Fedco Is Getting a Make-Over, but Analysts Say It’s Not Enough
The company hasn’t renovated its department stores in 20 years, its sales have declined in each of the last five years and the chain is an absolute mystery to many Southern Californians despite its 49-year history in the region.
In a critical bid for more customers, Fedco Superstores--the regional membership discount chain--is beginning renovations at its cramped Cerritos store, the first step in a make-over of the 13-store chain.
Analysts say Fedco, which sells everything from bathrobes and milk to jewelry and refrigerators, needs more than a make-over. They say Fedco badly needs to expand to attract customers from powerful rivals with many more stores like Target, Wal-Mart and Kmart. But Fedco, hampered by its nonprofit status, is moving slowly.
“A three-year renovation is an eternity in retailing,” said Jack Kyser, senior economist at the Economic Development Corp. of Los Angeles County. “In just three years, we’ll see some retailers change their merchandising strategy and we’ll also see new retail competitors in this market. It’s a fast-changing competitive environment.”
Most chains are able to expand or renovate quickly because they have relatively easy access to capital--either loans, public debt or stock sales. In contrast, Fedco, as a nonprofit organization, has less access to capital and so cannot expand quickly, said David Fletcher, Fedco’s executive vice president.
Fedco’s nonprofit status “is actually one of their challenges,” Kyser said.
Until the opening of the first Price Club store in 1976, Fedco was the only membership department store chain in Southern California. Founded in 1949 by federal employees who initially restricted membership to government employees, Fedco now offers lifetime memberships to the general public for $10 and sells only to members and their guests. It is the lone surviving regional store chain in a discount field dominated by the national giants--Wal-Mart, Kmart and Target.
Most of the nation’s regional discounters--more than a dozen companies--died in the 1980s. Woolco, Gemco and FedMart, three chains that competed against Fedco, were among those disappearing in that decade. While Fedco competes with the Big Three national discounters in merchandise categories such as apparel, home furnishings, toys and sundries, the Southland retailer also competes with Sears in the heavy-appliance category and with specialty chain retailers for buyers of a broad range of other merchandise.
Fedco is not a warehouse store operation, but it competes in some areas with discount warehouse giant Costco--also a membership store. Fedco sells groceries, furniture, automotive accessories, tools, hardware, electronics, books and appliances.
Fedco executives say they have an advantage over rivals in that theirs is a nonprofit membership operation that does not have the earnings demands of companies that issue stock. Profit must be reinvested in Fedco’s operations or used to lower prices--and that’s one of the appeals of the chain, said Fedco President Bob Stevenish. Prices at Fedco are comparable to the national discount chains.
Fedco has 2.3 million active members. Stevenish said 97% of them track sales events and special offerings through the Reporter, the store’s promotional circular mailed out twice a month. About 60% of members use the Reporter to make spending choices, according to a company survey.
Lower prices and the wide selection of merchandise lure Jan Fields, who stood in one of Fedco’s supermarket-like checkout lanes with a cartload of clothing and hair-care products.
“I’m willing to stand in long lines for the specials--and sometimes I have to do that,” she said.
Unfortunately for Fedco, it is attracting fewer shoppers like Fields. While the company would not release actual numbers, it acknowledged that sales have declined 3% to 4% in each of the last five years. Earnings have declined an average of 2% in each of those years.
Unless Fedco expands its customer base, retail analysts say, its prospects are even dimmer. About 63% of its sales are generated by consumers who have been members at least 10 years; their average age is 62.
Reaching new customers is a daunting task, because many Southern Californians are not aware that the chain offers memberships to the general public and because most Southland residents have never visited a Fedco store, analysts say.
Fedco tried to attract new shoppers with February newspaper ads offering nonmembers a chance to shop for nine days without the obligatory membership card. Stevenish said the promotion failed.
Fedco is now soliciting new members from certain social organizations and is organizing membership drives by hosting special discount shopping nights for residents of certain communities. The retailer also plans to launch an advertising campaign in Spanish-language media this fall.
“Fedco has to conduct outreach because their customer demographics are a real problem,” said Jonathan Ziegler, a retail analyst at Salomon Smith Barney in San Francisco. “But the outreach won’t be effective unless the stores are ready with a better mix of merchandise.”
The plan to remake the stores is the linchpin of Fedco’s revitalization effort. It is planning to eliminate some poorer-selling merchandise lines and expand its selection of better-selling goods--a strategy that J.C. Penney is also now pursuing.
Big brand names have been strong sellers at Fedco and the chain stocks a broad array of high-profile lines. Among the more popular brands are Sony and Panasonic electronic goods, Whirlpool and Maytag appliances and Levi and Jordache apparel.
The company is expanding its stronger merchandise departments, such as home furnishings. For example, its stores next month will begin offering mini-blinds and draperies for the first time and expand the selection of bathroom and bedroom rugs. Meanwhile, Fedco will reduce the selection in some weaker sections, such as the toy and hardware departments.
To keep pace with shopper preferences, Fedco in July will issue new coded membership cards that will allow the company to track customer purchases.
As for structural changes, Fedco plans to expand shopping space in each store by 20% to 25% by converting storage and office areas into retail space.
The physical expansion plans please Jane Warner, a retired teacher who shops at Fedco’s Cerritos store.
“It’s so crowded there,” she said. “If you’re not careful, people will knock you down.”
The redesign project will be carried out at Fedco’s 10 stores and its three free-standing furniture-appliance centers over the next three years. The stores are located in Orange, Los Angeles, San Bernardino and San Diego counties.
