ALBERTSONS' COMBO STORES

BOISE, Idaho -- If two heads are better than one, then surely two brand names with strong consumer recognition should also be better than one.That's the theory behind the push by Albertsons here to convert stores to a dual-brand identity in markets where it operates both supermarkets and stand-alone drug stores. It has begun adding a drug store banner to supermarkets in other regions as well.The chain

BOISE, Idaho -- If two heads are better than one, then surely two brand names with strong consumer recognition should also be better than one.

That's the theory behind the push by Albertsons here to convert stores to a dual-brand identity in markets where it operates both supermarkets and stand-alone drug stores. It has begun adding a drug store banner to supermarkets in other regions as well.

The chain operates 677 dual-branded stores -- about 27% of its 1,800 supermarkets and 700 stand-alone drug stores -- in the Midwest, Southern California, Arizona , Nevada and New England. It combines the Albertsons name with Osco in all areas except Southern California and Nevada, where its drug stores carry the Sav-on banner. It's also using the Osco name in New England, where it does not have a stand-alone drug operation.

Albertsons has acknowledged the dual-brand format results in higher overall sales, primarily from pharmacy customers who do their food shopping when they come in to pick up prescriptions. Larry Johnston, chairman, president and chief executive officer, has said the average pharmacy customer buys 30% more food than the average supermarket customer.

However, the chain has never been specific about the overall lift it gets. Observers contacted by SN were unable to pinpoint the sales gains provided by the dual-brand format.

However, they said the conversion of 17 conventional Albertsons stores to Super Saver -- the chain's new price-impact format in Texas, Louisiana, Florida and Utah -- may be yielding sales increases of 5% to 10% and returns on invested capital approaching 50%.

According to an Albertsons annual report, "The dual-branded concept differentiates us in the marketplace, increases return on investment for our shareholders, and creates a shopping experience that matches our customers' vision of the ideal store."

Dual-branded stores include a complete supermarket offering combined with the complete product selection of a stand-alone drug store -- approximately 10,000 items -- plus a full-service pharmacy.

The dual-brand prototype is a store of 55,000 to 65,000 square feet, although stores of 45,000 square feet can accommodate the full selection of a 14,000-square-foot drug store by reallocating the number of facings throughout the store, company officials have indicated. Drug store merchandise is displayed on gondolas throughout the store, with no demarcation between supermarket and drug store products.

Observers said the drug store assortments in the dual-branded stores encompass items not usually carried by a supermarket. The most dramatic differences are apparent in the broad assortment of cosmetics (up to 48 feet, vs. the standard supermarket run of 12 feet), the inclusion of nutrition and homeopathic products, and expanded seasonal merchandise.

To accommodate 10,000 additional items, Albertsons cuts back on some slow-moving merchandise and reduces the number of facings of others, observers pointed out.

However, dual branding involves more than operating a combination food store with a pharmacy and expanded drug assortment, Johnston told SN in 2002. "It's a matter of adding an entire drug store into a supermarket, including a broadened selection of nonfoods," he explained.

While typical combination stores have a single manager overseeing the entire operation, Albertsons' dual-branded stores have separate managers for the food and drug operations, "which provides expertise on both sides and allows each to focus on the separate businesses," Johnston added.

Mark Husson, New York-based managing director and global head of consumer research for HSBC Securities, London, said putting two stores under one roof requires more capital, "but it also offers the possibility of a better return in terms of profitability. Clearly, the Jewel-Osco stores [in Chicago] have become Albertsons' most profitable division. It seemed like a reasonable idea to expand the concept to other markets to improve profitability."

According to Pat Turpin, managing director of consumer products for USBX Advisory Services, Santa Monica, Calif., "Co-branding a supermarket with a drug store makes a lot of sense, especially as pharmacies have become a destination concept over the past few years. By promoting the brands together, the supermarket isn't going to lose dollar purchases to the drug store.

"In addition, because the consumer going to the pharmacy to get a prescription filled has a broader set of options for impulse buys when he goes into a pharmacy in a supermarket, the supermarket has the chance to get increased average rings."

Bill Bishop, principal at Willard Bishop Consulting, Barrington, Ill., said the dual-branded format is "a proven winner," based on the Jewel-Osco combination that's thrived in the Chicago market for more than 40 years. "Albertsons realized one size doesn't fit all. It saw sales were higher in the Jewel-Osco stores that operated under one roof and decided to try it on a national basis."

According to the company, it was Johnston who recognized the wider potential for the format when he joined Albertsons in 2001.

Two analysts contacted by SN expressed contrasting views on the impact of dual-branding.

Chuck Cerankosky, an analyst with KeyBanc Capital Markets, Cleveland, said dual-branding "provides a competitive advantage for Albertsons in some ways, but not a huge competitive advantage. It enables the food operator to bring the image of a stand-alone pharmacy and health care business into the supermarket, and creates more of a destination for customers of both as part of a one-stop shopping trip."

Cerankosky said Albertsons' dual-branded stores do not differ markedly from the food and drug combos with pharmacies operated by any number of competitors. "But the fact that Albertsons can associate its supermarkets with a stand-alone drug chain with a strong local identity is a positive thing that gives the stores' pharmacies greater credibility," he pointed out.

"Kroger, for example, has been in the pharmacy business for years, but the idea of dual branding probably never crossed its mind because its in-store pharmacies have good standing with consumers on their own. But for a company like Albertsons, which has good stand-alone drug store businesses in Osco and Sav-on, dual branding should be additive to its total share in a given market."

Perry Caicco, an analyst with CIBC World Markets, Toronto, said the dual-branding strategy is flawed "because neither brand wins. Both brands can lose, and the customer experience is not maximized.

"The idea of using two brands together dilutes the power of each in the marketplace," he explained. "Albertsons could certainly run full drug store operations [within its supermarkets] without the Osco or Sav-on names on the store, and the grocery brand would benefit from displaying a combo store offering. Over time, the Albertsons brand would develop its own reputation as a drug store, a reputation carefully differentiated from Osco or Sav-on and tailored to the drug store needs of the weekly grocery shopper."

Caicco said he believes the drug operations at Albertsons stores without dual branding should be run by drug store management, as they are now -- "not so they could be the same, but so they could be intelligently different.

"The stand-alone drug stores most likely suffer from the image of their brands being jammed into a supermarket," he said. "In many dual-branded combo stores, the drug store offering is weaker and in some cases higher priced than the stand-alone stores, which cannot be positive for the image of the stand-alone drug stores in dual-branded markets."

Super Saver Captures The Price-Conscious

Albertsons' new price-impact format, Super Saver, appears to be meeting consumer demands for low-priced groceries, observers said.

Albertsons has converted 17 conventional stores to the banner since last summer, including nine in the Dallas area; two in Baton Rouge, La.; four in Florida; and two in Salt Lake City. The format offers a full variety of products, but with a more limited selection.

According to Bill Bishop, principal at Barrington, Ill.-based Bishop Consulting, the chain's return on its investment in converting stores to the price-impact banner is probably a sales lift of 5% to 10%.

Perry Caicco, analyst, CIBC World Markets, Toronto, said he believes Albertsons is moving in the right direction with Super Saver. "There are hundreds of struggling conventional stores that could benefit from this conversion and a significant void in the discount food store market in most regions of the U.S.," he said. "It's small, it's early and it needs work, but Super Saver could be a huge opportunity for Albertsons."

According to Caicco, weekly sales at Super Saver run around $630,000. With a capital investment of $1.5 million to $2 million per location, Super Savers are capable of producing an annual ROI of 46.8%, compared with 14.2% for a conventional store, he said.

However, Caicco expressed concern about the size of some of the Super Saver stores, which, at 50,000 square feet and larger, "may be the biggest problem in developing this format. It's too big for the most efficient discount store operation, and it results in some interesting merchandising decisions."

For example, while most discounters carry a national brand and a private-label item, the Super Savers carry every brand carried by Albertsons in a conventional store, albeit with just a single size or flavor of each. "[This] radically reduces supplier leverage, forces more stockkeeping units to be price-checked against Wal-Mart, and hurts operational efficiency," Caicco said.