SAGE REFLECTIONS

DAVID ORGEL

The early days of computers ... the move to block ready meat ... the dawn of scanning ... the waves of industry megamergers ... the long journey from small grocery stores to superstores to supercenters ... increasing product variety and consumer demands ... forward buying ... the exponential growth of ethnic populations ... Efficient Consumer Response ...

The supermarket industry has been transformed over the last four decades, and many top executives have come and gone along with the trends.

But one industry leader, whose tenure included almost 20 years as a chairman and chief executive officer, has steered the industry through all of these developments.

That executive is Byron Allumbaugh.

The seasoned Ralphs Grocery Co. executive, set to retire next January at the age of 65, is still a major force some 38 years after joining the Compton, Calif.-based company.

In a wide-ranging interview with SN, Allumbaugh, currently Ralphs chairman, looked back and forward and offered numerous insights into the supermarket business. He often provided comforting words for today's supermarket managements.

"I'm very pleased with my career in the food industry," Allumbaugh said. "Would I just as soon start now? You bet. Is there as much opportunity today? You bet."

Regarding the viability of supermarkets, Allumbaugh is equally upbeat. "The supermarket business will be here as long as I can look ahead. I think people will continue to buy the bulk of their food in supermarkets because of the assortment and variety and the shopping experience."

Allumbaugh takes an optimistic view toward competitive threats to supermarkets, industry efficiency efforts and the future of Ralphs and the southern California market. This executive is insistent about the importance of recognizing major changes in the consumer base, particularly ethnic diversity.

Allumbaugh relays a sense of being humbled by all that he's seen as he launches into a quick trip through the recent history of the business.

A DYNAMIC CAREER

Figuratively speaking, "we've gone from the horse and buggy to the supersonic jet during my career in the food industry," he reflected.

Allumbaugh joined Ralphs in 1958 as director of meat operations, and at the time he had already had experience with management of meat departments and supermarkets in general. By 1967 he began to take on increasing management responsibilities at Ralphs. He became chief operating officer in 1971 and president in 1973. In 1976 Allumbaugh was named chairman and chief executive officer, titles he would retain for almost 20 years under a variety of ownerships. When Ralphs merged with Food 4 Less last year, Allumbaugh at first retained the CEO title but gave up the chairman position. Earlier this year he resumed the chairman title but relinquished the CEO position.

Allumbaugh first came to Ralphs with a major goal in mind: inaugurating the block ready beef concept at a major chain. What now seems such a logical and common practice was yet to be championed.

"Stores used to get beef hanging on hooks and disassemble it in the stores -- a massive, labor-intensive job," Allumbaugh recalled. "I always thought there had to be a simpler way. So we set up a disassembly factory at a central location. There we did all the major production work centrally and put beef in smaller pieces in shrink-wrap and shipped it to the stores for the final cuts."

The program was a resounding success because it pulled the labor out of the stores, and Allumbaugh had gotten his chance to experiment.

Years later Allumbaugh would lead Ralphs and the industry into an innovation even more sweeping. In 1974 Ralphs was the first supermarket chain in the West to embrace scanning. By that time Allumbaugh was already Ralphs president. The program was completely integrated into the chain four years later. The benefits were extraordinary from early on.

"To begin with, it was helpful in front-end throughput. But we were one of the first to set up a scan analysis department to determine what to do with the data. By 1981 or 1982 we were getting very useful information for merchandising, a big competitive advantage."

How big a change did scanning represent? "Scanning changed the whole world of food retailing. For the first time, food retailers knew more about what they sold than the manufacturers. All of a sudden we had the information that helped us set up stores, reorder, decide what to promote. Before that, manufacturers told us what to sell, how to set it up on the shelves and how to promote. It was now a whole different world."

Scanning helped supermarkets target consumers better, and often that meant massive growth in product variety. Not surprisingly, consumer expectations have grown exponentially during Allumbaugh's career.

"We've fueled that fire because we've increasingly expanded our offerings. That's important particularly in Los Angeles, which caters to ethnic communities. We've got what they want to buy. Thirty years ago we carried 5,000 or 6,000 items. Today our biggest stores have 40,000 to 45,000 items."

Scanning was only one technology that Allumbaugh helped promote during his carrier. The executive has been a cheerleader for initiatives ranging from early computerization to electronic data interchange.

"We were the first supermarket in the West and one of the first in the country to have a computer," he recalled. "When I went to Ralphs in 1958, they just installed this new vacuum tube computer, a huge thing. In later years we understood it had the computing capacity of a handheld calculator.

"We were one of the first on EDI, transmitting orders and information from our headquarters to supplier headquarters and back. I tried to encourage more retailers into the system in the 1980s, and that has since happened. We also pioneered along with a few other companies the direct-store-delivery systems for receiving at our back door with paperless invoices. We started that in the late 1980s.

OWNERSHIP CHALLENGES OVER THE YEARS

Allumbaugh gives the impression that he would have liked to have focused on nothing but innovating throughout his career. But his attentions were often drawn to urgent matters of corporate ownership. Ralphs, which is now 123 years old, passed through many ownerships during Allumbaugh's tenure at the company.

The succession of ownerships began in 1968, when the founding family sold out to Federated Department Stores. Federated was acquired in 1988 by Campeau Corp. of Canada in a hostile takeover. Ralphs executives soon joined with Campeau Corp. (the latter was principal partner) in a leveraged buyout that separated the supermarket chain from Federated. But in 1992 Ralphs became part of Edward J. DeBartolo Corp., the mall developer, when Campeau paid off a debt to DeBartolo with Ralphs stock. That lasted until 1993, when DeBartolo began selling off assets. Ralphs eventually identified Food 4 Less as a merger partner that would provide a more permanent ownership. That merger was consummated last June.

The many shifts required Allumbaugh to acquire new skills. In particular, he was forced to become familiar with venture capital and ownership structures. "I knew nothing about venture capital, but in 1987 it became apparent that Federated was thinking of selling Ralphs, so I took a crash course in finance. I had some very good teachers who took me by the hand and said this is what you have to know."

That knowledge came in handy a year later because Allumbaugh was about to face some of his darkest days in management.

"I was called into Federated offices on a Wednesday and told to put the company up for auction, starting on Friday," he relayed. "I didn't even know what an auction was. All of a sudden I had investment bankers all over the place, and I was told we had to show the company to our competitors and other qualified buyers. We came very close to being sold to a competitor, in which case the Ralphs name would have disappeared. We were fighting for our lives. That's when it paid off that I'd had enough education about how to finance the business. I went out and got an LBO partner and we were ready to do an LBO. And we bid on the company and actually had the winning bid."

That LBO never occurred because of complications with the battle for control of Federated itself, but Allumbaugh's finance know-how would help him a number of times during his career.

INDUSTRY OUTLOOK

Remarkably, the years of shifting ownerships didn't leave Allumbaugh jaded or pessimistic about the industry. He still expresses a strong belief in the viability of supermarkets and the operating fundamentals of the business. He contends that supermarkets stack up well against a multitude of competitive threats.

"Supercenters are not the long-term answer," he stressed. "They're too big and impersonal and not really food people.

"The wholesale clubs, though they've taken a piece of the business, have matured. We won't see expansion of market share.

"I'm not concerned about computerized shopping. I think that's a niche market for people that don't have time to shop or want to shop. The economics are not in their favor. Supermarkets are predicated on being a self-service business. You can't tell me that you can call in and select an order economically. It can't be done."

One factor helping to make the industry even more competitive is the ECR initiative, Allumbaugh said. This is the case even though the driving forces of ECR have changed, he said.

"I think the ECR dialogue's been healthy for the industry. It's beginning to become more of a retailer initiative, as opposed to a supplier-manufacturer initiative. It certainly was a manufacturer initiative to begin with."

Allumbaugh noted that ECR has meant a challenging reordering of buying practices for retailers, who are being forced to relearn the old rules.

"We built the system in retailing the way the manufacturers taught us how to buy. And we had to have all this warehouse space to do the forward buying since our profit was wrapped up in that. In our case we just built this gigantic high-rise electronic warehouse, which cost us $55 million. And now I'm hearing that forward buying is going to disappear.

"But we sorted all that out. There are enough buying opportunities to utilize the warehouse space in this industry. The large companies, like Procter & Gamble, have made it uneconomical to do forward buying, but not everyone's a Procter & Gamble." Likewise, Procter & Gamble's initiatives to eliminate couponing, including a test this year in upstate New York, won't necessarily mean the whole industry will follow suit, Allumbaugh said. In fact, Ralphs' group vice president of sales and merchandising, Frank Lazaran, recently said the chain will put more effort behind promoting double coupons.

"If anyone can do it [coupon elimination], P&G can do it, particularly as it relates to their products. But here again, you have a two-tier industry: the leaders like P&G that can pretty much set their own tone, and those that have to utilize every merchandising and sales weapon known to man. I'm not sure the P&G tests will be successful."

A discussion of couponing and ECR inevitably raises the question of the state of trade relations. Allumbaugh has done far more than his fair share to promote understanding. Among his industry posts, he's been chairman of the Food Marketing Institute and the California Grocers Association, president of the Western Association of Food Chains and director of CIES, the international chain store association. Allumbaugh insists that supplier-retailer relationships are far better than earlier in his career.

"I can remember some contentious times. In the late 1970s and early 1980s, relationships were not all that warm and friendly. The balance of information between supplier and retailer has led to greater respect. I think the working relationships are far better."

RALPHS OUTLOOK

Allumbaugh reserves some of his greatest optimism for the future of his own company. The $1.5 billion merger of Ralphs and Food 4 Less Supermarkets, La Habra, Calif., was a dynamic and highly desirable move to create a more stable ownership structure, Allumbaugh said. The combination created a new entity called Ralphs Grocery Co. Annual sales are about $5.5 billion to $6 billion with about 415 stores primarily under the Ralphs (conventional) and Food 4 Less (warehouse) banners. Many secondary banners were dropped in favor of the two main names.

Allumbaugh said the company will soon turn its attentions to going public. That move will occur in the next year or two. "As a $6 billion company, we're too big to be privately owned," he said.

"It's a whole new bright world as far as Ralphs is concerned," Allumbaugh said. "It's not without its bumps in the road. But the good news is that, long term, we have a much stronger, more aggressive, more flexible company to meet the requirements of the marketplace."

Much of the strength lies in the combination of the two very different banners.

"Ralphs has had a reputation and ability to do business in middle- and higher-income markets, but didn't do well in the low-income or minority areas. On the other hand, the Food 4 Less format did extremely well in price-sensitive and ethnic markets. We can now serve any part of the market. I'm involved in real estate, and for years Ralphs would walk away from real estate in low-income or minority areas. Now we can look at anything."

Southern California represents 90% of Ralphs' business, but there are two other regions. The company operates 25 stores under the Cala & Bell and Foods Co. names in northern California. It also runs 38 stores in Kansas under the Food 4 Less and Falley's banners.

"We have looked at whether or not long term it makes sense to hold a company out of state," Allumbaugh said. "I don't want to forecast but it's a natural question we get asked all the time. The northern California operation is a little more defensible. It could give us expansion opportunities."

Following the Ralphs-Food 4 Less merger, the new Ralphs inherited a different profit profile than the old one.

"Ralphs has always been an extremely high performer in EBITDA [earnings before interest, taxes, depreciation and amortization] as we will continue to be. We will be less so because Food 4 Less produces a lower EBITDA. So the meld will be less than Ralphs' historical numbers, but it will still be a healthy return."

Some analysts have expressed concern about Ralphs' overall performance, noting the failure of many converted stores to perform up to expectations and recent negative same-store sales. Some analysts said Ralphs will be challenged to keep to the timetable for anticipated cash flow levels. Some point to a high retail price structure at Ralphs.

Gary Giblen, analyst with Smith Barney, New York, said in a March report that Vons is benefiting from problems at Ralphs. "Ralphs continues to run negative comp sales and laid off 1,000 to 1,100 people [resulting from store closures] . This worsens already inferior store conditions and service levels, while further impairing morale and quality of service . Undoubtedly, Ralphs and Lucky will recover focus and competitive potency. For the intermediate term, however, Vons is benefiting from its superior focus and momentum."

Allumbaugh said Ralphs has continued to hold its southern California market share of about 28.5% and that the same-store sales picture is turning around. The company reported same-store sales rose 0.9% for the fourth quarter.

"Same-store sales are now slightly positive and increasingly so," he said. "We'll be in strong positive same-store numbers throughout the year."

Allumbaugh contends that the company's EBITDA performance is within reasonable range of projections. He also disputed the contention that Ralphs' retail pricing competitiveness has been hurt since the merger.

"Our pricing is all over the lot," he explained. "Food 4 Less is the lowest priced operator in the area. So we have the price segment covered. That was one of the reasons for the merger. Ralphs has never been a price operator, but it's competitive with other full-service supermarkets. Ralphs stores vary on pricing depending on the competition they face."

Analysts have also noted poorer than expected results for some store conversions.

"When they converted stores to the Ralphs banner, they expected a 5% sales increase in those stores," said Mike Kirkpatrick, a securities analyst with Mendham Capital Group, Roseland, N.J. "So they improved many service details, but they never got the bump up in sales, and that pressured margins."

Allumbaugh conceded some problems in this area, but said the situation is turning around.

"This is the weakest area," he said of the store conversion efforts. "The bigger, newer, larger Food 4 Less stores converted well into Ralphs. The older, smaller ones [Alpha Beta to Ralphs] didn't convert as well. But that is beginning to change. And the inner-city ones -- the Boys to Ralphs -- responded well."

A big factor boosting Ralphs' prospects was its agreement last November to lease the Riverside, Calif., distribution center and dairy facility from Salt Lake City-based Smith's Food & Drug Centers, Allumbaugh said. That deal was struck just two months before Smith's signaled it would pull out of the southern California market.

"The Smith's [distribution] deal was a godsend," Allumbaugh said. "One of the things we underestimated was our adequacy of space, especially frozen food and refrigerated. All of a sudden we were offered a million-square-foot, brand-new facility that fit our needs perfectly."

Accordingly, Ralphs will vacate its La Habra Alpha Beta facility and some leased space. Ultimately the company will rely on three facilities: the Smith's warehouse in Riverside, the original Ralphs dry grocery facility in Glendale and the Ralphs refrigerated distribution depot in Compton.

SOUTHERN CALIFORNIA OUTLOOK

Turning to the state of the southern California marketplace today, Allumbaugh first reflected on how many companies have come and gone over the years. He proudly points to a list he's kept since 1960 that lists 47 companies no longer in business in southern California.

The market is still competitive, but Allumbaugh described a scenario in which the strong surviving companies are now living in a kind of detente for a while.

"I don't see any big changes in the immediate future. Maybe one or two companies may be acquired. I think we're in for a fairly stable period in the southern California market, especially among the major operators."

Assessing the individual players, Allumbaugh stressed the aggressive nature of many local operators. "Vons and Lucky are as good an operator as you're going to find. We're good for each other, since we keep each other on our toes. Albertson's is growing in southern California. Then there are independents served by Certified of California, and companies including Hughes and Stater Bros."

Part of the local challenge is the rapid pace of new unit openings by Ralphs and its competitors. Allumbaugh noted that about 20% of stores in the market have been constructed in the past five years. Ralphs is certainly fueling the trend: It plans to open 16 conventional Ralphs and 10 Food 4 Less stores this year, which is more new stores than all of the other major southern California chains combined, according to Al Marasca, president and chief operating officer.

"We could do without a lot of the stores in this market," Allumbaugh said. "We and our competitors are closing a lot of smaller, inefficient stores. That, and the departure of Smith's, are healthy for this market. We didn't need another operator. There haven't been as many store closings as there ought to be. I think that will accelerate."

In terms of serving the consumer, there will be no letup in the imperative to target southern California's ethnic populations, Allumbaugh stressed.

"It's not only a matter of serving one ethnic group like Asians," he said. "You've got all kinds of Asians -- Vietnamese, Laotians -- and each have their own likings. In our own back yard near our central office, we have a huge population of Samoans. It's the largest group of Samoans outside of Samoa. "You have to understand what they want to eat. In downtown, there's an area in Hollywood with a huge population of Russians. I don't know how they got there, but with one of our stores a large part of our business is with Russians. We had to find out what they want."

Because Allumbaugh thinks a lot about the future, his talk turns often to matters such as opportunities for young people and the need for future managements to embrace technological skills. But after all these years in the business, he concedes that he still can't predict the next major technological wave, such as scanning, that will revolutionize the industry. That doesn't stop Allumbaugh from being perennially optimistic.

"I can't see it, but it's out there."