EXPANSION-MINDED

MARK TOSH Reported by Glen A. Beres and Lisa A. Tibbitts

NEW YORK -- After years of cost-cutting and consolidation, supermarket operators say they are poised for growth in 1995 and beyond.

Retailers have lowered overhead costs, paid down debt and are operating more efficiently than ever before. They plan to continue to refine these strategies this year -- but they will look to plow more of the savings achieved by such measures into capital expenditures.

This seemed to be the consensus among industry executives who attended the fifth-annual Lehman Bros. Food Retailing Conference here. Executives representing 16 companies made presentations to investors during the two-day event.

Take Kash n' Karry Food Stores, for example. The Tampa, Fla.-based company expects to remodel at least 18 of its 99 supermarkets over the next six months, said Ronald E. Johnson, chief executive officer.

Or Albertson's. The Boise, Idaho-based operator opened 29 new stores in the fourth quarter alone last year, has another 55 grand openings scheduled for this year and expects to open 350 new units in the next five years, said A. Craig Olsen, senior vice president of finance and chief financial officer. This is in addition to the 242 remodels planned over the same five-year period.

And Cincinnati-based Kroger Co., the nation's largest operator, plans to open 90 stores in 1995 and remodel 65, which will increase its square footage by 5% to 6%, according to Joseph Pichler, chairman and CEO.

"Starting in 1994, we shifted our focus from refinancing our high-cost debt to growth through significant capital investments," Pichler said. "Our strategy for the next five years is to accelerate the expansion we began last year." Expansion is not the only theme companies will be focusing on this year. Other trends that emerged from the conference included:

Operators continue to be wary of the threat from supercenters -- but many of them are taking it in stride and are philosophically looking at the category as "just another format to contend with."

"We're not frightened by [supercenters]," said Steven A. Burd, president and CEO of Oakland, Calif.-based Safeway. "Their sales impact is more moderate than conventional supermarkets within a mile of our stores. [Supercenters] tend to have a wider impact once you go beyond that radius."

Many companies are in the process of beefing up their private-label programs. "We feel we need to let private label take its place in the marketplace," said Tom E. Smith, president and CEO of Salisbury, N.C.-based Food Lion, for which private-label products represent about 15% of its grocery mix.

"Private label is a key to increasing our growth rate from existing stores," Kroger's Pichler said.

Numerous large-scale retailers are looking to make each store in the chain more in tune with and responsive to its own customer base through individual store marketing. "We believe that no single format fits every community or market in which we operate," explained Gary D. Hirsch, chairman of Syracuse, N.Y.-based Penn Traffic Co.

More and more operators are investing in technologies they hope will make operations more streamlined and efficient. Safeway, for example, announced last May it was reorganizing its decentralized management information systems functions into a single unit. And the company has already seen results in the way of cost savings, reduction of duplicated efforts and a more consistent information systems architecture, said Julian C. Day, Safeway's executive vice president and chief financial officer.

Following are summaries of some of the presentations given at the conference.

Kroger Co.: Working Capital

Since managing to reduce its high-interest debt over the past year, Kroger Co., Cincinnati, has mapped out an ambitious plan calling for $600 million in capital expenditures.

Joseph Pichler, chairman and chief executive officer, laid out the company's plans for increasing shareholder returns in the years ahead. "First, we'll produce higher returns from existing assets. Second, we'll grow our business through increased square footage. And third, we'll grow our profitability through enhanced technology and logistics," he said.

To maximize sales in individual markets, personnel in each of the company's highly decentralized divisions are encouraged to use a variety of techniques to boost sales, which include featuring "rock-bottom" prices on health and beauty care items and promising a 100% satisfaction guarantee on private-label merchandise.

Due to a significant reduction in working capital -- from $426 million in 1989 to $171 million last year -- the company has pledged to significantly increase its total square footage.

"In 1995 we'll invest about $600 million [in capital expenditures]. Square footage will increase 5% to 6% and we'll open 90 stores instead of the 62 that we opened last year, and on top of that, any acquisitions that we're able to make. We'll also remodel 65 [stores]," he said. That compares with 82 new projects and 66 store remodels last year.

The company was particularly impressed with results from its Signature store format, which "delighted" company executives. There are currently six Signature stores in Houston, merchandised specifically to serve their surrounding neighborhoods. At least one more store is planned for Houston the coming year. "We are bullish on Houston and intend to invest heavily," he said.

The last area to receive increased attention in the years ahead will be technology and logistics. Pichler declined to discuss specific projects, saying only, "Our distribution and logistics areas are poised for dramatic changes in the years ahead."

Safeway: Efficiency Is Paying Off

Safeway's three main priorities in 1995 are essentially the same as they were last year, according to Steven A. Burd, president and chief executive officer:

To continue to lower operating expenses.

To build sales.

To increase capital spending.

The Oakland, Calif.-based company has reduced operating expenses for seven consecutive quarters, Burd said, mainly by becoming more efficient in its manufacturing operations. Safeway closed or sold off six manufacturing plants last year, consolidated its three Canadian divisions into one Calgary operation and reduced overhead costs in its northern California facility by more than 20%, he said.

Burd said the company will continue its efforts to work costs down by further streamlining operations and working to achieve labor cost parity in every market it operates.

In the area of building sales, Safeway's strategy has been a three-pronged effort centered around competitive pricing, improved store standards and enhanced service.

The strategy appears to be working. Burd said Safeway's sales last year increased 4.2% in both the first and second quarters, 3.7% in the third quarter and 5.2% in the fourth.

"We've worked very hard over the last couple of years to become increasingly price-competitive and we think we're there," he said.

Burd said the company is building and remodeling new stores today "at a lower cost than we did one or two years ago," which allows Safeway to plow those savings right back into the capital spending program.

One way the operator has achieved these savings is by scaling down its newer stores. According to Burd, Safeway's new prototype calls for units of 55,000 square feet, as opposed to the old design of 62,000 square feet. Yet no selling space has been lost with the smaller units, he said.

Hannaford Bros.: New Directions

Hannaford Bros., Scarborough, Maine, plans to build 15 new stores this year, in both its Northeastern trading area as well as the Southeast, thus increasing the company's selling area by about 12%.

In the Northeast the company will add eight new stores. In the Southeast Hannaford will enter four new areas with Wilson's Supermarkets, Wilmington, N.C., the 21-unit chain it acquired last July.

"We'll probably be able to do this for somewhere around $125 million to $130 million and will provide an increase of about 12% in our selling area," said Hannaford Chairman James Moody told investors at the Lehman Bros. conference. Areas slated for new stores are West Peabody, Mass.; Glenville and South Troy, N.Y., and Brattleboro and Wilton, Vt., he said.

Three sites are scheduled for store relocations: Brunswick and Skowhegan, Maine, and Nashua, N.H.

Tidewater, Va., is the newest market Hannaford has fingered for expansion. The company had previously announced plans to place Wilson's stores in the Richmond, Va., and Charlotte and Raleigh-Durham, N.C., areas.

"We expect to open seven new stores in the Southeast in this next year and we hope and believe that we can open an average of at least 10 stores in the Southeast over the next several years," said Moody.

Vons Sets Growth Strategy for 1995

Vons Cos., Arcadia, Calif., plans to increase market share in 1995 by opening new stores, emphasizing its image as a low-price operator and continuing to pursue the cost-cutting and restructuring program it began last year.

"In 1994, we focused on taking costs out of the system," said Lawrence Del Santo, vice chairman and chief executive officer of Vons. "Our chart in 1995 is to grow sales."

The company has pledged $175 million in capital expenditures this year for 75 store remodels and 10 new stores, five of which will be replacements. Vons also plans to add 15 new Pavilion units over the next three years to the 33 already in existence.

Within the next year, Vons plans to close one of its three California distribution facilities, "which will result in savings, largely from a reduction in redundant inventory," he said.

Del Santo estimated that the company has lost about one percentage point of market share over the last several years to other retailers operating within its markets. He said Vons will focus on two basic strategies aimed at regaining lost share: responding more effectively to employees and customers and focusing on Vons' low-pricing image.

Phillip Hawkins, senior vice president of operations, conducts "Heart of the Matter" informational meetings with individual stores to discuss goals and market positioning and to stress the employees' importance to the company.

Last year the "Vons Values" marketing campaign was introduced. The company simultaneously dropped the prices on thousands of stockkeeping units to maintain its image as a low-price operator. This year, the company is announcing "Vons Is Value."

The retailer is investing heavily in its Vons Club frequent shopper card and its private-label lines. "Early analysis of Vons Club records suggests that this can be an extremely important and effective marketing tool for Vons in the future," he said.

The plan calls for increasing private label to 20% of store sales. Private-label sales increased from 13% in 1993 to 16% in 1994.

Pamela Knous, Vons' senior vice president and chief financial officer, said the company's concentration on improving operating efficiencies figures in its success. "With an improving economy and strengthening operating trends, we believe we'll be able to achieve a ratio of debt to capital of 55% or better in the near future," she said.

Fred Meyer Gets Back on Track

After a devastating 88-day strike last fall at 26 stores, Fred Meyer Inc. said it has regained most of its sales momentum.

The Portland, Ore.-based retailer -- which operates combination food and general merchandise supercenters featuring full grocery stores as large as 200,000 square feet with up to 225,000 different stockkeeping units -- dropped 30% to 35% in sales in its core Portland, Ore., and Vancouver, Wash., markets during the strike.

However, Robert G. Miller, chairman and CEO, said sales in Portland and Vancouver are now running 3% to 5% behind the pre-strike pace and should be back to normal by the end of the first quarter in May.

"After the temporary setback in 1994 because of the strike, we expect to get back on track in 1995 with results that compare favorably on a trend basis with our 1993 performance," he said.

The mass merchant now looks to hit a net profit margin of 2.75% of sales by the end of 1997, rather than by year end 1996. The chain posted a net margin of 2.4% at year end 1993, which is better than most other retailers in the combined food and general merchandise format, with the exception being Wal-Mart, which posted a net margin of 3.5% in 1993.

Earnings in 1994 were undoubtedly hit hard by the strike. Meyer is scheduled to report its results for 1994 on March 7.

Miller's other goals for Meyer included the following:

Reduce expenses as a percentage of sales by at least 1% by the end of 1997 from the level in 1993.

Increase annual sales by 10% annually through new stores and remodelings.

Miller said sales growth will be driven by the construction of 30 to 35 new full-line stores and 40 major remodels over the next five years. The company controls 40 sites in its existing markets, either by ownership or lease, Miller said.

Smith's Shrinking Stores to Expand

A smaller store size may enable Smith's Food & Drug Centers, Salt Lake City, Utah, to expand into regions it had previously overlooked.

Smith's has already built five store in the 54,000 square foot range, down from about 66,000 square feet, according to chairman and chief executive officer Jeffrey Smith. Robert Bolinder, executive vice president, said Smith's plans to open 13 to 16 stores in 1995 and 10 to 12 in 1996. The smaller format gives the company a lower break-even point with a better return on investment, thus providing the affordability to expand into new markets.

"The smaller format allows us to move into cities we passed up before, as well as some of the larger marketing areas, such as Salt Lake City, Phoenix, Albuquerque and Las Vegas," he said.

Smith's also has big plans for its southern California operations. The company had delayed intrastate expansion beyond its current 32 units because of a sluggish state economy and poorly trained employees.

A program to cut costs chain-wide, which includes a restructured employee bonus plan and an increased use of systems and technology, has been implemented. A new employee training program tailored specifically for California employees has also been instituted. "During 1995, you will see us become very aggressive from a sales standpoint and we will get our sales back in that market" said Smith.

Food Lion Expanding Stores, Sales

Food Lion, Salisbury, N.C., said that in 1995 it will continue an aggressive remodeling program of enlarging and fine-tuning its store format implemented last year.

Food Lion expects to remodel 120 stores, which it said will create an additional 600,000 square feet of store space and generate another $2 million in sales per week.

The remodels call for 35,000 square feet of space, as opposed to 29,000 square feet in the older format, said Dan Boone, chief financial officer for Food Lion.

The new prototype increases the SKU count 21% to 20,000; private label SKUs are more than doubled from 550 to 1,400 -- 11% of total sales.

The remodels will also expand fresh offerings and add deli-bakeries, Boone said. "We've been seeing sales increases exceeding 10% in the newly remodeled stores," said Tom E. Smith, Food Lion chairman, president and CEO. "People really like shopping in the remodeled stores. It's proven to be both a very popular service to our customers and a very effective way of getting quick returns on our capital investment."

The retailer -- which opened 30 stores, closed 87 and remodeled 65 in 1994 -- projects opening 50 new stores this year as well, which would give it 1,089 units.

All of the expansion is planned for the Middle Atlantic and the Southeast, Food Lion's traditional stronghold. Smith said Food Lion introduced a Gold Lion Guarantee program last year and began its MVP program to award frequent shoppers.

The company also is conducting two customer surveys per year to "really zoom in on the needs of customers in individual markets," Smith said.

"The surveys tell us that our customers want our low prices," he said, "Our challenge is to address their other needs and still protect those low prices."

Supervalu Has Growth 'Advantage'

Michael Wright, president, chairman and CEO of Supervalu, Minneapolis, sees the company's highly publicized Supervalu Advantage project as the key to its growth in the future.

The Advantage program, announced in September, is designed to improve the effectiveness and efficiency of the company's food distribution system. It includes changes in pricing, vendor relations and systems.

Wright said improvements within the distribution system should reduce handling expenses dramatically and also attract more business.

"But Advantage's worth is more than just eliminating hidden costs in the system," he said. "By investing some of these benefits to attract customers, we believe our market share will expand."

Another thrust of the Advantage program is developing market-driving capabilities for retail customers. Wright said the program will provide customers with enhanced, integrated technology support systems designed to increase their sales, lower operating costs and increase productivity.

Wright also said the redesigned system restructures forward-buy practices to pass all benefits on to the customer whenever possible.

The company plans to sell about 30 stores and eliminate about 4,500 positions over the next few years to help cover the costs of implementing the Advantage project.

On the retail side, Wright said the strategy going forward is to eliminate underperformers like the two Twin Valu supercenters it is selling and the 11 Laneco food and discount general merchandise stores it is converting to a combination format.

In 1995 and beyond, Supervalu will focus on its preferred retail formats: superstores, supercenters, limited assortment stores and food & drug stores, Wright said.

"We'll focus on formats we want to grow and continue to remove the distraction of underperformers that have weakened our business," he said.