MARSH'S NEW LIFESTYLE 2004-01-26 (2)

MARK HAMSTRA

FORT WAYNE, Ind. -- After Don Marsh, chairman and chief executive officer, Marsh Supermarkets, cut the ribbon on one of the company's prototype "new lifestyle" supermarkets here earlier this month, one customer told him she remembered shopping at Marsh with her mother before the company left the market 30 years ago.

This was definitely not her mother's supermarket, however.

The 66,000-square-foot store that Marsh opened here, along with another of similar size that the company unveiled a few weeks earlier in Noblesville, Ind., represent a starkly different approach to merchandising and store design than what consumers are accustomed to seeing in their typical retail food store.

"I truly believe that you can't sit still in today's retail climate," Marsh, son of the company's founder, told SN during a tour of the store during its grand opening. "We've stayed on the leading edge."

He said the supermarket's design rivals that of any food store in the country.

The store, which has a heavy emphasis on gourmet and natural/organic foods, is designed in a double-racetrack format, with an expansive produce department and a coffee bar occupying most of the center area of the store and various departments in separate "rooms" around the perimeter. Each room measures several hundred square feet, and has its own unique decor package.

Customers can enter any of the perimeter rooms from the wide-open central area, or they can travel room-to-room around the perimeter of the store on an "outer racetrack" that cuts through the middle of each department. Clockwise around the perimeter of the store as customers enter are individual rooms for baby care, pharmacy, health and beauty care, frozen foods, meat, wine, beer, seafood, dairy, bakery, dry groceries and the delicatessen. The dry-goods area itself is sub-divided into mini-rooms for pet products, cleaning products, snacks and beverages, and pantry.

In addition to produce and the coffee bar, the central area of the store contains international foods, magazines, cards, coffee and candy, all merchandised on low gondolas so that shoppers can easily see the whole store at a glance.

"It's a totally new way to look at center store, and a new way to think about how consumers shop," said David Marsh, president, and son of Don Marsh. "This store has things laid out the way a customer would want them to be, rather than how a retailer or manufacturer would want them to be."

David said his father traveled throughout the world conducting research for the store.

"We wanted to come up with a supermarket that was totally different from any supermarket that we've seen," he said.

Marsh declined to reveal the construction costs for the store, although sources told SN the store was only slightly more expensive to build than a typical Marsh supermarket.

The new design offers Marsh yet another format to expand its presence in Indiana. In addition to 68 traditional Marsh Supermarkets, the company also has 36 LoBill Foods stores, nine O'Malia's Food Markets and two Savin$ Mercados. The company, whose stock is publicly traded but is 22% owned by the Marsh family, also owns 166 Village Pantry convenience stores in central Indiana and western Ohio, and operates a catering company and a small chain of floral shops called McNamara.

At the sites of the new Marsh prototypes, the company also is planning to open its first freestanding restaurants, called Trios, which will be combined with the McNamara freestanding floral concept.

Analysts said the effort to diversify comes at a critical time for the 73-year-old company.

"A lot of what they are doing is trying to differentiate themselves from supercenters," said Richard Baldwin, analyst, Moody's, New York. "Both Wal-Mart and Meijer have gained a lot of share over the past few years."

He noted that Marsh's market share has been eroding only slightly in Indianapolis, where it is about even with Kroger, Cincinnati. (See the SN List, Page 51.) However, Marsh has had to invest a lot in marketing to retain that share.

"You can't just stay with what you're doing and wait for Wal-Mart and Meijer to undercut you and take all your customers," Baldwin said. "I think they're smart in trying to be proactive in coming up with ways they can hold onto their customers and still earn a fair profit."

Wal-Mart, which has increased its share of the grocery market with a handful of new supercenters in recent years, now also is planning to open three of its Neighborhood Markets in the Indianapolis area this spring, according to reports.

In addition to the new format, Marsh is expanding its presence into new markets. The Fort Wayne debut marked the company's return to the market -- the second-largest in Indiana -- after 30 years. At one time, the company had five stores in Fort Wayne.

Marsh is also planning to use the new format to enter the Chicago market, where the performance of the No. 2 player, Dominick's, has been deteriorating.

By entering the market with its "new lifestyle" prototype, Marsh is not positioning itself to compete directly with the traditional players in the market like Dominick's and Jewel, the local division of Albertsons, but it is coming in as a more high-end player, Baldwin pointed out.

Don Marsh declined to reveal specifics about the company's plans for Chicago, other than to say he planned to break ground in 2004 on a store there that will feature the new format. A fourth store utilizing the format is planned for Indianapolis.

All of the new stores will be served from the company's current distribution facilities in Indianapolis and Yorktown, Ind., the company said.

Don Marsh said the new prototype stores would target middle- to upper-income markets. Because of the radical departure from typical store construction that the format employs, he said the new design would not be used as a conversion vehicle for traditional Marsh stores.

"We'll be pushing this concept," he said, although he declined to say how many stores featuring the new prototype he thought the company could open. "Not all stores we open will be like this because we have other concepts under development," he said. "Under the lifestyle theme, we will have different banners."

According to local press reports that came out after the new prototypes opened in Noblesville and Fort Wayne, Marsh is planning a scaled-down version of the new lifestyle prototype in New Palestine, Ind., to be called Arthur's. The 20,000-square-foot location, said to feature produce and meats surrounded by dry groceries, reportedly will open next summer.

Jodi Marsh, a spokeswoman for Marsh, confirmed that the company is developing a concept called Arthur's, although she declined to reveal details about the company's plans.

Marsh unveiled its format targeting Hispanics, Savin$ Mercados, in a neighborhood with a large Hispanic population in late 2002, followed by a second store late last year.

Its LoBill Foods format, which offers a limited assortment with less service, is being used in inner-city and small-town markets. Some traditional Marsh stores are being converted to the LoBill Foods concept.

Marsh acquired O'Malia's Food Markets in 2001 and plans to expand that format, which features extensive service departments and a more gourmet selection, in higher-income neighborhoods.

"They have a number of brands that they are trying to leverage," said Patrick Jeffrey, analyst, Standard & Poor's. "Sales have been weak, so one of the first things they are trying to do is improve sales and compete effectively with larger players."

Jeffrey said debt analysts have been concerned about Marsh's declines in same-store sales, which have been in the low single digits for the past several quarters.

"We're looking for some stabilization in that," he said. "Hopefully, some of the initiatives they are doing will help them compete effectively, and will lead to some better trends in sales."

The company is expected to generate about $1.7 billion in sales for the current fiscal year, which ends March 31. Earnings for the first half of the fiscal year ended Oct. 11 totaled $1.2 million on $887 million in sales, compared with a net income of $3.3 million on $896.2 million in sales through the first two quarters of the preceding fiscal year.