THE WAREHOUSE TRADES UP 1996-01-22 (2)

ELLIOT ZWIEBACH

Supermarket warehouse stores -- one of the major growth formats of the 1980s -- are evolving into a hybrid of their former selves in the 1990s. With more customers demanding more service as well as low prices, the bare-bones look and service-free ambience that once characterized most supermarket warehouse stores are gone.

In their place is a collection of service departments -- usually delicatessens and bakeries, sometimes seafood counters and pharmacies -- and a more upscale visual look. Virtually all that remains from the original format are warehouse shelving -- and even that has been modified or eliminated at some stores; customer bagging at the front end, and low, low pricing. "Consumer research shows that certain people are constantly looking for the kind of shopping experience for their weekly food purchases that they find at a Costco or other membership club," said Roger Wall, executive vice president and chief financial officer at Foodland Super Market, Honolulu.

"But they want something a step above that, which is why warehouse stores developed into the hybrid they have become," Wall told SN. "With these larger stores we can merchandise more aggressively against the clubs with big value-pack sections, more one-stop shopping, bank branches and, in some cases, fast foods." With about 2,500 supermarket warehouse stores in operation, the format continues to exert its power -- as a proven competitive response to membership clubs and as a potential bulwark against the advance of supercenters. However, the name "warehouse store" itself -- with its connotations of warehouse racking, low lighting, concrete floors and an almost total absence of ambience -- has been replaced by several operators with the more consumer-friendly "price-impact store." Still, there's a price to going more upscale, said Robert Piccinini, chairman, president and chief executive officer of Save Mart Supermarkets, Modesto, Calif., which operates with a more traditional warehouse approach with its six Food Maxx and two Food 4 Less warehouse units. "Our customers tell us they would like to have more services, but when we tell them that would raise the price of groceries, they change their minds," he told SN. Operators are now running warehouse stores with a variety of formats that run along a continuum from basic to service-heavy. Among the entries:

Food 4 Less and Save Mart continue to operate the industry's purest form of warehouse store, with the fewest frills.

Raley's also offers a bare-bones format at its Food Source warehouse stores but does feature upgraded meats and produce.

Warehouse stores operated by Safeway, Farm Fresh, Minyard and Foodland have adopted a more hybrid approach by adding service departments and other amenities.

Eagle Food Centers is blurring the line between its warehouse and superstore formats, while Associated Wholesale Grocers already has crossed that line by converting its warehouse-formatted Price Choppers to superstores and combos.

Supervalu's Cub Foods has developed a unique hybrid that segments groceries, perishables and nonfood sections.

Albertson's is still seeking a winning formula for its Food Max warehouse stores, while American Stores and Smith's are trying to gain a foothold in the warehouse niche. One of the industry's major adherents of the traditional approach to warehouse stores is Food 4 Less, which operates 104 corporate stores in California and the Midwest as a division of Ralphs Grocery Co., Compton, Calif. "The stores have warehouse racking, full-case stocking, limited varieties and no front-end service," George Golleher, vice chairman of Ralphs, told SN, "and we use automated forklifts for stocking so we can receive merchandise right from the manufacturer and thereby bypass our distribution facilities to keep costs down. "Our stores still feature bare-bones, spartan decor -- concrete floors, open ceilings with skylights and very stark yellow, white and brown colors -- to create an ambience for super discount shopping," he added. The stores range from 40,000 to 80,000 square feet. Food 4 Less has no intentions of adding service departments or other amenities, Golleher said. "The format is working well, and we plan to stick to our guns," he declared. Save Mart also takes a very traditional approach at its eight warehouse stores, and Piccinini told SN he sees no reason to change. "We think we need to be completely at the opposite end of what a superstore offers by running bare-bones warehouse stores with no service at all," he explained. "Other operators are trying to be everything to everybody to build volume and to appeal to the rest of the world. But we like the idea that we're super-cheap, with a wall-to-wall gross of about 16%, compared with a gross of 28% at our conventional stores." Save Mart's newer warehouse stores fall in the 55,000-square-foot range, with older stores doing $30 million to $35 million a year and newer units averaging $45 million annually, Piccinini said. Raley's Food Source warehouse stores also eschew service departments but differ from other bare-bones chains by offering a higher quality of meat and produce than most of the warehouse competition, said Charles Collings, president and CEO of the Sacramento, Calif.-based chain.

Raley's operates three Food Source stores in northern California, averaging about 55,000 square feet. The stores sell the same top-quality produce as Raley's conventional stores and offer a standard grade of beef (but not the conventional stores' Choice grade), compared with a no-roll at most other warehouse units, Collings told SN. "Because we have our own perishables warehouse, we're able to handle a better-quality product without adding much cost, and that gives us an important edge over the most basic warehouse units," he said. Most other warehouse-store operators contacted by SN take a less traditional approach to their stores. Minyard Food Stores, Coppell, Texas, offers service delicatessens and bakeries at some of its 19 Sack 'n Save warehouse units "because we're trying to reach a value, price-oriented customer while at the same time trying to stay competitive with other formats," Ron McDearmon, senior vice president of planning and development, told SN. "But we're also being careful by offering only a limited amount of service because of the labor costs involved." Michael E. Julian, chairman, president and CEO of Farm Fresh, Norfolk, Va., told SN some service and ambience are necessary ingredients, even in a warehouse environment. "One of the knocks on warehouse stores, and rightfully so, has been their spartan nature and the fact they made people feel they were giving up something by shopping there," he said. "So we've gone back into our Rack & Sack warehouse stores and added service departments for delicatessen, bakery and seafood; we've spent money on lighting so the stores feel warmer, and we've added more pleasant decor, all of which have enhanced sales." Farm Fresh operates 11 Rack & Sacks, which range between 43,000 and 90,000 square feet and do volumes of $15 million to $35 million a year, Julian said. He said he expects Rack & Sack to continue to add service departments "when they can pay their own way. So far, ours do." Like Rack & Sack, Safeway, Oakland, Calif., has moved away from a stark, bare-bones look at its 20 Pak 'n Save stores in northern California. According to Debra Lambert, Safeway's corporate director of public affairs, "We've given the stores a more modern look, replacing the bright colors with softer pastels. We've moved excess stock off the sales floor and into the back room, and we've eliminated most of the warehouse racking, except in the bulk foods section. "We've also added service delis and bakeries, and one store has a pharmacy as well -- because customers are looking for fresh-baked goods, deli trays and other amenities. "So the stores look more like standard supermarkets, although they still feature customer bagging at the front end and signage that emphasizes the low-price nature of the format." Pak 'n Save, whose sizes range from 60,000 to 80,000 square feet, carries 25,000 stockkeeping units, and it runs radio and print advertising, which most warehouse stores do not. In Hawaii, Foodland Super Market operates eight Sack N Save warehouse stores that were opened as a defense against a growing number of membership warehouse clubs. "The stores have discount prices, but even though they're warehouses, they don't look boxy like the clubs," Wall said. "It's a pleasing environment with services." Stores range from 40,000 to 53,000 square feet and include a wide array of service departments and conventional store decor. Pricing is 8% to 25% below Foodland's stores, and the warehouse stores post double the sales of the conventional units, Wall said. He said the Sack N Saves are likely to be Foodland's primary growth vehicle, although expansion is on hold "until we feel competitive forces make it appropriate to add more retail square footage." The warehouse operation that's apparently moved the farthest from its roots is Price Chopper, a format in the Kansas City area franchised by Associated Wholesale Grocers, Kansas City, Kan. According to an AWG spokesman, what started as a group of warehouse stores in the late 1970s evolved by the mid-1980s into superstores and combos with expanded nonfood selections, pharmacies and the full range of service departments. A warehouse format that, like AWG's Price Chopper, seems to be moving away from its roots is Country Warehouse Markets, a seven-store group operated by Eagle Food Centers, Milan, Ill. The chain promotes the stores in concert with its conventional Eagle Country Markets, said Herb Dotterer, senior vice president and chief financial officer, and it has no current plans to expand the warehouse format, "though that's something we're wrestling with." Dotterer said the warehouse stores were never "that distinctively different from our Country Markets, except for higher ceilings and some warehouse racking and, originally, different pricing and merchandising. "But now, without the pricing and merchandising differences, there's little to delineate one format from the other." One of the industry's warehouse-store pioneers, Cub Foods, Stillwater, Minn., has taken the hybrid format one step further by operating the equivalent of three stores under one roof, with expanded sections in stores of 80,000 to 85,000 square feet for perishables, dry groceries, and general merchandise and health and beauty care. Cub, a division of Supervalu, Minneapolis, operates the three-in-one format at about 15 of its 116 stores (56 corporate-owned, 60 franchised). In the newest Cub format, customers enter the perishables section, which features a series of expansive service and self-service counters. At the store's center is the dry grocery section, on modified warehouse racks that aren't as high as traditional racking, flanked on the far side of the store by the nonfood assortment and a power alley on the side wall. While the average Cub carries 35,000 items, the newest format offers more than 49,000 products. "Supermarkets used to be built in more of a cookie-cutter mold, but as conventional stores have begun to differentiate themselves more and more, it's become more imperative for warehouse stores to evolve as well," a Supervalu official explained. "So Cub has had to change more rapidly and more often over the past few years than ever before to keep up with changing consumer demand." According to one industry observer, "The key to the success of a warehouse store is to have the right location with the right size -- something around 50,000 to 60,000 square feet -- and a demographic of low-middle to low-income shoppers interested in economic value who don't mind the self-service aspects of the format. "The problem is, there isn't an abundance of those locations around. You can't just convert an existing supermarket and expect that, with a lower cost structure, you'll succeed." Yet that's exactly what some operators are trying to do. One of them is American Stores Co., Salt Lake City, which entered the warehouse store sweepstakes in 1994 by converting 13 smaller, underperforming Lucky stores in California to the new Super Saver banner. The stores range from 27,000 to 62,000 square feet, with annual volumes at the larger stores estimated at $20 million to $24 million.

The company initially disclosed plans to convert an additional 12 locations to the warehouse format during 1995. However, American said late last year it would instead build three or four new stores in 1996 to add to the Super Saver group.

American Stores executives declined comment on the performance of the Super Saver stores.

However, Ed Comeau, an analyst with Donaldson, Lufkin & Jenrette, New York, said American has been disappointed with the results of the stores so far. "Its original strategy was to take several undersized Luckys with good leases and low rents and convert them to a price-oriented warehouse format," he said.

"The problem was trying to recycle smaller units into more competitive vehicles, which didn't work because some stores are too small and lack space for adequate departments, and they are not competitive. So now American is looking to build new, larger Super Saver units in better locations."

According to Jonathan Ziegler, a securities analyst with Salomon Bros., New York, it's still too early to tell how well the Super Saver format will work out. "The initial results have been disappointing, but American has tinkered with the format, and they are happier with it now," he said.

One observer told SN that Albertson's, Boise, Idaho, has also been disappointed with its longtime Food Max warehouse format, which operates most of its 43 stores in California, Texas and Colorado. "Like American, Albertson's looked at warehouse stores as a way to recycle older real estate, but it's met with only limited success," the observer said.

He said Albertson's has no plans to expand the format. Albertson's executives declined to comment.

The jury is also still out on Price Rite Grocery Warehouse, a group of four 50,000-square-foot warehouse stores in Las Vegas operated by Smith's Food & Drug Centers, Salt Lake City.

"The format still needs work," one observer said. "The stores don't seem as customer-friendly as a Food 4 Less, for example, and they're not as good on pricing as a Lucky."