Innovative spirit burns bright - Part 2: Business Today Overview - ShopKo Stores - Brief Article

DSN Retailing Today, Oct, 2002

With 141 stores today and some lean times behind it, ShopKo is looking past stabilizing its business to the future, where new merchandising initiatives, store remodeling and physical expansion once again become priorities. Although the past two years have focused on tightening operations and fixing problems at the company's Pamida division, its slowdown in organic growth hasn't stopped ShopKo from developing and implementing new innovative merchandising programs that will further differentiate ShopKo from its competition, all the while keeping a sharp eye on costs.

More than a year ago, ShopKo's management team conducted extensive segmentation research in an attempt to move forward based on consumer research. The results gave rise to 24 different segments or initiatives, some of which the company has developed and rolled out to stores, some of which are still gestating and some of which are not quite ready for prime time.

What is clear from both the ambitious nature of the initiatives and the merchandising direction already apparent in stores, is that ShopKo is continuing to raise the bar with forward-thinking merchandising, lifestyle marketing and branding initiatives.

"Neat Stuff. Neat Store." is the company's motto and everything going on at ShopKo today remains true to that slogan. No cost-cutting initiatives are permitted that will detract from the clean, uncluttered stores, friendly service and trend-right merchandising. "One of the core competencies that this company holds near and dear to its heart is creating a shopping experience for the customer that is simple, easy and friendly," said Doug Wurl, senior vp and gmm of home.

For years, ShopKo has prescribed to a lifestyle approach and its newest initiatives take that concept to another level. A series of new merchandising programs and tests are set to bring product together from different areas of the store in vignette-like displays, making it easier for customers to both envision an entire look and find products to complete it, said Wurl.

The company has even gone so far as to extend lifestyle marketing and "adjacency thinking" into advertising efforts, said Terry McDonald, senior vp of marketing and communications. Recent circulars draw together product from different departments on the page, a dramatic departure from the standard advertising program that allocated space by category, he said.

But the biggest focus at ShopKo is actually on its Pamida division. ShopKo purchased the Omaha-based chain in 1999 as a growth vehicle, intending to build it into a national chain that would serve small markets underserved by big-box discount stores, including ShopKo's own. But that goal was quickly sidelined, as new operational and merchandising initiatives proved ineffective and Pamida became a drag on earnings.

But all that seems about to change. "As we move into 2003 and 2004 we're being more optimistic for top-line growth," said Pamida president Mike Hopkins. "Everybody knows that our problems have been operational, and we don't have those problems anymore. Distribution center inventory is down 40%, in-stocks are higher than ever, a high concentration of business is not ad-driven anymore and we've gone to zone pricing based on distance."

Stores furthest from big-box discount stores charge slightly higher prices than those closer in. In this way, Pamida operates three such pricing zones, squeezing a few extra "pennies from heaven," as Hopkins calls it, from those outer areas.

One of Pamida's biggest problems was a DC so fraught with glitches that the chain couldn't get product to stores. That is now fixed and management is focused on rectifying earlier merchandising miscalculations and expanding the pharmacy, a core strength at ShopKo stores and one Hopkins believes also can help Pamida.

"It's a foundation ShopKo's built on and Pamida could be built on, as well," Hopkins said. "It's a great business." To that end, Pamida is incorporating pharmacies into stores, buying out the local pharmacist when it can to build traffic and loyalty.

There are currently three different formats among Pamida stores: those that operate pharmacy and expanded grocery areas called the Pantry; units with a Pantry department and no pharmacy; and the simple discount/variety store format. Profitability decreases with the loss of each department and those units with both a Pantry and pharmacy perform best. The goal is to bring these traffic-driving departments into as many Pamida units as possible.

ShopKo added 14 pharmacies in Pamida units this fall, and plans to add about 20 per year, ultimately converting about two-thirds of the chain. The division has been reorganized as well, with Pamida pharmacy operations reporting to Mike Bettiga, ShopKo senior vp of stores and retail health operations.

The success of the pantry at Pamida further illustrates the differences between the two divisions. Whereas a similar program was tested and discontinued at ShopKo stores, items such as milk are some of Pamida's best-selling SKUs. Small-town customers are more inclined to use Pamida as a convenience store than ShopKo customers, who have more shopping options nearby.