SCHNUCK SELLING KANSAS CITY UNITS TO HY-VEE

ELLIOT ZWIEBACH

ST. LOUIS -- Schnuck Markets here said last week it will exit the Kansas City marketplace by selling all seven of its stores there to Hy-Vee Food Stores, the West Des Moines, Iowa-based company that operates 14 stores in that area.

The sale comes six years after Schnuck entered the Kansas City market.

According to Craig D. Schnuck, chairman and chief executive officer, "We realized we were at a crossroads with two options: to make a substantial investment in new stores and sales promotion in Kansas City in order to expand our presence there to reach a sufficient size and scale to be profitable, or to see if another supermarket operator might want to grow by buying our operation."

Terms of the deal were not disclosed.

The transaction, which also includes an option for Hy-Vee to purchase undeveloped real estate from Schnuck in Independence, Mo., will become effective Aug. 25, with the stores reopening under the Hy-Vee banner Aug. 26. Both companies said the deal has already been approved by the Federal Trade Commission.

Craig Schnuck said his company will use the proceeds from the sale to fund ongoing expansion in other markets -- reportedly with a heavy emphasis in Illinois.

A company spokeswoman told SN Schnuck opened a store last week in Carbondale, Ill., with plans for two stores in St. Louis this year and one in Decatur, Ill., next year. She declined to disclose expansion plans beyond those locations.

Schnuck entered the Kansas City market in 1991 and opened its last store there in 1995. Following the sale, Schnuck will operate 87 stores: 72 in the metropolitan St. Louis area (including some in East St. Louis, Ill.), four Missouri stores outside St. Louis, four stores in Indiana and seven Illinois stores outside East St. Louis. The Kansas City stores are the farthest from Schnuck's distribution center here -- about 250 miles away.

Hy-Vee, which operates 234 stores in seven Midwestern states, entered the Kansas City marketplace in 1988. Its 14 stores control a market share estimated at about 12%, compared with about 4% for Schnuck -- way behind market-leader Price Chopper, a franchise banner from Associated Wholesale Grocers, Kansas City, Kan., which has a share of about 45%, local sources said.

Hy-Vee said it plans to close three of the seven Schnuck locations, for a net gain of four stores. It said it will close two units immediately by merging stores in Olathe, Kan., and Raytown, Mo., with existing Hy-Vee stores in nearby communities; and in early September, when it opens a new store in Overland Park, Kan., Hy-Vee said it will close one of the acquired Schnuck units located almost directly across the street.

Ronald D. Pearson, chairman, president and CEO of Hy-Vee, said the purchase complements Hy-Vee's business philosophy and plans for growth in this market.

"Schnuck's has outstanding facilities and a reputation for operating progressive, service-oriented stores," Pearson said. "At the same time this move will strengthen Hy-Vee's position in the market and create new opportunities for our employees and our existing customers."

He said Hy-Vee intends to retain all 900 current Schnuck employees, noting they will be offered comparable jobs wherever possible.

Craig Schnuck said two factors prompted the company's decision to sell. "One was the over-stored condition of the Kansas City market and the tendency of local operators to build stores in growth areas before the surrounding population is large enough to support a profitable operation.

"The other was the high cost of transporting products from Schnuck's St. Louis warehouses [250 miles away] to the Kansas City stores. Those costs are significantly higher on a per-item basis than in most of Schnuck's other markets."

Craig Schnuck said the chain received "a strong response" from potential buyers and began pursuing discussions with the highest bidders earlier this summer. "We decided on Hy-Vee's offer because it makes everybody a winner," he said. "Our employees will retain their jobs, our customers will continue to have great stores in which to shop and we are able to recoup our investment."

Trade observers in Kansas City, Kan., told SN Schnuck apparently found it difficult to establish a strong image there, using buy-one, get-one-free offers when it first came to town and more recently resorting to triple coupons to attract customers.

Schnuck also had some apparent problems with its loyalty cards -- in part, an observer said, because it tended to offer discounts on private-label items, which met with some customer resistance and led the company to pull back on its emphasis on the card program.

Because most retailers in Kansas City use newspaper inserts rather than run-of-press ads, Schnuck tended to promote each of its stores individually rather than all seven as a group, an observer said.