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COVER STORY: What's on your worry list?

For the chief executive of any food distribution company, worrying comes with the territory, especially these days. There's competition that seems to intensify by the week as Wal-Mart continues its massive supercenter rollout and the number of retailers seeking a piece of the grocery business grows constantly. There's the dilemma of finding and keeping good workers without being overwhelmed by the costs of taking on new employees. There's the economy, which seems to be emerging from nearly three years in the tank, but is hardly on fire. There's the ever-present threat that government may come up with yet another idea that translates to more expense for businesses.

And then there's the biggest challenge of all: mustering the vision and creativity to wring positive results from an overstock of negative influences. In the current climate, that's the most basic job requirement, and it's one c.e.o.'s who shared their goals and concerns with Progressive Grocer take very seriously.

"We believe there's always going to be a battle for consumers, and those that can execute right at the local level are going to ultimately win, whether it's a supercenter or anyone else," says Jeff Noddle, chairman and c.e.o. of Eden Prairie, Minn.-based Supervalu.

"If you focus on serving the customer rather than just focus on one competitor, I think you have a much better chance to do what we're supposed to do," says Jack Brown, chairman, president, and c.e.o. of Stater Bros. Markets in Colton, Calif. California retailers are bracing for an influx of some 40 Wal-Mart supercenters, beginning next month. "We're supposed to be entrepreneurs," Brown says. "As merchants we're supposed to look for those areas and products that our customers want that they can't find someplace else."

The imperative to keep striving is alive and well in Pittsburgh, where Giant Eagle chairman and c.e.o. David Shapira warns, "Those food retailers that lack innovative vision run the risk of not only losing market share today, but of ultimate extinction, as well."

On the other side of the country, that resonates with wholesaler Unified Western Grocers in Commerce, Calif. "You will see many changes at Unified Western Grocers in the coming year, including a new emphasis on perishables, an expansion of our specialty food categories, and beefed-up services—like real estate and retail technology—that will help our retailers better distinguish themselves from their competitors in the marketplace," says Alfred A. Plamann, president and c.e.o.

And in the Southeast, Rick Anicetti, president and c.e.o. of Salisbury, N.C.-based Food Lion, emphasizes staff recruitment and development as a way to keep his chain on the leading edge. "I constantly challenge our organization to seek the best possible candidates and to create a nurturing environment that will help all associates reach their full potential. This approach produces knowledgeable, flexible, and innovative employees who strive for excellence and create a strong leadership pool," says Anicetti.

Keeping ahead of


Noddle says that Supervalu keeps tabs on the growth of aggressive competitors, "although we're one that believes that we always have new competition in the industry. We believe that currently it's supercenter competition." That represents a new challenge, he says, because of the size of the companies, particularly Wal-Mart.

"We've put a lot of stress on delivering our retail business and in support of the independents we serve on the distribution side being very local in our merchandising and marketing," Noddle says. "We believe in that very strongly. We believe that ultimately the consumers will respond to those who execute the best for them within their market."

To that end Supervalu has worked hard to maintain an in-market decision-making process even as it has centralized many administrative functions and taken advantage of the purchasing clout that comes with scale. "The decisions as to what people are going to buy, how to price goods in the market, what to advertise, what to display—those kinds of decisions, we believe, you leave in the local market," Noddle says. "It's a very difficult balancing act, but it can be done."

Supervalu places a premium on innovation and creativity, he says, and one of the company's creative moves involves turning a core competency into a service it can sell to other food distributors. The Advantage Logistics subsidiary, formed in 2002, recently won a contract to run a third distribution center for Kroger Co. and now manages a DC for a manufacturer, Atkins Nutritionals.

The Save-A-Lot price-impact format continues to be expanded, Noddle says. "We think it is a very innovative way to go to market, and very focused and targeted toward a specific customer demographic."

In California Stater Bros. began preparing early for Wal-Mart's entry into the market, says Brown, traveling the country to see its grocery operations firsthand. "We've been in Syracuse, Bentonville, Dallas, Indianapolis, and looked at the operations," he says. "I had about seven of our people take a trip—actually, I took several trips—just to get a feel for it, so they'll know what they're coming up against. And then we came home and made our plans."

Brown takes a broad view of the coming competitive picture. "There are more issues than just price that we compete with, and we want to be sure that all the issues that we control have been honed to develop customer loyalty," he says. "We'll be close on price, but we'll be way above them on every other category there is in the store—in service, in cleanliness, in our people."

One key, he adds, is merchandising the store as a brand, first creating high expectations among customers, then meeting them. "When our customers think of Stater, I want them to think of us as that brand," Brown says. "It's their store, and everything they expect, we deliver."

Unified is also preparing for Wal-Mart's entry into California, and Plamann says that means paying especially close attention to expenses. "Retailers must do a good job of managing their costs on a daily basis to survive in the marketplace of tomorrow," he says. "In my opinion this means there will be continued consolidation among retail grocery companies in 2004 and beyond."

Giant Eagle has been traveling for some time the road on which California grocers are about to embark. "Food retailers are challenged daily to demonstrate a consistent level of quality, value, and service to our customers—all while competition is increasing in multiple channels and there is growing attention on pricing strategy," Shapira says. "But what will truly differentiate Giant Eagle from the competition is our constant focus on innovation to enhance and redefine the shopping experience, innovation targeted at the customer in the forms of more inviting and convenient store formats, unique value-added products and services, and technology that ultimately reduces the costs of goods and provides competitive value."

The importance of people

A concern frequently cited by corporate chiefs is having people on board who can raise their companies' odds of success. "One of the industry's biggest challenges is to find good employees," Anicetti says. "As the service sector becomes increasingly automated, it is more critical than ever that companies hire, develop, and retain highly qualified and talented people to serve customers and to lead the business."

Brown's view is strikingly similar. "There's a tremendous need for skilled and trained people in our industry even today, but when you get people like Wal-Mart coming into an area, of all the things they say they bring, I can tell you they don't bring people," the Stater Bros. c.e.o. says. "They don't bring skilled people in the supermarket industry; therefore, they will go out and pirate people from the existing chains and supermarkets in that area. If you bring in 40 stores, you're talking over 4,000 grocery people who will have to be replaced somewhere on a per-store basis, and, therefore, I think chains need to do all they can to continue to develop the loyalty of their employees with the goals of their chain. Otherwise they will bail out for other opportunities that may be real or just believed."

And Wal-Mart will be aggressively looking for workers. The world's largest company estimated it would need to hire 616,000 people last year just to account for turnover, and it plans to create 800,000 new jobs from now through 2008, 47,000 of them for managers. Not that Wal-Mart is worry-free. Vice chairman Tom Coughlin has called finding enough employees to support the expansion plans his biggest concern.

"Last year we put a terrific amount of effort into training because we're getting ready for the first Wal-Mart supercenter to open in February in La Quinta," Brown says.

The problem of finding and keeping good people may grow more intense. The economy, so far in a recovery that's been mostly jobless, is showing signs that employment is starting to creep up, and some economists predict that job growth will be steady, if slow. A leisurely pace of improvement could afford companies some time to solidify their relationships with their employees to head off excessive turnover as more opportunities become available.

The cost dilemma

But while smart employers value their workers, they also have to take into account the ever-increasing expense of keeping each employee on the payroll, costs that automatically attach to every new hire, as well.

Noddle says Supervalu's costs for health insurance have risen 13 percent to 15 percent in each of the last two years. "Whether those are union plans or nonunion plans doesn't make any difference," he says. "Ultimately we have to share the majority of that burden. No business can take these kinds of increases on such a large expense as health care."

He says good health care is in the interests of both Supervalu and its employees, and he calls reports the company wants to eliminate coverage for its union workers "absolutely untrue." Supervalu's aim, he says, is to get employees to participate in covering some of the costs. "If they are more engaged by paying some portion of it, they're going to be better users of the health care," Noddle says. "Health care is important, and until such time as there is a broad national solution to a better health care system in the U.S., this is what we've got and we need to respond to it."

While the cost of health care is a nationwide concern, California grocers are suffering doubly from rising employment expenses because of the state's exploding costs for workers' compensation. Plamann says that because Unified does 70 percent of its business in California, it is at a competitive disadvantage against wholesalers from other states and will remain in that fix until the Legislature enacts reforms. "Total workers' compensation costs for California employers are expected to exceed $20 billion in 2003, and our workers' compensation premiums are the highest in the nation," he says.

Brown says Stater Bros.' workers' comp costs have gone up 210 percent in the last five years—along with a 110 percent jump in utility costs and an 86 percent increase in fuel spending—and he's hopeful the state's new administration will begin to take some action.

Monitoring the economy

The national economy is always something to be watched, Noddle says. "People think we're insulated in this business from variations in the economy, and of course that's really not true," he says. With a presidential election coming in November, Noddle observes, it's especially important to be alert "because the administration and the government in general tend to act differently in an election year than they do in other years."

Noddle expresses optimism about Supervalu's outlook, and he feels the economy is getting back on track. But he cautions, "The amount of deficits the government is running is going to have to be dealt with sooner rather than later."

Both Brown and Plamann say they're concerned about California's fiscal crisis, which led to the recall of former Gov. Gray Davis and the election of Gov. Arnold Schwarzenegger, but Brown says the national economy, at least, appears to be "in pretty good shape."

Although Davis got the blame, he says, the Legislature shares much of the responsibility for California's huge deficit. However, with the change of administration, he adds, "at least I have hope."

Plamann notes, "There are still many unknowns. Will taxes be increased to reduce the deficit? What new methods will be introduced to raise revenue? What additional cuts in services will be put forward? How will our borrowings impact future growth?

"Because of the size and scope of the retail grocery business in California, our industry will be on the lookout for tax items and other legislation that could have an impact on our industry, such as vehicle license fees, split roll property tax, manufacturers' investment tax credit, and so on."

Regulatory concerns

On the federal level, legislation mandating country-of-origin labeling at retail for most perishable commodities and meats has played to what are probably the most universally bad reviews by the food distribution industry since the ergonomics regulations issued at the close of the Clinton administration. They were set aside by Congress shortly after President Bush took office.

The rules, originally scheduled to take effect next September, appeared at presstime to be headed for a two-year delay, but grocery executives don't show signs of becoming big fans, even if they get extra time to prepare. "I, for one, believe that if customers want this kind of information, then everybody will find a way to deliver it to them in their own way and their own style," Noddle says. "But the country-of-origin labeling legislation adds billions of costs into the system that ultimately get passed to consumers, and the tradeoff is not worthy of it."

Plamann says if and when the law goes into effect, it needs to serve the best interests of retailers as well as consumers. "Our industry is taking a two-pronged approach toward county-of-origin labeling—preparing for its implementation and simultaneously lobbying against aspects of the law that place excessive burdens on retailers," he says.

The extent of the expected burden apparently isn't clear to the government yet. The Small Business Administration's estimate of the number of retail food stores that would be affected is far greater than the estimate made by the Agriculture Department, which proposed the rule.

Complying with the Sarbanes-Oxley Act of 2002, which set new rules for corporate accounting and governance, has already raised companies' expenses, Plamann says. "While these and other changes have helped restore public confidence in the integrity of business information, financial records, and the impartiality of corporate governance, these changes have also added significant cost and manpower burdens to these very same companies," he says.

"At Unified, for example, we have changed the structure and makeup of our board and committees, created new audit and internal control staff positions, and stepped up our monitoring and tracking controls throughout every department in the company."

Brown praises the Medicare bill signed into law last month as "a tremendous step forward." He notes that the measure was no sooner passed than a horde of critics were trying to undo it. "But Dianne Feinstein, the Democratic senator from California who voted for it, said, 'Give it a chance; you've got to start somewhere.' Those were some of the most encouraging words, and, I think, real leadership words, that we need in Congress in both houses to really get America moving again rather than sniping at every issue you can."
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