DEL SANTO TO TAKE VONS HELM

ELLIOT ZWIEBACH

ARCADIA, Calif. -- The Larry Del Santo era as chairman of Vons Cos. here will begin Wednesday -- at a point in the chain's history when it finds itself on the brink of a full financial recovery.

Del Santo will become chairman at Vons' annual meeting, which will also signal the formal retirement of Roger E. Stangeland, who has been chairman for 10 years.

Although positive change is well under way, several factors beyond Vons' control could create challenges for Del Santo and the area's leading volume chain. These factors include local competitive challenges, the ongoing southern California recession and the potential for involvement in Vons' operations from Safeway, which owns a large stake in Vons.

Del Santo has been vice chairman and chief executive officer of Vons for a year, and he has disclosed his own plans to retire in two years. Thus, if he hopes to make his mark, observers told SN, the future is now.

"Del Santo's biggest challenge will be getting earnings back on track," said Jonathan Ziegler, a securities analyst with Salomon Bros., New York. "I think the reason Vons closed its Expo warehouse stores so abruptly last year was that it was a long-term investment and Del Santo wanted to deliver earnings this year."

Vons apparently is delivering, with analysts expecting an earnings gain of close to 50% for the first quarter ended March 26. Sales for the chain's 326 stores in the first quarter are expected to be off about 1% to $1.1 billion, while same-store sales are projected to be up 1.25% to 1.5%, compared with a decline a year ago, according to analyst estimates.

"Del Santo has already made some tough decisions, including eliminating hundreds of jobs," a Vons competitor told SN. "Once he makes another tough decision -- to close another 30 unproductive stores -- Vons should be able to build on its strengths going forward."

Several factors are driving industry expectations for the chain's long-term recovery, including the following:

· The company's "Vons Is Value" campaign, which is an effort to remove price as its main promotional peg by broadening its message to convey to consumers the full range of what Vons offers.

· A stronger reinvestment in its store base, with Vons committing $175 million for 10 new stores and 65 remodeling projects in 1995.

· The shutdown of unprofitable stores.

· An aggressive expansion plan over the next three years for 15 additional units of Pavilions, Vons' upscale combination-store format.

· A reconfiguration of the chain's distribution centers to increase inventory turns, including the shutdown of a San Diego facility and the consolidation of two Los Angeles distribution facilities.

· An ongoing focus on private-label merchandising, with an attempt to raise private label's share of total grocery sales from 16% last year to 20% by the end of 1995.

· Better use of existing systems and technology.

Vons has been struggling to recover momentum since a low point in 1993, when sales dropped 9.3% to $5.1 billion and same-store sales fell 9.0%.

In the past year and a half, Vons has eliminated 700 administrative and support positions "to create a flatter, more responsive organization," Del Santo said in the company's annual report.

Simultaneously, it has also lowered thousands of prices to become more competitive -- maintaining a 3% to 5% pricing spread above everyday-low-price competitors -- while offering double coupons, high service levels and a strong frequent shopper program.

At the end of 1994, Vons reported sales of just under $5 billion, down 1.5% from 1993, while same-store sales recovered to a negative 2.4% and earnings dropped 15.8% to $26.6 million due to several nonrecurring charges.

According to Gary Giblen, managing director of Smith Barney, New York, "The closure by Vons of underperforming stores should bolster same-store sales growth at remaining units -- but that same-store sales improvement mirrors the improving performance at most other southern California chains and thus does not indicate market-share gain."

Vons' local market share is 18.7%, compared with 14.4% at Lucky Stores, 14.0% at Ralphs Grocery Co. and 13.7% at Food 4 Less Supermarkets.

Giblen said the decision to expand and focus more on the Pavilions stores, which feature strong perishables and specialty departments, should help Vons differentiate itself from some of its competition.

"In addition, the new 'Vons Is Value' campaign, with its broadened definition of value to embrace assortment and perishables quality rather than just price, may also help Vons differentiate itself," Giblen added.

Clouding the horizon is the southern California economy, which remains in a recession, with unemployment up and climbing interest rates likely to impede spending, observers said.

Debra Levin, a securities analyst with Morgan Stanley, New York, said she expects Vons to continue to improve its sales trends as the southern California economy improves.

"And streamlining in the distribution area, closing unprofitable Expo units and stringent cost controls bode well for bottom-line earnings," she said.

Posing a potential challenge to Vons' recovery is the unknown impact of the anticipated merger of Ralphs, Compton, Calif., and Food 4 Less, La Habra, Calif.

According to observers, the merger may make Ralphs a stronger, better financed operator on the conventional side, while increasing price pressure on the market from a spurt in the number of merged units converted to the Food 4 Less warehouse format.