LOS ANGELES -- The big red Ralphs oval is about to become the most-seen supermarket banner in southern California.
After more than a year of negotiation, Food 4 Less Supermarkets, La Habra, Calif., said last week it would join Ralphs Grocery Co., Compton, Calif., in a management-led deal valued at $1.5 billion.
Projected market share for the combined operation was expected to approach 30% in southern California. By comparison, current market-share leader Vons Cos., La Habra, controls about 25%.
The much anticipated deal, under which Yucaipa Cos. here, parent of Food 4 Less, will acquire Ralphs' stock, is subject to approvals but is expected to close next month. (Yucaipa's Smitty's chain may be planning to buy 23 Arizona Megafoods units. See Page 4.)
The California deal was finally approved late last week by Banque Paribas of France, which had been the sole shareholder
that had objected to the deal. Other major holders who had agreed earlier were Camdev Properties, Bank of Montreal and Federated entities. Yucaipa Cos. will pay Ralphs shareholders $525 million and assume $980 million of Ralphs debt. With that amount, plus Food 4 Less, valued at $1 billion, the combined companies are valued at $2.5 billion. A portion of the merged companies will be owned by management of each firm.
The new entity, to be called Ralphs Grocery Co., will operate an estimated 280 conventional stores under the Ralphs name and approximately 80 warehouse stores under the Food 4 Less name, all in an area of southern California stretching from Ventura County south to the Mexican border.
Ron Burkle, chairman and chief executive of Food 4 Less, will be chairman of the new Ralphs and retain his title as managing partner of Yucaipa; Byron Allumbaugh, chairman and chief executive officer of Ralphs, will be CEO of the new firm; George Golleher, president of Food 4 Less, will be vice chairman, and Al Marasca, president of Ralphs, will be president and chief operating officer of the new Ralphs Grocery Co.
These executives explained details of the deal in a joint interview with SN last week at Yucaipa's offices in Century City.
SN learned that Golleher will oversee the company's warehouse-store operations in southern California, as well as its 25 stores in northern California (19 conventional and six price-impact units) and 38 price-impact units in Missouri and Kansas; Marasca will oversee the conventional-store operations.
The new Ralphs will be the largest-volume chain in southern California, with sales exceeding $5.5 billion and a projected market share approaching 30% -- approximately 25% from conventional stores and 5% from warehouse stores.
Vons Cos., with 345 stores and volume of $5.1 billion, will control a 25% market share, according to industry estimates. Lucky Stores, Buena Park, Calif., a division of American Stores Co., Salt Lake City, will have a 20% share.
Prior to the merger, Ralphs operated 168 conventional stores, while Food 4 Less Supermarkets had 133 conventional Alpha Betas, 24 conventional Boys, 15 conventional Vivas and 30 Food 4 Less warehouse stores.
That would give the combined operation 370 units. However, the merged company plans to close an estimated 20 units, including 14 Alpha Betas and two units each of Ralphs, Boys and Viva.
Once those stores have closed and various stores under construction have opened, chain officials estimate the company will operate 360 units.
In the process, the Alpha Beta and Boys names that have been part of the southern California competitive landscape for more than 70 years, as well as the Viva name that was introduced in 1988, will disappear.
The ability to operate a price-impact format fulfills a desire Ralphs has had for years. It tried to develop its own warehouse format, called The Giant, in the early 1980s, "but we were about 10 years too soon," Marasca told SN in the interview, "and we couldn't get the [lower-cost] labor contracts at that time to make the format financially feasible."
One of Ralphs' weaknesses before the merger was the inability to operate a second format, Marasca added. "As powerful as the Ralphs conventional format is, it didn't lend itself to certain price-impact areas," he said.
"But the Ralphs stores are so different from the Food 4 Less format that the two operations complement each other, and you might very well see a conventional Ralphs across the street from a Food 4 Less store because they attract two separate segments."
Below the top executive level, chain officials are not sure how various management positions will be redeployed. "But we don't anticipate any demotions, though some people may be reassigned," Allumbaugh said.
According to Marasca, the new company expects to be able to place all existing employees somewhere in the new organization.
The executives expect to retain all existing distribution facilities for at least a year or two "while we decide how to rationalize the warehouse situation going forward," Allumbaugh said.
Ralphs' office complex in Compton will be headquarters for the new company's senior management. However, the office space that Food 4 Less occupies in La Habra will also be used for an indefinite period.
The company kept the Ralphs name "because Ralphs has maintained a better image over the years with consumers in southern California," Marasca told SN.
"We've been here since 1873, and we're the oldest supermarket chain west of the Mississippi, with a strong customer franchise and a fine reputation for how we operate."
The merger must still be approved by the California Attorney General and the Federal Trade Commission. However, chain officials expressed confidence they will get state approval after closing some stores.
Rather than reducing competition, Allumbaugh said he expects the combined operation will benefit consumers "because we'll be far more efficient, which will enable us to reflect greater savings and offer better values to consumers."
By replacing the high-margin Boys operation in south-central Los Angeles with the more moderately priced Ralphs stores, "this deal will bring lower prices to the inner city," Allumbaugh added.
After the deal is consummated, store conversions will occur in three waves:
· An estimated 16 Boys and Viva stores will be converted to the Food 4 Less price-impact format before the end of the year. With the addition of approximately 10 warehouse stores scheduled to open, the company will have about 56 Food 4 Less units by year's end. · Sometime after that, the company will begin converting 10 to 30 Ralphs units to the Food 4 Less format over a six-month period at a cost of $1 million per store. With the addition of those stores to the existing warehouse-store base, the company expects to operate an estimated 80 Food 4 Less stores.
· Approximately 120 Alpha Betas will be converted all at once to the Ralphs name sometime after Jan. 1. With the opening of 10 additional Ralphs and Alpha Beta stores between now and then, and the conversion of 10 to 30 Ralphs to the Food 4 Less banner, the company will end up with approximately 280 Ralphs stores.