OUTLOOK 2000

ELLIOT ZWIEBACH

Executives will be closely gauging the results of industry mergers and integrations this year in order to forecast how their companies will be impacted by consolidation.

Facing the effects of consolidation is one of the main challenges on the minds of retail and wholesale executives as they enter the new year, according to interviews conducted by SN. Other key areas of focus include the growing consumer interest in healthier foods and the goal of maintaining an adequate workforce.

"This is the year we'll see the full impact of previous merger activity by Kroger, Albertson's and Safeway," Al Plamann, president and chief executive officer of Unified Western Grocers, Los Angeles, told SN. "This will be the bellwether year for seeing how the synergies from those national retailers' mergers are going to play out in local marketplaces across the country."

Carole Bitter, president and chief executive officer of Friedman's, Butler, Pa., predicted that "by the third and fourth quarters of 2000 we will see if the economies of scale are clicking in the major industry mergers," she said.

If those economies of scale do develop, it will challenge the ingenuity of the rest of the industry to find ways to compete, Rich Parkinson, president and CEO of Associated Food Stores, Salt Lake City, pointed out. "One of the biggest challenges is seeing how the independent sector will compete with the five entities (Wal-Mart, Kroger, Albertson's, Safeway and Ahold) that control more than 40% of the industry's volume, in terms of their relationships with suppliers," he said.

While noting that the larger operators are likely to get a comparable cost of goods, "they will lose flexibility," Parkinson said, "and that represents a great opportunity for companies who have the ability to change to meet regional needs."

Plamann also said companies with less buying clout must find ways to get better deals from suppliers. "As the larger companies continue to put pressure on vendors, it heightens the importance of reaching some resolution of our own with vendors because the impact of the larger players' clout will become obvious at shelf level," he explained.

Jack Brown, chairman, president and CEO of Stater Bros. Markets, Colton, Calif., said he believes consolidation among larger chains gives smaller retailers a clear opportunity to serve customers better. "The focus of most chains, particularly those that are highly leveraged, is on the bottom line and shareholder equity, not taking care of customers," Brown said.

"Most major chains are leveraged, their stocks are down and they're in a real crunch for earnings, and that is causing them to lose focus on customers. At Stater Bros. we think volume is available from companies that can't give customers true service."

Gerald Lestina, president and CEO of Roundy's, Pewaukee, Wis., said ongoing consolidation will offer new opportunities for wholesalers "with the wherewithal to operate retail stores and control their own destiny."

Two Western executives expressed concerns about Wal-Mart.

"Obviously the continued growth of Wal-Mart supercenters is an issue here in the Southwest," Tom Dahlen, president and CEO of Furr's Supermarkets, Albuquerque, N.M., told SN. "We've spent a lot of time looking at stores that reportedly do well competing with Wal-Mart because any time there's new competition, it requires you to refresh your thinking, and that's what we're doing."

According to Plamann, "Wal-Mart is getting more aggressive in more areas, and we will continue to see competitive marketplaces all over the United States"

Ron Pearson, president and CEO of Hy-Vee Food Stores, Des Moines, Iowa, told SN he believes consumers are becoming more interested in seeking out healthier foods. "Our focus right now is on carrying more healthy foods -- organics, natural and kosher foods," he said, "because we believe food safety will become more important to consumers in the years ahead and people will pay more attention to what they consume."

Lestina said Roundy's plans to expand its health food offerings this year, including vitamins, natural foods and organic meats and produce. "We think the future for those categories is absolutely unlimited," he said. "Our plan is to do the research-and-development at corporate stores, then offer it to [retail] customers as quickly as we can -- probably by the end of the first quarter."

For Pearson, another major industry challenge is recruiting and retaining personnel. "We operate in a high-service industry that customers rely on for good service, and everyone is scrambling for jobs," he said.

However, "people in their 30's and younger are not particularly interested in our business," he said, "and it's tough to keep a good labor force. So we expect more applications of automation to creep in as we look for ways to rely less on physical labor in our new warehouse."

Christian Haub, president and CEO of A&P, Montvale, N.J., was also thinking about workforce issues, noting that A&P's "greatest challenge and greatest opportunity is to make those who connect us to the consumer our biggest competitive advantage. We need to ensure that our management drives the essence and urgency of our new core values and operating principles throughout the entire organization and to deliver the tools and training that will enable our skills to match our spirit."

Among the executives' other observations:

Bitter said she expects a sluggish first quarter because of fourth-quarter stockpiling in anticipation of Y2K. However, she said she expects the economy to remain strong leading up to next fall's election, "but same-store sales will be hard to come by, though they will still be positive, and profits will be good."

Roundy's plans to "hit the ground running" this year with installations of above-ground, self-contained gasoline stations, Lestina said. He said the wholesaler hopes to add 24 locations this year to the single test site it opened in 1999, and it hopes to expand the concept to incorporate drive-through kiosks "for people on their way home from work who want to fill up on gas while picking up some staple groceries."

Plamann said he expects a shakeout this year among dot-com companies. "Someone will find a solution to the cost equation, and that could have a major impact in urban areas," he said.

The executives' complete comments follow:

Carole Bitter president, ceo Friedman's, Butler, Pa.

We think the first quarter will be sluggish because of stockpiling in the fourth quarter, as people work off their food inventories at home. We think there was a lot of overspending at retail at the end of 1999, so people will be more conservative in their spending in the new year.

We also see industry consolidation continuing but at a slower pace. By the third and fourth quarters of 2000 we will see if the economies of scale are clicking in the major industry mergers.

The year 2000 will have a fairly strong economy leading up to the elections, with decent sales. But same-store sales will be hard to come by, though they will still be positive, and profits will be good.

For our company, we just spent $1.8 million to enlarge and remodel two stores, and we have one more major remodel and one minor remodel planned. And we're looking at acquiring stores, including a small company in a complementary business [which she declined to pinpoint]. We're looking at acquisitions because there are opportunities as wholesalers divest smaller stores and independents look to sell out.

Rich Parkinson president, ceo Associated Food Stores, Salt Lake City

One of the biggest challenges for the industry is seeing how the economies of scale from past mergers develop and how the different channels of distribution are affected -- in other words, how the independent sector will compete with the five entities (Wal-Mart, Kroger, Albertson's, Safeway and Ahold) that control more than 40% of the industry's volume, in terms of their relationships with suppliers.

There's no question what impact Wal-Mart's relationship with suppliers has had, and assuming the other four companies get the same scale, what will that mean to vendors and what consequences will it have for independent channels?

What it will mean is, we will differentiate ourselves even more by the types of deals between channels because we will undoubtedly have less clout with manufacturers.

But there will be other ways we can differentiate ourselves. The larger companies will be able to get a comparable cost of goods, but they will lose flexibility, and that represents a great opportunity for companies who have the ability to change to meet regional needs, whereas the standardized programs by the chains will make it difficult for them to maintain flexibility.

For our company, the biggest challenge will be to maintain an adequate labor force to get the job done. In the market economy of the Intermountain West, people in their 30s and younger are not particularly interested in our business, and it's tough to keep a good labor force.

But while we've always been competitive in pay and benefits, there's a lack of interest on the part of the new generation. So we expect more applications of automation to creep in. We won't be fully automated, but we are looking for ways to include more automation in our new warehouse to rely less on physical labor. [That 800,000-square-foot warehouse, which will begin construction next spring and take about 14 months to build, will replace existing frozen, grocery and meat facilities at three locations.]

Gerald Lestina president, ceo Roundy's, Pewaukee, Wis.

We anticipate additional industry consolidation, and that will result in more wholesalers with the wherewithal to operate retail stores and control their own destiny.

The good news for Roundy's is 35% of our annual revenue comes from corporate stores, and with our licensing agreements, we control 55% of our volume, which is a good mark for a wholesaler.

The other thing we're looking forward to is to hit the ground running in 2000 with installations of above-ground, self-contained, portable gasoline stations. It's too early to say how many we'll install. We've tested one at a store in Eau Claire, Wis., and we're now negotiating with various oil companies to expand our base. I assume we can probably add 24 locations during the new year.

It's a value-added service we think we can offer at larger stores, where gas stations will be an additional traffic draw, and we hope it will evolve into drive-through kiosks for people on the way home from work who want to fill up on gas while picking up some staple groceries.

Also in its infancy, which we plan to expand in 2000, is natural and organic stores within a store. including vitamins, natural foods, organic produce and meats. We think the future for those categories is absolutely unlimited. We've looked at a lot of different concepts around the country, and we find those doing it are each a little bit different.

Our plan is to do the research and development at corporate stores, then offer it to customers as quickly as we can. We've already started on a limited basis, testing categories as we go, then expanding, and we think we'll be ready to begin rolling them out by the end of the first quarter of 2000.

Jack Brown chairman, president, ceo Stater Bros. Markets, Colton, Calif.

I was at a meeting recently with several retired supermarket executives, and the question was asked, are customers better served today, with all the technology available, than they were 30 years ago? I would say customers are being served very well, but they're not getting as much personal service as they used to, given today's use of scanners and all the up-front technology.

It's just a feeling I have that the focus of most chains, particulary those that are highly leveraged, is on the bottom line and shareholder equity, not taking care of customers, which we at Stater Bros. believe in. Most major chains are leveraged, their stocks are down and they're in a real crunch for earnings, and that is causing them to lose focus on customers.

At Stater Bros., we think the volume is available out there. Our motto is GGI -- go get it! That volume is available from companies that can't give customers true service, and that's what we give, led by our service meat departments and by service fish, floral, bakery and deli departments that we inherited when we acquired 43 Lucky stores from Albertson's. We're now retrofitting those departments into our existing stores where we can, and we're also taking some of their programs and moving them to existing stores.

We're trying to benefit from the synergies. We've always had good ideas at Stater but we've also gotten some good ideas from Lucky, and we're trying to build employee cultures and synergies on those merchandising programs.

Christian Haub president, ceo A&P, Montvale, N.J.

The greatest challenge for A&P is accelerating the momentum of the customer-focused culture change that's underway. Over the past 18 months our people have been instrumental in generating a sustained identical-store sales trend that is among the best in the industry, and while we're pleased, we know it's just a good start and that our top- and bottom-line results are not uniformly excellent throughout the company.

We need to ensure that our management drives the essence and urgency of our new core values and operating principles throughout the entire organization and retail network and to deliver the tools and training that will enable our skills to match our spirit.

Building stores and their support structure is a matter of capital, organization and planning. But in the end everyday excellence at retail is determined by the quality and commitment of people. Our greatest challenge, and our greatest opportunity, is to make those who connect us to the consumer our biggest competitive advantage.

Tom Dahlen president, ceo Furr's Supermarkets, Albuquerque N.M.

Obviously the continued growth of Wal-Mart supercenters is an issue here in the Southwest. An article I read described Wal-Mart as the plague of the supermarket business, and its presence is an issue, despite the fact Wal-Mart contends it isn't destroying the industry.

We've spent a lot of time looking at stores that reportedly do well competing with Wal-Mart. We've done our fair share of market tours to look at the things they do differently.

We have a number of stores competing with Wal-Mart in Albuquerque and El Paso, and that requires us to operate somewhat differently at those locations because anytime there's new competition, it requires you to refresh your thinking, and that's what we're doing.

Ron Pearson chairman, president Hy-Vee Stores, Des Moines, Iowa

The biggest challenge for the industry is recruiting and retaining the right people to work in a service industry. Everyone is scrambling for jobs, and we operate in a high-service industry that customers rely on for good service, which is what distinguishes us from the competition.

One of the most important challenges for Hy-Vee is continuing to review our offerings in great detail to be sure we're in tune with customers' lifestyles today and to focus on what's ahead for the next four or five years. That's been our forte for the past 12 to 15 years, and it's one factor that has helped us get bigger and better and become more profitable.

Our focus right now is on carrying more healthy foods -- organics, natural and kosher foods -- all health-related items that are a major consumer concern. We believe food safety will become more important to consumers in the years ahead and people will pay more attention to what they consume.

Al Plamann president, ceo Unified Western Grocers, Los Angeles

Obviously there are still significant challenges from consolidation in the industry. But this is the year we'll see the full impact of previous merger activity by Kroger, Albertson's and Safeway as they get their synergies in place. So this will be the bellwether year seeing how the synergies from those national retailers' mergers are going to play out in local marketplaces across the country.

And Wal-Mart is getting more aggressive in the United States.

And it's still not clear what the role of foreign investors will be. I don't believe European companies that are already in the United States are anxious to pull out, and we may still see more companies get involved here. Carrefour, for example, has nowhere else to go in Europe and they'll have to look somewhere else. So it would be a mistake to assume it can't happen.

Another challenge will be a shakeout in the dot-com companies. Someone will find a solution to the cost equation, and that could have a major impact in urban areas.

For Unified Western Grocers, the challenge is continuing the process of transitioning toward a merged entity [that combined Certified Grocers of California, Los Angeles, and United Grocers, Portland, Ore.]. We will be consolidating facilities in northern California in 2000 and looking to grow our business in Oregon and Washington. We will always look at cost structures throughout the entire merged company very carefully, and in some cases we will introduce retail programs in Oregon that have been successful in southern California.

Retailers in Oregon are facing more competition as Fred Meyer gets stronger as part of the Kroger organization, and retailers in northern California will continue to face strong competition from Safeway, Albertson's and Kroger, and that will put pressure on Unified to help our members find ways to compete.

Another challenge for our company and the industry is to come up with solutions that allow retailers to get support from vendors on deals, new-item introductions and promotions. It's an evolving thing that we've been working on for years, but as the larger companies continue to put pressure on vendors, it heightens the importance of reaching some resolution of our own with vendors because the impact of the larger players' clout will be obvious at shelf level.