SAFEWAY TAPS EVERETTE TO OVERSEE DOMINICK'S 2004-09-27 (1)

JON SPRINGER

CHICAGO -- As another chapter begins in the peculiar saga of Dominick's Finer Foods, industry observers cheered the appointment of the chain's new president even as they were puzzled by the departure of his predecessor.

Then there's the question of what it all will eventually mean for Dominick's, the chain acquired by Pleasanton, Calif.-based Safeway in 1998, only to see it hemorrhage sales and market share and nearly be sold as damaged goods a year ago. The incoming president, veteran Safeway executive Bruce Everette, inherits many of the same troubles with labor and sales as did his predecessor, Randall Onstead Jr., who is leaving after less than a year in charge. Everette will be the fifth Dominick's president since Safeway acquired the chain. To win back business and profitability at Dominick's, he'll have to win one battle with labor and another with competitors.

Safeway on Sept. 17 announced that Onstead had resigned in order to attend to his family's investments following the death of his father, and that Everette would oversee Dominick's in addition to his other duties as an executive vice president. Safeway declined SN's request for an interview with Everette. SN was unable to contact Onstead last week.

Industry observers said the appointment of Everette was a positive sign for the troubled chain. Everette, who joined Safeway as a teenager 36 years ago, previously headed Safeway's Arizona and Northern California divisions and was described as one of the company's "top five executive officers" by Steve Burd, Safeway's chairman, president and chief executive officer.

Everette inherits a chain beset by declining market share and an unresolved contract with two local unions. United Food and Commercial Workers Locals 881 and 1546, which together represent around 9,000 Dominick's workers at its 101 Chicagoland stores, have been working on a day-to-day extended contract for nearly 23 months. The inability to reach a labor agreement was cited as the reason Safeway put the chain on the block in 2002, but a potential deal to sell it fell through last November when the buyer -- reportedly Minneapolis-based Supervalu -- also could not reach a contract agreement.

It was then that Safeway announced the appointment of Onstead, the former chairman and chief executive officer of Houston-based Randalls Food Markets, which Safeway also acquired in 1998. In making the appointment, Burd praised Onstead's abilities in leading a family-run supermarket chain and for his skills as a merchandiser. But the decision met mixed reviews from analysts, who said Onstead lacked experience managing a struggling franchise in a union environment.

Observers say they noticed some progress at Dominick's during Onstead's reign, but speculated that Onstead grew uncomfortable with his role as it related to the labor situation and other issues. "The huge thing hanging over all of this is labor," said one.

"There was a sense [Onstead] was doing the right thing and charting a course more appropriate to how Dominick's had historically been managed -- locally and with an eye toward Chicago consumers and their preferences," Jim Hertel, senior vice president for Willard Bishop Consulting, Barrington, Ill., told SN. "There was a sense that things were turning around for the first time in a while."

This was evident in merchandising and sales programs such as local produce resets, Seafood Extravaganzas and Friday Night Pizza Nights, said Neil Stern, senior partner of Chicago-based consultant McMillan Doolittle. "Some of these programs you'll see across all Safeway divisions, but there was definitely a feel that Dominick's was back in business," Stern said.

Onstead's public persona helped to "put a face" back onto Dominick's among consumers and the unions, Stern added. "Randall was a much more public figure [than his predecessors] and was accessible to the local press," said Stern.

Some observers, however, took a cynical view of that, suggesting that Onstead was a figurehead to "pacify labor" while Safeway's corporate team ran negotiations. S.J. Peters, a spokesman for UFCW 1546, told SN the union didn't negotiate with Onstead directly.

"He had little experience with turnarounds, with urban environments or with unions," said Gary Giblen, director of research at CL King & Associates, New York. "I thought it was an astonishingly bad fit from the start."

Burt P. Flickinger III, managing director, Strategic Resource Group, New York, added that Onstead "had grown up running superpremium, high-service stores, mainly in non-union markets, and by the time he got to Dominick's it had already lost its edge. While he took Randalls to record profitability, he hadn't been in a situation where he was not the market leader. Same-store sales are still a significant struggle for Dominick's, and profitability is nowhere near what it was when Safeway purchased it."

Safeway acquired Dominick's from Yucaipa in 1998 for $1.85 billion, including nearly $650 million in debt. The selling price for Dominick's last year was expected to be in the $400 million to $500 million range. At the time Safeway acquired it, Dominick's operated 111 stores with sales of $2.6 billion and a market share of approximately 26%, second to Jewel-Osco, which had a market share of 36%. More recent estimates put Dominick's current sales below $2 billion, with 101 stores and a market share of around 20%. Jewel, now a division of Albertsons, has a market share of 40%.

Everette, who most recently was responsible for executing business strategies across all Safeway divisions at its Pleasanton headquarters, is Safeway's "best operating person in the country," and assigning him to lead Dominick's "is a superb strategic decision," according to Flickinger.

"If there's ever going to be a turnaround at Dominick's, Bruce Everette is the right person to do it," Flickinger said. "He stacks up well against any food retail CEO in the U.S. or Canada."

Giblen said Everette "is great with people and great with operations. He's the kind of person who should have been put in charge of Dominick's in the first place."

However, analysts say restoring Dominick's will be a challenge, citing labor and a competitive landscape that changed in part because of Dominick's struggles. "Dominick's weakness has been an open invitation for competition to come in and steal market share, and winning customers back will be a bloody battle, and one of the most expensive Safeway has ever initiated," predicted Flickinger.