Albertsons sees dual-brand store as key to staying competitive

Drug Store News, Dec 15, 2003 by Doug Desjardins

Albertsons has high hopes for 2004 as it prepares to roll out its dual-brand stores in Southern California and continues to pursue store-within-a-store deals with retailers like Toys "R" Us. But a protracted strike among workers in California and the resulting impact on sales may force Albertsons to lower its earnings estimates this year for a second time.

The problem cropped up in early October when employees with the United Food and Commercial Workers Union went on strike in Southern California. As of press time, the strike was entering its seventh week and had taken a toll on sales at Albertsons' 259 stores in the region. The main sticking points between the company and union members are medical benefits and future salary increases.

On Nov. 14, Albertsons withdrew its fiscal 2004 earnings guidance of $1.70 to $1.75 per year and is not expected to issue a revised estimate until the strike ends. The chain already, had lowered its earnings estimates earlier this year following a shortfall in first quarter sales.

The strike--which has also impacted the Vons and Ralphs supermarket chains--is the latest development in what's been an eventful year for Albertsons. It's included the rollout of its dual-brand stores in new markets, the launch of a major national advertising campaign and the sudden resignation of its No. 2 executive. While many of the events have been positive, it has not been the year of "growth and stabilization that Albertsons chairman and chief executive officer Larry Johnston predicted for the company following a two-year rebuilding effort.

In 2002, the chain completed a two-year restructuring in which it closed 446 stores and exited four major markets including Nashville and Memphis in Tennessee and San Antonio and Houston in Texas. Those closings and departures, which resulted in the elimination of more than 1,000 jobs, were the outgrowths of a new policy in which Albertsons would leave markets where it could not sustain the No. 1 or No. 2 position.

During that time, the company also launched its dual-brand supermarket and drug stores that have become the cornerstone of its future plans. The "two stores under one roof" concept originated with its Jewel-Osco stores in Chicago and was launched in Tucson, Ariz., and Reno, Nev., in 2001 and later rolled out in Omaha, Neb., and Phoenix in 2002. This year, the company introduced the stores in El Paso, Texas, and currently is launching them in Las Vegas.

Looking back at what he described as "one of the largest retail restructures in history," Johnston told the audience at Albertsons annual shareholders meeting that the store closings and dual-brand store rollout "left us with a smaller but stronger company."

But at that meeting, Johnston also announced the chain was lowering its earnings estimates for the year from between $2.08 and $2.13 to between $1.70 and $1.75. At the time, he said the first quarter "presented a much tougher economic and competitive environment than we expected" and noted "the reduced guidance reflects the investments we'll have to make to stay competitive." Despite the revision, the chain managed to meet analysts expectations for the quarter with earnings of $172 million.

Then on July 24, the company was rocked with the sudden departure of president Peter Lynch. The official company line was that Lynch resigned, but his departure was prompted by a "management restructure" that would have transferred his responsibilities as president to Johnston. Johnston later noted that Lynch's departure "was not a personal issue" and was part of an ongoing "delayering" of management that transferred many of Lynch's duties to him.

Overall, 2003 has not gone exactly as planned but there have been several positive developments and innovations that have set the company on course for future growth.

In July, Albertsons launched a major national advertising campaign with TV commercials starring actress Patricia Heaton from the show "Everybody Loves Raymond." The commercials also introduced a new "Making Life Easier" slogan for the company. "Our new 'Making Life Easier' message is starting to get across," Johnston noted. "We're getting customers back into stores.

And during its second quarter that ended July 31, the chain beat analysts' estimates by posting earnings of 44 cents per share and introduced more than 250 new private label products under its "Essensia" brand in food and other categories. And during the past few months, the chain began installing more than 4,000 self-checkout stands in stores to improve customer service and speed up checkout lines.

Another new development introduced this fall were store-within-a-store initiatives designed to drive customer traffic and make stores more of a one-stop shopping destination.

Its most ambitious plan was launched with toy retailer Toys "R" Us, which began opening small "Toy Box" departments in more than 1,100 Albertsons stores in September. The "Toy Box" sections carry about 500 different products priced under $25 to encourage impulse buys. Albertsons plan to make the toy departments a part of all 2,300 Albertsons stores in 2004.