RETOOL TIME

ELLIOT ZWIEBACH

Most major retailers plan to spend more capital in 1998 on store remodelings and replacement units than on opening new stores.

As a result, total square footage, which grew about 5.1% among the majors in 1997, will increase by only about 4.7% this year, according to an SN survey of several of the nation's largest publicly held food chains.

Those companies told SN the dollar amounts they will spend for capital projects will increase, but those increases will generally be smaller than in previous years.

Among the chains queried by SN, A&P, Albertson's, Food Lion and Safeway each plan to boost overall spending this year, and American Stores Co., Kroger Co. and Giant Food are expected to maintain 1997 levels; only Winn-Dixie Stores said it expects to reduce its rate of investment. Melissa C. Plaisance, senior vice president, finance and public affairs, for Safeway told SN the chain is concentrating on upgrading existing assets through remodeling activity and store replacements, "because we intend to grow over time through acquisitions rather than building new stores."

Chris Ahearn, director of corporate communications for Food Lion told SN, "Remodels or store expansions are the way to grow in 1998 rather than adding new square footage in an overstored marketplace."

According to Michael C. Rourke, senior vice president of communications and corporate affairs for A&P, many of A&P's new stores will be replacement units that will be larger and offer more services than the stores they will replace.

Likewise, American Stores Co. and Winn-Dixie Stores said they will concentrate on replacing smaller, outmoded stores with fewer but larger units.

One marked exception to the supermarket industry's tendency toward fewer new stores and more remodels is Wal-Mart Stores, Bentonville, Ark., which is moving ahead rapidly with expansion of its supercenter format in both new stores and square footage increases. The company said it will open 30 to 35 new stores and complete 90 relocations or discount store expansions this year, compared with 30 new stores and 70 relocations or expansions in 1997.

Ed Comeau, a securities analyst with Donaldson, Lufkin & Jenrette, New York, said that, with some exceptions, the larger supermarket companies are generally investing more in capital projects than in the past, while medium-sized chains have cut their capital expenditures budgets.

But even among chains where spending is up, Comeau said he believes more money is going toward remodeling and development of replacement stores and less to new stores in new or existing markets.

According to Jonathan Ziegler, a San Francisco-based analyst with Salomon Smith Barney, New York, the leveling off of spending for some operators reflects the general deleveraging of the industry during the last few years.

"The leveraging that occurred in the late 1980's was followed by a deleveraging in the early 1990's, after which supermarkets spent three or four years ratcheting up their capital expenditures," Ziegler told SN. "Now spending is evening out, and with the industry already overstored, my hope is that chains will spend more on acquisitions than opening new stores willy-nilly.

"And while they will have to spend money to upgrade those stores, it will certainly mean fewer new stores, and that's good news."

Chuck Cerankosky, a Cleveland-based analyst with Tucker Anthony, Boston, also said he expects supermarkets to spend a little less on capital projects in the next year or so "because of the rapid ramp-up in square footage in the last couple of years and because the rate of consolidation within the industry will continue. "And since acquired stores always require a little bit more management attention than anticipated, companies tend to add less square footage in the following year or two than they might have done without the acquisition," Cerankosky added.

According to Debra Levin, an analyst with Morgan Stanley Dean Witter, New York, "Square footage growth is a key focus for food retailers, although overstoring remains an issue. Operators know that without new stores, remodels and expansions, facilities are doomed to obsolescence.

"Square footage expansion rates have stabilized at fairly healthy levels, which should benefit earnings, since new stores are initially a drag on earnings. "Furthermore, supermarket operators are generally realizing a solid return on their new-store investments. Consequently, the rollout of competitive square footage should continue to be robust."

In its discussions with chain operators and industry observers, SN elicited the following information on capital spending plans for 1998:

Kroger Co., Cincinnati, declined comment for this story. However, observers said the chain is likely to maintain capital spending at about $775 million this year -- the same amount it spent in 1997 -- "because that's a spending level that it's comfortable with," Ziegler said. According to Cerankosky, Kroger is likely to concentrate on expansion in growth markets in the Sun Belt rather than areas north of the frost line where there's less population growth. "But it could accelerate its capital program in any areas where competition is weak," he said. Kroger may also be seeking acquisitions, Cerankosky said, "but its recent history indicates it prefers to buy small groups of stores -- though it will remain alert for any opportunities." Safeway, Pleasanton, Calif., said it will boost capital spending nearly 19% to $950 million this year, with a square footage increase of 2.5% to 3%, compared with a rise of 1.5% to 2% in 1997.

According to Plaisance, about $65 million of this year's capital spending budget is devoted to a new 750,000-square-foot grocery/perishables warehouse in Bowie, Md., due to open next fall; of last year's budget, $20 million was devoted to getting the warehouse project underway, she pointed out.

Having completed its purchase of Vons Cos., Arcadia, Calif., earlier this year, Safeway has its corporate eyes open for another major acquisition, Plaisance told SN. "We have no specific time frame, but we will certainly be proactively looking this year for acquisition candidates, though I can't say when any deals will come to fruition," she said.

She added that potential acquisitions do not have to be contiguous with Safeway's existing operations.

Gary Giblen, an analyst with Salomon Smith Barney, New York, said the addition of the Vons chain will not be much of a capital budget issue for Safeway this year, "since Vons was on a light capital schedule after making a lot of heavy investments in its store base in the years before it was acquired."

American Stores Co., Salt Lake City, said it will continue its high rate of spending, budgeting $1 billion this year to capital projects for the second year, with square footage increasing an identical 4% to 5% in both years.

According to Dan Zvonek, director of investor and public relations, 70 of the new stores and about half of the remodels will involve Osco and Sav-on drug stores, "but of the 30 or 40 new food stores we open, virtually all will be combination stores because of the success we've had with that format," he told SN.

He said American is maintaining its high rate of spending "because we're still carrying out our ongoing growth program in which we're updating our store base and trying as quickly as we can to create a chain of new, modern stores while eliminating older, weaker units. Our plan is to continue at a fairly consistent level of investment."

Zvonek said spending will be evenly distributed among food divisions, with about 10 to 15 new Acmes, Luckys and Jewel-Oscos scheduled to open this year.

According to Ziegler, the Malvern, Pa.-based Acme Stores division "still needs a lot of work because it was neglected the longest." Cerankosky said the Acme division is likely to get a lot of the company's attention, with the chain likely to continue to close a number of smaller, shopworn Acmes and replace them with fewer but larger stores "so that square footage will increase while the number of stores will be down."

Lucky Stores needs the same kind of attention that Acme does, Cerankosky added, "but with greater population growth in California, there's more likely to be some new-store growth while American continues to update and replace older Lucky units."

In Chicago, stronger competition from the Fresh stores being opened by rival Dominick's Finer Foods, Northlake, Ill., and the possible entry of Eagle Food Centers, Milan, Ill., may force Jewel to take more defensive actions -- in regard to upgrading or replacing existing stores -- in addition to any expansion moves, Cerankosky said.

Albertson's, Boise, Idaho, said it will increase capital spending by nearly 21% this year to about $785 million, compared with $650 million for the fiscal year ending later this week.

Square footage will increase 7.5% this year -- down from 7.8% in 1997 and 8.1% the prior year -- representing a slight but ongoing drop from year to year as the company begins to slow down the expansion goals it set for itself in the mid-1990's, Michael Read, director of public relations and government affairs, told SN.

Most of Albertson's new-store growth will be in California, Florida and Texas, where the chain has been concentrating most of its expansion the last few years, Read said. "Those are all high-growth states, and there's still a lot of opportunity there for us to fill in areas where we already operate stores."

According to Ziegler, the dollar amount of Albertson's spending continues to increase year-to-year in proportion to its growing size. "Albertson's views itself as a growth company, especially in southern Texas, where it wants to become more profitable through greater store density," he said.

The company is also seeking growth through acquisition, Read said. "Albertson's has historically been interested in looking at anything that's out there, but we are looking at acquisition opportunities a bit more aggressively now than we have in the past," he told SN. Winn-Dixie Stores, Jacksonville, Fla., said total capital investment (including retail support facilities and operating leases) will increase 13.3% this year to $850 million, although the company was not sure of the square footage increase.

Observers said square footage will continue to increase -- an estimated 5% this year, compared with a 4.6% increase last year -- because of Winn-Dixie's 10-year-old program to replace smaller stores with larger ones, Mickey Clerc, vice president and director of public relations, said. Larger stores now outnumber smaller ones, he added.

Clerc said new stores are slated to open throughout Winn-Dixie's operating area. "Although we would probably build more stores in areas where population is growing, we usually have an even distribution of new stores across all divisions," he told SN. Ziegler said Winn-Dixie's capital spending tends to be fairly stable "because the company has reached a level where it's comfortable renovating older stores to introduce its Marketplace format. But it's a fairly conservative company, and it likes to keep its balance sheet solid."

Fred Meyer Inc., Portland, Ore., said it plans to open five Fred Meyer stores this year and six units of Smith's Food & Drug Centers, the Salt Lake City-based chain it acquired Sept. 9, compared with seven new Smith's and five Fred Meyers opened in 1987.

The company said it also plans 31 major remodelings this year (13 Smith's units, 10 Smitty's in Phoenix and eight Fred Meyers), compared with 32 last year (25 Smith's, two Smitty's and five Fred Meyers).

However, the company said comparing projected 1998 capital spending with 1997 expenditures is difficult, since 1997 included spending for the full year by Fred Meyer, but just under five months for Smith's.

A spokesman told SN the company's projected capital budget for this year -- including projects at Ralphs Grocery Co., Compton, Calif., and Quality Food Centers, Bellevue, Wash., whose acquisitions are expected to be completed by mid-March -- will be $685 million, encompassing 41 new stores and 61 major remodelings, compared with $275 million in 1997 for a full year's worth of projects at Fred Meyer and five months' worth of post-acquisition projects at Smith's.

The spokesman said he was not sure how much square footage would increase this year; combined square footage for Fred Meyer and Smith's in 1997 rose 2.8%, he said.

Ziegler said last year's acquisition of Smith's and the pending acquisitions of Ralphs and QFC "give Fred Meyer room for paring back a little, so it will do less remodeling and build fewer stores than it would have without the acquisitions."

A&P, Montvale, N.J., said it will increase capital spending 8.3% this year to $325 million, compared with $300 million spent in 1997. Square footage growth, which had been negative for about a decade, was relatively flat last year after a 1% increase in 1996 "because we closed over 50 stores last year, including 13 in the Carolinas that we sold," Rourke said.

However, A&P expects overall square footage to rise in the future "as larger new stores replace smaller, older units," Rourke told SN.

He said A&P will continue to concentrate its capital spending in its strongest marketing areas -- metropolitan New York, Michigan, Canada and the Mid-Atlantic region -- as it did in 1997, "though we will open some new stores in New Orleans and Atlanta," Rourke noted.

According to Giblen, A&P's capital expenditure in 1997 was "the company's highest level of investment as a percentage of sales within memory, so an increase of 8.3% this year is an indication that the company is maintaining that more aggressive rate of spending.

"A&P really is dedicated to improving its store base because, by the company's own admission, many of its stores are old and outmoded; so it's essential for them to get new stores up and running. In fact, A&P has had good results from its newer units, with reasonably good ramp-up in profitability and high sales levels."

Food Lion, Salisbury, N.C., said capital spending this year will increase 20% to $360 million, while square footage will increase by 7.5%, compared with an increase of 11% in 1997, Ahearn said. She declined to pinpoint how much remodeling activity is slated for Kash n' Karry Food Stores, the Tampa, Fla.-based chain of 100 stores that Food Lion acquired at the end of 1996. Food Lion also has its eye open for acquisitions -- including major acquisitions like the Kash n' Karry purchase or smaller acquisitions to fill in its distribution in a given marketplace -- Ahearn said.

Giant Food, Landover, Md., could not be reached for comment. However, observers said the chain's capital budget is likely to remain level at about $150 million -- "although with a new chief financial officer in place, there's a clear sense that Giant's capital budget may be cut back significantly, to as low as $120 million," one observer told SN.

Pathmark Stores, Woodbridge, N.J., said spending will increase nearly 21% to $70 million to accommodate various backstage projects, as well as two new stores, 17 renovations and two store enlargements, compared with two new stores, nine renovations and eight enlargements in 1997. In line with the tendencies of other chains, square footage will increase less this year than last -- 1.8%, compared with 2.5% in 1997.