WESTERN BEEF ON TRAIL OF INNER-CITY EXPANSION

DAVID ORGEL

RIDGEWOOD, N.Y. -- Despite its name, Western Beef's retail business and expansion plans have nothing to do with the West Coast and involve far more than beef.

If the store banners were to fully identify the chain's mission, they might read "Inner-City Warehouse East."

The 17-unit operator here is now accelerating unit growth for its 18-year-old full-line warehouse supermarket concept, geared to low-income and ethnic areas in the New York metropolitan region. These plans are being laid at a time when some major chains around the country are rediscovering the potential of inner-city locations. However, in an interview with SN, Peter Castellana Jr., Western Beef's president and chief executive officer, said his company's edge is a longtime expertise in merchandising to this population.

"As in the past, a lot of the big chains are not going to find inner-city operations the same as their suburban operations," Castellana said. "It's hard to change your format of merchandising. It's not easy for a big organization to service both the upscale and low-income customers. We find the inner-city customer to be the best one out there. I love their shopping habits, their loyalty to their supermarket. We are a low-income ethnic chain, and we have it down to a pattern.

"Customers in our low-income areas have less disposable income for eating out, but they're more family oriented and feed bigger families. It's a better source of volume."

The company, which posted volume of $291.9 million last year and $219 million in the first three quarters of this year, is making expansion a top priority. A buildup in technology, improved cash flow, increased attention to cost controls and ample warehouse capacity have opened the door for faster growth, Castellana stressed.

"Expansion is the major retail challenge," he said. "We've implemented all the foundations needed for expansion. We just need more locations. We have the nucleus for a major chain. We have systems in place. Without those, you are growing out of control. We're ready more than ever to expand."

The operator has opened three New York stores in the current fiscal year -- in Staten Island, Brooklyn and West Hempstead -- and is charting plans for subsequent years.

"In general, we'd be comfortable opening two to three stores a year," Castellana said, which is a more consistent expansion than in past years. "We'd take more if locations become available. We'd also like to do at least one to two remodels a year."

The unit growth will be financed through a combination of internal resources and borrowing. The company hopes to take more advantage of tax relief by locating in Economic Development Zones.

The chain operates units with a wide range of sizes that reach up to 83,000 square feet. However, most units are built in the 25,000- to 40,000-square-foot range, often on sites previously occupied by other supermarkets. The chain, which operates in the city's boroughs and on Long Island, will not expand outside the New York area until it's exhausted the potential here, Castellana said.

Western Beef also operates a wholesale division that is a large meat and poultry distributor to various stores, mostly independents, in the New York area. The chain also has close to 200,000 square feet of warehouse space at its Ridgewood headquarters that house perishables and grocery items. Castellana calls this space "a nucleus for expansion."

Some 72% of Western Beef is owned by the Castellana family and the rest is owned by public shareholders.

The chain's executives stress that expansion will be helped by Western Beef's years of fine-tuning merchandising for its target customer.

"We cater to the local communities," Castellana said. "For example, in our latest store in Brooklyn, we sell to the West Indian/Jamaican community. We're providing seamoss, which is used for a beverage. Whole coconuts are a big item with this community so we'll do big displays. Our private-label 'champagne cola' is an important item for the Central American customer."

The chain targets far more than Latin American customers. Its stores include products for Jewish, Oriental, Greek, Indian and other groups in various proportions depending on a store's customer base. Western Beef also incorporates traditional supermarket departments for bakery, seafood, deli, produce and other perishables categories. Its meat departments include custom cutting of orders.

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Western Beef has been emphasizing a private-label program that now encompasses some 300 stockkeeping units, primarily in grocery but also in dairy and frozens. A large portion of the merchandise is supplied by wholesaler White Rose. Western Beef sells many items in bulk packaging, a hallmark of warehouse operators. But shoppers pay no membership fee, and all merchandise is also sold in conventional sizes.

As a warehouse operator, much of Western Beef's success hinges on its ability to provide low prices. Units of the chain have recently been cited as the lowest priced stores in their areas in price comparisons by the New York City Human Resources Administration. The chain has upgraded its front-end systems, launched centralized headquarters pricing for all departments, computerized functions such as payroll, and installed energy efficient lighting and maintenance-free features. The retailer also saves money by using large-scale refrigeration rooms in its stores rather than costly individual display cases for perishables. Customers in many stores walk into large cold rooms that stock produce, meats and other perishables. Nevertheless, the company will rely somewhat less on the cold rooms in order to make the shopping experience more comfortable for customers. Western Beef's expansion hasn't come without some sacrifice. Castellana noted that recent declines in same-store sales resulted partly from cannibalization of existing units as the chain opens new locations. Same-store sales were off 5.6% in the nine months ended Sept. 29 and 2.1% for the third quarter. However, the company said it is narrowing the gap and expects fourth-quarter same-store results to be even with the year-ago period. Improved advertising and merchandising and efforts to reset stores are expected to help comp sales.

In the quarter, overall sales rose 6.6% to $78.4 million and net income advanced 1.9% to $1.36 million. For the nine months, sales dropped 0.3% to $219.04 million, partly resulting from the sale of a small wholesale produce business in the second quarter. Net income for the nine months fell 2.1% to $3.31 million. Castellana said net earnings figures reflect the costs of new store openings and the loss of the Federal Targeted Jobs Credit Program, which is expected to be reinstated.