Smart & Final Is Thriving With Ease


While grocery stores have been battered by the proliferation of huge warehouse clubs such as Costco and Wal-Mart's Sam's Club, the pint-size warehouses of Smart & Final have flourished in their shadow, siphoning away business from customers who have become disenchanted by the long lines and parking lot congestion.

Its nondescript stores have no tire centers, snack bars or electronics departments, just unglamorous items such as 25-pound bags of pinto beans, gallons of private-label barbecue sauce and 200-count packages of plastic cups. But the 220 stores have one key advantage their huge competitors don't: convenience.

"I come here because I don't have to wait in huge lines or deal with the traffic at Costco," said Janice Bustos, who shops at the Covina Smart & Final for cleaning supplies for her business and picks up coffee and other groceries for her home.

The Commerce-based company seems to have finally righted itself after a poorly executed expansion in Florida helped depress earnings in the late-1990s. In the first three quarters of last year, Smart & Final's total store sales were up 6% to $1.1 billion from a year earlier, and earnings more than doubled to $7.9 million from $3 million in the 1999 period.

Much of the sales bump can be attributed to small-business owners like Bustos, who can't spare the time or can't find the cleaning supplies or food items they need at Costco.

Part supermarket, part warehouse store, part food distributor, Smart & Final's no-frills concept defies easy description and has for years befuddled analysts, manufacturers and competitors alike.

Even if the food industry doesn't know quite what to make of the 130-year-old chain, which trades as SMF on the New York Stock Exchange, its concept finally seems to be clicking with consumers, especially after the introduction of its new ad campaign, which entices consumers to "shop where the pros shop and save."

Consumers have become increasingly comfortable with warehouse shopping in recent years. Fifty percent of all households surveyed by ACNielsen in 1999 shopped at a warehouse club at least once that year, up from 48% in 1997.

Meanwhile, the number of trips to the supermarket have been declining, slipping to 90 annual trips from 94 just three years earlier.

With the company back in the black, Smart & Final's expansion plans have been revived. More than 15 new stores will open this year in its existing markets such as California, Florida, Nevada and the Pacific Northwest, where it bought the Cash & Carry wholesale grocery chain in 1998.

Although its stores are only about 20,000 square feet--a fraction of the size of Costco's 130,000-square-foot stores--they contain more than four times the number of Costco's 1,500 food items and a large number of cleaning supplies and paper products that the big warehouses don't carry.

The addition of a produce aisle, cuts of meat, premium wine and smaller-sized items also have helped attract more bargain-hunting grocery shoppers, just as Costco began using these items to lure customers away from supermarkets years ago.

"They've made some progress here that's key to driving sales," said Jonathan Ziegler, a retail analyst with Salomon Smith Barney. "They're certainly on the right path."

The chain's recent success has even convinced its majority stakeholder--Groupe Casino, France's largest supermarket chain--to begin buying up more shares, prompting another round of takeover rumors.

Ross Roeder, Smart & Final chairman and chief executive, says these rumors have persisted for years, and he knows of no immediate plans by Groupe Casino to wrest control of the company.

Ziegler, however, says the company needs to be taken private by Groupe Casino or sold entirely. Groupe Casino's stake, amounting to about 60%, has dampened interest in the stock and hampered the company's efforts to raise capital in the public market.

The stock's 52-week high, reached Monday, was $9.94. It closed at $9.31 on Wednesday, down 13 cents. But the price is less than half what it was in 1996, before the company embarked on an aggressive expansion in Florida, which pushed the company into the red for the first time since it went public in 1991.

"In hindsight, you could say too much was attempted at once, or ask why did they have to go all the way across the country to Florida," said Roeder, a board member who was enlisted to clean up the messy Florida expansion and in 1998 hired as chief executive. "There was no question that some very basic mistakes were made."

Those mistakes included opening just a handful of stores across an area where they were not known, requiring an expensive advertising campaign.

Moreover, its Florida food service company, Henry Lee Co., dipped into the red in 1999 after it had trouble integrating the stock from its stores, and as some of the customers it was carrying did not pay their bills.

Although the company appears to be back on solid footing, it's still not without its weaknesses. Smart & Final's food distribution business is still more potential than profit, many of its Southern California stores are old and badly in need of updating, and it still lacks a strong identity.

"Nobody knows what they are," said Glenn Llopis of Power Insights, a Brea-based warehouse club consultancy.

Their mix of products is certainly unusual, from its wide selection of gourmet cheeses to massive containers of pine cleaner, cases of candy and commercial gas stoves.

Although some locations appear to be a jumble of bargain buys or close-outs, its new stores are much more organized, with clearly labeled sections and angled aisles with big signs on the end showing the prices of its biggest movers.

The stores to be built this year also will contain test kitchens, Roeder says, where chefs can demonstrate the equipment and products the store sells.

Despite its recent stumbles, Smart & Final can boast one of the longest track records of any food store in California. The chain traces its roots back 130 years to grocery store Hellman Haas Co. in downtown Los Angeles, one of seven businesses listed in the first L.A. phone directory.

Although today's Smart & Final bears little resemblance to that operation, it has revived the Iris name, a private label introduced by that grocery in 1889.

The Smart & Final name came along in 1915, when J.S. Smart and H.D. Final, a couple of transplanted Midwesterners eager to introduce the "cash-and-carry" concept to Los Angeles, bought a small grocery and named it after themselves.

Smart & Final now ranks 21st among Los Angeles County's largest public companies, according to the Los Angeles Business Journal, with 220 stores and a large food distribution business, serving restaurants in Northern California and South Florida.

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