True to Its Roots

ELLIOT ZWIEBACH

Stater Bros. Markets believes in sticking with the girl it brung to the dance, metaphorically speaking — maintaining the values going forward that made it possible to reach the 75th anniversary it's celebrating this year.

According to Stater's way of thinking, maintaining its low-price position will enable it to boost sales and retain customer loyalty during the tough economic times to ensure a more profitable future.

That approach appears to be paying off for the San Bernardino, Calif.-based chain, with sales at its 167 stores continuing to increase, customer counts climbing and earnings likely to see an upswing this year after two years of declines.

For Jack Brown, the chain's chairman and chief executive officer, Stater is simply following the principles on which its founders, twins Leo and Cleo Stater, built the company — low prices, quality merchandise, good service and convenient locations.

“That was their dream, and those were their values, and they stayed true to them as long as they operated the stores,” he told SN.

“We've dragged our feet on raising prices when our costs go up, and our customers know we're sharing the tough times with them,” he said. “We get calls and letters every week thanking us for holding the line on prices, and we intend to continue to do that.

“Of course, that approach has affected earnings, but it speaks very loudly about our commitment to customers. And as a private company we're able to take less without having to worry about Wall Street pounding on our door.”

One industry source said Stater keeps prices “within 10% or less” of Wal-Mart.

The opening of a 2.5 million-square-foot distribution center in 2008 — replacing 11 separate warehouses — has made the low-pricing stance easier to maintain, Brown noted.

“Someone must have been looking out for us because the timing was perfect — the distribution center came on line just as the economy hit the pits,” he said. “We would have been in serious trouble without the efficiencies it's created.”

Anniversary-themed promotions, featuring up to 10 items a week priced at 75 cents, have given Stater sales momentum, he said, with volume expected to grow approximately 6% to $3.8 billion for the fiscal year ending in late September; and because of the distribution efficiencies, he said he expects earnings to increase.

Of the chain's 167 stores, 99 are in the San Bernardino-Riverside County area of Southern California known as the Inland Empire. “I like music, and there's a song in ‘The Music Man’ that says ‘you gotta know the territory,’ and we know this territory,” Brown explained.

“We've had opportunities over the years to expand to Arizona, Nevada, New Mexico and Northern California, but we've always felt there were plenty of opportunities right here where we are.

“In fact, there are 10 locations I would build on tomorrow if the economy was stronger.”

The economy in the Inland Empire has strengthened a bit, with more housing starts under way, “which means the potential for new customers to move into the area,” Brown said, and slightly lower unemployment, “which means more people going back to work and being able to afford more groceries.”

He said he anticipates additional long-term growth within the chain's core area, as well as further expansion into San Diego, Orange County and the eastern fringes of Los Angeles County.

But that growth will come slowly, he added, with just two replacement stores opened last year, two more set to open next month and three additional replacement stores scheduled to open next year.

“Right now our primary goal is serving customers at the stores we have, and while that's a powerful motive, it's not a reason to approve new stores,” Brown said.

“As opportunities to grow present themselves — including potential acquisitions — we will take advantage of them. We are particularly interested in looking at opportunities where people are underserved.”

Independent Culture

Stater has managed to remain independent throughout most of its 75-year history, turning back offers to merge with or be acquired by other companies, Brown acknowledged.

“I never found a company or investment group where I felt comfortable putting the future of the Stater Bros. family in their hands,” he explained.

“I care a lot about these people. They know it, I know it and even the customers know it, and that's why we call ourselves the Stater Bros. family.

“But that's not just a phrase or slogan. With the exception of a handful of executives, our management team grew up inside the company, which creates a consistency of thinking and execution where everyone knows our message, and that's one of our strengths.

“I wish Cleo and Leo were here so they could see that the philosophy they preached is still in place.”

Bryan Hunt, managing director of Wells Fargo Securities, Charlotte, said the management culture at Stater is a big plus.

“It's only when you have problems and are falling behind your peer group that you need external soil to freshen the garden,” he told SN. “But given Stater's success with the disciplines it has in place, its homegrown management team is a definite asset.”

As Brown walks around a store, he is greeted enthusiastically with hugs and handshakes from employees — and when he is introduced to those who are meeting him for the first time, he gives them a hearty personal greeting.

“We have a consistent family approach in our stores,” he said. “Like all families, we have disagreements, but our family members are very disciplined, and I believe they are the best people in the supermarket industry.”

Customers relate to Stater Bros. because so many of them grew up with the company, Brown said. “People regard us as their hometown chain, and it's not unusual for customers to tell us how long they and their mothers and grandmothers have been shopping with us.”

Brown said he does not foresee Stater's independent status changing.

“My family knows how I feel, so even if I am not around, they know that as long as our management team prospers, we will move forward independently,” he said.

“We've survived for 75 years due to the commitment of our Stater family members, our commitment to our customers and our commitment to the communities we serve. We have never wavered from any of those commitments, and our reward is the loyalty of our customers.”

In the future, Brown said, he believes there will be room in a marketing area for just one or two full-service supermarkets and a box store, and he expects Stater Bros. to be one of those survivors.

“The third-, fourth- and fifth-tier supermarkets are in deep trouble,” he said.

“But companies like Price Chopper, Giant Eagle, Publix, Harris Teeter, Schnucks, Wegmans and Stater Bros. are all strong regional chains who control their own destinies, and those are the ones that are most likely to remain.”

Still, while he is clearly proud to see Stater celebrate 75 years in business, Brown is not as enthusiastic about what the next few years may hold.

Asked whether Stater will still be around to celebrate its centennial, Brown said, “I hope so. But I'm really concerned about the financial future of America and how that could affect the future of Stater Bros.

“Consumers are losing confidence in America, and that's causing them to spend less.

“We all need hope, and I don't see a lot of hope out there. There are too many regulations and a lot of pressures imposed on the industry by the government — for example, using dual-fuel trucks, which wear out faster than regular trucks — and we cannot be guinea pigs for various consumer groups.

“My job is to guide and protect the Stater Bros. family of employees and customers because we can't allow Washington, D.C., or Sacramento [Calif.] to do it. So the best I can do is try to build a stronger Stater Bros. and hope the people who run other supermarket companies do the same.

“My concern is, if we keep moving in the direction we're going now, we're liable to end up with one supermarket run by the government.

“But as long as we work hard to avoid that — as long as farmers, manufacturers and supermarkets all work together to keep costs low and deliver products that are safe — then we all have a good shot at being around for another 25 years or more and helping to keep America the best-fed nation in the world.”

Anniversary Marketing

Stater has been working with its vendors to make the chain's 75th anniversary a significant marketing event.

“Finding items we can price at 75 cents — which may be less than half the price in some cases — can be difficult, particularly when it comes to bargaining with suppliers. But since we kicked off the program in January, we've had a lot of cooperation from them, and our sales momentum has increased,” Brown said.

In-store signs and balloons call attention to the anniversary, as do lapel pins sported by each employee that were pinned on personally by a member of management, Brown pointed out.

In August, the company will publish a 200-page coffee-table-sized book on its history that will be available to employees at half-price, he added.

The acquisition of 43 stores from Albertsons in 1999 proved to be a watershed for Stater Bros.: Boosting its size from 112 stores to 155, including an entry into San Diego; prompting a reassessment of its distribution needs; and leading to a significant store upgrade program.

“When you make an acquisition, volume generally goes down as customers react,” Brown said.

“But within a year of the acquisition, our sales were up $100,000 per week per store over the volume we acquired from Albertsons, which we attribute to the fact we hired 3,000 Albertsons employees.

“I told our management team at the time that, if the Albertsons employees were not happy, then the customers wouldn't be happy; but if the employees were happy, then customer satisfaction would be up. And I received more than 1,000 letters that said consumers liked shopping with the people they knew, and that was the key to our success.”

The addition of the 43 Albertsons stores prompted Stater to reassess its distribution operations, which encompassed 11 warehouses in four cities and required the chain to shuffle products between facilities, “which of course was very inefficient,” Brown pointed out.

Consolidation of Distribution

The new distribution center is strategically located in San Bernardino, “and our average haul is only 42 miles,” he noted — “though we go as far as 100 miles north to Santa Clarita and about 80 miles south to San Diego.”

According to Hunt, “The distribution facility has really helped the company because there are so many excess facings available that it can do a lot of forward buying in an inflationary environment.

“By consolidating into one location, it was able to reduce costs by approximately $25 million. And by doing a follow-up cost analysis across the business, it's found ways to extract additional costs and become very cost-disciplined over the last 36 months as it's dealt with a very difficult consumer environment.”

The new distribution center is centrally located in San Bernardino.

Brown acknowledged that the ability to forward buy is one of the big advantages the distribution facility has made possible — something Stater couldn't do previously or, if it did, that required it to lease additional space for storage.

The new facility also has 40-foot ceilings, compared with 22 feet at the chain's former primary warehouse in Colton, allowing for more storage space, he said. In addition, it has enabled Stater to reduce energy costs by one-third on a per-foot basis by using 1,000 skylights to and by using better insulation in building the facility.

Stater makes all deliveries at night, after its stores close at midnight, “and the night crews are able to have the stores ‘can tight’ by 6 a.m. when we open so customers don't have to walk around pallets and cardboard,” Brown said.

The Albertsons acquisition also prompted the chain to upgrade its store base.

Reminded that its stores prior to the acquisition were often described as “plain vanilla,” Brown replied, “Vanilla is the No. 1-selling flavor of ice cream.

“But because this industry is my avocation as well as my vocation, I've always loved to see what others are doing, so over the years we've made some changes based on what I've seen.

“For example, at one time Stater stores were 24,000 square feet, but we determined those were too small for us to do everything we wanted in terms of adding departments and product. So we went to 33,000 square feet and then to 40,000, and now we're at 45,000, which we think is the ideal size.

“It gives us enough square footage to merchandise to our strengths, which include meat and produce; to expand those departments; and to add service departments we believe customers want, such as delis and bakeries.”

Stater has also added 43 service floral departments, 33 in-store banks and 27 pharmacies, with more to come, he added.

The chain is also building some stores of 48,000 square feet to accommodate extra space for promotional items like summer furniture or holiday merchandise, Brown said.

According to Hunt, Stater Bros. has the best store base in Southern California, having used internally generated cash flow to touch all stores over the last seven years — “some more than once,” he noted. “Among the traditional chains, it has the freshest stores, and its asset quality is, hands down, the best.”

As the population of the Inland Empire grew over the years, it attracted all of Southern California's major chains. However, the chains have slowed their expansion into Stater territory in recent years, Brown said, “and right now they're closing more stores than they are opening.”

Stater is scheduled to open two replacement stores in August — one in Riverside and one in Grand Terrace, near San Bernardino.

It plans three more replacement stores next year, two of which are former Albertsons locations it acquired from Supervalu that are within a block of smaller Stater stores whose leases are about to expire. A store in Hesperia will reopen under the Stater banner in February and one in Lake Elsinore will reopen in May.

The company has not disclosed the location of the third replacement store that will open next year.

Brown said there are other Albertsons units for sale, “but we haven't seen any we felt we have to have,” he explained.

Expansion Plans

As for future expansion plans, Brown said, “I'm very comfortable with our store base, which goes from inner city locations to stores next door to country clubs, because we're able to merchandise to all customers.”

He said Stater would like to add more stores in San Diego, where it operates 11 units. “Our stores there do very well, even though several are in higher-income areas than most of our other stores. But we've learned how to operate in those areas — where consumers tend to do more entertaining — by expanding our offerings of deli items, cheeses, breads, wine and liquor.

“It's incorrect to think higher-income people don't care about saving money,” he added. “They are often more cost-conscious than people with lower incomes.

“In Orange County, where we have 30 stores, we would also like to open more stores in similar upscale areas.”

Stater has 25 stores in Los Angeles County. Brown said he'd like to expand there — but just a few miles in, along the county's eastern fringe, “because otherwise there's too much competition,” he explained.

The company also operates two former Albertsons stores from the 1999 acquisition more than 100 miles north of San Bernardino in Kern County.

Brand Strategy

According to Brown, Cleo and Leo Stater wanted their stores to be known for the brand-name products they sold, and the chain has stuck with that policy, with branded products accounting for 75% of the 45,000 SKUs it carries.

With private- and controlled-label sales at 25%, Brown said he believes the category has maxed out.

“It's possible we could do more sales in private label, but in my 60 years in this business I've seen too many chains lose their customers' loyalty by limiting their selection to only corporate brands,” he said.

“The old 80/20 rule still holds — 80% of movement comes from just 20% of the items. So I don't think we need to carry Stater Bros. razor blades just to have a private-label alternative to the national brand.”

Still, the top-selling item in the store is Stater Bros. raisin bran, Brown said. “It's priced $1 less than the branded item on an everyday basis and $2 less when it's on the ad,” he pointed out.

Since its earliest days, Stater Bros. Markets was known for its meat, with the slogan, “It's our meat that made us famous,” Brown pointed out.

“Stater has always been the only chain with a fresh meat department where there's always a butcher behind the counter — you didn't have to ring a bell to get one — and we still do well with meat, with 65% of our meat volume sold one piece at a time over the counter.”

The service counter runs 56 feet, with 40 feet for red meat and 16 feet for seafood. Items in the service case are sold at the same price per pound as the identical products in the self-service case, Brown noted.

One new meat item that has proved very popular is sliders — sold by the pound in the service case and in small patties in the self-service case. Introduced a year ago and merchandised with small-sized buns, varieties include jalapeno, bacon cheddar, blue cheese, and cracked pepper and garlic.

Brown said he is proud of the stores' produce departments, which carry 800 items, compared with 400 to 450 at most chain stores. “Perishables is really what distinguishes a supermarket from a box store,” he said, “and nobody does produce better than we do. They may do it as well, but no one does it better.”

Stater competes with 78 box stores located within five miles of one of its stores. Though most of those are Targets, it got its initiation-under-fire from Wal-Mart, which opened its first California supercenter in 2004 in La Quinta, Calif., less than six blocks from a Stater store.

“For a year we prepared for their arrival, with training sessions and meetings with all our people, during which we emphasized how much we could gain by stressing customer service,” Brown recalled.

“During the first two years after that supercenter opened, we lost less than 10% of our volume, which my friends in the industry said was surprising since they said Wal-Mart always takes 40% or more from local operators.

“But as the lowest-priced full-service supermarket, there is less difference in price at our stores vs. Wal-Mart, compared with the Big 3” — Kroger Co., Safeway and Supervalu.

“And their perishables were weak, and since meat and produce are our strengths, that was a big plus for us. And although Wal-Mart has improved perishables since then, it will never be as good as us.”