ALBERTSON'S LOOKING TO CUT COSTS: NEW CEO

ELLIOT ZWIEBACH

BOISE, Idaho -- Albertson's here said last week it is pursuing five strategic imperatives to leverage its strengths and reach its full potential, including the imposition of aggressive cost and process controls, according to Larry Johnston, chairman and chief executive officer.

The other four imperatives described by Johnston were: maximizing return on invested capital by evaluating every asset in the company, reinvesting the money saved from the expense and process control programs back into the marketplace, launching a companywide focus on technology, and doing a better job of motivating employees.

Johnston, who joined Albertson's in late April, said the new five-point program is designed to grow sales, reduce costs and increase return on capital.

Industry analysts told SN they do not anticipate the strategic moves will provide a quick fix for Albertson's problems but said they are encouraged that the company seems to be on the right track.

Johnston's remarks came during a conference call with analysts following the release of financial results for the first quarter ended May 3. He elaborated on the strategic imperatives as follows:

Instituting aggressive cost controls at stores, corporate and division offices and distribution centers "will require rigorous disciplines," Johnston said. The company's cost structure is still "far too high," he explained, "and we are not yet on a trend line to meet our goal [in fiscal 2002] of $250 million in annual reductions in distribution and selling, general and administrative expenses.

"Consequently, every major expense category within the company will be analyzed and monitored by a member of my executive team -- a process we believe can make a big difference in improving the competitiveness and efficiency of the company."

Johnston also said he believes Albertson's can not only meet the goal of $250 million in savings but can exceed it as time goes on "because we see huge upside opportunities."

To maximize return on investment, Albertson's will reexamine every asset in the company "to determine if it creates or destroys value," Johnston said.

"There will be no sacred cows, and once the [evaluation] process is completed, we will move rapidly to make the tough decisions and eliminate assets that are not adding value. Future capital expenditures will only be focused on stores, markets, processes and formats that drive growth and exceed the weighted average cost of capital."

When an analyst asked whether Albertson's would be comfortable walking away from markets with positive cash flow that may not have long-term potential, Johnston replied, "We would be comfortable with that, and we're looking at this process with an open mind and won't be afraid to make the tough calls."

Albertson's also plans to be more aggressive in converting surplus property to cash, Johnston added, as was done in the first quarter when it completed the sale of the former American Stores headquarters building in Salt Lake City.

To reinvest this money into the marketplace, Albertson's must become more customer-focused, Johnston said. "We must be more obsessed with satisfying customers than anyone else."

To drive the company's competitive advantage and productivity, Albertson's will launch a companywide focus on technology. "Digitization can transform Albertson's," he said, "and we will commit a greater share of cap-ex to information and process technology over the next three to five years, with the goal of becoming the industry leader."

To realize all these goals, Albertson's must do a better job of energizing associates. "Human capital is our most critical element because our people will make the difference in how we meet and exceed our cost expectations," Johnston said. "We will strive to make Albertson's the industry's employer of choice by eliminating bureaucracy, having fewer layers of management, strengthening communication, launching better training programs and introducing new reward systems."

During the conference call, company officials also discussed first-quarter financial results, which showed sales up 3.5% to $9.3 billion, comparable store sales up 1.4% and net income, including merger-related costs, up 3.9% to $186 million.

Peter Lynch, president and chief operating officer, said Albertson's goal of achieving comparable sales increases of 3% "has been difficult to reach, and it may be more realistic to get to the 2% level as we increase penetration of private label and get more efficient with perishables. Combining those efforts with our new organizational structure and our new expense reduction program makes 2% very much attainable."

He also said Albertson's has achieved its goal of becoming more price-competitive in all but two of the target markets it set for increases nine months ago, "and we will be there in those two in the foreseeable future."

Lynch said the chain's new organizational structure and stronger promotional focus is already paying dividends, including "significant improvements" in its California operation; increased market shares in every region in which it competes with Wal-Mart Supercenters, and ongoing improvements in corporate brand sales. He also said changes in the produce operations in Florida have resulted in "a dramatic turnaround in sales."

In addition, Lynch said Albertson's contemplates developing a dual-brand strategy -- combining its food and drug operations under one roof -- in different regions, based on the long-term success of its Jewel-Osco division in the Chicago area. He also said the company plans to introduce loyalty-card programs in additional markets during the balance of the year after successful tests at Jewel and Acme operations in Chicago and Philadelphia, respectively.

Following the conference call, Jonathan Ziegler, San Francisco-based managing director for Deutsche Banc Alex. Brown, New York, told SN: "The good news is that reform is taking place at Albertson's, and the short-term pain should result in long-term gain.

"The company still faces numerous challenges, and while Johnston handled his first earnings release with poise and tact, he must now prove his mettle in the competitive landscape. If he can deliver on his programs, he will have Albertson's well on the way back to being the sound operator it once was."

Deborah Weinswig, an analyst with Bear Stearns, New York, said the programs outlined by Johnston make the outlook for Albertson's cloudier. "Albertson's continues to face challenges that include an unfavorable pricing perception by customers, persistent market-share losses and a rising cost structure, and the initiatives will likely result in added costs over the near term, while incremental benefits will take time to develop, so it is far too early to tell which of the initiatives will actually take form and over what time-frame.

"In addition, market share will be increasingly difficult to recapture, given the aggressive growth of both traditional and supercenter competition, and the addition of a new CEO places a large degree of uncertainty on near- and long-term results."

Debra Levin, an analyst with Morgan Stanley, New York, was also cautious. "Driving sales in a competitive environment will be tough, particularly since Albertson's is a large company with a lot of moving parts and one that faces numerous challenges," she said.

According to Meredith Adler, an analyst with Lehman Brothers, New York, "Albertson's turnaround will be complex. It will take a long time to be executed and a long time for the benefits to be visible.

"Although most of the painful process of integrating American Stores is behind the company, permanent damage to market share and asset values was done on the West Coast as a result of eliminating the Lucky banner, and even as it struggles to change its operation, Albertson's is facing a hotter competitive environment as Wal-Mart and others expand in some of its key markets. Since Albertson's has the least attractive market-share position of the big three supermarket chains, it will have a harder time than the others fighting off these competitive threats.

"But I think Johnston is a true leader with great strategic breadth, so the future is more hopeful than it has been in a long time. However, I still have some concerns that the company is trying to do too much and that it risks overwhelming the store-level organization because its goals are ambitious and may end up burdening the store staff beyond its capacity."

Adler also noted that Albertson's willingness to divest stores in markets where its market position is weak but the assets are profitable marks "a significant change in the company's thinking and, if done well, will lead to a smaller but more profitable company. Johnston described the process as right-sizing, so the divestitures could be significant."

She also said the company's decision to expand its loyalty card program could be problematic. "Albertson's had been adamant about not introducing a loyalty program and that message was repeatedly communicated to customers, so it's not clear what impact a card rollout will have," Adler said.