GROWTH FORMULA

Michael Harrison / Elliot Zwiebach

Top supermarket companies have found a winning formula for growth and they seem to be sticking with it. Major industry players reported that more of their 1999 capital-expenditure dollars would be spent on store remodelings and relocations than on new store openings -- similar to findings in a 1998 survey conducted by SN.

The companies -- including some of the more active ones on the consolidation scene -- are increasing their budget allocations for capital projects, though most are not doing so drastically. Among the companies surveyed, square footage will increase an average of approximately 4% to 5.5%, with one, Food Lion, saying it expects to increase its square footage by 7%, compared with 7.7% a year ago.

Wal-Mart Supercenters said it plans to open between 120 and 125 new stores, with approximately 90 of them coming from relocated or expanded Wal-Marts, while Safeway reportedly plans to vastly remodel more stores than it will open. Shaw's Supermarkets will spend about the same as it did last year on new openings and remodels, and Winn-Dixie Stores has increased its capital-expenditure budget notably to pay for more remodels and expansions than it undertook in 1998.

Harvey Gutman, senior vice president of retail development for Pathmark Stores, said, "Our [capital-project] philosophy of focusing our capital on things that make a difference in our stores -- things our customers can see -- continues." Pathmark, according to Gutman, is one of the few chains spending substantially more on capital projects in 1999 than it did last year.

Michael Read, a spokesman for Albertson's, said that company's cap-ex plans are in flux because of the pending acquisition of American Stores Co., Salt Lake City.

"It's kind of a work in progress because of the merger," he said, and "some of the numbers may be revised as we're going forward." The core plan, however, calls for more than 100 new stores and a "substantial" -- though as-yet undetermined -- number of remodels, according to Read.

"To cap-ex or not cap-ex, that is no longer the question," said analyst Gary Giblen, a New York-based analyst for NationsBanc Montgomery Securities, San Francisco. "I cannot recall the industry ever being a more wonderful place for deriving more yield on capital expenditures than it is now." According to Giblen, "there's been no consistent shift in either direction," since last year in major supermarket companies' capital-expenditure plans.

"It's hard to create more capacity unless you're in geographies with growing populations and it's harder to be more profitable by [new openings] than it is by remodeling. If you have a store that can really benefit from remodeling, that will probably give you more return than trying to squeeze a new store in."

Jonathan Ziegler, a San Francisco-based analyst with Salomon Smith Barney, New York, said, "With consolidation, companies decide to grow by acquiring existing properties and then remodeling what they've acquired, so there's definitely more remodeling activity going on this year.

"With remodeling, you get a better bang for your buck because it gives you a quicker return on your investment. Remodelings give you a nice bump in sales and margin mix that you don't get as quickly when you put up a new store."

Lisa Cartwright, an analyst with J.P. Morgan, New York, echoed that sentiment. "When you grow the top line through acquisitions, it's a better use of capital to relocate or expand stores that need it," she said.

Following are comments by the chains, and by securities analysts who follow them, about capital spending plans for 1999:

KROGER CO., Cincinnati, plans to spend approximately $1.5 billion this year, reflecting about $800 million to $850 million for its existing store base and $700 million for Fred Meyer Inc., Portland, Ore., whose acquisition it will complete in the next couple of months. That represents about 3.5% of projected sales of $43 billion. The company spent $922 million on capital projects last year.

Lynn Marmer, Kroger's group vice president for corporate affairs, told SN the company will expand capacity by 4.25% in 1999. That includes 21 expansions and 39 relocations, she said.

She declined to say how many projects involved Fred Meyer stores.

According to Ziegler, "Both Kroger and Fred Meyer already have excellent store bases, with nothing in glaring need of fixing.

"But Kroger is in the path of the Neighborhood Stores that Wal-Mart will be expanding, and while those stores will not be much of a threat in 1999, Kroger will need to keep its stores in good shape because of future Wal-Mart openings."

Ziegler also noted that Fred Meyer is expanding its Seattle distribution center, "and that will become a Kroger project this year."

Analyst Debra Levin, Morgan Stanley Dean Witter, New York, said most of what Kroger will do this year involves filling in stores within existing operating areas, with possibly a heavier concentration in areas of large population growth, including the Southeast.

She said she expects Kroger to expand total square footage by 4% to 5% this year. Meredith Adler, an analyst with Lehman Bros., New York, said Kroger is likely to slow new-store expansion to concentrate more on expansions and remodelings.

"I have no problem with their choices," said Chuck Cerankosky, an analyst with McDonald & Co., Cleveland. "It's hard to find fault with a capital program that includes mostly new stores and further developing existing stores. In same-store sales they reported good numbers in 1998 as compared to 1997, compared to '96; there's an upward trend there."

According to Giblen, "Kroger can barely contain their enthusiasm. Talk about operating return on assets. You have this confluence of circumstance: management has improved its discipline on cap-ex at the same time the industry became very profitable and more aggressive in spending as a percentage of sales.

"Like anything else, the rich get richer, the poor get poorer."

ALBERTSON'S, Boise, Idaho, will reportedly spend $2 billion on cap-ex, including $1 billion originally earmarked by American Stores Co., which it will acquire shortly.

Read said the company's core plan calls for spending about 90% of its cap-ex dollars on building and remodeling. That includes 135 new stores, 95 of which will be combination food/drug stores and another 40 stand-alone drug stores.

A five-year plan released by the company last year called for a 5.8% increase in square footage for 1999, followed by a 7.9% increase in 2000. "I think their square-foot growth is going to be mostly for fill-in stores," Cartwright said.

"I don't see them entering new markets."

According to Cerankosky, "Historically, Albertson's has done a lot of internal store development. "The most interesting thing is, like Kroger, they're going to spend a lot on store expansions. Their capital budget can be expected to be about $2 billion and there will be a small push to upgrade the American stores and accelerate drug-store openings." "American Stores tended to rotate where it invested cap-ex," said Adler. "One year it was Acme, another year it was Lucky, another it was drug stores. It always seemed the company had $1 billion to spend and wouldn't spend more than that, even though other opportunities existed."

Levin added, "Albertson's is likely to pick up the pace from what American Stores was going to do because Albertson's has deeper pockets, so it can spend more money for things American Stores was constrained from doing.

"As a result, there are a lot of stores that need to be updated, remodeled or replaced, especially at Lucky [in southern California] and Acme [in Pennsylvania and New Jersey]."

Ziegler said he expects Albertson's to open stand-alone drug stores in markets where it already operates combination stores, such as Texas, Missouri and Tennessee, and to open supermarkets in areas where American already operates drug stores, such as Kansas City.

WAL-MART SUPERCENTERS, Bentonville, Ark., plans to spend $4 billion this year. According to the company's annual report, "Supercenters will lead Wal-Mart's domestic growth in the future. Acceptance of these has exceeded our expectations, and we plan to add an additional 120 to 125 units domestically in the coming year."

"Wal-Mart is ramping up the number of supercenters every year, and it usually opens more in a given year than it says it will open," Levin said.

SAFEWAY, Pleasanton, Calif., reportedly plans to spend $980 million this year, or nearly 4% of sales, compared with $850 million in 1998. Plans call for 30 to 40 new stores and a minimum of 200 remodelings, observers said.

Cartwright said she expects the company to expand its capacity by 3% through remodeling. However, noting a recent expansion of Safeway's Washington-area distribution facility, "I think I expect them to make more acquisitions," she said.

"I expect [Safeway] to focus on the East Coast or through the Southwest into Texas," Cartwright added.

According to Adler, Safeway is likely to maintain spending levels at Dominick's Supermarkets -- the Chicago-area chain it acquired in November -- at the same high levels the company would have spent individually .... ; and to increase capital spending at Carr Gottstein Foods, Anchorage, Alaska, once Safeway's acquisition is completed.

"Safeway will probably not do much to alter either chain's expansion plans this year because those plans were set months ago," she added, "but by the end of 1999 and moving forward into 2000 you'll begin seeing more projects in the pipeline that reflect Safeway's plans."

Until then, Adler said, Safeway is likely to concentrate on remodelings and expansions "because its stores are so dominant in the markets in which it operates that there's not a lot of new-store opportunities."

Much of the increase in Safeway's cap-ex budget this year comes from Dominick's, Levin pointed out, which had aggressive pre-acquisition growth plans to increase square footage by about 10%, "and Safeway won't disrupt those plans," she said.

Ziegler said he believes most Safeway stores are in good shape because of past remodeling activity, "though Safeway has not yet touched some markets where stores need a bit of work, such as northern California and Colorado."

WINN-DIXIE STORES, Jacksonville, Fla., plans to spend approximately $800 million -- which is $430.4 million or 116.5% more than it did for capital programs in fiscal 1998. The company plans to open 80 new stores, for a square-footage increase of 4.8%, according to its annual report.

Of 1,179 Winn-Dixie stores, 986 are larger than 35,000 square feet, the company said, including 787 Marketplace units. Stores opened during the second half of 1998 averaged nearly 51,000 square feet, the company said.

"Winn-Dixie's goal has to be to win back market share in the Southeast, and it's moving in the right direction by continuing to open Marketplace stores," Ziegler said. "However, the company still has a lot of smaller stores it has to close.

"Winn-Dixie has to accelerate spending because so many stores still need remodeling or expansion. With sales so sluggish, Winn-Dixie knows that it has to open more larger stores, and although the company has been doing that for a while, sales and earnings still seem sluggish."

Adler said Winn-Dixie has been slowing capital spending "because it's already done a lot of upgrading and it wants to pay down some debt."

A&P, Montvale, N.J., will spend in the neighborhood of $1.5 billion, Carrano .... said. The focus will be on the new prototype stores that will feature in-store banks, pharmacies and expanded departments across the board.

A&P is stepping up the rate of expansions and remodelings, along with opening new stores, Levin said.

The company, according to Giblen, "is spending a little less [than it used to], but is getting much better returns. A&P underinvested a couple of years ago, but now they've started spending at a more competitive level."

As previously reported in SN, A&P will invest more than $400 million in capital improvements, including at least 50 new stores in fiscal 1999. It also plans to remodel or enlarge approximately 75 stores. The company said it plans to roll out an undetermined number of new, 50,000- to 60,000-square-foot prototype superstores in 1999.

FOOD LION, Salisbury, N.C., said it expects to spend $390 million this year, compared with $360 million in 1998, to boost square footage by 7%. In addition, Food Lion has said it will renovate and/or expand 140 stores. Of the company's 90 Kash n' Karry stores in west central Florida, 12 will be expanded and another 10 are slated for remodeling, Food Lion said.

In 1999, 14 replacement stores for Food Lion and one for Kash n' Karry will be opened, the company said.

"We are still seeing 15% sales increases at remodeled stores. Those stores have a customer base, so if you can grow on existing stores it costs less to remodel than to build," said Chris Ahearn, corporate communications manager, Food Lion.

In 1998, the company added 79 new stores, closed 12 and remodeled or expanded 141 others. The expanded stores gained an average 7.7% of square footage last year and Food Lion expects the same this year.

"Like Winn-Dixie, Food Lion needs to continue to get store expansions done to bring its average store size up," Ziegler said. "Food Lion's average store today is 33,000 square feet, while its prototype is 38,000 to 39,000 square feet.

"So it needs to continue to modernize and remodel existing stores to rejigger its traffic flow and, where space is available, it needs to build more stores in the larger size."

According to Cerankosky, "They celebrated good same-store sales and invested money in the right locations last year, so I think you'll see Food Lion spending to add another 7% to 8% to its square footage and focus on developing the chain. "They're making a big effort to expand the store base."

Adler also said the company is spending a lot of money on store expansions to add more service departments, "especially bakeries," she said.

Cartwright said Food Lion, because it "is in a high-growth area" and "not as multiregional" as other large chains, "can support that kind of square footage."

Further, "I think you can project them to add more stores in Florida and keep spending in the North territory," perhaps "with more stores in Delaware. I would think they will have to make another acquisition," she said.

PATHMARK STORES, Carteret, N.J., increased its capital-expenditure budget from $60 million in fiscal 1998 to $100 million. The company plans to open four new stores and remodel or enlarge approximately 40 others, Gutman said.

"Last year, we remodeled less than 20 and did not open any stores," he said. "We continue to see good investment opportunities in our existing trading areas and excellent returns from modernizing our existing stores."

Gutman said Pathmark will increase square footage by 3% to 4% and plans to devote 3% of a $3.7 billion sales base to capital projects. "We have outsourced a substantial amount of our distribution and since we don't have to invest that much in distribution, we have more to spend on [cap-ex]," he said.

SHAW'S SUPERMARKETS, East Bridgewater, Mass., which acquired 53 supermarkets from Star Markets Co., Cambridge, Mass., will spend approximately $94 million on three new store openings, "five or six remodels and expansions" and one relocation in 1999, according to Bernie Rogan, director of corporate communications.

In 1998, the company opened eight new stores, remodeled seven and relocated two, according to Rogan, who said Shaw's spent "about the same" amount on capital projects last year as it plans to in 1999.

CAP. BUDGET

FISCAL YEAR (in $ millions) PROJECTS CHANGE

1/1/99-12/31/99 $1,500 (e) *21 remodels/

expansions, 39 relocations 62.7%

Kroger Co.1/1/98-12/31/98 $922 N/A**

1/29/99-1/27/00 $1,700 135 new, 100 remodels/

expansions 116.6%

Albertson's1/30/98-1/28/99 $78565 new, 50 remodels

/expansions

Wal-Mart 2/1/99-1/31/00 $4,000 120-125 new, 90 relocations/

expansions 21.2%

Supercenters2/1/98-1/31/99 $3,300 35 new, 90 relocations/

expansions

1/3/99-1/4/00 $1,200 55-60 new, 250 remodels Unchanged

Safeway 1/4/98-1/2/99 $1,200 46 new, 238 remodels

Winn-Dixie 6/25/98-6/23/99 $80080 new, 136 expansions/

remodels 116.5%

Stores 6/26/97-6/24/98 $37079 new, 141 expansions/

relocations

3/1/99-2/26/00 $400 (e) 50 new, 75 remodels/

expansions 33.33%

A&P 3/1/98-2/27/99 $300 37 new, 60 remodels

1/3/99-1/1/00 $390 (e) 80 new, 140 remodels/expansions

8.33%

Food Lion 1/4/98-1/2/99 $360 79 new, 141 remodels/

expansions

Pathmark 2/1/99-1/30/00 $100 4 new, 40 remodels/

expansions 66.7

Stores 2/1/98-1/31/99 $600 new, 18 remodels/

expansions

Shaw's 3/1/99-2/27/00 $94 (e) 8 new (e), 7 remodels/expansions, 2 relocations Unchanged

Supermarkets 3/1/98-2/28/99 $94 3 new, 5-6 remodels/

expansions (e)

Footnotes: N/A = not available; (e) = estimate; * $800 million to $850 million for existing store base, $700 million for capital projects on Fred Meyer stores the company is acquiring.

** The company said its remodels, expansions and new store acquisitions totaled 96; the company declined to break the figure down into categories.