OSHAWA'S EXPANDING AGENDA

GLEN A. BERES

ETOBICOKE, Ontario -- Oshawa Group here has charted an ambitious course to steer through Canada's challenging retail waters.

The wholesaler-retailer is battling a Canadian economy not yet fully recovered from recession; intense competition driven by low prices, particularly in overstored Central Canada, and a market that is changing at an astonishing pace through new technologies and increasing levels of consumer sophistication.

According to Jonathan A. Wolfe, president and chief operating officer, "Getting costs out of our business and a more aggressive focus on top-line growth are our major challenges going forward.

"We know exactly what we have to do, we know exactly how to do it and we're doing it," he said in an interview with SN.

Wolfe said Oshawa's strategy to expand its business in the face of such challenges includes:

Aggressively encouraging the upgrading and expansion of its franchised stores.

Selectively installing a price-impact store format.

Restructuring its distribution network through consolidation, realignment and outsourcing.

Enhancing efficiencies through new technologies.

The company operates a $4.4 billion ($6.1 billion Canadian) business, of which 85% of its volume, or $3.75 billion, comes from the wholesale and retail food divisions, according to its annual report. Food service accounts for 7.6% of revenues; drug stores, 7%, and real estate less than 1%.

(Figures were converted at the exchange rate of $1.38 Canadian equals one U.S. dollar.)

Oshawa's volume places it third in the country behind Loblaw Cos., Toronto, at $6.1 billion, and Provigo, Montreal, at $4.5 billion -- but more than double the volume of Metro-Richelieu, Montreal, at $2.1 billion, according to SN's latest ranking of the top 75 operators.

Net income for the company rose 6% to $38.6 million in the fiscal year ended Jan. 28.

Oshawa's wholesale and retail food operations extend through nine of the country's 10 provinces (it has no operations in British Columbia). At the end of fiscal 1995, Oshawa supplied 1,550 independent grocers throughout Canada, including 688 -- or 93% of the country's IGA retailers -- under its IGA Canada franchise program.

The company also serviced 862 other markets under such banners as Knechtel, Bonichoix and Food Town, according to the report.

Additionally, the group owns 111 stores under the IGA, Food City, Price Chopper and Dutch Boy banners.

Last year, as part of its restructuring, Oshawa realigned its distribution network from seven divisions into three regions to "achieve more effective management control," explained Allister P. Graham, chairman and chief executive officer, at the company's annual meeting here this month. The new network includes:

The Eastern region, which covers Quebec and the Atlantic provinces (New Brunswick, Newfoundland, Nova Scotia and Prince Edward Island). In fiscal 1995, the company supplied 857 grocers in the sector, including 299 IGA franchised units, 532 non-IGA units and 26 company-owned stores, according to the annual report. The company holds an 18% market share there. Principal banners in the region are IGA and Bonichoix. Total sales for the sector increased 1.7% to $1.6 billion in 1995.

The Central region, which includes Ontario. Oshawa supplied 365 grocers in the region during the fiscal year, including 173 IGA franchises, 120 other stores and 72 corporate-owned units, according to the report. Oshawa holds a 15% market share here. IGA, Food City, Price Chopper and Knechtel are the primary banners. Total sales for the sector rose 3.6% to $1.44 billion.

The Western region, which extends from the Ontario/Manitoba border to the Rocky Mountains on the Alberta/British Columbia border. The sector includes Manitoba, Saskatchewan and Alberta. In fiscal 1995, the company serviced 328 stores in the region, including 173 IGA stores, 142 other units and 13 corporate stores, according to the report. Oshawa's market share there is 15%. IGA is the principal banner in the region. Sales for the year rose 5.2% to $718.7 million.

Wolfe said the company is focused on strengthening the IGA banner across the country.

In the last 18 months, Oshawa has converted a combined 22 franchised Elliott Marr stores in southwest Ontario and franchised Valley Foods units in the Ottawa Valley to IGA. Wolfe said the IGA conversions are basically complete.

Now Oshawa has turned its attention to encouraging IGA franchisees to make their stores more competitive by investing in expansion and store renovations. Wolfe said most of the stores it services range from 5,000 square feet to 40,000 square feet, and the company would like to expand them to 50,000 square feet.

"One of our competitive challenges is to drive more and more volume through physical facilities" too small to handle the increased loads, Wolfe said. "Encouraging franchisees to expand their facilities has been an ongoing exercise for us from the very beginning."

Oshawa's strategies to increase the average store size among its franchise customers vary by region. In the West, the company's smallest region in terms of sales but a geographically huge area, Wolfe said the company is looking to build its own stores and then install franchisees. In this way the company can control store size from the outset.

"We are taking the opportunity to find underserved markets and bring bricks and mortar there," he said. "Then we install franchising as soon as we build [in those underserved markets]."

In Eastern and Central Canada, the company is more inclined to encourage IGA franchisees to borrow money for store expansion -- either from financial institutions or from Oshawa itself, in the form of store group subsidizing it has set up in Quebec and other regions.

Wolfe said the strategy in these sectors differs from the West, because the Central and Eastern regions are far more overstored.

"We don't think it will pay to put up bricks and mortar in an environment that is dramatically overstored," he said. "We have seen competitors invest hundreds of millions of dollars in building new stores in the central Canadian market over the past 10 years with at best mixed results.

In another restructuring move, the company instituted a wage rollback last year for 2,500 employees in 54 Ontario corporate stores, incurring a one-time expense of $7.2 million, Wolfe said. Benefits from this and other measures should begin to appear in the second quarter, he said.

Oshawa's third major restructuring move was to shift its distribution strategy in the Eastern region. First, the company closed three small distribution facilities in New Brunswick, Nova Scotia and Newfoundland last year and moved that volume to a larger warehouse in Halifax, Nova Scotia.

Then, in February 1994, Oshawa sold off two distribution centers, which accounted for 21% of its grocery volume in Ontario, to Canadian wholesaler Tibbett & Britten in favor of an outsourcing arrangement.

And in January this year, the company sold the balance of its distribution network in Ontario -- including equipment and assets of two more distribution centers -- to Tibbett & Britten, which completed Oshawa's move to a third-party distributor in the region.

Wolfe said the switch to outsourced warehousing and transportation in the Ontario market has been a cautious, gradual process. But the company expects outsourcing to increase store efficiencies and reduce costs, he added.

"We began working with third-party operators about three and a half years ago and developed a growing level of confidence with them," he said. "But this was a major change in the way we do business, and there's been a tremendous learning curve for us."

According to Wolfe, working with third-party operators means "interpositioning an additional player between ourselves and our customers, a very delicate issue in the hearts and minds of many wholesalers." But so far, Wolfe said, the transition to outsourcing has been "very satisfying," with an improvement in service levels and a satisfactory performance bringing deliverables to the store level.

"It's been very good from the beginning, first in the two small warehouses and then with the two larger ones," he said. "But we have to work on the speed with which we change our information technology to enable the third party to apply, across our distribution network, activities that are currently used in other parts of the world, not just Canada."

To make its distribution system more efficient, Wolfe said Oshawa looks throughout the world for new technologies that it can bring home and incorporate into its own operations. Sophisticated levels of cross-docking, zero inventory at the end of the day in perishables and more advanced floor level refrigeration and temperature integrity are some of the areas in which European distributors are ahead of North American distributors, Wolfe said.

But Oshawa is starting to lay the groundwork now to enable it to install such sophisticated systems over the next 18 to 24 months, he added. Last year the company spent roughly $16 million, or 25%, of its $65 million capital budget on new logistics and information systems. Wolfe said the company plans to spend $36 million in such areas as in-store computer systems and electronic data interchange over the next two years -- or about 30% of its projected capital expenditures.

Implementing new marketing technologies also has been a priority for Oshawa on the retail side. For instance, the company has been developing software that will allow it to analyze individual market basket purchases.

Wolfe said the genesis of the project came as a result of the "enthusiastic response" of the company's merchandisers to category management -- which was installed in central Canada more than a year ago as part of Oshawa's commitment to Efficient Consumer Response.

"[Our merchandisers] became believers very quickly and are the ones driving our information technology people to get more and more specific software," he said. "The opportunity to manage our margins has grown exponentially [through category management] from what we had before, which was very little.

"We hope to have [category management] installed and operational in all regions by the end of this calendar year."

The market basket software, which the company said it expects to have in place some time next year, will allow Oshawa to better analyze what kind of traffic certain items generate, how those items influence other purchases, how successful its promotions are and how they affect their respective categories.

"The new software will likely have an impact on how we look at our advertising," Wolfe said. "We'll find out what particular products shoppers are specifically coming in for and what they're buying in the rest of the store.

Continuous replenishment is another ECR pilot project the company has installed. Wolfe said the program is "up and running in a big way" in the pilot site in Ontario and is helping the company build relationships with major manufacturers. Wolfe estimated that 15% of stockkeeping units are currently subject to continuous replenishment at the site, and "my guess is that it will continue to roll out across other regions this year."

Oshawa also has introduced a third ECR component, activity-based costing, in a pilot site in Central Canada. According to Wolfe, "we are only beginning to understand the implications of it and it has provided tools that are probably revolutionary for us."

"These [technologies] are giving us benchmarks to chart a continuous improvement," Wolfe said. "Once you have a benchmark to measure your performance against, you can constantly raise the mark and improve that performance."

On the corporate retail side, Wolfe said the company has converted 24 full-line, underperforming Food City units to the limited-line discount Price Chopper format during the last three years. The group plans to convert 10 more supermarkets to the format this year. He also said the company is "encouraged by the results of stores that have been converted from traditional to price-driven vehicles.

"There is a percentage of the population that is attracted to and driven by the price-focused format," he said. "Clearly, it's not a majority or even a plurality, but in the realm of possibility we might expect 20% to be attracted to this vehicle. So far, we are selectively converting stores to the Price Chopper market in one urban market [Toronto].

"This year, we're going to continue to roll out the [Price Chopper] banner slowly in existing markets. However, there may be opportunities to open some green fields [newly built stores rather than conversions]."

Wolfe acknowledged that the company has not ruled out expansion outside the Canadian market, including the United States, Europe and Central America -- but not in the current fiscal year.

"There are many markets out there," he said. "We have no restrictions. We have hopes [of international expansion] for almost every region in the world."