PENN TRAFFIC BIDS TO REGAIN CUSTOMERS BY PRICE CUTTING

GREG GATTUSO

SYRACUSE, N.Y. -- Penn Traffic here said last week it lowered prices on thousands of items at its 262 corporate stores as part of a sweeping new program to win back customers and to reverse a slide in same-store sales.

The cost of the lowered prices will be partially offset by lowered operating costs, the company said.

The new strategy was announced as same-store sales figures showed a disappointing 12% decline for the month of September. Same-store sales, in a tumble for several quarters in a row, dropped 8.4% in August and 7.7% in the second quarter ended Aug. 2.

"They clearly need to do something to get more people to come into their stores," said Ken Bann, senior vice president at Lehman Bros., New York. "I do think they need to reduce prices to get customers back."

Securities analysts told SN that price was just one complaint customers had about Penn Traffic stores, which operate in Pennsylvania, upstate New York, Ohio and West Virginia under the banners BiLo Foods, Big Bear, Big Bear Plus, P&C Foods and Quality Markets. (Until last week the company also ran Insalaco and Riverside Markets stores, but those were reflagged as BiLo.)

Other complaints included service, store cleanliness and product mix, analysts said. But those have been addressed under Penn Traffic's new president and chief executive officer, Phil Hawkins, who succeeded former president John T. Dixon.

"They've worked hard on those items and now they're attacking their price image," Bann said.

Bann said it could take a few months for the new tactics to generate improved sales. However, he said, those gains could come at the expense of earnings. "The question will be 'How much do the reduced prices hurt their margins?' " Bann said. "There's always going to be a trade-off. You may improve your same-store sales picture, but you're going to have to give up a tremendous amount in margins in order to do that."

Ted Bernstein, vice president at Grantchester Securities, a division of Wasserstein Perella Securities, New York, said lowering prices is crucial to keeping up with strong well-capitalized competitors in its various regions, including Kroger in eastern Ohio; Tops, Wegmans, Price Chopper and Hannaford Bros. in New York; and Weis Markets in Pennsylvania.

"Those guys can afford to be very aggressive on price," Bernstein said. "Upstate New York has been an extremely promotional area, and in order to reverse the longstanding trend of negative same-store sales comparisons, I believe this company feels they need to make some sort of price statement.

"The negative 12% same-store sales figure is not pretty. It's going to take a couple of months to see whether this new price campaign has any real effect."

Analysts applauded Hawkins' efforts to reduce operating costs by consolidating some functions and removing the divisional level of management at Penn Traffic's various banners.

The company said eliminating the divisional level of management will save $12 million a year. Analysts estimated that consolidation of other operations and business processes could add up to $18 million, for a total savings of $30 million annually.

"Cutting expenses with respect to duplicate functions in the different banners they run is an obvious strategy and it's a good idea," Bernstein said. "This is a fairly large chain and it takes a lot to turn things like this around, if they can be turned around. The decline has been longstanding and they have a tough row to hoe."

Bann added that Hawkins "has done things to cut costs -- however, he has not done anything yet to build sales."

However, in addition to the reduced prices, Penn Traffic said it will build sales by offering improved customer service and "shopper guarantees."

Company spokesman Marc Jampole said Hawkins has met with all 28,000 employees to stress their part in Penn Traffic's future.

The new concept, called "hassle-free shopping," is designed to provide customers with more help finding products, allow them to return goods without a receipt and to breeze through checkouts by opening lanes as needed, Jampole said.

"He has been talking about customer service and what the employees' role is," Jampole said. "That role is being reaffirmed and reinforced by managers."

Penn Traffic is also offering shoppers the following guarantees:

Sale items will be in stock or they're free.

Items will scan at the correct price or they're free.

If any product is found to be out-of-date, a fresh replacement will be given to the shopper at no charge.

Jampole said the pricing strategy, customer service initiatives and shopper guarantees are the result of extensive consumer research.

All current ads feature the tag line, "All we did was listen."

In the past, advertising for Penn Traffic stores featured the banners' divisional heads. Now, those heads are gone and all ads -- including television, print and billboards -- put Hawkins in the limelight.

"He is going to be the spokesperson, there is no doubt about that," said Jampole. "The ads are focused on him. It's his program." Last week the company announced another cost-cutting move -- rebannering all 29 of its Insalaco stores and six corporate Riverside Markets units as BiLo Foods.

Penn Traffic said it had been discussing a name change for Insalaco since it acquired the chain, then with 12 stores, in 1993. In 1995, Penn Traffic acquired 45 units from Acme and reopened some of them as Insalaco. (Others were opened as BiLo, P&C, or closed.)

Jampole said Insalaco's customers in northeastern Pennsylvania will notice the new name and lower prices, but no other major differences between the old stores and the reflagged BiLo units.

A full-page newspaper ad announcing the rebanner shows Hawkins wearing a hard hat and operating a crane. In the ad, he lowers a new BiLo sign onto the facade of an Insalaco store.

Bann said the use of Hawkins as a corporate figurehead will help change customers' perception of the company.

"[Hawkins] does have a generally strong message, he presents it well, and he gives a clear vision of what they have to do to turn the situation around," Bann said. "He's certainly trying to change the image of the company among consumers. Part of that is improving customer service, improving product mix, and now reducing prices."

Fliers distributed at BiLo stores last week contained a letter from Hawkins to shoppers, explaining the lower prices and the stores' new, streamlined sign system. New color-coded signs will flag hundreds of "Manager's Specials" and highlight "As Advertised" specials from weekly circulars.

In the letter, Hawkins says, "By eliminating all the confusing signs that clutter up the store, we're saving millions of dollars in material and labor costs! And that savings is being passed on to you in the form of better everyday prices."

Hawkins joined Penn Traffic in April from Vons Cos., Arcadia, Calif., where he was a senior vice president. He was given full responsibilities for Penn Traffic's day-to-day operations and named to the corporate board. Hawkins filled a gap left when former president Dixon resigned in September 1996 for personal reasons.