A Grocery Giant Comes to Town : American Stores Outlines Changes It Plans in Alpha Beta Outlets After $2.5-Billion Acquisition of Lucky

Cancel the brass band.

Forget the confetti.

When the largest supermarket chain in the country moves its headquarters from Salt Lake City to Irvine next month, there won’t be much hoopla.

Even though American Stores will become the biggest publicly owned company in Orange County, with sales last year of $14.3 billion, it is not likely to call much attention to itself as it opens its new headquarters office here.

In fact, American and its strong-willed chairman, L.S. (Sam) Skaggs, are so low-key that they have rarely consented to discuss their operations.

In a departure from past practice, however, the company late last week outlined some of the changes that will be made in the wake of its $2.5-billion acquisition of Lucky Stores.

In a statement issued Friday, American confirmed that it will gradually convert its lackluster Alpha Beta chain to Lucky supermarkets and adopt Lucky’s successful low-price strategy.

The company said it intends to invest $500 million to build new stores and renovate existing ones by 1990. While it plans to sell at least 31 stores, the company said that it will do everything possible to minimize job losses.

If American’s history is any indication, though, a period of belt-tightening and consolidation may be in store as the company digests its latest prize.

That history includes three other major acquisitions. In 1970, American, which was then based in Wilmington, Del., purchased Katz Drug Co. of Kansas City. In 1979, American was acquired by the Skaggs Co., a Salt Lake City drugstore chain headed by Sam Skaggs. And in 1984, American bought Jewel Food Stores of Melrose Park, Ill.

American’s earnings were depressed for up to three years after each acquisition, according to John Kosecoff, a retail analyst with First Manhattan Co. in New York.

Kosecoff said the combination of American and Lucky--which together operate 2,000 stores in 39 states with more than $21 billion in annual sales--”should without question be very competitive.”

To achieve that competitiveness, though, overlapping Southern California operations--including bakeries, warehouses, offices, and neighboring stores--will have to be streamlined or eliminated.

And before any profits are recorded, American must service the massive debt it will assume to complete the $2.5-billion acquisition.

But Skaggs is no stranger to consolidating operations or dealing with debt.

After acquiring American Stores in a March, 1979, leveraged buyout, Skaggs sold off Alpha Beta’s Arizona division, stores in Sacramento and the San Joaquin Valley, warehouses and offices in Northern California, and a chain of Southern California Alphy’s restaurants, according to Claude Edwards, who was Alpha Beta’s president or chairman for 25 years until 1973.

Although the buyout was a success, the resulting debt slowed the company’s growth, Edwards said.

“The company was going along (opening) 15 to 20 stores a year, and suddenly the brakes were pulled,” Edwards said. “After (the buyout), they couldn’t afford any expansion. They’ve only opened two or three stores from 1979 until the present time.”

A lack of expansion wasn’t the only problem plaguing the Alpha Beta chain in recent years.

According to industry experts, many Alpha Beta stores are less than 25,000 square feet in size, too small to compete effectively by modern industry standards.

And because profits have not been used to upgrade existing stores, industry observers said, customers gradually have been turned off.

“The stores suffered for a long time because there weren’t a lot of cosmetic changes,” said one industry expert. “People didn’t have the perception that Alpha Betas were clean and well-kept.”

The chain stuck with a dowdy brown, green and orange decor, while lighter colors came in vogue at competing chains.

And Alpha Beta has been slow--partly because of the small size of many of its stores--to add the fresh fish counters, delicatessens, bakeries and other customer lures used by rival chains.

Pricing perception is a problem, too. The company changed strategies repeatedly--from half-price sales to double coupons to specials--and apparently confused consumers in the process.

That may explain why many shoppers didn’t seem to notice when Alpha Beta switched in the summer of 1986 to a low-price policy--lower prices than anyone except Lucky, according to a consumer-group survey.

Alpha Beta’s market share in California has been steadily shrinking. Over the past five years, the chain’s market share dropped from 7% to 5% in the San Francisco Bay area, and from 13% to less than 10% in Southern California, according to Supermarket News, a trade publication.

Not surprisingly, American has decided that it makes more sense to switch than continue fighting for market share. The company said Friday that it will retire the Alpha Beta name and convert the California supermarkets to Lucky’s over time.

American operates 248 Alpha Beta stores across California, although it plans to sell at least 31 and may close others as it combines the two companies. Lucky operates 481 supermarkets in California and three other states.

Besides the California supermarkets, American’s Alpha Beta subsidiary also operates Skaggs Alpha Betas and Buttrey Food Stores in the Northwest. A second subsidiary, American Superstores, oversees three supermarket chains in the East and Midwest--Acme Markets, Jewel Food Stores and Star Markets. A third, Osco Drug, operates drugstores across the country.

Of the company’s various holdings, the West Coast operations have recently been among the least successful.

American reported profits of $154.3 million last year, up slightly from $144.5 million the year before. But the increase reflected a low tax rate and a gain on the sale of some of its Osco drugstores. Operating profits dropped 8.3% to $386.6 million.

American reported last week that earnings declined 23% to $27.1 million during the first quarter of 1988.

The profit squeeze was even more severe for the company’s Alpha Beta stores. Operating earnings for the chain plunged 55.9% last year to $31.4 million. For the first quarter of 1988, Alpha Beta operating earnings declined 43.6% to $6.7 million.

“Alpha Beta didn’t have a great future in this market,” a competitor said. “Skaggs had to do something and make an acquisition here or get out.”

What Skaggs did first was attempt to buy Ralphs Grocery, which was put up for sale early this year by Federated Department Stores in an attempt to thwart an unwanted takeover.

When Skaggs was outbid for Ralphs, he turned his attention to Lucky. Like American, Lucky had been a serious suitor for Ralphs.

The similarities didn’t end there. Last June, Lucky concluded a nine-month streamlining process after incurring a high level of debt.

Much of that debt was created by a $575-million stock buyback designed to thwart an attempted takeover by investor Asher Edelman. In addition, in late 1986, Lucky shed unprofitable divisions, including the Gemco discount store chain.

“They got rid of all the non-food assets and concentrated on the core food retailing division,” Edward Comeau, a food-retailing analyst with Wood Gundy Ltd. in New York, pointed out.

“They restructured in six months and turned it into an extremely profitable company. . . . Since then, they’ve really been cooking with steam. After the restructuring, a lot of capital was poured back into food retailing, and they were regarded as the most viable player in California,” Comeau said.

Lucky’s highly promoted image as the “low-price leader” among supermarkets also made it attractive to American.

“Lucky unquestionably has the stronger consumer perception, (while) Alpha Beta just can’t get enough momentum to change its customer image,” one retail expert said.

If American can make Lucky’s image work at the former Alpha Beta markets--even though they are small--it should increase sales at those outlets, he added.

Because of Lucky’s comparative success, many industry observers believe that retaining its management may be a key to making the merger work.

That is apparently what will happen. The Lucky management team headed by Chairman John Lillie is staying on board to run the combined Lucky-Alpha Beta operation.

The consolidated chains will be a separate group within American Stores, with its own board of directors and considerable autonomy. The combined operation will be run from Lucky’s current headquarters in the Northern California city of Dublin.

In a recent interview, Lillie said that Skaggs “wants to make it attractive for Lucky management to aggressively run the combined operations.”

But some remain skeptical about Skaggs’ willingness to delegate responsibility.

“He could shoot himself in the foot,” said Comeau, the analyst. “If Sam starts sticking his finger into the business, Lucky might have a problem. . . . Skaggs needs the management of Lucky a lot more than they need him.”

And industry observers wonder how American’s traditionally hard-line policy against labor demands will affect the consolidation process.

In late 1985, for example, American’s Alpha Beta division threatened to close a Fullerton warehouse, thereby laying off 185 workers, if wage concessions were not made.

The company ultimately backed down on the threat, according to Jerry Scott, secretary-treasurer of Teamsters Local 952 in Orange.

“They’re no good for working people,” Scott said.

If that is the case, it may be unwelcome news for employees in operations that American decides are duplicative.

American said it will sell from 31 to 37 stores in California within six months to satisfy Federal Trade Commission concerns. The company said it would attempt to sell the stores to other food-market operators to “protect, insofar as possible, the jobs of our employees in these stores.”

According to Morton Baum, field director for Local 324 of the United Food and Commercial Workers Union in Buena Park, the sales could affect about 50 to 100 jobs in each store, depending on size.

Jobs aren’t the only unknown. The new chain will also have to determine such things as how to adapt Lucky’s coupon and discount policies to its Alpha Beta stores and how to meld Lucky’s streamlined, unstructured management style with Alpha Beta’s much more regimented operations.

Industry observers also worry that because of its added debt burden, American Stores may lay off more personnel than necessary, reduce needed capital investments and defer store maintenance and remodeling.

In other words, repeat its past history.

But the company said Friday that it plans to spend about $500 million over the next two years to build new stores and remodel existing supermarkets.

Still, some analysts voice concern. “American most likely will have to pull capital from other areas of the country to maintain the level of capital spending that Lucky wants,” Comeau said. “But if Sam Skaggs is smart, he’ll make sure that Lucky gets whatever it wants.”

There is, however, another scenario mentioned by some observers. American Stores could spin off one or more of its divisions as separate corporate entities. One industry insider theorized that Skaggs might sell Osco and American Superstores and attempt to keep the western grocery stores for his family.

If so, neither Skaggs nor any company spokesperson is offering any clues.

Meanwhile, the Southland supermarket industry is bracing for intense competition.

“I’ve been in the business for 40 years, and there’s never been a time when this hasn’t been a very competitive market,” said William S. Davila, president and chief operating officer of rival Vons Cos. supermarkets. “But don’t think we’re going to roll over and let ‘em do it without knowing they’ve been in a little bit of a dogfight.”

Sam Skaggs just may enjoy the battle.

Times staff writer Martha Groves contributed to this story.

AMERICAN STORES AT A GLANCE

American Stores is major operator of supermarkets and drug stores, with 1,460 retail outlets in 39 states. The company’s operations include Alpha Beta, Skaggs Alpha Beta, Buttrey Food Stores, Acme Markets, Jewel Food Stores, Star Markets, Osco Drug and Skaggs Telecommunications Service. Last week, American Stores won a bidding war to acquire Lucky Stores, another major supermarket chain. The company plans to convert its Alpha Beta stores to Lucky supermarkets. American Stores will relocate its corporate headquarters to Irvine from Salt Lake City in July. The company’s Orange County operations include Alpha Beta’s national and regional headquarters, 40 Alpha Beta supermarkets, 36 Osco drug stores, a dairy plant and two warehouses.

Year ends January

(in millions) 1988 1987 1986 1985 1984 Revenue $14,272.4 $14,021.5 $13,889.5 $12,118.8 $7,983.7 Net income $154.3 $144.5 $154.5 $185.5 $117.9

Assets . . . $3.7 billion

Number of employees . . . 130,000

Shares outstanding . . . 30.8 million

52-week price range . . . $86.25-$41.50

Friday’s closing price (NYSE) . . . $51, down 50 cents

Chief executive . . . L.S. (Sam) Skaggs