Stater Bros. Grooms and Grows
Jack Brown shakes a customer’s hand and plucks a peach from a produce table at a Stater Bros. grocery store in Redlands. He casts an almost loving glance at the chilled fruit and asks a visitor to feel its firm yellow and red skin.
“We’ve invested millions in these refrigerated produce tables,” explained the owner and chief executive of Colton-based Stater Bros. Markets, the largest independent supermarket chain in Southern California. “This peach is going to stay cool until it gets into the customer’s refrigerator.”
To be exact, the 162-store chain spent $15 million over the last two years on refrigeration and expanding its produce sections from 450 items to more than 800.
The spending is part of a large capital improvement campaign that includes $250 million on a new 200-acre corporate headquarters and distribution center complex to be completed at the site of the former Norton Air Force Base in San Bernardino next year.
Investing in stores and distribution, combined with a low-price strategy and an emphasis on customer service, is the core of Brown’s formula for competing in the tough Southern California market against rivals such as Ralphs, Albertsons and Vons, all owned by larger national supermarket companies, and so-called big-box retailers such as Wal-Mart Stores Inc. and Costco Wholesale Corp.
Stater Bros. will open five more stores this year and next and ramp up to 10 more stores in 2008, when Brown said the new distribution center would be running smoothly.
The company’s low prices haven’t gone unnoticed by customers and consumer groups.
“Pricewise, I prefer this Stater Bros. store to the Albertsons across town,” said Redlands resident Debbee Huston as she loaded groceries into her car.
In its October issue, Consumer Reports magazine ranked Stater Bros. the 10th-best chain in the country, noting its low prices. Vons ranked 21st; Ralphs 42nd and Albertsons 43rd. Ralphs and Albertsons received poor marks for prices. Trader Joe’s, also noted for low prices, was the only major Southern California grocery chain ranked higher than Stater Bros., placing second.
Although Stater Bros.’ prices are low, Huston said, the selection isn’t as broad as Albertsons and the other major markets, forcing her to sometimes make multiple shopping trips.
“They will have a product, but maybe not all the flavors,” Huston said. “Or there will be a coupon for something in the newspaper and when I bring it in, they won’t have that product in the store.”
At an average of 30,000 square feet, Stater Bros.’ stores often are smaller than rivals. But Jim Lee, Stater Bros.’ chief operating officer, said the company was constantly working to expand its offerings, especially at its new stores, which at 45,000 square feet are 50% bigger.
In older stores, Stater Bros. is shrinking its back room storage area to get more floor space and to add products to the shelves. The company, for example, recently added 120 products from the Full Circle brand of natural and organic goods.
Brown looks at each store as an admiral might view ships in a navy. Everything must be neat and tidy, and the staff must remember that it works for the customers.
“We have a better groomed and more disciplined staff than any of the other chains,” Brown said.
There’s a boot camp for newly hired checkers, even if they have worked at another chain. The five-day course teaches recruits “how we expect our customers to be treated,” Brown said.
Shoppers notice.
“It is a clean and nice store and the people are very kind,” said Carmona Viorica, another shopper at the Redlands store.
Founded 70 years ago in Yucaipa, Stater Bros. has been a longtime fixture in the Inland Empire. Its geographical reach expanded deeper into Los Angeles, Orange and Kern counties in 1999, when the company bought 43 Lucky stores as part of a divestiture ordered by regulators when that chain was acquired by Albertsons Inc.
Stater Bros. has continued to grow, helped by the rampant home building in San Bernardino and Riverside counties, where more than half its stores are located.
“With all the growth in housing in the immediate area, we don’t have to look far for places to open new stores,” Brown said.
Each new store leverages the branding, advertising and distribution investments Stater Bros. has made in the Inland Empire.
The chain got a big boost from the strike and employee lockout that savaged Southern California’s supermarket industry nearly three years ago.
Before the dispute, Brown made an agreement with United Food and Commercial Workers union Local 770 in Los Angeles to go along with the terms of any contract the union worked out with Stater Bros.’ bigger rivals, Ralphs, Albertsons and Vons. In exchange, union members continued working at Stater Bros. stores through the work stoppage, getting mobbed by shoppers who wanted to avoid the picket lines at the other chains.
The company’s annual sales were $2.75 billion in its fiscal 2003, which ended in September just before the labor dispute. Revenue jumped 35% to $3.7 billion in 2004.
Stater Bros.’ growth rate has since normalized. Revenue in 2005 dropped to $3.4 billion -- still 24% higher than before the strike and lockout. Brown believes the supermarket strike left his company with a permanent 6% gain in sales.
The 2005 revenue decline prompted credit rating firm Standard & Poor’s to lower Stater Bros.’ debt rating to B-plus from BB-minus in June.
“The company was not able to hold on to as much market share as originally anticipated as after the strike ended,” S&P; analyst Stella Kapur said.
“Most supermarket shoppers dwindle back to their previous stores,” Brown said. “But we did reach people who had not been in a Stater before and found they like it.”
Although popular with shoppers, the company’s aggressive pricing strategy can be risky for profit margins, Kapur said. When competitors lower prices, Stater Bros. is forced to match to maintain its advantage.
The risks of that strategy were evident in the company’s recent fiscal third quarter, when profit fell 22% to $5.7 million despite a 5.4% gain in sales to $885.9 million.
Brown attributed the profit drop to a price war that broke out after Vons eliminated doubling the value of manufacturers’ coupons.
“It is like a chess game,” Brown said. “We are all dealing with such small profit margins that there’s not a lot of room for error.”
As the industry heads into negotiations on a new labor contract early next year, Stater Bros. remains on good terms with the union.
“In light of what has happened with the other three big employers, I would have to rate Stater Bros. No. 1,” said Rick Icaza, president of United Food and Commercial Workers union Local 770. “They are an exceptionally good employer that is not anti-union or anti-worker.”
Icaza will probably be dealing with Brown for at least several more contracts.
Despite last month’s promotion of Lee, a former Wild Oats Markets Inc. and Ralphs Grocery Co. executive, there’s no indication that Brown, 67, is stepping back from the company he has shepherded since 1981.
“I have no plans to leave,” Brown said.
He regularly receives inquiries about selling the company, which analysts estimate could be worth $1 billion to $1.4 billion.
But Brown answers that question with the same “no” when asked about retirement.
“I have no interest at this time,” he said.
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At a glance
* Company: Stater Bros. Markets
* Founded: 1936
* Headquarters: Colton
* Operations: 162 supermarkets in Riverside, San Bernardino, Los Angeles, Orange, San Diego and Kern counties; Heartland Farms, the processor of Knudsen dairy products.
* Employees: 17,000
* Leadership: Jack Brown, chairman and chief executive; Jim Lee, president and chief operating officer
* 2005* sales: $3.4 billion
* 2005* profit: $26.2 million
*Fiscal year ended Sept. 25
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Source: Stater Bros., regulatory filings
