A BANNER YEAR FOR YUCAIPA

ELLIOT ZWIEBACH

LOS ANGELES -- The long, drawn-out process of merging Food 4 Less Supermarkets into Ralphs Grocery Co. hasn't decreased the enthusiasm of Yucaipa Cos. here, the parent of the merged entity. With the merger's completion last month after nine months of working out the details, Yucaipa is energized for its next challenge: orchestrating new savings and synergies from its growing supermarket portfolio, which includes banners in northern and southern California, Phoenix, Chicago and elsewhere in the Midwest, Ron Burkle, majority owner and managing partner of the investment group, told SN in an interview.

Moreover, Yucaipa is still shopping for supermarket properties despite a spate of recent purchases.

"Yucaipa is on an acquisition bent, and we will continue to look for more opportunities," Burkle said.

But the goal is not simply to gain a larger share of the industry's volume, he said. "I've never cared about size. If we don't see anything we like, we won't buy. And if we do see something, we could buy it tomorrow.

"At any given time we may be very acquisitive or we may do nothing," he explained.

The company has completed three major transactions over the past 12 months at a combined cost of nearly $2.4 billion: Smitty's Super Valu, Phoenix, in July 1994; Dominick's Finer Foods, Northlake, Ill., in March, and Ralphs Grocery Co., Compton, Calif., and its merger (under the Ralphs name) with Food 4 Less Supermarkets, La Habra, Calif., June 14.

Combining the volume from those three companies with volume from its stores in northern California and the Midwest gives Yucaipa control of just under $9 billion at 400 stores.

Yucaipa has laid out a game plan for each of its operations, according to Burkle. Those plans include the following: · At Dominick's, to install retail accounting and other backstage systems to increase cash flow and broaden the company's focus from a strict concentration on sales alone; and to accelerate new-store expansion and to move into new areas in the Chicago suburbs.

· At Ralphs, to continue to invest heavily in new-store growth to bolster sales and to begin long-delayed closings of underperforming stores to help boost same-store sales.

· At Smitty's, to complete the remodeling of all stores by fall to pave the way for a more aggressive merchandising push.

· At the company's northern California division, to expand the base of warehouse stores to justify a distribution center.

· At the company's Midwest division, to continue digesting the 10 Food Barn stores acquired a year ago and to seek additional growth opportunities.

Burkle said Yucaipa intends to use the combined buying clout of its holdings to negotiate better terms with suppliers.

"Yucaipa holdings control 30% of the southern California market, 24% of the Chicago market and 24% of the Phoenix market, which, although not as large as the other two areas, is a big test market for a lot of manufacturers," Burkle said.

"We believe that leveraging the buying power of those three companies can probably get us national buying agreements, and we're going to go after that."

Yucaipa has already had some exploratory discussions with manufacturers, Burkle said, "but we were prohibited from cutting any deals until the merger of Ralphs and Food 4 Less was completed."

He declined to say at what level or geographic location a combined buying program would be conducted.

Jonathan Ziegler, a securities analyst with Salomon Bros., New York, said he sees Yucaipa's attempts to leverage its buying clout as a necessity to level the playing field with power buyers like Wal-Mart Stores.

"Wal-Mart is bigger than most companies, and the more supermarket operators can equalize the buying field with vendors, the better off they will be," Ziegler told SN.

"And if you extrapolate that to private label, then the longer your production runs, the more advantage there is for the supermarket retailer -- and with narrow margins, a few basis points can make a big difference."

Another analyst, who asked to remain anonymous, said he is not convinced that Yucaipa can get better deals by combining the buying clout of its retail operations.

"Dominick's and Ralphs are large enough regional operators to take advantage of every deal that comes along, and although they're both part of Yucaipa now, there's no advantage to saying they do more business collectively and therefore want special deals," the analyst declared.

Besides using its combined buying clout to seek better pricing, Yucaipa also sees possibilities in joint technology developments for the three chains, Burkle said. "It would be foolish not to share knowledge and coordinate what we're doing in software," he explained.

Regarding future acquisitions, Burkle said Yucaipa has its eye on Megafoods Stores, Mesa, Ariz., which is working its way through a Chapter 11 bankruptcy reorganization.

"Megafoods would make sense for us because of its proximity to Smitty's, and we have an interest in pursuing something with Megafoods," he said. "But although we've talked with them in the past, there are no offers on the table at this time."

Megafoods executives could not be reached for comment.

Geography is not a concern in evaluating acquisitions, Burkle said, though Yucaipa will not consider anything outside the continental United States.

"Geography may make an acquisition more attractive, but we wouldn't exclude anything because it wasn't close to one of our other holdings," he explained. "We would have looked at Ralphs no matter what, though that deal had an edge because we are located in southern California."

Burkle is so sure of making additional acquisitions that Yucaipa's retail operations are operating with more top-level executives than they need, he said.

"Our plan is to run rich with management for a while to help the Ralphs-Food 4 Less transition go smoothly and also to hold on to as many good people as we can who can eventually be assigned to other companies," Burkle explained.

Some reassignments have already occurred, including the appointment of John Boyle, formerly vice president of information systems at Food 4 Less, as vice president of administration at Dominick's, where he will be responsible for information technology, construction and risk management.

The challenge at Dominick's is to improve on areas such as retail accounting, direct store delivery and point-of-sale systems. "Historically, Dominick's has been very successful in developing a strong sales base, a good reputation with customers and a powerful market share.

"There are strong numbers all across the board, and we would be proud to own Dominick's, even as a stand-alone company, without any other supermarket investments," Burkle said.

"But for all its success, Dominick's hasn't focused on backstage systems and related technologies, and by installing some of the standard accounting systems that Ralphs, Food 4 Less and Smitty's use, we think we can make some good cash-flow improvements at Dominick's over the next couple of years."

Burkle also said Dominick's will develop a more aggressive new-store program than it has pursued in the past. "The company has focused on growth in the Chicagoland area, but now we're looking at more suburban locations to grow into that are outside its current operating area," Burkle said.

At Ralphs, Yucaipa is intent on closing underperforming units to improve same-store sales performance and investing in new stores to boost sales, Burkle said.

"Before the merger the focus at both companies was increasing market share, not same-store sales," he explained.

Looking at recent results, both Ralphs and Food 4 Less showed negative same-store sales for the second half of 1994 -- drops of 1.2% and 4.7%, respectively, Burkle noted.

While total sales for the same period were off 1% at Ralphs and 0.5% at Food 4 Less, results for the first quarter ended April 23 showed Ralphs sales up 3.5% and Food 4 Less sales up 7.1%, while market shares have gone up 2% at Ralphs and 1% at Food 4 Less.

Burkle said he expects same-store sales numbers to pick up once the company begins closing underperforming stores and sales from those stores shift to existing units.

"We haven't closed any stores prior to the merger. We've left them all open, including some that might otherwise have been closed under normal circumstances.

"Now we'll be divesting 27 stores to other food retailers as part of our agreement with the California attorney general's office, and we plan to close and sell 16 others to nonsupermarket operators. "

The company plans to spend nearly $132 million this year and about $119 million in 1996 on capital expenditures, with five new Food 4 Less stores and four new Ralphs scheduled to open this year and six new warehouse stores and 12 Ralphs planned for 1996, Burkle said.

He said he doesn't see the merged company's $2 billion debt as a hindrance. "The total debt is close to the combined debt of Ralphs and Food 4 Less before the merger," Burkle explained.

"We plan to concentrate on building a quality company, which means we need to find a balance between growth and debt. The merger was structured conservatively, with most of the debt amortized over five years, so we have cash available to grow the company."

Several analysts interviewed by SN said they expect cost savings from the merged companies to go into debt repayment, and they do not expect the chain's debt to hinder it.

Taking exception to that view was Ted Bernstein, a high-yield analyst with Grantchester Securities, a division of Wasserstein Perella Securities, New York. Bernstein said Ralphs will be burdened by "significant" debt levels at the same time it is spending large amounts of capital on new stores -- factors that could "limit the new Ralphs' ability to respond quickly and effectively to changes in its competitive environment."

Bernstein also noted that both chains "have experienced significant revenue declines over the past three years, driven by generally negative same-store sales trends. And despite some recent moderation in same-store sales declines, a return to positive comparisons might be several more quarters in the future due to the competitive markets in which the two companies operate."

At Smitty's, Yucaipa expects to complete the last of 17 store renovations in October, Burkle said. He said the chain's 11 other stores have all been built or remodeled since 1992.

"Smitty's has a good customer franchise, but the stores needed remodeling. When we bought the company, we paid a very reasonable multiple of five times cash flow, but we knew we had to remodel all the stores, and now we're completing that job."

Once the remodels are completed, "we plan to launch an advertising program emphasizing our new look," Burkle said.

He said Yucaipa is spending $25 million on the 17 remodels.

"We invested the money to have the right customer image and to get a good return. The real push will come from reducing the amount of general merchandise in each store, to help us become a first-class grocery store."

A market observer in Phoenix told SN the new and remodeled Smitty's units have a good chance to capture additional market share. "Those upgrades have moved Smitty's two decades ahead of where the stores were before," he declared.

"The stores have better, brighter lighting, wider aisles and a dramatic increase in space to accommodate larger selections of perishables that make them much more consumer-friendly and very much leading-edge supermarkets," the observer said.

The big challenge, he added, will be getting customers Smitty's has lost back into the stores.

"A bingo game the chain is running has not dramatically increased traffic, but it has kept down the number of customers leaving to shop elsewhere, and Smitty's ads have gotten more competitive," the observer noted.

"However, Yucaipa is looking for a better gross from those stores, so shelf prices that were lowered have begun to creep up recently, which could have a negative impact in the long run," he said.

To help oversee the Smitty's operations, Yucaipa has transferred John Standley, formerly vice president of finance at Food 4 Less, to Smitty's as vice president and chief financial officer.

Smitty's has also brought in new people in human resources and real estate and switched employees in merchandising and operations, Burkle noted.

At Yucaipa's northern California stores, the company is de-emphasizing the growth of conventional Cala and Bell stores in favor of more Foods Co. warehouse stores.

"With only six warehouse stores there now, we don't have enough volume to operate a distribution facility," Burkle explained. "Opening more warehouse stores will add enough volume to enable us to look at opening a perishables warehouse."

Because Fleming Cos., Oklahoma City, owns licensing rights to the Food 4 Less name in northern California, Yucaipa calls its six warehouse stores there Foods Co. The other 19 stores in the division are conventional, operating as either Bell Markets or Cala Foods. At Yucaipa's Midwest division, Burkle said the company is continuing to absorb the 10 units it acquired last year when Food Barn, the former Safeway spinoff, liquidated its assets. Of the division's 38 stores in Kansas and Missouri, 32 operate under the Food 4 Less banner and six under the Falley's name. "And we will also continue to look at new-store opportunities," Burkle said.