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    PG Profile: Albertsons

    Larry Johnston's re-energized management team is abandoning weak markets, hacking costs, and working a plan to be the nation's top food and drug retailer.

    In the voracious world of mergers and acquisitions, a bad case of indigestion crops up now and again. That was the case with Albertsons' heralded 1999 purchase of American Stores, a multi-regional jewel composed of Acme in the Mid-Atlantic, Lucky on the West Coast, and, well, Jewel (and drug chain Osco) in the Midwest. The funny thing about acquisitions is that often the acquirer-swallower isn't blessed with as strong a constitution as the acquired-swallowee.

    The American acquisition was a promising development for Albertsons. Its people could learn a lot from the diverse experience of the aggressive marketers and merchandisers from Boston, Philadelphia, Chicago, and Los Angeles who made up the American Stores retail network. But instead, Albertsons attempted to remake American in its own Boise-bred, vanilla image. It continued to open plain, traditional stores in multicultural states like Texas and Florida, and it shut down frequent shopper programs that were thriving in American Stores outlets.

    "The old Albertsons management was fairly provincial. They rejected the donor organ that was going to help the patient live. And by that I mean the tactics and strategies that were working for Lucky, Acme, and Jewel," says longtime supermarket industry observer Burt Flickinger III, president of Strategic Resource Group, a New York City-based retail consultancy.

    The task of absorbing American Stores, meanwhile, was sapping Albertsons' strength and slowing it down, just as competition for the grocery dollar was intensifying from all sides, and especially from Wal-Mart. A culture clash ensued at the acquired stores, which received more directives than communications from the new headquarters. Stores were told to abandon longstanding services and processes and replace them with standard Albertsons fare. The Lucky banner was torn down and replaced with Albertsons. Store closings were rumored, and employees remained suspended in wait-and-see mode. Across the new Albertsons chain, sales and margins were lackluster while costs were rising.

    "Whatever it was that was the problem with American, it was painful on Wall Street. Albertsons and American were both lepers, and together they made a leper colony," says supermarket analyst Jonathon Ziegler of Deutsche Bank Securities in San Francisco. "After 10 months of scrutiny by the FTC, and not knowing which stores would have to be sold or closed, well, that doesn't exactly breed employee loyalty."

    None of that appeared lost on the Albertsons board, which in April 2001 brought in General Electric veteran Larry Johnston to rebuild the management team, slash waste, and set Albertsons off in a new direction. Ziegler likes to say that the closest Johnston had ever gotten to the food industry was selling GE refrigerators. But Johnston jumped in and took charge immediately. He went on the road, making his commanding, six-foot-seven-inch presence known in division headquarters, distribution centers, and stores. He disseminated the notion that the merger was a good one, that with a hard eye toward costs and performance and a lot of hard work, Albertsons could become the nation's leading food and drug retailer.

    Like most good leaders, Johnston began by assembling a proven team of senior executives. "Johnston recruited the best and the brightest," says Flickinger. "He brought in Larry Stablein, who did a great job at Jewel, to improve customer programs. He got Bob Dunst from Safeway to head technology and Terry Lee from Safeway to lead private label. He put Teresa Beck, Vic Lund, and Scotty Scott from American Stores on the board."

    That last move, contends Flickinger, served to right some of the wrongs perpetrated by Albertsons' former management in the early days of the merger. "That was the one key thing Albertsons did, keeping three of the best people from American," he says. "Usually, you don't keep the best and the brightest from an acquisition, but they bring with them an incredible store of experience."

    Perhaps Albertsons' most important coup was securing American's Peter Lynch as Johnston's No. 2. A well-respected and well-liked veteran of 30 years in the supermarket industry, Lynch is perfectly cast as Mr. Inside to Johnston's Mr. Outside. "The board did a great job keeping Peter Lynch, who, word has it, was passed over for the top job," says Ziegler.

    Flickinger agrees: "Lynch is a great people person and a great [supermarket] operator. He knows the business. He's got the confidence of the suppliers and is fully dedicated to moving the top line. He's involved at St. Joseph's University increasing training at the upper levels of the company. Lynch and Johnston are the perfect pair—an experienced retail operator and an analytical c.e.o."

    The new senior management's actions were swift, decisive, and results-driven. Johnston decreed that Albertsons would not settle for being anything less than No. 1 or No. 2 in any market. The new management team implemented an aggressive cost-cutting program, began to instill a new corporate culture in employees, and pinned its future survival on the exploitation of the food-and-drug combo format.

    "The hiring of Johnston was a major departure for the industry, a c.e.o. who is simply that, not someone who grew up in the supermarket business," says retail consultant Neil Stern of McMillan Dolittle in Chicago. "He doesn't have some of the biases that other industry c.e.o.'s have, so he has more of a willingness to get out of certain markets and look at the business in a different way." Since Johnston took over, for instance, Albertsons has:

    •Declared it will leave the Houston, San Antonio, Memphis, and Nashville markets, where prospects of being a leading player are dim. Stores to be closed: 165.

    •Announced plans to invest $200 million building up business in Oklahoma and Texas.

    •Completed the first phase of a cost-cutting program aimed at paring $500 million by mid-2003. Twenty percent of administrative and corporate staff above store level were let go or took advantage of a voluntary separation plan.

    •Decreased the number of operating divisions from 19 to 11.

    •Reversed a longstanding policy against frequent shopper programs at stores under the Albertsons banner. This past summer, its Preferred Customer membership program debuted in a number of Western states. It was rolled into 183 Northern California stores last month.

    •Extended its Albertsons.com online business to Los Angeles, San Francisco, and Portland. It also operates in Seattle, San Diego, and Vancouver.

    •Converted its entire Phoenix business base of 36 stores to Albertsons-Osco combo stores, the food-and-drug format company executives see as their competitive trump card.

    In a position to win

    All of these moves are born of "five imperatives" handed down by the new management: aggressively control costs, maximize ROI, focus on technology, employ a customer-focused approach to growth, and energize associates. The most obvious-sounding of the five—infuse a customer focus—is ironically the action with which Albertsons made the most news recently.

    Albertsons stores were well-known for their "No cards, no hassle" policy, especially on the West Coast where a group called Consumers Against Supermarket Privacy Invasion and Numbering had virtually nominated the chain for sainthood. But Albertsons fell out of CASPIAN's good graces by instituting card programs in its Western stores. It was a pure reaction to a competitive threat the old management had ignored.

    "Johnston made a great move by working closely with Larry Stablein to correct the mistakes made in loyalty programs and get them going again, especially in California, where Stater Bros. is expanding and Safeway is getting more aggressive with its promotions," observes Flickinger.

    The flames of Albertsons' competitiveness are being fanned all over. To draw away business from convenience stores, it is expanding Albertsons Express fuel centers at the rate of 30-plus percent a year and now has more than 200 of them in place. It has expressed willingness to snare customers from bodegas and Asian specialty markets in ethnic areas, instituting a neighborhood marketing campaign that will seek to customize products and services to local clienteles. In August, Albertsons named Yakov Yarmove, a rabbi who had worked at Price Chopper in Upstate New York, to the new position of corporate kosher marketing and operations manager.

    At the same time, the new Albertsons has shown an unwillingness to do battle with Wal-Mart, Target, and their ilk. Most of the stores being shuttered by management competed against supercenters. Some 650 Albertsons stores will continue to vie with the big discounters after the market exits are completed, versus 784 before.

    But it's their possession of strong names in both food and drug retailing that puts them in the best position to win regional retail skirmishes, Albertsons executives feel. Grocery store sales are flat, yet drug store sales are on an upward trend that figures to hold steady for years to come. Rising drug approvals and an aging population have prescription drug sales climbing at an annual rate of more than 13 percent. Chain drug stores capture the larger share of the increase, filling an average of about 1,600 prescriptions per week as opposed to only 1,000 for food store pharmacies. By keeping the food and drug banners distinct at its Jewel Osco and Albertsons Sav-On combo stores—to the extent of employing separate store managers—Albertsons figures to get more than its fair share of the drug business while at the same time drawing more traffic to its grocery business.

    'The best combo format'

    Over the past year, Albertsons has spread the food and drug format throughout the Southwest, with multiple openings in Reno, Tucson, and Omaha as well as Phoenix. According to the company, it's cheaper to develop a combo store than a new supermarket, and customers spend 30 percent more in them than they do in supermarkets.

    "Albertsons definitely has the best combo format in the industry. They're situated well to grow with it," says Flickinger.

    Stern sees the Albertsons combo concept as one of the best supermarket industry examples of coming to grips with heightened competition, but he wonders how long it can hold up. "It positions them well in the current competitive set," he says, "but is the supermarket proposition of food-drug-gas compelling enough to work well into the future?"

    $1 billion investment

    Albertsons executives are poised to find out. The way they see it, their foothold in drug retailing gives them an antidote to flagging top line results that other supermarket chains lack. They have announced their intentions to spend upwards of $1 billion to make the food-drug combo store an Albertsons staple in the years to come.

    Look for private label offerings at Albertsons stores to expand in the coming year as well. Johnston as much as affirmed that in comments he made at an economic conference hosted by Treasury Secretary Paul O'Neill in Waco, Texas, in August. "Consumer confidence is weak; there's no doubt about it," said Johnston, according to a Bloomberg News report. "Consumers are gun-shy. We see it in their buying behavior, we see it in them buying private label products instead of branded products. We see them buying things like hamburger instead of steak."

    Earlier this year, Albertsons brought in Safeway's private label maven Terry Lee as its v.p. of corporate brands. "Strengthening the private brand segment of our business is one of the company's critical initiatives for 2002," noted marketing and merchandising chief Larry Stablein at the time of the hire.

    Another Safeway hire, chief technology officer Bob Dunst, leads the campaign to use technology to both save money and build incremental sales. Albertsons.com, the online grocery service, recently expanded to two more major markets, situating the Web-based grocery delivery system up and down the West Coast from San Diego to Vancouver. Its drug business gives Albertsons an edge online, as it is one of the fastest-growing channels for purchase of prescription drugs.

    Further acquisitions, however, appear inevitable if Albertsons is to make good on its stated mission to become the nation's No. 1 food and drug retailer. Most analysts rate it as the company most likely to set off the next big buying binge.

    "When everyone else is closing divisions and hunkering down, Johnston is looking at a world that's going to be populated with Wal-Marts and Targets and hard discounters," says Flickinger. "I think Albertsons can go through with some more acquisitions."

    Though Ziegler feels that Albertsons' real estate locations in California protect it from any serious incursions by Wal-Mart for the time being, he envisions a similar scenario. "The new and remodeled stores and the food and drug combos are great, but it's not going to be enough," he says. "I see a lot of opportunity for acquisition at Albertsons. The company has the best balance sheet in the business."

    Buy, but proceed with caution, is Flickinger's advice. "When Albertsons bought Seesel's in Memphis, it looked like such a steal, but a lot of the stores were beyond saving," he says. "They have to remember that and not buy divisions that may be too broken to be fixed. They need to look at a retailer like Pathmark, whose stores are in urban areas where there's no entry for Wal-Mart. Or wait for another Jitney Jungle to come on the market and just buy the stores that fit their strategy."

    One thing Albertsons' drug operation surely cannot provide is a cure for acquisition indigestion.

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