PATHMARK CHIEF MAPS WAY TO GROW IN CHANGING MARKET

DAVID MERREFIELD

WHITE SULPHUR SPRINGS, W.Va. -- Does Pathmark Stores want everyone to start stealing?

Pathmark's top executive said last week he encourages every store associate to start stealing -- stealing market share, that is.

During a presentation at the 90th annual executive conference of the Grocery Manufacturers of America here, James Donald, chairman, president and chief executive officer of Pathmark, Woodbridge, N.J., told an audience, chiefly composed of manufacturers, that Pathmark's marketplace is changing dramatically and that a new sense of unity between Pathmark and its vendors is required to ensure success.

Donald joined Pathmark late in 1996 following stints as an executive at various other companies including Safeway, H. E. Butt Grocery Co., Albertson's and Wal-Mart Stores. Donald inherited a company that had experienced diminishing financial performance for some time.

One of the reasons for the decline, Donald said, is that Pathmark had entered a new marketplace characterized by more competition and little way to grow other than to quietly grab market share from other retailers. Pathmark operates 135 stores in five Northeastern states.

Indeed, observers said that at the time of Donald's appointment to the helm of Pathmark, the chain had moved beyond the point at which cost savings could carry the day -- costs had been cut and the time had come to position Pathmark correctly in its marketplace and start to grow sales, they said.

Donald apparently agrees with that perspective: "From 1991 to 1996, Pathmark was in a box as a company and was on a trend that was not looking good. It was going south, and this despite all the wonderful things that were Pathmark's strengths back then and which are Pathmark's strengths today. The strengths include its 31-year history, a strong franchise and name that means something to customers, excellent store locations and productivity well in excess of norms."

But, notwithstanding those positives, something had to change to arrest the downward sales slide. "What's needed now is to create sales growth and market-share growth in the new marketplace, and unless we can do that, we're not going to go anywhere. The other term I use is that we need to 'steal' market share in this new marketplace," he told the GMA audience.

New marketplace? "This is why I call this a new marketplace: In 1997, 34 new competitive stores entered our five-state marketplace. In 1998, 44 are expected to open, about 12 have to date. In 1999 it looks like it will be about the same, 40 openings. That is a new marketplace and it's an ugly picture."

Donald specified that Pathmark's "experienced, albeit new, management team," is adding to the strengths and has managed to wrest from the changing marketplace five consecutive quarters of same-store sales increases. "We aren't experiencing ShopRite numbers, or Safeway numbers or Wal-Mart numbers, but it's a trend and a trend that's going the right way." During Pathmark's first quarter, ended May 2, same-store sales rose 1.7%, although sales declined in the 13-week quarter by 0.7%, to $916 million. Net losses for the most recent quarter were cut to $7.5 million against $8.8 million for the same quarter a year earlier.

"Increases happen when you do things that go undetected in the market," he said. "We say we are doing about 60 things about 1% better. If we did one thing 1,000% better, then all my competition and everyone else would be doing it as well. It's the little things that push it."

Such as?

Donald said Pathmark has observed "the five operating priorities I started on day one. We haven't changed how we address these, because they work."

Topping Donald's list of what works at Pathmark is the "right management approach."

"Right management no longer means the lone-wolf approach. Whether you're talking about the retail or the wholesale side of the business, gone are the days when one individual could make the call and do what was needed to get the job done. It takes the right management team and we have to expect our vendors to become partners in business, with the understanding that both partners win.

"We must have mutual trust. Our vendors must work with us to develop better merchandising techniques. They must share with us what techniques work in other parts of the country. How are we performing to the industry average? How are we performing for our geographic location? How are we performing against our competition? We need continual education from [the vendor] side of the fence and, more important, we have to be listening when someone comes forth with information. We realize that."

And, he said, Pathmark needs to continue to develop expertise too: "At Pathmark, for the longest time we did a horrible job in running produce. We never had a produce guy doing operations. But we hired one in the spring of last year, and as he was making his way around our stores -- and you're not going to believe this -- he said 'you guys are missing the boat. You're doing a great job of selling plantains, but you have no mangos out for sale at any time.'

"Well, mango happens to be the No. 1 fruit in the world. This guy was the expert and told us what we had to do. And, in a period of six or seven weeks, through some promotions, we sold about 44,000 cases of mangos -- all incremental sales."

Donald pointed out that the mango scenario shows how science and art can be at war: Costs must be contained and the performance of stockkeeping units must be analyzed, but what customers want of a store must remain the supreme determinant of what to do.

"We have to look at the performance of SKUs quarterly to identify opportunities and reverse negative trends and produce an efficient product assortment. But the SKUs that are the most profitable and which appeal to our most profitable customers aren't necessarily the ones that would make it in an efficient product assortment. We have a job to do with our vendor partners to determine from your cost side and our cost side what we need to do.

"In the new millennium, our shoppers will increasingly be an ethnically diverse group and of all ages and all income levels. We have to listen to our vendor partners who know what will sell to this diverse group. And we're also asking our associates to tell us what sells."

This all has to do with improving customer service, Donald observed. "We [Pathmark and its vendors] must communicate immediately with one another about market changes, differences in business trends, product availability and anything that would interfere with Pathmark, or you, in delivering excellent service to our customers. This is key."

Concerning promotional activity, Donald said that taking a look at, and changing, the traditions of promotions can also pay off in incremental sales, and it can happen in nonfood too.

"We need to get out of the traditional way of doing business, such as selling holiday-related items at holiday time only. In December of 1996 we ran a [battery] promotion. It was all right . It was front page in our flier and we offered an adequate discount. And we sold a certain amount of product.

"Last June we went back to our group and we said, 'let's take that same promotion and see if we can beat those holiday sales -- in June.' So we ran the same ad, which unfortunately ended up in the middle of the insert, not the front page. But we talked and talked to our associates about this. And we offered a sales incentive through an award system available to all our associates. Soon we had associates with batteries stuck to their vests with Velcro, with batteries stuck on the registers and everywhere. It was unbelievable.

"In the end, we beat sales of the holiday period three to one and gained $750,000 in incremental sales vs. the holiday."

Beyond promotions, said Donald, Pathmark and other retailers must concentrate on core business: "The diversified approach is out and what's in is concentrating on core business. At Pathmark we were too diversified. We had convenience stores, we had jeans stores, we had gas pumps, we had catalog showrooms, we had home-improvement centers, we had a chain of drug stores, we had a separate chain of grocery stores. And the rest is history. We were too diversified.

"Going forward, you'll see a new industry focus. That's what you'll see in the new millennium, and you see it happening today. The Albertson's of the world, the Safeways of the world and so on have the focus that will work."

A new focus on competitors must also be applied, said Donald: "A focus on supermarket competition alone is gone. We must now focus on all classes of trade that sell food. Gone are the days when we could price-check only on stores identical to our own. Now you've got discounters, club stores, convenience stores, gas stations. They all sell our product that we carry in our stores. And as this concentration on core business comes across, we need to be continually reminded that we have to have all sets of eyes out there to keep us in business."

Finally, he said, it's increasingly important to spend capital wisely: "Throwing money at every problem doesn't work any more. We must try to be more creative in merchandising so we don't always have to be dependent on extremely low price points. The object here is to create motivation, which beats throwing money at every problem."

For instance, Donald said, Pathmark partnered with a ready-to-eat cereal manufacturer to make promotional boxes of cereal, each with a photo of a Pathmark store manager. That commanded the attention of managers, resulting in sales this year that exceeded by 20% last year's. Similarly, attention must be paid to keeping operating costs down. "We [retailer and manufacturer] need to work together in lowering expenditures so we're both more profitable. And we can both reinvest in better promotions -- and you have a right to ask for your return on lowering costs," he said.

For example, he said, Pathmark asked meat packers to reduce the weight of meat cases in a bid to reduce the level of the chain's warehouse-worker injuries. One packer agreed to do so and back injuries were reduced to nearly nil. That packer has enjoyed a doubling of business with Pathmark in the last two years.

"That's the kind of return we have to work together to get," he said.