SOLVING RETAIL'S OVERCAPACITY PROBLEM

David Merrefield

Let's say you're in the manufacturing business. You're running factories at full capacity, acquiring more and hiring all the workers you can find because the level of consumer demand is high. Your costs are high, but profits are high too. There's no problem.

But then one day consumers reduce their buying levels. At first, you can't believe it's true and you do nothing. After all, consumers will return to their old buying ways, right? Not so, it develops.

After a while it becomes clear what to do: To plump your profit, you must make less product to reduce production costs to make a decent return on declining revenues. And the quickest result would be obtained from closing entire factories.

That simple resolution of a problem in the manufacturing sector is not unlike the solution advanced last week by Lawrence Johnston, Albertson's new chairman and chief executive officer. He joined the food retailer in April after a stint as head of General Electric's appliance division. As you'll see on Page 1 of this week's SN, he mandated that up to 20% of Albertson's administrative-level employees must exit. No count was cited, but that probably would be well under 2,000. And, the number of divisions is to be reduced to 15, from 19.

More important, from the perspective of total-industry competition, the plan calls for shuttering 165 stores spread across 25 states. Together those stores, while underperforming, contributed some $1.4 billion to Albertson's sales volume.

These numbers are huge, but to put them in context, Albertson's now operates 2,541 stores in 36 states, generating a top line of about $37 billion. Albertson's employs some 235,000 people at all levels of the enterprise.

Context or not, these are bold cuts aimed at solving a problem of overcapacity, which, no doubt, was exacerbated by -- if not rooted in -- the incomplete integration of Albertson's 1999 acquisition of American Stores.

Now let's look at the problem of overcapacity throughout food retailing.

Since the modern supermarket era emerged more than 50 years ago, the philosophy behind supermarket retailing has been to sell large quantities of goods at tiny unit profit. Enforcing that practice as time went on was that so many supermarkets sprang up that none dared be the first mover toward higher price points. Then, in more recent time, business dynamics changed: Population growth slowed, price inflation was muted and other trade channels started to offer food. As a result, the number of dollars available to supermarkets stabilized, if they didn't actually decline. But retailing capacity failed to pull back. To the contrary, the number of stores continued to increase. When that couldn't be sustained, retailers went on an acquisition binge to chase immediate growth, or to mute competition.

Now, it seems, that entire string is running out and actions such as those taken by Albertson's will become increasingly common. (See A&P's plans, Page 1.) And it's clear Albertson's will have to do more. Closing a smattering of stores here and there will soon weaken Albertson's presence in many markets, sparking the need to exit entire markets, just as surely as it will close entire divisions.

Maybe it's just as well the industry has a new executive from the manufacturing sector who can apply a starker analysis to the problem of overcapacity. It's well, that is, from the viewpoint of all but those who are soon to be without jobs. Here's hoping most will soon find themselves in more productive and rewarding activities.