FASTER, FRESHER AND BETTER

ELLIOT ZWIEBACH

OKLAHOMA CITY -- Homeland Stores here is trying to become faster, fresher and better.

David B. Clark, chairman, president and chief executive officer, told SN he's convinced Homeland is moving in the right direction.

"If you look at same-store sales as a measure of success, then we are succeeding," he said, pointing to the chain's 3% increase in the first quarter of this year and its more modest 0.2% increase in the second quarter -- against a tougher comparison, he noted -- following same-store sales declines in seven of the prior eight quarters.

"We believe our same-store sales performance is representative of the health of our existing base of supermarkets, and we have committed ourselves to strengthening that base," Clark said.

Although he declined to pinpoint the sales trend for the current quarter, which ends Sept. 12, Clark said he's optimistic Homeland can continue to improve and strengthen its operation.

Once he's completely satisfied Homeland can deliver faster, fresher and better -- faster service, fresher perishables and better consumer values -- Clark said the chain will incorporate the three adjectives into its advertising.

However, he said, he isn't sure when that will be.

"I'm very impatient, and it won't be soon enough for me," he told SN. "But we believe if we can be faster, fresher and better than the competition -- if we can find ways to satisfy our customers' needs -- then we will be in a position to co-exist with supercenters or any other format.

"That vision for the company is something we'll always be striving for, and I'm not sure anyone ever really gets there. But we believe that at some point we will feel we can claim that ground, and that's when we'll adopt the new slogan."

Until then Homeland will continue to use the slogan, "Homeland -- Working harder to be a better place to shop," which it introduced in January to replace an earlier work-in-progress phrase, "Homeland -- A good deal better."

Clark came to Homeland in February 1998, just six months after the chain emerged from a pre-arranged Chapter 11 financial reorganization. "The challenge when I came here was to re-energize the organization to focus on customers, and that's what we've been doing," he said.

With that focus in mind, Clark said his goals for Homeland include the following:

To continue to seek out acquisition possibilities from among Oklahoma's large independent sector.

To continue a modest pace of store remodels, with no plans to build new stores in the foreseeable future.

To continue to invest heavily in promotional spending to broaden its customer base.

Homeland operates 77 stores in Oklahoma, southern Kansas and the Texas Panhandle, with 1998 sales of $529 million -- an estimated 15% of the Oklahoma market in a state where independents control 49% of the market share.

The chain grew out of the former Oklahoma division of Safeway Stores -- predecessor to Pleasanton, Calif.-based Safeway -- which sold off that division and others as part of a 1986 leveraged buyout. (See related story, Page 20.)

Like the other spinoffs, Homeland ran into a cash crunch early on and decided, in 1995, to sell its distribution center here and 29 store locations to Associated Wholesale Grocers, Kansas City, Kan. With fixed costs continuing to proliferate, the company went through a financial reorganization a year later.

Since completing the reorganization in mid-1996, Homeland has grown primarily through acquisition, adding four stores in 1997 and nine Apple Markets in eastern Oklahoma earlier this year -- including five of the 29 stores the chain had spun off to AWG customers four years ago.

Clark left his position as senior vice president of merchandising and distribution at Bruno's, Birmingham, Ala., to succeed James Demme as Homeland's chairman and CEO when Demme, coincidentally, left Homeland to head Bruno's.

By the time he arrived, Clark acknowledged, Homeland had already begun turning itself around -- by expanding its perishables offerings, developing a program of hot ad specials and introducing its Homeland Savings Card.

His mission, Clark said, was to broaden the chain's appeal. "Our research showed our core customer was slightly older with slightly lower income and smaller families, and while we don't want to ignore that core base, we want to expand our appeal to a younger customer with a larger family and a moderate to high income who is looking for convenience, freshness and value," he explained.

"But we want to distance ourselves from peripheral customers who are driven by price -- younger shoppers with small families who are income-constrained and who tend to gravitate to a supercenter. That still leaves us with a sizable market."

Accordingly, Homeland adopted a three-pronged strategy, Clark said, that stressed convenience (of location, store design, product assortment, services and speed); freshness (in terms of product standards, packaging and displays); and value (translated as competitive pricing, strong promotions and relationship marketing).

Homeland's sales last year rose 2.3% to $529 million. Clark declined to predict this year's volume.

He said earnings will continue to be affected by Homeland's investments in promotional spending "to maintain our market share.

"We're still spending to generate new customers, and given the competitive nature of this market, with expectations of more stores from Albertson's and Wal-Mart, we intend to keep up the promotional pressure, which is simply part of the way we go to market."

Homeland operates in four primary marketing areas: Oklahoma City, where its 21 stores have an estimated market share of 13%, second to Albertson's 16%; Tulsa, Okla., 18 stores, with a share of about 13%, second to Albertson's 21%; Amarillo, Texas, where its five stores have a 20% share, behind United Supermarkets, Lubbock, Texas; and 33 rural stores spread over its three-state operating area.

Two of its competitors are price-driven -- Albertson's and Wal-Mart supercenters -- and two others are high-low chains -- Baker's Supermarkets, Omaha, Neb., and United Supermarkets. Adding to the mix will be Wal-Mart's first local Neighborhood Market, which is scheduled to open here later this year, Clark pointed out.

Clark said he feels Homeland has an edge over supercenters and other larger-format stores "because convenience is a big factor. People want to get in and out quickly, to be waited on by friendly personnel and to find products that are fresh and in-stock.

"So we have to focus on our strategy and the way we go to market, and we have to play our own game, not theirs."

Industry observers see the competitive threat as Homeland's biggest hurdle.

"Despite its growth through acquisition, Homeland has to go up against some very formidable competitors in its primary markets, which makes for a very difficult operating environment," Ted Bernstein, a high-yield securities analyst with Grantchester Securities, New York, told SN.

"The increase in Homeland's same-store sales indicates that its efforts are having some impact and the company is probably doing a better job, although the 3% gain in the first quarter was up against a negative 4.4% the year before and the 0.2% gain in the second quarter was against a gain of 0.4% the year before, so both comparisons were relatively easy."

With operating cash flow relatively flat, Bernstein said, "it's clear Homeland is feeling some margin pressure because of the competitive environment, requiring more promotions to sustain its same-store sales growth.

"But management is being as proactive as it can be and attempting to grow the store base and respond to competition with strong promotions, so it's not taking things lying down. But the situation has not improved significantly over the past year, and it will continue to be tough for Homeland to make headway."

Another securities analyst, who asked not to be named, said the wide-open spaces of Oklahoma make it easy for more deeply pocketed competitors to continue to build new stores, "and with only 77 stores, Homeland cannot generate the economies of scale it needs to survive long-term."

Clark told SN he remains optimistic, pointing out the potential for growth through acquisition of the area's large number of independent operators. "Independents have remained strong in this part of the country because AWG and Fleming -- and at one time Scrivner -- have been strong wholesalers that have served this area effectively, and that legacy is still with us," he explained.

Homeland completed the acquisition of nine Apple Markets in eastern Oklahoma earlier this year, and it's actively looking for additional opportunities, Clark said. "There are a lot of operators out there with five to 15 stores, and we're willing to look at all opportunities. "And as the pressure to become larger increases, it's an advantage for some of those smaller companies to merge with a larger business like ours."

Wayne Peterson, Homeland's chief financial officer, told SN the chain is very proactive in seeking acquisitions, though he said he was reluctant to predict when the next one would be or how many stores the company is likely to add this year or next.

"It's difficult to predict," Peterson said, "because each situation takes a varying amount of time to complete, so it's hard to put a timeframe or number on it."

Financing is not a problem, he added, with $10 million of its $49.9 million line of credit available for acquisitions. "Our bank group, headed by National Bank of Canada, has been good to work with, and they increased our line of credit late last year."

According to Peterson, Oklahoma's statewide population of 4 million means Homeland has lower per-store volumes than others in the industry, though the square footage per capita is higher.

Homeland's stores average just over 37,000 square feet, and while the chain doesn't have a prototype, it prefers stores in the 40,000- to 45,000-square-foot range, Clark said. But he does not see size as a problem.

"There is a place for smaller-sized stores that are convenient for customers and that can still provide a one-stop shopping experience," he said.

"You don't need 65,000 or 70,000 square feet -- we think we can accomplish our mission in stores of 45,000 feet or smaller.

"Although 45,000 is the optimal size for us, we have a variety of sizes to work with, and we can achieve our mission in any size. In a rural area we can achieve a lot of value in a store of 20,000 to 25,000 square feet."

Homeland's largest store is a 100,000-square-foot edifice in Amarillo, Texas, that it acquired in 1995. "But it has a tremendous backroom, and the selling area is only 65,000 feet," Clark said.

"Although we've remodeled it over the years and added some of our own elements, we've kept the large tortilleria and scratch bakery we inherited when we bought the store."

At the other end of the spectrum are the Apple Markets, which run in the 15,000- to 20,000-square-foot range. "They are primarily in rural markets and are able to serve the needs of customers there," Clark said.

Homeland has no plans to build any new stores, he noted. "We won't rule it out, but we feel there is already plenty of square footage in the marketplace, and our spending priorities are to upgrade existing facilities and look for potential acquisitions.

"We like the 40,000- to 45,000-square-foot store, and although we have no such prototype on the drawing board, we're remodeling stores and expanding them to bring them up to that range," Clark said.

Homeland completed seven remodels last year, including one expansion, and will complete four this year, including two that have already been done. Those stores, in Edmond, Okla., and here, both involved expansions of 10,000 square feet to bring them up to the 44,000-square-foot range, Clark said.

Two more stores -- a 40,000-square-foot unit in Amarillo and a 45,000-square-foot location in Tulsa -- will be remodeled later this year, Clark said.

"Our primary mission in remodelings is to update the fresh departments," he said, with expanded deli-bakeries, increased selections of hot foods-to-go, expanded floral sections and additional refrigerated space to accommodate new racking for packaged salads and other growing produce categories.

Remodelings also give Homeland the opportunity to tailor the assortment of groceries and health and beauty care items to the specific needs of each store as well as to upgrade the facilities with new lighting, decor and infrastructure improvements where needed, Clark noted.

"Our focus in remodels is to deliver what customers tell us they like," he said. "For example, in hot foods we execute a simple menu and try to concentrate on value-added products that we create, as well as manufactured ready-to-serve products and convenience meals for kids."

Homeland also is expanding the frozen-food departments in its remodels to offer more convenience foods, including frozen meat entrees and full dinners, "because that's what customers tell us they want," Clark said.

Homeland has pharmacies at 44 stores, and they are being added at remodeled units where space allows, he said.

He declined to pinpoint sales increases resulting from remodelings, noting only that the increases "are meeting our expectations."

Although he acknowledged the company has not yet set its capital budget for next year, he said Homeland typically allocates about $10 million a year for capital expenditures -- the amount it spent this year and last year, he said.

Part of Homeland's promotional positioning involves use of its frequent-shopper cards. "We're very aggressive about marketing the card and communicating its value," Clark noted.

He said only one competitor has a card program -- Baker's, which introduced its card in mid-1998, about a year after it entered the market here. "But we've continued to increase our penetration," Clark said, noting the Homeland cards are involved in 80% of the chain's transactions.

When Homeland sold its distribution center to AWG four years ago, it also signed a seven-year supply agreement that Clark said has resulted in a good working relationship between the two companies.

"We view AWG as our partners, and we're very proactive with them, sharing our mission and working with them on the cost of goods, logistics and promotional planning, and we've found them to be very responsive to our needs," he said.

"Our challenge is to stay on the same playing field with companies with captive facilities, so we're constantly working with AWG to lower our cost of goods through supply-chain initiatives such as cross-docking and investment buying and by attempting to optimize delivery loads and learning to maximize our promotional dollars."

Homeland is also working closely with vendors to find ways to make its promotional programs work more effectively, Clark said. "We're trying to look at store assortments and to work with vendors to better understand our customers in each area. We still have a lot of work to do in that regard, but that's what we need to do to be convenient," he explained.

While customers in Oklahoma and southern Kansas tend to be homogeneous, there are some differences among customers in the Texas Panhandle, Clark said, "and we're constantly trying to understand them better. Amarillo is only four hours from here, so we feel we are very much in touch with our customers there.

"But the demographics are different. There's a higher Hispanic population in the Panhandle, which translates to different merchandising opportunities, and there's a strong retired military population there, which tends to be older."