125 YEARS OLD . . . AND NEW

ELLIOT ZWIEBACH

COMPTON, Calif. -- As Ralphs Grocery Co. here marks its 125th anniversary, the red and white oval is still flying all over southern California, but what's happening underneath the oval is not quite the same. In the executive suite, George Golleher has moved from president and chief executive officer of Ralphs to president and chief operating officer of Fred Meyer Inc., Portland, Ore., Ralphs' new holding company parent. And the president of the Ralphs Supermarkets division is Sam Duncan, an import from Fred Meyer.

At store level, although the company is still opening Signature stores, some of those signatures are getting a few extra loops in the form of additional nonfood categories.

And while the Hughes Family Markets banner still prevails outside the Hughes stores, the chain is now operated by Ralphs and its interiors are beginning more and more to resemble the Ralphs stores they will ultimately become. "But it's basically business as usual," Golleher told SN. "The only real difference is Ralphs exists under a different operating umbrella."

That umbrella is Fred Meyer Inc., which engineered a mega-merger earlier this year that added Ralphs; Hughes, Irwindale, Calif.; and Quality Food Centers, Bellevue, Wash., to its family of stores. The company had already acquired Smith's Food & Drug Centers, Salt Lake City, several months earlier.

Fred Meyer Inc. is now a holding company for Fred Meyer Stores, QFC, Ralphs (which includes Hughes) and Smith's (which includes Phoenix-based Smitty's Supermarkets).

"The concept of the merger is that each company will retain its own differentiation, without any reference to Fred Meyer whatsoever," Golleher explained.

However, each will benefit through the consolidation of distribution and manufacturing facilities and the exchange of ideas among executives, he added.

According to Golleher, Ralphs' plans to achieve some of those benefits include the following:

The addition of 20 new nonfood categories as part of an effort to give Ralphs a competitive edge and to recoup sales lost to mass merchandisers.

A growth plan that will see Ralphs expanding northward into central California and possibly farther up the coast over the next decade.

Renewed capital expenditures for the chain's Bay Area stores.

An ongoing interchange of people and ideas among Ralphs, Fred Meyer Stores, QFC and Smith's. Ralphs operates 466 stores, including 265 Ralphs units, 56 Hughes stores and 80 Food 4 Less warehouse stores, all in southern California; 27 stores in northern California (operating under the names Cala Foods, Bell Markets and FoodsCo., and 38 Falley's stores in Kansas and Missouri.

At the time of the merger, Ralphs' volume was approximately $5.5 billion. The addition of the Hughes operation adds another $1 billion to the total.

Ralphs, traditionally an innovator in southern California, would have preferred being the consolidator in any merger, Golleher said.

"But there were no more major opportunities for consolidation in this market, and as Ralphs looked at everything that came along, the deal with Fred Meyer made a lot of sense because it made Ralphs part of a multiregional operation that enables it to buy more competitively as a group.

"It also enabled Ralphs to do an in-market consolidation with Hughes.

"But every decision point remains in the region, and the only real change in the operation is the fact that all capital plans are reviewed in Portland."

Securities analysts told SN they expect the merger to serve Ralphs and the other Fred Meyer-owned companies well by making each part of a larger, stronger entity.

"The merger is a positive step for Ralphs because it joins what has become one of the largest chains in the United States, with more advantages in buying, improved systems and the spread of Best Practices," said Ted Bernstein, a high-yield analyst with Grantchester Securities, New York.

"It also makes Ralphs more competitive against all types of competition and gives it more flexibility in pricing, and it provides greater cash flow to reinvest in the business." According to Chuck Cerankosky, an analyst with McDonald & Co., Cleveland, customers ultimately benefit from such mergers "because they provide great opportunities to consolidate a lot of functions that customers don't see, such as distribution, procurement and systems -- and although the stores may seem to remain the same, the savings from consolidations are passed on to consumers in terms of better values."

Jonathan Ziegler, a San Francisco-based analyst with Salomon Smith Barney, New York, said the merger makes Ralphs and Food 4 Less stronger players in southern California, "which gives them more impact with vendors on deals and pricing. And it will give the combined company the ability to rationalize private label to provide the best for all divisions." Ralphs has historically been a single-region operator, Golleher pointed out, "and we were proud of that because it gave us a great deal of flexibility to be unique in the market and to react quickly, but it also put us at a disadvantage in capital markets.

"So we felt a merger with Fred Meyer -- a publicly held company with a good balance sheet and greater financial resources than we had for growth and capitalization -- would be advantageous for us. Becoming part of a multiregional operation will enable us to withstand periods of competition better and to become more competitive on our own." From Fred Meyer's point of view, Golleher said, one advantage of having Ralphs as part of its corporate family is the ability to benefit from its food expertise. "We've had Fred Meyer people in the Ralphs stores to see what they do best, and Ralphs people have visited Fred Meyer and QFC stores, and all of us and the Smith's people are working together to share merchandising expertise and to develop certain concepts and programs, just like a Best Practices group," he said.

Golleher said the Ralphs people were impressed by the job Fred Meyer does in various nonfood categories, and Fred Meyer personnel were taken with the job Ralphs does on prepared foods and home-meal solutions, "and the people from Fred Meyer and Smith's are working with Ralphs to develop the same concepts for their stores.

"It's a bottom-up approach to building the business, where each company is able to maintain its regional culture while sharing its best ideas." According to Duncan, one of the most exciting parts of the new company "is exchanging ideas and finding ways to leverage our collective buying power."

Golleher acknowledged that Ralphs stands to benefit greatly from Fred Meyer's knowledge of nonfood, which accounts for 40% of sales at its multidepartment stores. "Fred Meyer has long been one of the premiere food and nonfood operators, and no one in southern California has their tremendous expertise in nonfood. That gives Ralphs the opportunity to introduce new categories and also provides a competitive leverage point that it can capitalize on over time."

Golleher said Ralphs expects to add up to 20 nonfood categories at its stores over the next couple of years, including pet centers, bath and body shops, small appliances, nutrition centers, lawn and garden, office supplies, automotives and kitchen gadgets, in addition to expanding cookware and books.

"Ralphs certainly sells cookware now, but in the future it will be able to carry more upscale lines that have not previously been available to supermarkets, and it expects to do a lot of in-store promotions and to see nonfood sales increase as a result," Golleher said.

Buying from Fred Meyer rather than through a third-party distributor will also keep Ralphs' nonfood prices competitive, Duncan added. "Right now this market is driven by third-party suppliers, which makes it difficult to be competitive with the discounters. Now Ralphs will be more competitive."

Category killers take business away from supermarkets, Duncan added, "and what we're going to try to do is make sure we maintain our volume in those categories and keep those sales in our stores."

According to Golleher, discounters like Wal-Mart, Kmart and Target "nibble away at you with bites so little, you don't even know you've been bitten.

"We know they sell a lot of nonfood categories that Ralphs doesn't compete in. And as they expand, they're trying to sell more food products to drive their traffic, and conventional supermarkets are taking hits that they haven't been giving back.

"Becoming more competitive in nonfood -- on merchandising as well as pricing -- can drive the supermarket business, and trading on Fred Meyer's nonfood expertise will give Ralphs a chance to bring some of those discount shoppers into its stores."

Ziegler said he believes the addition of nonfood at Ralphs, based on Fred Meyer's expertise, "should make the stores more exciting. And aside from giving Ralphs an edge over other supermarket competition, it will put it into discount-store territory. "Fred Meyer has installed bath boutique endcaps and kiosks at the Smith's stores in Salt Lake that are very impressive, and that could be the pattern for Ralphs."

Cerankosky cautioned that Ralphs has to be careful in adding nonfood. "Combination stores with a large amount of nonfood categories tend to do well," he told SN, "as long as they stick to high-turnover items.

''But if you start getting into small-volume items within categories, you're taking a big risk. A chain has to be careful of what it's trying to be because successful combo stores tend to focus on frequently purchased goods and services." Golleher said Ralphs expects to be able to integrate most of the new categories into its 50,000- to 55,000-square-foot prototype, which accounts for about 25% of its store base. "But first we'll try them out in a handful of bigger stores to see what sells best and then integrate those categories into other stores."

He said Ralphs will incorporate the new categories in three to five existing stores in the 60,000- to 65,000-square-foot range that are slated for renovations later this year, though he declined to pinpoint the locations. Ralphs calls its latest design concept "Signature stores." According to Golleher, "A Signature store contains essentially everything a shopper could want in a contemporary market, carefully customized to the community it serves, with all the quality, value and service customers have come to expect from the Ralphs name.

"It combines years of research, practical experience and thoughtfully listening to our customers. That's why Ralphs puts its signature on it."

Ralphs plans to open about a dozen new stores this year, a dozen more next year "and much more than a dozen in the years that follow," he said.

The Food 4 Less warehouse stores will definitely be a part of Ralphs expansion program, Golleher added. "The dual-format approach has given the company a unique position in southern California," he said.

The greater availability of capital from Fred Meyer will also enable Ralphs to invest in its Bay Area stores, Golleher noted. Although he said early in 1997 that those stores might be for sale, that is no longer the case, he told SN.

"Ralphs plans to reinvest strongly in the Cala, Bell and FoodsCo. stores. The company really hasn't had a solid growth plan up there because it was investing so heavily in southern California. But with a better capital structure, Ralphs will be able to reinvest more in those stores," Golleher said.

According to Golleher, some of Ralphs' longterm expansion is likely to be outside the confines of its southern California operating area, which stretches from San Diego to Orange County and Los Angeles, with only 17 stores farther north into Santa Barbara (100 miles north of Los Angeles). "Currently, Ralphs is looking at real estate as far north as San Luis Obispo [200 miles north of Los Angeles]," Golleher said, "and the company will probably open additional Ralphs stores in Santa Barbara and locations farther north in the next couple of years." Some of the real-estate sites in central California will be locations Smith's had staked out for its own expansion before it left southern California in early 1996, Golleher said. Because Ralphs and Smith's are now part of the same holding company, ownership of those sites will simply be transferred over to Ralphs without any money changing hands, he noted.

"My vision over the next 10 years is to fill in the rest of the state and see Ralphs reach the Oregon border," Golleher said.

He also said Fred Meyer Inc. would like to see its various retail companies expand to fill in some of the empty spaces between them. "Fred Meyer Stores could come down from Oregon into northern California, while Smith's could move west from Nevada into northern California and Smitty's could move from Phoenix eastward into the desert region," Golleher explained.

The 56 Hughes Family Markets in southern California -- which were acquired last year by QFC before QFC became part of the Fred Meyer mega-merger -- have moved from QFC oversight to Ralphs in the wake of the merger, and although the name on the front still says Hughes, everything on the inside is pretty much Ralphs, Golleher acknowledged.

"All Hughes' purchasing is done by Ralphs," he said, "along with all computer systems, point-of-sale systems, scanning, payroll and accounting.

"And the Hughes stores accept the Ralphs loyalty card and carry some of the Ralphs private-label lines. Hughes had only about a third the number of private-label lines Ralphs has, and Ralphs has swapped its items for theirs where they were identical and will put in the rest as it remerchandises those stores over the next two years."

Even the employees sport new uniforms that say "Ralphs" on them, Golleher said.

When the mega-merger was originally disclosed in January, the plan was for Ralphs to replace the Hughes name immediately. However, that changed by the time the deal closed in April, with Ralphs retaining the Hughes name on the stores indefinitely.

"For now, we feel the transition has gone so well that we'll leave the Hughes name out there and see what happens," Golleher said. "Over time, Ralphs will probably lose some dedicated Hughes shoppers and pick up some dedicated Ralphs shoppers." Nearly all of Hughes' clerical staff, buying staff, supervisors and district managers were retained by Ralphs, along with virtually all store-level personnel, Golleher said. "Ralphs went into a hiring freeze six weeks before the merger, so by the time it was completed, the company had job openings for most of their people."

Bringing Duncan, from Fred Meyer, in as Ralphs new president will not disrupt the way Ralphs does business, Duncan told SN. He spent 20 years competing with Ralphs while working for Albertson's in southern California before moving to Oregon in 1992 to join Fred Meyer's food group, ultimately becoming executive vice president of food for Fred Meyer.

"When I worked in southern California as a competitor of Ralphs, I admired its traditions and customer loyalty, and my purpose here is to see that that continues," Duncan said.