SMITH'S SLOWS CALIFORNIA EXPANSION

ELLIOT ZWIEBACH

SALT LAKE CITY -- Smith's Food & Drug Centers here is pausing in its California expansion plans to allow its existing stores there to meet the company's projections, according to a memorandum sent to Smith's employees.

The company already has opened five stores in California this year and planned to open an additional three units before the end of the year. Most of the 10 to 12 new stores Smith's planned to open in 1995 also would have been in California, according to a previous Smith's press release.

The new policy means the company will temporarily halt all new construction in California, including six sites on which construction is ready to begin. Moreover, of six units already under construction in the state, Smith's will open only two this year, both in San Diego, Robert D. Bolinder, executive vice president, told SN. While it plans to complete construction on the other four, Smith's will hold off opening them until it resumes its expansion program.

Smith's hopes to continue its growth plans in California "in a few months, possibly as soon as the first part of 1995," Bolinder said. However, he noted that would mean the company wouldn't be opening many additional California stores before the end of 1995.

"We're still very confident about California," Bolinder said last week. "But after opening 31 stores in just under three years, we want to give our people there some breathing room to fine-tune what we already have."

In the memorandum, the company said, "We have temporarily suspended opening new stores [in California] in an attempt to concentrate our efforts on improving our current stores. Once we achieve our budgets and goals for our current stores, we will then reinstitute our California expansion."

In place of growth in California, Smith's is accelerating its expansion plans in other markets, with three stores scheduled to open in New Mexico and two in Nevada before the end of the year, Bolinder said.

Smith's plans to stay with its overall projections of 12 more stores next year. Those units will focus on other markets, including New Mexico, Nevada and Arizona, "to keep the total number of new stores on projection," he said.

The company memo was issued by the California region's three top executives: Ken White, senior vice president and regional manager; Ken Martindale, vice president of sales and merchandising, and Brent Farnsworth, vice president and director of operations.

Smith's, which came to southern California with conventional stores in 1971 and exited in 1984, re-entered the market with a 75,000-square-foot one-stop shopping format in 1991.

Beyond the 31 stores already in operation, it had originally projected moving aggressively into central California last year and northern California by 1996.

However, the California recession stymied Smith's statewide growth plans and its store-level results in southern California, ultimately leading to the temporary halt in its expansion plans.

Smith's presaged the expansion cutback in California in its recent annual report when Jeff Smith, chairman, president and chief executive officer, wrote, "Due to market conditions and current recessionary pressures in our expansion area, we are modifying our expansion plans."

The report did not go into any detail on those modifications, nor did it indicate the amount of money Smith's planned to allocate to capital spending for 1994 or 1995.

Jonathan Ziegler, a securities analyst with Salomon Bros., New York, said Smith's decision to halt its California expansion "may represent the first sign of sanity creeping into the industry, with management opting to allow existing stores to mature instead of throwing more capital at the market to see if that improves the situation.

"This is the first sign that perhaps we'll see a halt to growth, which may enable same-store sales all over the industry to get healthier."

Debra Levin, an analyst with Morgan Stanley, New York, said she was surprised by Smith's actions "because the company said it really wanted to reach a base of 40 stores in California to achieve better economies of scale and put it on the road to profitability.

"But the company feels the stores in California are not progressing the way it would like," she said.