Stater Seeks Market Share
Driving through an Albertsons parking lot in San Bernardino, Stater Bros. owner and Chief Executive Jack Brown counted cars and declared victory.
One of his grocery stores a couple of blocks away was more crowded that afternoon, as, Brown claimed, it usually is. “They can’t touch us,” he laughed, wheeling his Cadillac out of the half-empty shopping center.
Brown’s Colton-based supermarket chain, which operates 157 stores from San Diego to Kern counties, has defied the conventional wisdom that small chains would get crushed as big grocers got even larger. In fact, Stater’s sales have grown more than 50% in the last few years, as it has made acquisitions and siphoned away market share from larger chains such as Ralphs Grocery Co. and Albertson’s Inc.
Now Stater Bros. and Brown are gearing up for their most formidable competition: Wal-Mart Stores Inc.
Late next year, the world’s largest retailer plans to open the first of 40 grocery super-centers in California, many likely in suburban counties such as Riverside and San Bernardino, where Stater has its highest concentration of stores.
Wal-Mart’s assault on the nation’s most competitive grocery market could take a toll on privately held Stater. “It doesn’t take a lot of encroachment to have an impact on a company that size,” said Andrew Ebersole, a bond analyst with KDP Investment Advisors.
Brown knows that: He recalled that after a Wal-Mart opened near his home in Redlands, a local bike shop, a sporting goods store and a vacuum cleaner outlet closed their doors.
But groceries, he said, are a different business, and there’s enough of it to go around for several kinds of markets, super-size and small.
“We don’t have to outrun the grizzly,” Brown said, referring to Wal-Mart. “We just have to outrun our competition. I’m really competing with Ralphs, Vons and Albertson’s, then Wal-Mart.”
That’s not to say that he hasn’t been planning for its invasion. Brown, 62, has run Stater Bros. for two decades and knows he’s in for a fight.
In the last year, he dispatched top managers to Bentonville, Ark., where Wal-Mart is based, and to Dallas, Philadelphia and Syracuse, N.Y., where the discounter goes head-to-head with national grocers and regional chains. His staff asked local grocers: “How do you compete? What did you do? What are their weaknesses?”
Managers took away a few ideas from their trips, such as the big black-and-white signs now on display at the end of Stater aisles that resemble Wal-Mart’s price rollback signs.
Although Albertson’s and Kroger Inc., which owns Ralphs, have tried to fend off Wal-Mart and other discounters by offering fancier food and outdoor furniture, Stater has competed against larger companies by holding to the quaint strategy espoused by twin brothers Leo and Cleo Stater when they started the chain in 1936: Provide low prices, clean, easy-to-navigate stores and butchers on duty to cut steaks for customers.
“They have the best meat and seafood,” said Angie Costa, perusing the produce aisles with her 4-year-old daughter, Jessica, at Stater’s Downey store. “And I think it’s cleaner ... the Albertsons down the street is a dive.”
By some indicators, Stater is outpacing rivals. Stater’s same-stores sales climbed 1.8% in its third quarter ended June 29, whereas Safeway Inc., which owns Vons, and Albertson’s posted negative same-store sales.
A recent survey in Consumer Reports ranked Stater the ninth-favorite grocer in the country, ranking below No. 1 Raley’s, which operates stores in Central and Northern California, but above Vons (No. 10), Ralphs (No. 26) and Albertson’s (No. 30).
Stater Bros. stores are smaller -- averaging 33,000 square feet to Safeway’s 44,000-square-foot stores and Wal-Mart’s 200,000-square-foot super-centers -- so it can’t stock as many sizes of certain products. Some customers find the stores, with their red, white and blue decor, a bit antiquated, but say the chain’s low prices make up for the drawback.
Stater’s short haul from its distribution center to its Southern California stores has helped it keep its prices lower than its competitors on many items. But analysts say Wal-Mart can undercut the “low price leader” in every hometown, including Southern California.
“Retailers are trying to take costs out of the system, but labor is a significant cost and Wal-Mart has nonunion labor rates,” said Mark Husson with Merrill Lynch in New York. And Stater, with 14,000 employees, is a union shop.
Competitors attribute the chain’s longevity in the highly competitive business to Brown. “He’s the reason they are still alive and well,” said Roger Hughes, former owner of the Hughes Family Markets chain.
Rather than updating the chain, Brown has wisely preserved Stater’s “hometown, apple pie and Fourth of July” appeal, Hughes said.
Brown joined the company in 1981 as president when it had 3,300 employees and 79 stores. Two years later, he and other senior managers teamed with Chairman Bernard Garrett to buy Stater from owner Petrolane Inc. The deal gave Brown a 49% stake and Garrett 51%.
The alliance between the two ambitious men was short-lived. In 1986 Brown fought Garrett for control of the company; Brown was temporarily ousted and both sides accused the other of corporate wrongdoing and public defamation.
Brown garnered the support of employees, who picketed for his return, and of the San Bernardino County Board of Supervisors, which passed a resolution supporting his bid. Craig Corp., which owned 41% of Stater Bros., agreed to back Brown, who eventually bought out Craig and now owns 100% of the company.
“All I’ve ever wanted is to control the company’s destiny,” Brown said.
The company has made him wealthy. His grocery empire is worth about $650 million, according to Los Angeles investment firm Houlihan Lokey Howard & Zukin. Brown earned $1.2 million in total compensation last year.
Stater is the largest private employer in the Inland Empire, where it operates 88 stores. That’s a source of pride to Brown, who grew up in San Bernardino and took his first job as a box boy in a neighborhood grocery store.
His biggest gamble was in 1999, when the company bought 43 Lucky’s stores as part of a divestiture ordered by regulators when that chain was acquired by Albertson’s.
It cost Stater $134 million, plus $40 million to remodel the stores, and the company had to float $450 million in corporate bonds, adding more debt than it had ever taken on. The heavy debt load pushed Stater into the red, as the company lost a combined $15 million in 1999 and 2000.
It has since recovered, posting an $11.8-million profit in fiscal 2002, when sales rose 4% to $2.7 billion. But, like many other grocery chains in California, Stater also has struggled with thin profit margins, in part because of higher utility, workers’ compensation and employee medical costs.
In the first nine months of fiscal 2003 ended June 29, Stater’s net income declined 32% to $7.5 million as sales rose 3% to $2 billion.
Industry analysts say Stater has taken the right steps, adding more luxurious items to its stores on which it can take a bigger margin, such as Krispy Kreme doughnuts and fresh flowers.
Now, Brown wants to slow down the pace of growth to five new stores a year.
He said Stater wouldn’t venture much farther north than the company’s Ridgecrest store in Kern County, because that would take away his distribution advantage.
In other words, Stater will stay put and wait for Wal-Mart to open up, and then duke it out.
“There’s a song from ‘The Music Man’ where the salesmen are on a train, singing ‘You have to know the territory,’ ” Brown said. “Here, we know our territory better than anyone because we have been serving it longer.”
