Phase of Expansion

For Stater Bros. Markets, the best is yet to come, according to Jack Brown, chairman and chief executive officer.

As the company prepares to move into a 2.1 million-square-foot office and distribution center, excitement and energy are running high, he told SN.

“Many companies have a great past, and some have a great present, but there's no question at Stater that our best days are still ahead of us,” he declared.

“We operate in one of the fastest-growing areas in the U.S., with the shortest hauls of any major operator, most within a 40-mile radius; a low-price program that's attractive to customers; and a loyal group of employees who have helped the company accomplish all that we have by working together.”

Stater is the largest privately held supermarket chain in Southern California, with 163 stores stretching across the fast-growing Inland Empire of San Bernardino and Riverside counties, plus a smattering of stores in Los Angeles, Orange and San Diego counties.

While everything around Stater has changed — including the owners of the major chains with which it competes and the entry of Wal-Mart Supercenters in its operating area — the chain's top leadership has not, with Brown in control for 26 years.

“Jack Brown is Stater Bros., as far as the investment community is concerned,” one analyst, who asked not to be named, told SN. “Wall Street has a good deal of confidence in his ability to make a regional supermarket chain work.”

Brown, 67, told SN he has no plans to retire. “I've been in this industry for 54 years, and I still love what I do,” he explained.

He declined to discuss whatever succession plan the company has.

Brown is the owner and sole shareholder of La Cadena Investments, which owns Stater Bros. Markets.

For most of his 26 years at the Stater helm, Brown served as president as well as chairman and CEO. Two years ago he decided to appoint Don Baker, a longtime colleague, president so Baker could end his career before retirement with that title, he explained.

When Baker retired last October, Brown named Jim Lee to succeed him. Lee is a longtime veteran of Ralphs Grocery Co. who subsequently served as president of Wild Oats Markets before returning to Southern California to join Stater.

Some industry observers regard Stater as a potential acquisition candidate, though Brown does not.

“If we're asked if we are for sale, the answer is no,” he said. “Of course, you can never say never, but for now, it's no.”

Brown said he sees Stater as a potential acquirer, with its eye on some of the Albertsons stores in Southern California if Supervalu decides to sell them.

“I've already sent them a list of 12 stores we're interested in, most of which are outpost stores — single stores distant from clusters at other locations,” he explained.

“So far we've heard back from Supervalu saying no decisions have been made, but they said they will advise us if and when they do make a decision.”

Having acquired 43 stores from Albertsons in 1999, Brown said he admires Supervalu's ability to convert more than 600 former Albertsons stores to its own programs. “From what we went through, we know how much work it is, and I have no idea what it would be like to do 600,” Brown said.

As the Southern California operator going head-to-head with more Wal-Mart Supercenters than anyone else in the area, Brown said he believes Stater is up to the challenge.

Although it competes with 12 supercenters that operate within 10 miles of 40 of its stores, Wal-Mart is not having much impact, he said.

“That battle is won at the stores, and our people work very hard to hold onto our customers,” he said. “Since Wal-Mart opened its first California supercenter in 2004, we've never run negative comps at any competing Stater stores, which is as high a compliment as management can pay to the people who take care of customers.

“Wal-Mart may take some of our sales gains for a little while, but if a store was up 4% and Wal-Mart takes 3% in the first month after opening, we get some of that back over time, usually beginning 90 days after their grand opening.”

Brown said he anticipates five more supercenter openings against his stores over the next 18 months, “but two of those are conversions, which have less effect than a new store because they're already selling groceries there.”

While the rest of the Southern California marketplace has consolidated over the past decade, Stater Bros. has survived as one of the area's only locally owned and operated supermarkets — a position it touts in its marketing.

“We are determined that we will never be out-home-towned in the communities we serve,” Brown said, “so we make sure we are responsive to those customers.

“For example, we get 4,000 requests a year for contributions to local causes, and in most cases, we're able to fill most of those requests.

“Further, most of the 17,000 members of the Stater family live, work and go to school and to church or synagogue in our marketing areas, and we stress that in our marketing programs so the communities know we return more non-profit dollars to them than any chain our size.”

Stater also offers a Hometown Community Card for sale at a 6% discount to local organizations, who then re-sell the cards at full price and keep the profits while enabling buyers to use the cards to shop at the stores, Brown noted.

The chain has no plans to introduce a loyalty card, he said. “When customers come through the front doors, they are automatically members of the ‘Stater Club,” Brown said.

Stater enjoyed a big boost in volume during the Southern California work stoppage in late 2003 and early 2004, with sales up more than 50% for several months, “and while most customers returned to their original store after that contract was settled, we probably held onto 10% of that pickup,” Brown said.
— E.Z.