CAP-EX SPENDING TO SHORE UP MARKET SHARE

ELLIOT ZWIEBACH

Retailers will allocate their capital budgets in 2002 to maintain their market-share positions and existing store bases in an effort to compete more successfully with alternative distribution channels, industry analysts told SN.

Only Wal-Mart will continue to move into new markets with supercenters this year, while the major conventional chains plan to focus on integrating what they have and strengthening their operations, the analysts said.

Most chains are expected to allocate approximately the same amount of capital to new projects this year as they did a year ago, with the exception of Winn-Dixie, which is boosting spending by 37.5% as it completes a restructuring year -- a year in which it cut back on spending by more than 25%.

Overall square footage for supermarkets will continue to grow modestly -- in the range of 2% to 4% -- while Wal-Mart grows overall at a rate of 9%, with most of the increase coming in its supercenter segment.

"The chains are not escalating their square footage," Lisa Cartwright, an analyst with Salomon Smith Barney, New York, told SN. "They're going to continue spending at about the same rate they did a year ago and focus on maintaining their market-share positions and their existing store base.

"That's in sharp contrast with two or three years ago, when square-footage growth was accelerating more rapidly for some of the chains. But now those companies are concentrating more on market fill-ins, and they're shying away from new-market entries, which are very costly."

The goal, Cartwright said, is "to make sure they're strong enough in each market and their cost structure is low enough that they can compete productively with other channels."

Gary Giblen, senior vice president and director of research for C L King Associates, New York, said he agreed that chains will be investing in capital projects this year more to maintain their sales levels against competition than to actually grow their businesses. "If they really want to grow," he said, "the chains will have to do more acquisitions.

"But acquisitions aside, they have to keep cap-ex at levels comparable to previous years or they will lose ground to Wal-Mart and other alternative formats. As a result, capital spending will be more defensive this year as the chains try to stay in place rather than to grow sales and earnings.

"The spending levels are justified, however, because if they don't spend the money, they stand to lose more ground in terms of sales and leveraging expenses."

Jack Murphy, an analyst with Credit Suisse First Boston, New York, said the spending levels contemplated by most chains could be too much, given the industry's slow growth. "Most companies are spending large amounts of cap-ex despite very modest sales growth, and that is putting pressure on profitability," he explained.

Murphy said he believes that growth is likely to result in declining profitability. "This is a slow-growth industry with a high degree of capital spending driving lower financial returns, and that's likely to be less attractive to potential investors. And long term, with growth rates stagnant and capital expenditures going up, there's a definite risk that opening new stores won't be as good an investment as it was in the past."

Based on corporate data and information supplied by analysts, capital-spending plans for 2002 will include the following:

WAL-MART, Bentonville, Ark., will spend an estimated $2.85 billion on supercenter expansion this year, compared with an estimated $2.75 billion a year ago, analysts said.

The company said it plans to open 180 to 185 new supercenters, including 65 to 70 new units and 110 to 115 relocations or expansions of existing discount stores, plus 15 to 20 new Neighborhood Markets, 50 new discount stores, 50 to 55 Sam's Clubs and 120 to 130 stores overseas.

According to Wal-Mart, retail space will rise by 46 million square feet, or 9% -- the largest increase in the company's history.

Wal-Mart also said it plans to build three new food-distribution centers that will open in 2003 and 2004, including one in Lewiston, Maine, and two fresh-food facilities, as well as two regional general merchandise warehouses, that will boost total distribution space by 7 million square feet.

During 2001, Wal-Mart opened 180 supercenters, including 75 new units and 105 conversions, plus 15 Neighborhood Markets, 40 discount stores, 45 Sam's and 105 overseas units -- increases totaling 40 million square feet, or 8%.

A company spokesman said most of the discount-store conversions planned for this year will be in the Midwest and Southeast, while some of the new-store construction will be in Oregon and Washington, as well as Las Vegas. The company said it does not have any immediate plans to open supercenters in California, though it is growing its discount-store base there.

David Rogers, principal at DSR Marketing System, Deerfield, Ill., said the saturation of supercenters in the south-central United States means Wal-Mart is likely to seek to grow more aggressively in the West, including the Pacific Northwest, "but it's actually going in many directions at once, so it's hard to say it will concentrate on any one area over another."

KROGER CO., Cincinnati, said it will spend $2.1 billion this year on capital projects -- the same level of spending as in 2001. However, while last year's total included the acquisition of 30 stores, this year's total does not, the company told SN.

Kroger declined to provide data on the number of projects it completed last year. However, analysts said the company opened 95 new stores, including 60 food or multidepartment stores, 28 jewelry stores and four convenience stores, and completed 130 remodels for a square-footage increase of about 4.3%.

This year Kroger is expected to open about 105 new stores, including 60 to 70 food or multidepartment stores, 15 convenience stores and 30 jewelry stores -- for a square footage increase of 4.5% -- according to analyst estimates.

However, Kroger will also be moving into the Chicago marketplace this year with three to five units of Food 4 Less, the price-impact format that has been so successful in California. The company operates 111 warehouse stores in the West, with 93 Food 4 Less units in southern California and five in Nevada, plus 13 Foodsco stores in northern California.

Analysts said they believe Food 4 Less has a good chance of success in Chicago, though it will be tough.

Jonathan Ziegler, San Francisco-based managing director for Deutsche Banc Alex. Brown, New York, said he believes Kroger's decision to open Food 4 Less in Chicago will be an interesting test "because it will be a brand new market entry with a totally new name, which is always a difficult proposition.

"However, with only a handful of Food 4 Less stores, Kroger isn't betting the ranch, and it would seem it could be a tough go. But if it works, Kroger could expand Food 4 Less into several markets with the right income strata, particularly areas with large Hispanic populations like Texas -- and Food 4 Less could be the right format for Kroger to use as it goes up against Wal-Mart."

Kroger's long-term focus will be on its combination-store and Food 4 Less formats, Ziegler said, "though it will retain the Fred Meyer multidepartment store format in the Pacific Northwest. But rather than expanding that format, it will take merchandising concepts from Fred Meyer and use them at Kroger, Ralphs, Dillon and King Soopers stores."

ALBERTSON'S, Boise, Idaho, is expected to grow net square footage by about 1% this year as it moves forward with its plans to close large numbers of underperforming stores.

Spending this year will be approximately $1.7 billion, analysts said -- about even with last year.

Analysts said Albertson's is expected to open about 80 new food stores this year -- about the same number as last year -- and complete 190 remodels -- comparable with last year's 184 remodels, for an increase in square footage of about 2.5%, compared with negative growth last year due to about 160 store closures.

The company plans to close about 130 stores this year, analysts said.

Although Albertson's executives have said the company does not plan to exit any markets completely as it closes underperforming stores, analysts said they expect the chain to leave some markets that require significant capital expenditures to be competitive with Wal-Mart -- "areas where the returns won't pencil out now that the company is more focused on returns."

Various analysts said possible exit markets could include south Texas, including Houston; Tennessee; the Oklahoma-Nebraska region; Ohio; and Daytona, Fla.

SAFEWAY, Pleasanton, Calif., is expected to spend approximately $2.1 billion on capital projects this year -- about the same level of spending as in 2001 -- to grow square footage by about 4%, analysts said.

Safeway officials declined to comment on projects planned for this year or projects completed in 2001.

Analysts estimated the company will open 75 to 85 new stores this year, including relocations, and complete about 120 remodels, compared with about 80 new stores last year, including about 50 relocations, and 120 remodels.

According to Ziegler, "It's logical to expect Safeway to allocate about the same amount to capital projects because it's basically doing what you do when you grow a stable store base. With no new distribution centers planned and excluding any possible acquisitions, sales growth will be relatively modest, and Safeway will simply maintain its ratio of capital spending to sales."

Ziegler said he anticipates Safeway will probably flesh out its store bases in Chicago and Texas while engaging in heavier remodeling activity on the West Coast, where there's less room for new stores.

Cartwright said she expects Safeway to focus capital spending in areas of high population growth, including the South and Southwest.

Another acquisition is always a possibility for Safeway, Ziegler added. "Safeway has already said it's keeping its powder dry for a share buyback in case it wants to make another acquisition."

DELHAIZE AMERICA, the Salisbury, N.C.-based division of Delhaize Group, Brussels, said it will spend $460 million this year to open 56 new stores, including 11 relocations, and to remodel or expand 137 units, for an increase in square footage of approximately 3%.

During 2001 the company said it expanded square footage by 3.8% to 44.8 million square feet, opening 47 new stores, relocating or closing eight, and remodeling or expanding 145.

According to Giblen, Delhaize America is likely to spend more in the South than the Northeast "because it's more under fire there from Wal-Mart and conventional chains like Publix and others."

He said much of the company's growth strategy is tied to Wal-Mart and/or Winn-Dixie. "In the Southeast, a lot of the spending will be offensive in terms of targeting Winn-Dixie at a time Winn-Dixie is struggling but defensive in the sense that if the company doesn't grow aggressively, it will lose share to Wal-Mart."

In the Northeast, new-store construction will be limited "because there aren't many real-estate opportunities there," he added. "But there is undoubtedly more to do there in terms of ongoing store remodelings to offer clean, fresh stores as Wal-Mart continues to grow supercenters there."

Spending at Kash n' Karry will be more offensive, Giblen said, "because Florida is still growing and Kash n' Karry is a more upscale format than Food Lion, Winn-Dixie or Wal-Mart."

A&P, Montvale, N.J., will spend $260 million this year -- about the same amount it spent in the prior year -- to complete the same number of projects -- 25 new stores and 75 remodels, analysts told SN.

"A&P's sales will run about flat this year, so it makes sense that the capital budget will remain flat," Murphy pointed out. He said A&P is likely to open new stores in some of its better markets, including metropolitan New York, Michigan and Canada -- in contrast to the company's past practice of building more widely dispersed stores.

WINN-DIXIE STORES, Jacksonville, Fla., said it is spending $140 million on capital projects this year (plus $100 million in leasehold improvements), moving up to $190 million in the fiscal year that begins in late June (including $190 million in leases), as it moves beyond its restructuring.

The company said it hopes to open 10 new stores this year while completing 60 to 70 remodels. According to a company spokesman, the chain developed a series of new prototypes based on store size at the time it began retrofitting approximately 600 stores two years ago. With the retrofitting process completed, Winn-Dixie is beginning to build those prototypes, with the first two opened late in 2001 in Pinson, Ala., and Orlando, Fla.; in addition, elements of the prototype stores are being incorporated into remodelings as they are completed, the spokesman told SN.

He declined to pinpoint the changes included in the prototypes but said they involve different merchandise adjacencies.

Murphy said he expects the number of Winn-Dixie store openings to remain modest through next year while the company focuses "on fixing its core business" through a new adverstising campaign.