Mega Warehouse Foods plans 50% expansion of hybrid club concept - Megafoods Stores Inc., supermarket that uses warehouse store-style marketing

Discount Store News, April 5, 1993

MESA, Ariz. -- Mega Warehouse Foods, eyeing a 50% expansion for its hybrid warehouse-type operation, plans to open at least 12 stores this year, with a unit already unveiled in Henderson, Nev.,--its third in the Greater Las Vegas market--and six more due during the next three months.

The openings set by the now 23-store Southwest chain include replacing its initial Mega Warehouse Foods, a 34,667-sq.-ft. store in Mesa, with its 52,000-sq.-ft. prototype during the second quarter starting this month.

Other openings during the quarter include another two in the Greater Phoenix market, two in San Diego County, Calif., in Santee and Blythe, and one in San Luis, Ariz. Expansion during the third quarter calls for two more in the Phoenix area, where the chain currently has 10 stores, two in San Diego County, Calif., in San Marcos and Poway to double its count to eight in Southern California, and in Coolidge and Tuscon, Ariz., to also double its count in Arizona markets outside of Phoenix.

Besides its expansion program, Megafoods is also phasing in fast-food takeout courts in its stores that will provide products from such eateries as Kentucky Fried Chicken, Pizza Hut and Taco Bell on a licensed basis. It tested the program, designed to boost store traffic and volume, late last year in its University Square, San Diego store.

Last year, Megafoods added eight stores to help propel sales for the fiscal year ending Jan. 2 to $292.9 million, a 19.7% jump from $244.7 million in 1991. Net income, before a non-recurring charge of $1.1 million, amounted to $1.4 million, or double the $627,000 earned in the prior year.

The 5-year-old company, which went public at the end of last year, uses a wholesale club merchandising and marketing format for its food-oriented operation, while playing up its greater assortment of 20,000 skus and lack of any membership requirement.

Megafoods uses the proceeds of the initial public offering to reduce its dependence on the Fleming Co., a wholesaler that is the company's major supplier. It has begun to develop relationships with other suppliers.

The IPO netted Megafoods $37,968,000 from the sale of 2.8 million shares at $13.56 a share. A major portion of the funds were used to repay a loan of about $23 million from Fleming and to repay $1,480,000 to Fleming that was used to acquire two stores in Las Vegas. Two stockholders sold another 200,000 shares for $2,712,000 for their personal account.

Megafood's founder, Dean G. Miller, an experienced grocery industry executive who retained about 28% of the stock following the IPO, combined the warehouse format and its low-cost operations with the promotional appeal of traditional supermarkets as the way to offer the lowest possible prices to "the price-conscious segment of the retail grocery market," the company's prospectus noted.

The result of this hybrid operation: Megafoods' gross margin last year was 15.6%, up slightly from 14.8%. That figure was higher than the wholesale club industry's average 10% gross margin, but is about 60% under that of the traditional supermarket industry's 25% margin.

The warehouse format allows Megafoods to build a new store shell at about 20% less than the capital costs of a typical supermarket, the company said, while merchandising pre-packaged goods has resulted in sales per employee hour of approximately $140, compared with about $95 for the combination or superstores operated by supermarkets.

Megafoods projects development and construction of company-owned stores ranging from $2.5 million to $4 million a unit, depending on location and other factors. Its average investment in a new leased unit is about $1,625,000, with $1.2 million going for fixtures, equipment and other improvements and $425,000 for working capital. It also incurs indirect costs of about $175,000 for rent, labor, advertising, utilities and professional fees prior to a store's opening.

Megafoods' hybrid format forms the theme of the chain's current ad campaign in local newspapers and on TV: |Shop Us Like A Supermarket. Save, Like A Warehouse Club.' Spanish language print and broadcast ads are used in Hispanic communities within Megafoods' markets.

The chain positions itself as a low cost club-type alternative to supermarkets by merchandising a food-oriented assortment that includes basic and convenience non-foods like housewares and motor oil in stores opened 24 hours a day, seven days a week. The stores draw shoppers from a four- to seven-mile radius, the prospectus noted, while supermarkets attract customers from one to three miles away, while clubs pull members from a 20- to 25-mile radius.

Megafoods began by featuring large package size, but has worked with suppliers to expand its offering of club packs. More space is now devoted to club packs, which are displayed under signs identifying them as "Club Busters." Its dry grocery mix includes two private labels, Megafresh and Rainbow.

Megafoods has registered its name and the Megafresh and Rainbow private labels only in Arizona. But the chain uses the Mega name in other markets under its supplier agreement with Fleming, which has trademarked the Mega logo in other states.