Heating Up the Supermarket Wars : Grocers: Smith’s of Utah sold its Food King outlets in the Southland seven years ago, but it’s returning with megastores.
The last time it did business in Southern California, Smith’s Food & Drug Centers got run out of town.
Now Salt Lake City-based Smith’s is one of the hottest supermarket chains in the West, and it’s coming back to the Southland with a score to settle.
Will Smith’s be a winner its second time around with its new king-size stores, where shoppers will be able to buy everything from concert tickets to takeout Chinese food to cold tablets?
Most analysts are upbeat about the fast-growing retailer’s long-term prospects, even though it’s hit some snags in other new markets--including a serious run-in last year with health authorities in Reno and tougher-than-expected competition in Phoenix.
Smith’s biggest test yet will begin Thursday in Oxnard, where it will open the first of the 50 to 60 supermarket-drugstores it plans to build in the southern half of the state by 1995. At 79,000 square feet, the gleaming “combination stores” will be twice the size of many competing supermarkets. They also will be a far cry from the beat-up markets the company sold seven years ago when it operated here under the name Smith’s Food King.
“We’ll be the only place in Southern California where you can truly do one-stop shopping,” crowed Jeffrey P. Smith, the company’s 41-year-old chairman and chief executive and the late founder’s middle son.
For some consumers, the rapid influx of combination stores will probably mean more choice and lower grocery bills.
Analysts generally expect supermarket price battles to flare for several months or more in the neighborhoods that Smith’s enters as entrenched grocers fight to hang on to their customers. Over the long run, Smith’s says, its prices will usually be in line with those of Lucky supermarkets, which is considered to have the lowest across-the-board prices in the Southland.
But for Smith’s, which has 100 stores from Idaho to Texas, the push into Southern California represents a big gamble in a complicated, sprawling market. The precedents for super-sized supermarkets here aren’t encouraging.
Ralphs, for instance, flopped in the late 1980s with its Giant warehouse store format, which had many of the services Smith’s will offer. Vons has had better luck with its upscale Pavilions chain, but even the largest of those stores is 14,000 square feet smaller than the Smith’s supermarkets will be.
Many shoppers are turned off by supermarkets exceeding 60,000 to 65,000 square feet. “It just seems too big to me,” said Sarah Oman, a University of Utah sophomore who occasionally shops at Smith’s.
In fact, a leading supermarket analyst who has long been a burr in Smith’s hide is slamming the expansion plans and questioning whether all of the chain’s proposed stores will open in Southern California.
The critic, Gary M. Giblen of Paine Webber Inc., contends that the company is headed for a bad fall because of an “inexperienced and unseasoned” management team that is moving too quickly and overspending.
“They build the nicest stores in town for the sake of building the nicest stores in town,” Giblen said.
As evidence that the company’s growth has gotten out of management’s control, Giblen points to a variety of “unfathomable errors” that suggest that more problems “are just waiting to happen.”
In Phoenix--where Albertson’s and longtime local supermarket chains have given Smith’s an unexpectedly tough battle--the company this spring agreed under pressure to change its price-comparison newspaper ads. The state attorney general’s office had contended that the ads were misleading.
Smith’s is also being investigated by the U.S. Labor Department, apparently on a charge that it pressured some employees in Phoenix to work overtime and then failed to pay them for all of their extra hours. A settlement is expected shortly.
But the worst embarrassment came at two Smith’s stores in Reno and neighboring Sparks. County health authorities cited Smith’s after discovering, among other things: ants and cockroaches in a deli department and vermin droppings in a dog food section. Also, authorities charged, furniture polish was used to clean a food preparation table and motor oil was stored next to a meat preparation area.
Jeanne Rucker, who supervised the Smith’s inspections for the Washoe County District Health Department, said the problems continued for two years and calls it the worst sanitation situation that she has seen in her 12 years in the field. “They would take care of one problem, and then they’d have three more,” she said. “They were basically out of control, at least at these two stores.”
Last October, Rucker said, her department threatened to close the Reno and Sparks stores. Now, however, Smith’s has taken corrective steps and is doing a “pretty good” job, she said. Rucker added that the stores remain “very popular” with shoppers.
Jeff Smith characterized the labor and health incidents as typical operating problems in the supermarket business and said the company normally acts swiftly to make improvements. He blames local managers for what happened in Reno, saying they neglected to notify corporate executives in Salt Lake City about the situation and then failed to handle it themselves.
Still, Smith’s has been a big hit with consumers, particularly among shoppers who think bigger is better. Along with conventional supermarket and drugstore goods, Smith’s stores feature specialty departments providing video rentals, fresh frozen yogurt, one-hour photo processing and dry-cleaning service.
In Southern California, there will also be customer service centers where shoppers can mail packages, pay utility bills, fax letters and buy tickets for ballgames or rock concerts. “You don’t have to go anywhere else,” said Jonathan H. Ziegler, an analyst with Sutro & Co. “I think they have the winningest formula around.”
Fans of the stores in other cities also enjoy the clean look and wide-open ambience. “I like the wide aisles,” said Dorothy Gilbert, a retired dental assistant in Salt Lake City. “I rarely get someone in front of me where I have to say, ‘Will you please move?’ ”
Likewise, most Wall Street analysts who follow the company are bullish on its long-term outlook. The company’s stock is hovering at one of the highest price-to-earnings ratios in the industry. Even after falling $2.875 last week to close at $39.125 on Friday, apparently because of short-term concerns about slowing supermarket industry sales, Smith’s stock was selling for 19 times its projected earnings per share for 1992.
Profits and sales have been robust for several years. Last year earnings soared 31% to $34.3 million on sales that climbed 17% to $2.03 billion.
Company executives soft-pedal the impact they will have in Southern California, saying they don’t expect to rattle the likes of Vons, Lucky or Ralphs. Smith’s predicts that it will snare about 6% of the market when its projected 50 to 60 stores are open, which would make it at best the fifth- or sixth-biggest chain here.
Although many of the first stores will be in the Inland Empire, Smith’s hopes to build supermarkets throughout Southern California and, later on, over the entire state. The potential sites include a location in depressed South-Central Los Angeles, a territory that most of the other supermarket and general merchandise chains have largely abandoned.
Leading the charge is Jeff Smith, who flies around the West to check out possible sites for stores on his company’s fleet of four jets.
A stylish dresser who wears gold rings on both hands, Smith likes to relax at his vacation home in the posh Vintage Club development in the Southern California desert town of Indian Wells. He added to his personal wealth in July when he sold a sliver of his corporate stock for $10 million in the company’s stock offering.
Another $12 million from the offering was pocketed by his lower-profile younger brother, Richard D. (Richie) Smith, 37, the company’s president and chief operating officer. Giblen questioned whether the stock sales by the brothers are a sign that the Smiths are worried about the company’s immediate prospects. But Jeff Smith said he simply wanted the money to pay off taxes and to diversify his personal holdings.
The Smith brothers, to some extent, have lived in the shadow of their father, Dee Smith, who died in 1984. A portrait of their father still adorns all of the company’s stores.
The elder Smith expanded the company from a pair of small markets in the late 1940s into a major Western chain by buying failing grocery chains and turning them around. One of the few times the company’s Midas touch failed was in Southern California, where it bought the former Food Giant stores.
Jeff Smith said the company’s Southland stores then badly needed expensive remodeling, so when Lucky offered a good price for the locations, management jumped at the chance to pull out. Now Smith’s is returning with a combination store format developed during the sons’ reign.
How could Smith’s fail to make it in Southern California? For starters, Smith’s big stores will be expensive to build and run. They will need to attract customers from as far as three miles away to bring in enough revenue to prosper. That means that many customers would have to like Smith’s enough to pass by one or more of their closer, existing neighborhood stores.
Other complications could also drive up Smith’s expenses. Lacking a major local warehouse, Smith’s will truck in frozen foods all the way from Phoenix. The Southern California stores will be unionized, unlike most other Smith’s locations.
On top of that, some analysts say, Smith’s will face tougher competition in Southern California than it has in any previous market.
But Jeff Smith discounts those issues. The chain’s strong balance sheet, he said, will enable it to sustain early start-up costs.
In addition, Smith said, Smith’s Food & Drug is accustomed to high labor costs; he said the company has avoided unionization elsewhere by paying high wages.
Store managers’ annual salaries and bonuses, company executives say, have averaged close to $90,000.
As for its Southern California competitors, Smith said, his company has gone head-to-head against Vons, Lucky and Albertson’s in Las Vegas and fared well.
He also isn’t worried by the failure of Ralphs’ Giant format in Southern California. Smith maintains that Giant flopped because, among other reasons, its prices weren’t low enough and because its stores were too close to competing Ralphs supermarkets.
Smith said his company decided to return to California to maintain its brisk growth largely because the state is less saturated with supermarkets than other parts of the West, particularly when it comes to big combination stores. He cited average weekly sales per square foot estimated at $12 for major supermarkets in Southern California versus $7.50 in other regions where Smith’s operates.
In addition, Smith said, the shrinking but still-heavy debt loads burdening the Vons, Ralphs and Lucky chains will curb their ability to compete against the new Smith’s stores by cutting prices or building new supermarkets.
All told, Smith said, it’s high time for his company to return.
Smith’s at a Glance
Company: Smith’s Food & Drug Centers
Headquarters: Salt Lake City, Utah
Business: Operator of a chain of grocery stores--mostly giant combination supermarket-drugstores--in the West
Stores: 100, with plans for 50-60 in Southern California by 1995
Employees: More than 15,000
Top Executives: Jeffrey P. Smith, chairman and chief executive; Richard D. Smith, president and chief operating officer; Robert D. Bolinder, chief financial officer, and Kenneth A. White, regional manager for California.
Major Shareholders: Chairman Jeffrey P. Smith owns or controls 48.2% of the voting stock, mainly from shares held in a trust for his mother, Ida. The next biggest voting block, 8.3%, is held by an arm of the Church of Jesus Christ of the Latter-Day Saints, which was given preferred shares in a charitable donation. President Richard D. Smith controls 6.9% of the voting stock, and director Fred L. Smith, 4.6%.
Financial Results: Net income climbed from $12.5 million in 1986 to $34.3 million last year. Sales in the same period rose from $882.2 million to $2.03 billion. In the first six months of 1991, net income rose 27% to $21.2 million on sales that increased 9% to $1.08 billion.
Stock Performance: Since the company went public in June, 1989, its stock has ranged from a low of $20.50 to a high of $43.75. It closed Friday on the New York Stock Exchange at $39.125.
Source: Smith’s Food & Drug Centers
