FEATURE: The bold and the embattled

Supermarket operators had a tough year in 2003, and by the look of it, things are only going to get tougher. In times like these, there's a case to be made that simply holding your own makes you a winner. But many have raised themselves above equilibrium, forging ahead against ever-steeper odds to create new successes, often from opportunities their competitors failed to appreciate. By the same token, others have lagged, hobbled by weaknesses that are sometimes self-inflicted, sometimes the result of a poor economy and relentless competition.

"Food retailing has become among the most difficult industries in which to compete," says Bob Costello, president of Huntingdon Valley, Pa.-based Costello Asset Management. Profitability and survivability, he says, are the two biggest challenges facing the mature retail food sector.

Among the major influences Costello cites are low margins, high capital requirements, back office systems, execution, and corporate culture.

Those who have played by the old rules, he adds, "either didn't make it, or are going to have a really rough time making it in 2004 if they don't do some major mending."

Companies that have succeeded in the current environment have often done so by making their own rules, a practice that's at the heart of innovation. Here are some of those who did it best in 2003, followed by examples of some of the year's least praiseworthy performances.

Wal-Mart has revolutionized the face of retailing in America over the past decade. Now the world's biggest corporation has become the largest private employer in Mexico, with a work force that exceeds 100,000.

"Wal-Mart...is changing Mexico in the same way it changed the economic landscape of the United States, and with the same formula: cut prices relentlessly, pump up productivity, pay low wages, ban unions, give suppliers the tightest possible profit margins, and sell everything under the sun for less than the guy next door," reported The New York Times last month.

Despite a rush of negative publicity surrounding its employment practices and its treatment of suppliers, the retailer continues to be the bane of grocers' existence in nearly every region where its stores are located. And with yet another aggressive round of Wal-Mart openings planned, the majority of the world's retailers might be wise to act as though the wolf were already at the door.

Having built a reputation as solid as its loyal following, Wegmans Food Markets will make its much anticipated debut in northern Virginia late next month when it unveils its newest supermarket in the community of Sterling.

The family-owned chain headquartered in Rochester, N.Y., which has been steadily improving its game plan in new marketing territories in recent years, will open a 130,000-square-foot former Wal-Mart as the first of three stores it plans to open in the Baltimore-Washington corridor over the next 18 months.

Wegmans plans to cut the ribbon on a 125,000-square-foot supermarket in Fairfax, Va. late this year and is aiming to complete a similar project in Hunt Valley, Md. in 2005. Late last year Wegmans opened its 65th unit, this one in Woodbridge, N.J. Other Garden State stores are on tap in Ocean Township, Cherry Hill, Mount Laurel, and Turnersville.

In September Consumer Reports ranked Wegmans as the nation's second-best supermarket chain after West Sacramento, Calif.-based Raley's.

It was Raley's third trip to the top of the magazine's list. The chain got high marks for meat, produce, speedy checkout, friendly service, variety, and cleanliness. That's the kind of report card that sets a supermarket company far apart from the pack.

Whole Foods Market, whose sales broke the $3 billion mark for the first time in fiscal 2003, made a remarkable showing for an operation that many observers originally believed to be too specialized and too pricey to go the distance.

Whole Foods' stores are nothing short of an oasis for an increasing number of consumers who have become much more mindful of what's going in their bodies. As demand for organic, natural, and special diet foods increases alongside that for low-carb and functional foods, the chain has put itself in a strong position to capitalize on these trends.

Although anybody can cut prices, it takes brains and nerve to produce a better article, and Issaquah, Wash.-based Costco Wholesale Corp. has done just that. The club store operator, which exceeded analysts' expectations with a 14 percent same-store sales gain in November, has attracted an almost cult-like base of consumers who are crazy for Costco.

In commenting on the November showing, which included an 18 percent jump in fresh food sales, the company readily acknowledged an "incremental benefit" from the Southern California grocery strike. But strike or no strike, Costco has shown it's got a good handle on delivering quality merchandise at very competitive prices.

Ukrop's Super Markets, the 30-store Richmond, Va. company that generally opens one new supermarket a year, opened three stores in seven weeks this past fall. The family-owned chain's ongoing emphasis on service and perishables continues to reinforce its market leadership position.

Food Lion's parent, the Delhaize Group, added some firepower to its U.S. portfolio with the acquisition of 43 Harvey's supermarkets in the Wal-Mart-heavy territory of central and south Georgia and Tallahassee, Fla. The move not only filled in an area where Food Lion had a void, but also reinforced the chain's presence in its current geographic footprint.

Colton, Calif.-based Stater Bros. also enjoyed a good run in 2003, largely as a result of being more than ready to spring into action during the crippling strike. The 157-unit supermarket chain, wrote the Los Angeles Times, has "defied the conventional wisdom that small chains would get crushed as big grocers got even larger. In fact, Stater's sales have grown more than 50 percent in the last few years, as it has made acquisitions and siphoned away market share from larger chains such as Ralphs Grocery Co. and Albertsons, Inc."

Supervalu continues to position itself favorably based on sound decision-making and a commitment to execution that continues to improve. As the Eden Prairie, Minn.-based wholesaler/retailer continues to align assets with opportunities, its Save-A-Lot group and new service-based logistics platform stand out.

The Advantage Logistics subsidiary has been pumping up the volume through new warehouse-management deals signed with the likes of Kroger and Atkins Nutritionals.

In September, in the wake of the collapse of Fleming Cos., Supervalu swapped its New England assets for Fleming properties acquired in the Midwest by C&S Wholesale Grocers of Brattleboro, Vt., a transaction that beefed up both companies' operations in their core markets.

Building on impressive records, H-E-B Grocery Co. of San Antonio, Texas and Trader Joe's, headquartered in Monrovia, Calif., each continued to bring innovation and excitement to a throng of loyal customers. Having expanded to almost 200 stores in 17 states, Trader Joe's can expect 2003's array of favorable publicity to help fuel its continuing development.

And Hy-Vee, Inc., the ever-innovative chain out of West Des Moines, Iowa, capped off a year in which it was recognized by Consumer Reports as one of the country's best supermarkets and by Child magazine as one of the most family-friendly by being named Progressive Grocer's Retailer of the Year.

There's no better example of the downside of 2003 than Lewisville, Texas-based Fleming Cos., not long ago the country's second-largest grocery wholesaler, which was liquidated in bankruptcy court, and left a legacy of failed leadership, Securities and Exchange Commission investigations, bitter and beaten-down retail customers, and outraged ex-employees.

At presstime Fleming was awaiting court approval to pay its banks $325 million in cash accumulated during the Chapter 11 proceedings. The company's lawyers were quoted in press reports as saying they wanted to see Fleming emerge from Chapter 11 with its Core-Mark division, which distributes to convenience stores, scaled down but intact. The company's spokesman was quoted in the same report as saying Fleming was still interested in selling off the division.

No matter how you slice it, Royal Ahold has got a fine mess on its hands in the aftermath of a $1.1 billion accounting scandal at its U.S. Foodservice unit and earlier spending on acquisitions that has placed the former Dutch dynamo more than $12 billion in the hole.

With new executives trying to correct what went wrong on the watch of Ahold's previous administration, the U.S. grocery trade is holding its collective breath to see where the chain's road to recovery—which relies heavily on a new strategic plan to restructure its portfolio—will lead. It's all riding on how effectively Ahold unravels its past.

Although the quarterly financial report issued last month saw losses narrow significantly from a year earlier, the struggle is far from over at Kmart Corp., which two years ago became the biggest retailer in history to file for bankruptcy.

Kmart emerged from its fast-track reorganization plan two months earlier than expected after selling 600 stores and slashing its work force in an effort that reduced debt by 80 percent. But after years of withering on the vine, Kmart faces monumental hurdles in its bid to compete with low-price leader Wal-Mart, the considerably hipper Target, and just about everyone else.

The discounter continues to try to win back customers with a more disciplined and efficient organizational structure, lower operating costs, a new team of retail executives, and a new ad campaign.

Things are tough all over for Safeway, whose current slump stands in stark contrast to its glory days of the late 1990s, when the stock price peaked at $62 a share, up from $4 at the start of the decade.

The Pleasanton, Calif.-based chain has been punished harshly by once-loyal consumers since its acquisitions in Texas, Illinois, and Pennsylvania. And Safeway's rapid and relentless pace of integrating its new regional banners into the corporate blueprint alienated both longtime employees and the vendor community.

Safeway paid $1.2 billion for Oak Brook, Ill.-based Dominick's in 1998 and last year made a highly publicized effort to sell the money-losing division, now valued at around $315 million. The retailer yanked the troubled division off the market, reportedly due to a disagreement with an unnamed prospective buyer over the labor contract. Simultaneously, the nation's third-ranked supermarket chain named Randall Onstead, former chairman and c.e.o. of its Randall's unit based in Houston, as Dominick's president.

The strike by supermarket workers in Southern California has also cost Safeway dearly; its Vons and Pavilions groups make up the largest division and account for nearly one-sixth of the company's sales. Projections for 2004 pointedly exclude losses from the strike.

When it comes to brand equity, it doesn't get much stronger than A&P. But after years of changing strategies in search of a solution to its declining performance, the Great Atlantic & Pacific Tea Co. continues to lose traction.

A&P, which has roughly 650 stores in 11 states, the District of Columbia, and Canada, has struggled to remain competitive in nearly every market in which it operates. Yet most observers believe the dominoes have been falling ever since the company began to spiral downward in the 1980s with several acquisitions that pulled profits dangerously low.

A&P's most recent efforts to turn its ship around included selling off eight of its northern New England stores and seven of its Kohl's supermarkets in Wisconsin last spring. Farmer Jack's, A&P's metro Detroit division that was recently named one of Child magazine's "10 Top Family-Friendly Supermarkets," is said to be among the chain's most profitable units. Yet recently the financially strapped company was forced to cut back hours at 30 of its 24-hour Farmer Jack's stores in Michigan and Ohio.

Other turnaround efforts included selling its Eight O'clock Coffee division for $107.5 million, and arranging an extended and amended senior secured revolving credit facility of $400 million.

In May Penn Traffic Co. filed for bankruptcy protection for the second time in four years. To help stem the mounting losses, the Syracuse, N.Y.-based retailer put its 67-store Big Bear division in central Ohio on the auction block last month. With Giant Eagle buying seven of the Big Bear stores, Penn Traffic will net nearly $48 million, not including the undisclosed price for two other stores that will be sold pending court approval.

Proceeds from the acquisition are expected to factor into Penn Traffic's efforts to emerge from Chapter 11 as a stronger, more competitive company. But from the bankruptcy filing in May through the end of September, the chain lost more than $21 million.
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