FRED MEYER'S FOOD FOCUS

DAVID ORGEL

PORTLAND, Ore. -- Fred Meyer Inc. here is on the fast track with food expansion.

The 126-unit Northwest giant, which sells everything from television sets to auto supplies in its huge food-nonfood, multidepartment superstores, is putting a premium on food growth as it refocuses its attention on store expansions and

remodels.

The chain, which operates in seven Western states and posted 1993 volume of $2.98 billion, plans to build at least 25 to 30 full-size units and complete 35 to 40 major remodels in the next five years. The new stores will incorporate full-line supermarkets, and several of the remodels are adding supermarkets to units that were previously oriented to nonfood.

"The expansion will add about 40% to the company's food sales during the period from the fiscal years 1993 through 1997," said Curt Lerew 3rd, senior vice president and director of the food division, in an interview here with SN.

Food sales grew to $1.1 billion in fiscal 1993, an increase of 6.7% from the prior year.

The chain's growth plans represent "an impressive food expansion, given Fred Meyer's current store base," said Jonathan Ziegler, an analyst with Salomon Bros., New York.

Food is posting strong same-store sales gains and is viewed as a critical catalyst for the retailer's overall store business. At a time when supermarkets are wondering if Wal-Mart or Kmart will be successful with groceries in their fledgling supercenter assortments, Fred Meyer has fine-tuned a similar mix and is expanding its concept.

Fred Meyer will accomplish its multistate expansion without escaping the borders of its current territories. That strategy will enable the chain to maximize economies of scale, Lerew stressed.

"We have a pretty good 10-year plan that doesn't have us leaving our current marketing areas," Lerew said. "There are enough opportunities in Alaska, Montana, Idaho, Utah, Washington and Oregon to grow our business effectively for 10 years. The best growth will still be in the Puget Sound area, and our immediate plans don't show expansion in our California market."

Although the chain is sticking to its markets, it will have to develop a first-time food reputation in its Utah trading area. Stores in that region haven't yet incorporated food into their assortments. But the company will change all that by opening two superstores there and remodeling five others, bringing a food presence into seven units. The task is projected to be completed by the fourth quarter of 1995. In order to ensure square footage growth leads to success, the chain's multistate expansion is being accompanied by major merchandising and logistics changes in the food division. Among key points, the company is: · Breaking with its self-distributing tradition by hiring Fleming to supply stores in two states.

· Constructing a second corporate food distribution facility to ease deliveries to the chain's northern markets.

· Building on the chain's recent sharp private-label growth by launching additional store lines for health and beauty care and for specialty niches, including fat-free products.

· Working to maximize sales and space opportunities within the smaller, cost-efficient prototypes the chain has now settled on -- units of 145,000 and 165,000 square feet. · Attempting to better leverage technology to lower costs and build sales. The company has undertaken test programs in cross-docking and continuous replenishment and has developed a computer program with IBM to closely track top sellers in its trading areas.

While 72-year-old Fred Meyer has long considered food integral to its game plan, the chain acquired many stores between the 1960s and the 1980s that became nonfood-only units because they weren't superstore size, Robert Boley, assistant vice president of public relations, told SN. Among the company's 126 units, 98 are large multidepartment stores, 78 of which feature the one-stop-shopping focus with nonfood and full-service food departments.

"But our strategy now is to add food to more stores for complete one-stop shopping," Lerew stressed.

Fueling that mission is the recognition of the role played by food -- and an everyday-low-price grocery image -- among Fred Meyer's vast array of product departments. "The food provides the traffic to the store; it's the driver," Lerew said, although he conceded that margins in food are lower. "The food shopper comes about four times a week whereas shoppers for areas like apparel or jewelry visit much less frequently."

A Salomon Bros. report last month by analyst Ziegler concurs with Fred Meyer's assessment of the importance of food to its superstores. "The supermarket sections of the store are making an impressive, positive contribution to the overall store," the report said. "Management has wisely, we believe, positioned the supermarket as an everyday-low-price leader. Thus, not only has the supermarket taken market share, but it has been an important traffic draw to the rest of the store."

The size of Fred Meyer's food offerings are comparable to those of a typical large supermarket, while Fred Meyer's HBC offerings are double those of most supermarkets, Lerew said.

Over the next four years, the expansion will add some 1.4 million square feet to the areas run by Fred Meyer's food division, which also include pharmacies, HBC sections and nutrition centers, Lerew said. That level of growth is expected to make the chain a more potent force against an increasingly competitive field of food retailers in its markets.

The food division's products represent about 29% of the square footage of a typical superstore, and account for more than 50,000 of the format's 225,000 stockkeeping units.

A key point is that the supermarket sections of Fred Meyer stores far outsell their share of square footage: They are responsible for about 40% of the sales of a typical superstore.

And for an industry obsessed with comparable-store sales, Fred Meyer's food group has made the grade under the two-and-a-half-year tenure of Lerew. Most recently, the chain reported a 3.4% same-store sales gain in food for the 1993 fiscal year.

Many observers credit Lerew for much of the retailer's recent food successes. A 30-year veteran of the supermarket business with a long tenure at Albertson's, Lerew was tapped to run the food operations by another Albertson's alumnus, Robert Miller, Fred Meyer's chairman and chief executive officer.

Lerew's ongoing strategy has been to maximize the store's existing strong food reputation -- which includes EDLP and a superior produce presentation -- by grabbing opportunities that were previously ignored. "The store always had the basics in place, but it was my job to be the sales driver and create new opportunities," he said. One major effort has been the addition of service departments, including bakeries and delis, to stores without them. Lerew also remade the perimeter departments by focusing on high-volume items rather than merely wide assortments. "We started pushing basics in the deli, like pizzas and chicken," he said. "Whereas the store previously sold only pizza to order, we focused on preparing and making available the top three varieties, and even tied purchases to soda promotions. We took pizza movement and multiplied it 10 times.

The store sharply reduced shrink by sifting out those items that weren't regular best-sellers in perimeter areas. But it is also playing into the convenience trend by beefing up prepared foods -- adding varieties including Chinese, Mexican and Italian -- and embracing branded food courts in some units. Perhaps even a bigger merchandising coup can be found in the grocery aisles. The retailer has made sharp gains in its private-label program, which will be continuing this year with the rollout of new lines. The top end of the private-label hierarchy is claimed by President's Choice, for which the chain has exclusive rights in the Pacific Northwest. A tier below is the Fred Meyer line, which is comparable in quality to national brands but at significantly lower prices. The bottom level is the FMV value brand, which is a grade above generics but at generic prices. The chain has now achieved a 20% penetration with store brands, compared with just 12% when Lerew arrived two and a half years ago.

"We wanted to get to 20% and we'll probably stay there," Lerew said. "That's because we want to sell national brands, too, and satisfy all the customers."

But there's still unfinished business in private label. "We're now undertaking HBC; that's this year's project," Lerew said. "We'll introduce an upscale line for beauty care products in the fall, and an FMV line for health and beauty care to be out mid- to late summer," Lerew said. The chain is also redesigning the packaging and look of its existing Fred Meyer HBC line, Lerew said. This is part of an effort throughout the division to remake private-label packaging to create a unique identity apart from the national brands.

The store-label focus is enabling Fred Meyer to proliferate the EDLP message it credits for much of its success. Also boosting that position is the plethora of in-store signs comparing product pricing to that of its competitors. But competitors are getting more aggressive, too, a fact not lost on Fred Meyer as it charts its store rollouts.

"Operators including Albertson's, Safeway, Cub Foods, club stores and regionals continue to expand, remodel and grow in our markets," Lerew said. The company has reported some 413 new competing units cropping up in its market in the past five years. The result is that expansion won't be a cakewalk, and Fred Meyer has been working hard not to misstep with the details. "The first thing we had to figure out with the expansion was logistics," Lerew stressed.

Distribution has become a front-burner topic. The food division currently operates with one distribution facility, a 1.1 million-square-foot center in Clackamas, Ore., which supplies items that include groceries, meat, produce, frozens and HBC. The retailer has planned a second center for the Seattle area to serve stores in the Puget Sound region and Alaska. "The second center will take the pressure off of the Clackamas center in markets like Alaska and southern Washington," Lerew stressed.

The food division will also make use of a soon-to-open flow-through warehouse in Chehalis, Wash. While the location will be used primarily for soft goods and apparel, the food division will use the facility for certain seasonal items, Lerew said.

Further taking the pressure off distribution is a new arrangement with Fleming Cos., Oklahoma City, to supply Utah and Idaho units with items ranging from food to general merchandise. Although the arrangement has already begun, Fleming won't provide food products to the Utah sites before the remodels and new launches in that market are completed.

The hunt for efficiency also has led Fred Meyer into programs involving Efficient Consumer Response issues, including cross-docking and continuous replenishment, Lerew said. The division is linked to thousands of vendors through electronic data interchange, and is undergoing a continuous replenishment test on selected product categories with Procter & Gamble and Campbell Soup Co.