Handicapping the regional retailers - Buyers & Sellers - Column

Discount Store News, August 15, 1994 by Don Longo

For the past four months, DSN editors traveled the country visiting the stores and head-quarters of the largest regional discount chains.

Analyzing the regional discount chains is a little like handicapping a horse race. The major difference is that only a few of the "horses" compete against one another. As far as their future prospects are concerned, the race is not against one another so much as it is against The Big Three discount chains: Wal-Mart, Kmart and Target. As I've said in the past, soon every major market will have a Wal-Mart, Kmart and Target, along with one, perhaps two, successful regionals.

Based on our staff observations, here's how I handicap the prospects for the five leading regional discounters over the next five years.

* Caldor (3-1): I like Caldor better than any of the other regionals mainly because its problems are so fixable. Caldor has a strong-willed, stablemanagement team. Its president, Marc Balmuth, is fanatical about staying on-trend and fashion-for-ward. Caldor's sales percentage of higher-margin soft lines is the envy of most regional chains--and some of the national discounters, for that matter. Most of its stores are as large as those operated by The Big Three and are located in densely populated markets where acquiring real estate will be difficult for competitors. Its main competition is Kmart, and Caldor's real estate locations, for a while at least, protect it from immediate head-to-head battles with Wal-Mart and Target.

Caldor's main problem is its store systems and service. The chain has been upgrading its information systems. Its newer stores, usually packed full of merchandise, are being opened up a bit to add customer space, like the major national chains have done.

A major customer service initiative, similar to the way Target lifted its employee morale through a Disney-inspired "Fast, Fun and Friendly" program, would go a long way toward cementing Caldor's position as the front-running regional in the nation.

* Venture (4-1): Venture shares many of the same strengths as Caldor. It is also a former division of May Department Stores, its management is solid and stable at the top, and it merchandisers respond quickly to fashion trends. Its soft lines sales mix also is higher than most other discounters' and, like Caldor, it is one of the few regional discounters to expand rapidly in recent years.

In systems and operations, Venture is ahead of Caldor. Its cost structure is lower than that of any regional chain and it is accustomed to highly competitive markets since it operates against The Big Three in such hotly contested cities as St. Louis, Chicago and Dallas.

My main concern: Has Venture weathered the best The Big Three can throw at it, or will even tougher competition put the squeeze on this efficient discounter?

* Pamida (5-1): Still a dark horse, Pamida is making good on its strategy to open in markets too small for The Big Three. It actually competes against fewer Wal-Marts today than it did a year ago. The chain still must upgrade its information systems and, despite great improvements in men's and women's apparel, the kids' assortment needs strengthening. The big question is: Will this 178-store chain have the financial resources to remodel its existing stores to the new soft lines-oriented prototype?

* Bradlees and ShopKo (6-1): Bradlees shares similar real estate and soft lines merchandising strengths as Caldor. Its execution seems to be better, but its prices seem higher. Many analysts feel Bradlees has one of the highest cost structures in the industry. Bradlees shares many markets with Caldor, and like Caldor is vulnerable to Northeastern expansion by Target. Caldor, however, has expansion momentum behind it. Bradlees has downsized since 1988.

Like Venture, ShopKo is also battle-hardened against the Big Three chains. However, its hard lines and male-oriented stores are under great pressure from the king of low-priced hard lines: Wal-Mart. The Vision 2000 prototype is a tremendous step in the right direction. Merchandising management turnover has been high though, so '95 is probably the real test of whether Vision 2000 is ShopKo's future. With expanded distribution facilities and a new, badly needed MIS upgrade underway, ShopKo is acting to secure its position as a superregional discounter in the Midwest and Mountain States.