CAPITAL CHOICES

Supermarket companies are taking divergent approaches to capital spending this year, industry observers told SN.While Safeway is opting to accelerate the pace of new store openings, Albertson's and A&P are focusing more on remodeling, and Kroger Co. is seeking to complement its store-upgrade program with small acquisitions on the local level."There seem to be a lot of cross-currents in the ways companies

Supermarket companies are taking divergent approaches to capital spending this year, industry observers told SN.

While Safeway is opting to accelerate the pace of new store openings, Albertson's and A&P are focusing more on remodeling, and Kroger Co. is seeking to complement its store-upgrade program with small acquisitions on the local level.

"There seem to be a lot of cross-currents in the ways companies are looking at capital spending," said Ed Comeau, vice president of Donaldson Lufkin & Jenrette, New York.

"Most companies will be making a choice to determine if they want to put money into upgrading and remodeling acquired stores or investing in organic growth of their core stores, with most opting to spend a fair amount of capital on upgrading," Comeau added.

Chuck Cerankosky, an analyst with McDonald & Co., Cleveland, offered a similar assessment. "Most chains are doing more in-market store development and weighting their spending to store improvements, with a fair amount also being spent on information technology and distribution," he said.

Gary Giblen, New York-based managing director of Banc of America Securities, San Francisco, also said the industry will engage in more remodelings and fewer new stores, "or in acquiring stores instead of building new ones, in part because there's less space for new stores."

According to Jonathan Ziegler, San Francisco-based managing director for Deutsche Bank/Alex Brown, New York, "Most companies have invested heavily in major remodels in the last few years, and what's left to do now is more cosmetic fix-ups."

On a chain-by-chain basis, here is what some major players plan to do:

KROGER CO., Cincinnati, will reportedly grow its store base through acquisitions of small chains in local markets while investing in remodeling, particularly in the stores it acquired last year in northern California.

"There's not such a clear direction of how Kroger will deploy its capital," Comeau said, "because Kroger traditionally takes an even-handed approach to spending capital, with the intent of trying to divide it up evenly among its divisions rather than necessarily investing where it can get the best returns."

Cerankosky said he anticipates square-footage growth of 4.5% to 5% this year at Kroger -- close to its normal growth rate, albeit with a larger store base. He said he expects significant investments in remodeling the northern California stores Kroger acquired from Albertson's last year, which are being converted to the Ralphs logo as that southern California chain expands into the northern part of the state.

Meredith Adler, an analyst with Lehman Bros., New York, said Kroger is also likely to contemplate opening a dedicated slow-turn distribution center in Arizona because of the success of similar facilities in other parts of the country.

WAL-MART STORES, Bentonville, Ark., said it plans to build another 60 to 65 new supercenters this year while expanding or relocating about 100 discount stores into supercenter operations, the same formula it has followed for several years.

In addition, after opening its first five Neighborhood Markets in the last two years, the company said it expects to open five to 10 more this year as it continues to fine-tune the format.

"Wal-Mart will continue to expand its supercenter base at a fast clip," Comeau said. "It's really nailed that format down, and there are opportunities for another 1,000 stores in existing markets over the next three to four years."

He said he expects Wal-Mart to expand the Neighborhood Markets format much more gradually. "It won't spend an enormous amount this year or next on cap-ex for that format, but a rollout could come in 2002. Wal-Mart is not going to do anything too aggressively with the Neighborhood Market until it has more time to experiment with the format and to tweak it, after which it will also take considerable lead time to assemble a rollout to fill the real-estate pipeline.

"So I would guess we'll see 15 or 20 Neighborhood Markets this year, then 30 next year, and then 100 to 150 a year after that. But Wal-Mart could paddle around with the concept for another three or four years, and if it determines it's not a high-return concept, that could be the end of it," Comeau said.

Adler said Wal-Mart is "still playing" with the Neighborhood Market format. "Wal-Mart feels it has plenty of pharmacy but not enough high-margin foods and general merchandise, and it will continue to test different mixes," she said.

ALBERTSON'S, Boise, Idaho, said it will spend $1.9 billion on capital investments this year, with money earmarked for new stores, remodelings of units acquired from American Stores Co., strategic retrofits on its existing Albertson's stores and installation of fuel centers.

Along with opening 90 new combination stores this year, compared with 82 last year, the company said it will ramp up the pace of remodelings. According to Michael Read, a chain spokesman, "We acquired a lot of great store locations [from American Stores], but many of them -- particularly Acme in the Philadelphia area and some Lucky Stores in the West -- could really benefit from remodeling."

The company said it anticipates remodeling 130 stores this year, up from 87 in 1999. Read also said Albertson's intends to increase its investment in fuel centers this year, with 120 scheduled to open in 2000, compared with 67 last year.

He said the company will also continue to remodel its Albertson's stores by adding extra services "that can drive sales, without having to acquire new real estate or to build from the ground up."

According to Adler, those strategic retrofits involve the addition of such departments as beverage and snack centers, baby centers and pet centers -- concepts that were tested at some of Albertson's Texas stores and that are now being introduced to other regions.

Adler said Albertson's originally contemplated replacing most older, smaller Acmes with larger units. However, she said, the company has found it can get better returns by investing in existing small stores "because they are in such great locations."

According to Comeau, "With the completion of the acquisition of American Stores six months ago, Albertson's is going to need to take a full year to properly understand where capital can best be spent. It all depends on how well the integration goes and how the company sees the return on the capital that's already been spent.

"The point is, Albertson's has gone from a consistent capital-spending program that's been in place for years to trying to figure out how to put all the pieces together in integrating its own operation with American Stores, and how to spend capital on the new businesses is a task unto itself."

SAFEWAY, Pleasanton, Calif., is expected to continue adding square footage by replacing smaller stores with larger ones and maintaining an aggressive remodeling program, while prospecting for new-store locations in the Midwest, the Mid-Atlantic, California and Texas.

Safeway said it will accelerate the pace of new store construction this year, with plans for 70 to 75 ground-up locations, compared with 67 last year. It also said it expects to maintain its remodeling program, with 250 upgrades due for completion this year, about the same number as last year.

According to Comeau, the company will inch up organic growth by pushing the perimeters of its Dominick's operation in Chicago and its own stores in the Mid-Atlantic area.

Adler said Safeway may also be looking at fill-in opportunities in the Sacramento area east of its Bay Area home base now that Kroger is expanding the Ralphs chain in that area, as well as areas for expansion in Texas.

DELHAIZE AMERICA, Salisbury, N.C., is expected to expand into adjacent geographies while focusing on integrating Hannaford Bros., the Scarborough, Maine-based chain whose acquisition is scheduled to close later this year.

Exclusive of the acquisition, Delhaize America said, it will spend $390 million on capital expenditures this year -- the same outlay as last year -- to open 85 new stores, slightly below last year's total of 100 new stores, and to remodel 150 stores, virtually identical with the 145 remodelings last year.

Analysts said they expect the company to continue to grow square footage organically at a rate of 7% to 8% this year, though at a fraction of the cost other chains are spending, "because the stores are typically smaller than some of the other majors, so the cost is less," Cerankosky said.

According to Giblen, Delhaize will devote more money to enlargements and upgrades "because with less capacity, it's difficult to make new square footage as profitable, whereas the return on investment from remodeling is better. And that's particularly true for Delhaize America, which is trying to take less of a limited-assortment, neighborhood approach in its Food Lion stores and to create more of a full shopping experience by extending perishables and nonfoods."

WINN-DIXIE STORES, Jacksonville, Fla., said it is reducing capital spending this year by nearly 40% -- to $500 million, compared with $800 million last year -- "because 80% of our stores have been built new, enlarged or remodeled in the last six years, so our store base is in excellent shape, and we don't need to spend as much as we did in the past."

Winn-Dixie said it will open 39 new stores and remodel or enlarge 39 more -- compared with 79 store openings and 64 enlargements a year ago -- in addition to upgrading several distribution facilities.

While analysts acknowledged that the company has been investing in its store base over the years, they told SN the investments have not always produced the desired returns.

According to Giblen, "Winn-Dixie spent a lot in the past upgrading its stores, but it's encountered a low rate of return and now it's taking a step back and trying to get a better handle on its basics before resuming a large cap-ex schedule."

Comeau expressed similar thoughts. "Although Winn-Dixie has spent money over the years, it may not have spent it very wisely. Its financial results tell you there are fundamental problems beyond the amount of capital spent, including the fact the chain operates in Wal-Mart Alley.

"Hopefully, Al Rowland [the chain's new president and chief executive officer] can rip the guts out of the company to get rid of unproductive markets and unproductive business practices and retrench back to its core markets by closing stores and then investing more money in the remaining markets."

Adler told SN, "It looks like Winn-Dixie is retreating, pruning divisions that are underperforming. And it will continue to try to optimize its store base by getting out of areas where it hasn't been successful and moving cap-ex into markets where it's been more successful, like New Orleans and Alabama."

A&P, Montvale, N.J., will reportedly continue to pursue Project Great Renewal by upgrading its existing assets.

"A&P is following the same model Safeway did in the mid-1980s," Giblen said, "selling off underperforming divisions and plowing the money from those sales back into capital spending for other divisions.

"Right now it's spending 5% of sales on cap-ex, which is a sharp contrast to the 1% it spent when it was under-investing. As a result it's spending more money and paring down the number of stores to spend it on, which means cap-ex is better focused, and that's a good way to turn a company around."

Adler said A&P is spending most of its cap-ex on fill-in projects and upgrading its existing store base through relocations.

According to Comeau, "A&P is taking the necessary steps to reposition itself in the marketplace, with plans to build 40 to 45 new stores and do extensive remodeling and store expansions, primarily in the New York metropolitan area, which is its most profitable, productive asset and one it clearly can't afford to let anyone take away."