MERGERS, MORALE AND MORE CHANNELS

MICHAEL HARRISON / ELLIOT ZWIEBACH

The countdown to the end of the 20th century is under way and supermarket executives have been busy preparing for the dawn of a new millennium.

In discussing their 1999 forecasts for the industry with SN, top executives touched on common themes, such as navigating their companies through straits that are becoming increasingly treacherous with the presence of new retail channels. Most said they hope to reduce employee anxiety over industry mergers and stay out in front in technological advances.

Unlike this time last year, supermarket executives expressed little worry over the Y2K problem -- a reward perhaps for meeting that challenge head-on. For example, Mary Sammons, president and chief executive officer of Fred Meyer Stores, Portland, Ore., said she is spending more time these days pondering the opportunities represented by the company's pending merger with Cincinnati-based Kroger than Y2K.

"I think we're in really good shape," Sammons said. " We had a good team put together over the last year addressing different angles on what Y2K means and we'll be in compliance by early 1999. We've addressed all of our program issues and we have a really experienced staff working on it," including a "schedule of tests" to iron out any wrinkles, such as "vendor communication issues both domestic and international.

"And, as we get a little closer, we'll be keeping customers informed -- certainly, with signing within our stores. A lot of it is what we tell our store people, so when they get questions, they'll be able to answer them."

Jack Brown, chairman, president and CEO of Stater Bros. Markets, Colton, Calif., said "At this point, we are not too worried about Y2K. We're about 90% there. We've installed NCR scanners and are 100% on board for retail and 90% for the corporate side. As far as Stater Bros. is concerned, we're there. There is some concern over our vendors and others being up to speed, but correspondence comes in regularly from vendors updating us as to where they are to reassure us."

James Demme, chairman and CEO of Bruno's, Birmingham, Ala., said "For the industry, I see a two-fold challenge: first, the growth and movement of Wal-Mart supercenters and other similar formats that will affect supermarkets, and, second, industry consolidation, which will continue to gather strength to combat the supercenter threat.

"In the Southeast, Wal-Mart is still moving rapidly on expansion, and I don't see that slowing down. We compete with several supercenters now, and what we've learned to do is to stay within our own niche and give customers service and emphasize the things we can do better. We can't compete on price but we can on quality and service, and we're succeeding, as best we can determine, because we're still in business. Customers are really attracted back to supermarkets because of the service, quality and variety we can give them."

Michael E. Julian, chairman and CEO of Jitney-Jungle Stores of America, Jackson, Miss., said "One major challenge for the industry in 1999 is to manage the unrest in employees' minds that consolidation creates."

And Mark S. Hansen, chairman and CEO of Fleming Cos., Oklahoma City, said "This is an industry that has a variety of different alternative formats attacking it on all edges, at the same time it's going through the throes of a remarkable level of consolidation." The executives' complete remarks follow:

Mary Sammons

president and CEO

Fred Meyer Stores

Portland, Ore.

Issues for Fred Meyer Stores include those connected with the merger and our other initiatives. There are two dimensions: one is to make sure we maximize the opportunities out there that have been made through consolidation, such as cost-saving synergies and corporate label opportunities. It's those opportunities that come because of the merger that will improve our bottom line.

The other is to make sure our corporate culture thrives and grows and stays consistent even with the Kroger initiative ahead of us.

Of the synergies, one of the big ones is expansion of our nonfood product line. As we begin a new year and the merger becomes completed, we want to expand categories and what that does is allow us to buy these products at much reduced costs and lets us compete more effectively with the Wal-Marts and other supercenters. We're looking forward to a much more intriguing product mix, an expanded private label and creating some national brands as we move forward.

For example, by the time the merger is completed, we'll be able to market our brand of bath and body floral essence therapies in over 2,000 stores across the country. Also, we're certainly going to have savings that will come from improved logistics between distribution networks and manufacturing plants, getting them to capacity. Those are the things that all help margin.

It seems like everybody wants to be in the food business. We're certainly keeping our eyes on the whole e-commerce arena. We're going to test market with a few items relative to sale either with our own application or a third party we can work through. This is going to be a lot more important in the next few years. We're also going to test the whole gasoline area. There are certain store locations that can do it, especially Fred Meyer stores .

Another challenge is the whole issue of employee retention and leadership. You've got to stay one step ahead of customers and for that you need capable, qualified employees who will be ready for the growth that's coming. For that, you must invest a lot in training programs. We are opening stores at a much faster pace than in the past and that takes a lot of leadership talent.

Jack Brown

chairman, president and

CEO Stater Bros. Markets

Colton, Calif.

From an industry viewpoint of 45 years in the business, I've had a chance to watch this industry grow and I think 1999 will be the year we will find out if bigger is better as far as supermergers. We'll have to find out if bigger is better for customers, for employees. Is bigger better for the communities we serve and does bigger mean more efficiency than the present method of operation in industry? Those are the things we'll have to wait and see and then react accordingly.

Stater Bros. is one of only four chains left in southern California -- down from 23 in 1980. The good news is, we're one of the four and a 62-year-old company that continues to operate in the marketing area where we were founded. That's 112 stores and a $2 billion company and we are the low-price leader in our area. The average haul to the average store is 33 miles and we have lots of room for continued expansion. That's where the challenge is. San Bernadino County is a geographic area you can fit six East Coast states in and we have 46 stores in that county -- twice as much as our nearest competitor.

What are the challenges? Efficiency of distribution centers, dedication of employees and loyalty of customers are the keys to success. We've done a great job with those and we plan on staying the course.

Other channels? We've learned to co-exist with them a long time ago. Costco, Wal-Mart -- we dug our foxholes and let them come on. You have to take them on immediately, before they arrive, so your customers don't begin to wonder if that's better. The point to get across is we've been able to deliver value to our customers and if you get past all the hype, the customer will decide who provides the most value for the family.

We'll be looking at the mergers of Albertson's and Lucky and the continued spinoff of some of the Ralphs stores for future opportunities for us.

I was told a long time ago by one of my bosses, "Jack, it's OK to go and see, but don't forget who you are." We went to Bentonville [Ark.] and took four of my people. We looked it over. A nice store. If we have to take it on we'll take it on but I don't want to. I'd rather build some myself. We are a very aggressive and disciplined chain and when you come into our market area, we'll be your worst enemy. I feel a great responsibility for people's jobs and if we lose sales, lose volume, we lose jobs. Our people know the No. 1 priority for Jack is keeping the company safe.

This war that we're in with these mergers will be won in the trenches, at each store, location after location. We can improve, but we're about there. When we perfect an order system that sets up product being ordered from the distribution center as it's being scanned from the checkstand, that's one of the last steps from being as electronically efficient as you can be.

It's not all that difficult to tie all the stores' scanners together and the benefit is being able to pull all day long from distribution centers rather than waiting all night and you can get ahead of the cycle.

What else? Full-service meat departments priced the same per-pound as self-service; Expanded produce departments. But you know, people are going to have to be made a priority. We can spend a lot of time on technical improvements with sophisticated reorder systems, but if we neglect people, we're missing something. I hear a lot of people complain that employees are not like they used to be. I tell them to look at the other end of the prism. If employees are not loyal, maybe the company has not been that loyal to employees, either.

I think we have reasons to concentrate on things like 401-K and profit-sharing. Even more than that, just level with people and make them part of the management plan so they know where they fit. Then, you can have the confidence to know they will be around next year. It works hand-in-hand; labor is 65% of a supermarket's controllable expenses. No matter how well you do with the other things, if you don't do labor right, you can't make up the difference. It's got a lot to do with attitude. If employees feel good about themselves, they will feel good about the company.

Michael E. Julian

chairman and CEO

Jitney-Jungle Stores of America

Jackson, Miss. The significant consolidation moves taking place create a lot of unrest among employees, who begin to wonder what will happen to their companies and their job security.

No company is big enough that it never had to worry about merging, and no company is too small, either. So I hear more executives talking about this problem for people who are being merged, or who may be merged, out of their jobs.

The situation creates a high degree of anxiety among a lot of people who are uncertain what the future holds because consolidation ultimately means fewer jobs. So they wonder whether something is going to happen in the future, and they may decide that, in order to be in control of their own futures, they should make a career change.

For a small regional supermarket chain like Jitney, the challenge in the new year will be how we survive in competition with $30 billion and $40 billion competitors.

The answer is our survival depends on making sure each single store survives against the competition by providing the highest quality of service and the right assortment of products.

So we tell our people to worry about the microcosm, because if they win the battle at every store, then we don't have to worry about the size of the competition.

Mark S. Hansen

chairman and CEO

Fleming Cos.

Oklahoma City This is an industry that has a variety of different alternative formats attacking it on all edges, at the same time it's going through the throes of a remarkable level of consolidation.

In addition, we're seeing a fundamental shift in power within the industry. In the 1970s manufacturers had the strongest hand, and that shifted to retailers in the 1980s. But in the late 1990s the consumer is driving the industry, and each of us has to do the best we can to meet the expectations, opportunities and challenges presented by that shift.

What we are doing at Fleming is trying to make the business more responsive and retailer-focused and to operate at a lower cost structure by attacking our point-of-sale and basic value equations.

For Fleming, the challenge in 1999 will be to really leverage our very good position in the industry. We have a core of strong retail stores that we own, and we're probably in the best position in years to help them grow by thoughtfully allocating our resources to concentrate on the market areas where we see the best opportunities. We can look at the whole environment and see it as a problem or an opportunity, and from our vantage point we see more opportunities.

James Demme

chairman and CEO

Bruno's

Birmingham, Ala. For Bruno's, the challenge is to continue to work our way out of Chapter 11 bankruptcy. In the last 14 months we've sold or closed 47 stores, and we're down to a core of 164 stores. We don't contemplate selling any more, but as any company, we're always looking at our store base. We're on schedule with the Chapter 11, though we have not yet set a date to complete our reorganization plan. There's no specific target for doing so, though we expect it will be prior to the summer.