Lucky Day

ELLIOT ZWIEBACH

When opportunity knocks, Save Mart Supermarkets answers.

“We are opportunists,” Bob Piccinini, chairman and chief executive officer of the Modesto, Calif.-based chain, told SN. “We're always looking for opportunities to build and acquire stores. For the last several years we weren't seeing a lot of acquisition possibilities, and then up popped Albertsons.”

Even after acquiring 130 Albertsons stores last October — and before completing the conversion of all of them to its own banners — the 252-store company is still listening for that knock.

“If someone came to us tomorrow with 10 new locations that were available and I could get them, I would,” Piccinini said.

According to Bob Spengler, president and chief operating officer, “Part of the secret to our success is being able to be in a financial position when opportunities come along.”

Roughly half of its stores prior to the Albertsons transaction came from acquisitions, including 27 Fry's stores in San Jose from Kroger Co. in 1989; 25 Food 4 Less stores along California's Central Coast from Fleming Cos. in 2002; four independently owned Food 4 Less stores in 2005; and four stores in Bakersfield and Fresno from Ralphs Grocery Co. in 2006.

After it acquired 130 Albertsons late last year, the ratio of acquired stores has soared closer to 75%.

As Save Mart continues to keep its corporate eye peeled for additional growth opportunities, Piccinini said he intends to stay within the chain's current operating area in Northern California and Northern Nevada.

“I have no desire to cross the Tehachapis,” he said — referring to the mountains south of Bakersfield that separate Southern California from the rest of the state — “because Southern California is a totally different marketing area.

“To be successful in any area, you need name recognition and enough critical mass to do what you do. And doing onesies and twosies in a new area wouldn't make any sense.

“But if we could go into Southern California with a whole group of stores…,” he said, without finishing the thought, then hastily adding, “But there is nothing pending.”

Currently, Save Mart has plenty to handle within its own backyard, including:

Of Save Mart's 252 stores, 127 operate with a conventional format under the Save Mart banner (including seven S-Mart units); 44 operate as price-impact stores under the Food Maxx banner; and, once the conversions are completed in mid-October, 72 stores in the San Francisco Bay Area will be operating as “the most competitively priced full-service supermarkets” in the area under the reborn Lucky banner.

Sales at the privately held chain came in at about $4.9 billion in 2006, encompassing $2.7 billion in volume it was doing before the acquisition and $2.2 billion from the Albertsons stores, industry sources said. Sales for this year are projected at $5.5 billion, they indicated.

As a larger player in the Northern California marketplace, “Save Mart will definitely show up on more radar screens because it will have the advantage of size at the same time it's still able to compete as a regional operator with a good grasp on local demographics,” said Jonathan Ziegler, an analyst with Dutton Associates, El Dorado Hills, Calif.

In addition, it will be entitled to more economic advantages from vendors, he said, “which will enable it to buy better and be more competitive — and it will also be able to afford more technology.”

With overcapacity at four distribution centers, “it will probably enjoy some logistics benefits it hasn't had,” Ziegler pointed out.

According to another Northern California observer, a larger Save Mart will be good for the marketplace.

“Save Mart has been able to demonstrate to consumers it's a lower-priced operator than Safeway and Raleys, and it's doing a better job of communicating that information to the public than Albertsons ever did,” the observer said.

PROFITABLE LOCATIONS

Save Mart's decision to more than double its size — from 124 stores to 252 — by taking on 130 Albertsons locations in a single transaction was not as big a move for the chain as it might seem, “because the stores we bought were profitable,” Piccinini told SN.

“Everyone thought Albertsons was taking a bath in Northern California, but that's not true. The division as a whole was losing money, but once Albertsons LLC had sold off 37 underperforming stores, what was left was profitable and didn't require a complete turnaround.”

The stores also made a great geographic fit for Save Mart, Piccinini added.

“The majority were concentrated in areas where we were not doing business. For example, we added 25 locations in the Sacramento area, where we were not operating, other than having three Food Maxx stores there, and we picked up several stores east of Sacramento moving toward and including Northern Nevada, where we had only a handful of locations.

“And while we had a few stores in the Bay Area, the 72 stores we acquired there do not overlap existing stores at all.”

“It's a big challenge to double your size,” Spengler added, “but the fact that those stores were profitable made us think we could go in and tweak a few things and everything would be fine.”

What it did at the Albertsons outside the Bay Area that it converted to the Save Mart name was to lower prices, upgrade perishables standards and introduce its Master Cut beef program, along with changing front-end systems, he said.

In the Bay Area, the biggest tweak involved changing the name on the stores from Albertsons to Lucky, a banner with long and positive associations there that had disappeared in 1999 when Albertsons put its own name on those stores.

Other changes included introducing three Lucky programs at those stores: Max Paks, club-sized packages for larger families in all categories; Key Values, reflecting promotional prices; and Three's a Crowd, a promise to open additional checkstands if more than three customers are in a line.

Save Mart is about halfway through restoring the Lucky banner to those locations, a task it expects to complete by mid-October.

“There were a lot of discussions and debates over what to call the Bay Area stores,” Piccinini said, “but the only names we seriously considered were Save Mart or Lucky.

“Most of us would have liked to operate under the Save Mart banner, but we realized Save Mart doesn't have a lot of name recognition in the Bay Area, whereas the Lucky name carries a lot of positives.

“Lucky is very well recognized there, and we knew instinctively that if we used that banner, we would get an awful lot of sizzle.”

That sizzle is reflected in the sales results Save Mart is seeing at those stores — with sales increases exceeding its original expectations of 10%, Spengler said — and in customer comments. “A lot of people are telling us that, when the Lucky name went away, they went away, and how excited they are now that the Lucky name is back,” Spengler said.

“And a lot of employees at those stores who worked for the original Lucky have told us that, when Albertsons changed the name, volumes fell 20%. So having the name come back is a big morale booster for them, and their excitement is overwhelming,” because after dealing with the uncertainties of their jobs while the original Albertsons was for sale and then not knowing if their jobs were secure under Albertsons LLC, “this is like a rebirth for many of them,” Spengler noted.

“There's also a tremendous amount of excitement within our legacy stores about the acquisition because growth brings opportunities for people to move up.”

Local observers contacted by SN said they are taking a wait-and-see attitude about the impact of the name change.

“It's my impression that what Lucky was and what Save Mart is are very similar, in terms of offering a very straightforward marketing presentation with a low-price image,” one Northern California retailer said, “so if anybody can revive the success Lucky enjoyed, it's probably Save Mart.”

According to another local source, “I'm not sure how much Save Mart can stay with the original Lucky doctrine, but it was a brilliant move to choose the name Lucky, and those stores should definitely see increased sales at every unit over and above what Albertsons was doing.”

Another local executive told SN, “It was a good decision, though my concern is whether those stores can live up to customer expectations of the Lucky name. History will determine if it was a good decision based on what Lucky means to customers, whether what they think it means is real or perceived.”

Save Mart is not the only Northern California operator drawn to the Lucky banner.

In 2006, seven years after Albertsons took the Lucky name off its California stores, Grocery Outlet, a chain of discount stores based in Berkeley, determined the Lucky name was up for grabs and decided to use the banner on a series of stores, beginning with a single unit in Rocklin, and with plans to introduce a private-label line under the Lady Lee name Lucky had used.

Albertsons immediately sued, and a judge eventually ordered Grocery Outlet to take the name off the store until he could make a determination on whether it had the right to use the name. That case is still pending.

Asked what would happen if the judge rules that Grocery Outlet can use the name, Piccinini told SN, “It's a risk we took, and we're not sure what would happen.”

Of the 130 Albertsons stores Save Mart acquired, 48 in Northern California have been converted to the Save Mart banner since April, with the 12 in Northern Nevada scheduled for conversion next month.

Of the decision to name the Nevada stores Save Mart rather than Lucky, Piccinini said, “We already operate under the Save Mart banner in a couple of locations on the California side of Lake Tahoe, so it's not as if the Save Mart name isn't known there.”

VENDOR RELATIONSHIPS

Once Save Mart completes the store conversion process, it will begin concentrating on other aspects of its new size, including vendor relationships, Spengler said.

“We're working with vendors on current deals at our legacy Save Mart stores, and Albertsons LLC is working with the same vendors on current deals, and once we have the stores converted, it will be time to start comparing deals and determining what we are entitled to,” he said.

Although Save Mart believes it should have been entitled to better discounts since adding the Albertsons store last fall, “to date, we haven't pursued it,” he said.

“We've had conversations with a handful of vendors who tell us we need to talk about future opportunities, and we've said OK, but now is not the time. Our total focus has been on converting the stores, and when we all have time, we will talk to them and hopefully get retroactive discounts on deals we should have qualified for.

“But because this has so many arms — with the involvement of Albertsons' former owners in Boise, along with Albertsons LLC and Supervalu — we haven't gotten our arms around the product flow through all the distribution centers yet. But it's our intention to look for deals wherever they were.”

The other post-conversion issue Save Mart has to deal with involves the four distribution centers it owns: an 840,000-square-foot dry grocery and frozen foods facility in Lathrop, Calif., that it has been operating since 1991 as a joint venture with Sacramento-based Raleys; its own 200,000-square-foot perishables warehouse in Merced; and the warehouses it acquired as part of the Albertsons deal — a 900,000-square-foot dry grocery facility in Vacaville and a 480,000-square-foot perishables center in Roseville.

Some consolidation of facilities will be necessary, Spengler said, “though the decision on how to work things out with Raleys is a work in progress, and we haven't figured it out yet,” he said.

According to Piccinini, “What we have to do to lev-erage what we bought is make it more efficient, and efficiency comes with consolidation. So there will be some consolidation of facilities, but how that will work, we have no clue at this time.”

That decision is unlikely to be made until early next year, he said, “and Raleys will have to be a part of the decision. But it's to our advantage, and theirs, to put as much as we can into fewer warehouses.”

As Save Mart shifts its focus to a more normal year of business, Piccinini said the company expects to open three new stores next year, though it could be more if opportunities arise. “There are another dozen sites that we're looking at,” he said.

The chain opened a new Save Mart in Ripon and a replacement store in Atwater earlier this year, both in the 50,000-square-foot range, and plans to open one more store, of 58,000 square feet, in the Fresno area before the end of the year.

“We like stores in the 55,000-58,000-square-foot range because that seems to work best with our format, though we'll go as low as 47,000 square feet,” Spengler said.

Save Mart also plans to reopen the two Albertsons stores that had been closed at the time it acquired them — in Concord and Brentwood, Calif. — under the Food Maxx banner next month

The 130 acquired stores range in size from 33,000 square feet to 60,000 square feet, he said.

Asked whether other companies have expressed an interest in acquiring Save Mart, Piccinini replied, “We've had no conversations of late, though I think potential acquirers should know we're not for sale. However, I believe we're a very desirable company, and if I ever suggested we were for sale, the doors would get broken down.”

“I get calls all the time from other retailers asking about stores we may not want to operate,” Spengler pointed out, “and my response is, we don't buy stores we're not going to operate.”

Piccinini, 65, said he has no plans to retire. “People ask me when I'll retire,” he told SN, “and my answer is, if I retire, what would I do? And the answer to that question is, anything I want, which is what I do now, so why retire?”

His two older children are not interested in running the business, he said, and his other two children are still too young to be involved.

The line of succession is unlikely to include Spengler, 68, who retired at the end of 2005 after 19 years with the chain and then came back earlier this year, at Piccinini's request, to help with the conversion of the Albertsons stores.

“But one thing that makes a strong company is to continually develop people, and we think we have a cadre of young people who continue to mature and develop,” Piccinini said. “There are two or three who could take either of our places, so I'm not concerned the company would flounder without us.”

Momentum Carries Save Mart Through Conversion Process

Save Mart Supermarkets, the Modesto, Calf.-based company that acquired 130 Albertsons stores from Albertsons LLC last year and is converting them to the Save Mart and Lucky banners, is taking a methodical, yet aggressive, approach to the mammoth undertaking.

The company has had to transfer support for technology, pricing, ordering and creating ads from Supervalu — the Minneapolis-based distributor who was providing those services for Albertsons LLC — to Save Mart. Initially, the stores were also being supplied by Supervalu through the two warehouses Save Mart acquired in the deal, said Bob Spengler, president and chief operating officer, Save Mart.

“When we began converting stores in April, my biggest concern was burnout,” he said, “and I tried to slow the process down because this is such an aggressive schedule. But the people on the teams said that, if they slowed down, we would lose momentum, and so far we haven't missed the conversion deadline on a single store.”

To accomplish the conversions, Save Mart organized eight teams of people — comprised of employees from legacy stores and acquired stores. Four stores are closed on a Sunday at midnight and reopened on a Wednesday morning, while four other stores shut down Tuesday night for a Friday morning reopening.

“Stores are closed for about two days, during which all the technology is replaced and all prices are changed, along with the internal decor and all outside signage. And as we change technology, we have to retrain store personnel to operate it, which puts a tremendous strain on our IT department,” Spengler pointed out.

“Prior to the acquisition, we had just completed the conversion of our 124 stores to a new NCR system, which took 18 months to roll out, with no deadlines. But as we reopened the acquired stores, there were deadlines.”

By mid-October, Save Mart will have completed software conversions at 252 stores within a two-year period, he said.

Asked about challenges during the process, Spengler recalled a phone call at 9:30 p.m. one night from the chain's chief information officer, telling him the conversion team was unable to get the self-checkouts functioning at two stores that were due to reopen the next morning.

“I told him he isn't required to perform miracles, and if it couldn't be done, we would staff the checkout area with people apologizing to customers and complete the work within a day. He told me the team felt like it was letting me down, which is typical of the attitude here.

“Ultimately, they managed to get the system going. But it's those kinds of pressures that have been challenging.”

Spengler said he anticipates exchanging best practices between legacy stores and acquired stores down the line, “but right now we're still compiling data,” he explained, “based on recommendations from the eight teams involved with converting the stores.”
— E.Z.

What's in a Name?

Does putting a time-tested name like Lucky on a group of underperforming Albertsons stores guarantee them the success the original Lucky once enjoyed, or even the cachet of that chain?

Save Mart Supermarkets hopes so. So does Supervalu. And so, for that matter, does Grocery Outlet, if the courts rule in its favor.

Save Mart is converting 72 Albertsons stores in the San Francisco Bay Area to the Lucky banner — a brand established in the Bay Area in 1935 that eventually spread throughout California, several other Western states and, briefly, to Texas and Florida before the chain, part of American Stores Co., was acquired by Albertsons in 1998. Albertsons abandoned the Lucky identity a year later when it rebranded the stores under its own name.

In 2005, Grocery Outlet, a chain of discount stores based in Berkeley, Calif., hoisted the Lucky name over a new store in Rocklin, Calif. — claiming Albertsons had lost rights to the name through disuse — with plans to use the name on additional locations and to introduce a private-label line under Lucky's old Lady Lee name.

Albertsons and, after Albertsons was acquired by Supervalu in 2006, Supervalu went to court to block Grocery Outlet's use of the name — a matter that's still pending.

Then Supervalu began putting the name on a series of neighborhood markets, encompassing five in Las Vegas and two in Southern California.

In July, Save Mart began converting the Bay Area Albertsons stores to the Lucky banner.

How effective the new name will be, what the old name means and how that differs from the new Lucky is the question of the moment, industry observers pointed out. Customer perceptions may be the key, they told SN.

“Different consumers have different ideas of what Lucky was and what they liked about it, based on their individual experiences and relationships with the original,” one Northern California observer told SN, “and each will make up his own mind whether or not the new Lucky is up to the standards of what they remember, whether real or imagined. Can Save Mart replicate those memories? The jury is still out.”

When Safeway acquired Genuardi's in Philadelphia, Dominick's in Chicago and Randalls in Houston several years ago, it retained the existing name on the stores but cut back on labor and remerchandised the stores with large helpings of its own brands — and, more significantly, without some of the brands those chains' customers were used to — with the result that the stores lost business.

When Safeway restored some of the old programs, business picked up again.

“Safeway took chains with good quality, good service and a broad local assortment, and tweaked the value proposition but wasn't able to get the equilibrium the stores originally had,” said Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va.

In the case of Lucky, both Save Mart and Supervalu are reestablishing an old name that had gone out of use rather than maintaining a name after an ownership change, Wolf pointed out.

“In those instances, what's inside the stores with the old Lucky name doesn't have to be the same as what Lucky was, as long as things are better or at least as good,” he said. “Save Mart determined the Lucky name still meant something positive in the Bay Area, so it's emphasized what was good about the old Lucky — by offering lower prices, which is similar to the old Lucky promise — and improved what needed updating.”

What the newly dubbed Lucky stores offer, aside from a familiar logo outside, is a Save Mart store with lower pricing levels than other conventional operators with which it competes in the area, primarily Safeway, combined with a handful of programs from the old Lucky.

Customers will not find any everyday-low-price guarantees or the Lady Lee line of private-label brands. But they will find Key Values, Lucky's name for specially reduced prices; Max Paks, Lucky's name for club-size packages of meat and other products; and 3's a Crowd, a program that promises to open another checkstand when more than three people are in any one line — the only program from the old Lucky that Supervalu has also incorporated.

“People who go in [to the Bay Area Luckys] looking for the specifics of the original Lucky may be confused or disappointed, while those who have just a general memory of the name and aren't looking for a lot of specifics will probably judge the stores on what they see, not what they remember,” Gary Giblen, executive vice president of Goldsmith & Harris, New York, told SN.

Whether what's inside the store reminds people of the original Lucky may be beside the point, he added. “The key to any brand is getting trial.

“The basic building block of marketing is inducing trial and, once tried, getting repeat business, and you can't get repeat business unless you get people to try something.

“If you're offering something new, an unmemorable name won't get very much trial — and even if you do get trial, an unmemorable shopping experience won't get repeat business.”

Giblen said putting the Lucky name on Save Mart's Bay Area locations will probably get people to try the stores, “and while some old-timers may not see what they expected at a Lucky store and may not come back, others may not care, as long as the shopping trip is a positive experience.”

Jonathan Ziegler, a Santa Barbara, Calif.-based analyst with Dutton Associates, El Dorado Hills, Calif., said the original Lucky stood for something that was different than other conventional supermarkets from the 1960s through the 1990s.

“It stood for low prices — everyday low prices — but not for double or triple coupons,” he said. “The stores didn't have a lot of sexiness to them, with a handful of basic service departments at the original stores, before it began opening larger, more diversified food centers.

“So in using the Lucky name, Save Mart has to make sure it offers great values and that it doesn't disappoint.

“The Lucky name is a trendy throwback, and stores today have to offer more than Lucky did years ago. It's not your father's Lucky, so the new stores can be fancier than Lucky used to be, but they need to position themselves as more than a high-low operation but one that offers the best prices without coupons. Anything else would only bastardize the Lucky name.”

For Mark Husson, New York-based managing director and director of global research for HSBC Securities, London, bringing back the Lucky brand in Northern California is likely to have less impact there than the decision by Supervalu to bring the name back in Southern California and Las Vegas.

In Northern California, where Lucky was a weaker player than in Southern California, “bringing back the Lucky name is simply bringing back a nostalgic brand but otherwise not meaningful at all,” Husson said.

Changing the name on the outside of a store “tells customers there are some changes inside as well — something better, newer or simply different,” Chuck Cerankosky, an analyst with Midwest Financial, Cleveland, told SN.

“With Lucky out of the picture for eight years, people's memories will tend to be soft, with nothing hard and fast to compare things to besides their memories. As long as Save Mart makes some attempt to present a lower-priced operation, which is what people are most likely to remember from the old Lucky, that should be enough.”

Several former executives of the original Lucky operation shared their opinions with SN on why the name still has meaning for some consumers after all these years.

“Frankly, we were good,” Gayle Paden, a 30-year Lucky veteran who works as a consultant to Stater Bros. Markets, told SN.

The key to Lucky's success — and the reason the name still has resonance — was its reputation, he said. “We were known as the low-price leader, and that's what we were, from the early 1960s onward, and we offered great service and clean, efficient stores, plus quality customer service and quality products.”

Dick Fredericksen, a 40-year Lucky veteran, said the original Lucky was a powerful brand in California — “much more powerful than the Albertsons logo it is replacing.”

However, the factors that made Lucky's EDLP position possible “likely do not exist today,” he said, because of the influx of non-union operators with lower pay scales.

Fredericksen said some of the advantages Lucky had that set it apart from other conventional operators in its heyday included a lower inventory for better turnover; a multi-tiered private-label offering; a corporate culture that was sales-driven and allowed for lower margins to protect market share; and a commitment to generating profits on the sale, not the buy.

Fred Schuit, a 29-year Lucky employee who is currently senior vice president of operations for Albertsons' Southern California division, said the original Lucky stood for quality products, good customer service and low everyday prices. The Lucky brand met the needs of price-sensitive shoppers looking for greater selection and higher-quality items, with no gimmicks, he added.

“Our customers always had a tremendous connection to the Lucky name,” Schuit told SN. “For many, Lucky was a favorite store that was recognized for its everyday low prices. It was a neighborhood store that met their unique needs.”
— E.Z.

Interest in Albertsons Dated Back to 2005

It was probably inevitable that Save Mart Supermarkets, Modesto, Calif., would end up acquiring the Albertsons stores in Northern California and Northern Nevada.

“We were approached by an investment banker in October 2005 who told us that Albertsons was about to be put in play and some of the parties interested in acquiring the company as a whole might be interested in spinning off pieces, and they wanted to know if we had any interest in all or part of the Northern California division,” said Bob Piccinini, Save Mart chairman and chief executive officer.

“I told them we did have an interest.”

At that point there were three bidders for the company, Piccinini said: Supervalu, Apollo Capital Management and Yucaipa Cos.

“We had an informal understanding with Apollo that if they were the successful bidder, we would make a deal for the Northern California operation, which had about 190 stores at that time, including the 130 we ultimately acquired, plus 35 that were sold and another 15 stores in Bakersfield and the Central Coast area.”

When Supervalu won the bidding for Albertsons in June 2006, it kept the chain's premier operations and sold the underperforming stores, including Northern California, to Cerberus Capital Partners, which formed Albertsons LLC to run them.

“In the deal between Cerberus and Supervalu, the stores in Bakersfield and the Central Coast ended up as part of the Southern California operation,” Piccinini said. “We would love to have had those as well because they were a good geographic fit.

“When we started talking with Cerberus, there were about 177 stores still in the Northern California division. But they decided to close 37 of them — the ones that were probably the biggest money-losers — because of their perceived real estate value. Some of them had retail value to us, but they had more value to Cerberus in terms of the real estate, and they were sold several months before we bought the rest.”

Piccinini declined to disclose the price he paid for the 130 stores, citing an agreement he signed with Albertsons LLC to keep the amount private.

That deal also included two of the 37 shuttered stores, in Concord and Brentwood, Calif., which Save Mart expects to reopen under the Food Maxx banner later this month.

In an interview with SN last February, Bob Miller, president and CEO of Albertsons LLC, said his company had no interest in selling entire divisions and the decision to sell Northern California was a unique situation.

“I got a call from Bob Piccinini even before I took this job, and he said he wanted to talk to me about buying all those [Northern California] stores,” Miller said.

“Bob is a good operator, and he pushed hard to buy them, and he was willing to pay a reasonable price. And selling to him created jobs for all associates, and that was appealing to us.

“Northern California is a tough market, and because Bob's Save Mart stores are right next door to our stores with very little overlap; there were a ton of synergies that he could have. Bob pushed hard to buy them, and he will do a terrific job with them. And we never talked with anyone else about selling them.”
— E.Z.