MOVING PENN TRAFFIC

SYRACUSE, N.Y. -- Penn Traffic Co. here is seeking a much-needed reversal of fortune.Its goal is to win back business it's lost over the past two or three years, Joseph V. Fisher, president and chief executive officer, told SN."Basically, we need to return our focus to the customer," he said. "No matter how many great ideas we talk about, we really lost that focus for about 18 months in the mid-1990s.

SYRACUSE, N.Y. -- Penn Traffic Co. here is seeking a much-needed reversal of fortune.

Its goal is to win back business it's lost over the past two or three years, Joseph V. Fisher, president and chief executive officer, told SN.

"Basically, we need to return our focus to the customer," he said. "No matter how many great ideas we talk about, we really lost that focus for about 18 months in the mid-1990s. But now we've refocused our efforts on building sales back to where they once were -- one customer at a time."

Building sales is a daunting challenge at best, as Penn Traffic has seen sales decline steadily from $3.5 billion in the year ended January 1996 to $2.8 billion in the year ended January 1999 while same-store sales have hovered in the negative range for more than three years, falling 8.2% in 1997 and improving only to a 3.8% decline last year.

The picture brightened a little in the second quarter, ended in July, when comps stood at only negative 1.1%, and Fisher said he is optimistic about the company's performance going forward -- although he declined to indicate where comps might be in the third quarter, which ended Saturday.

And securities analysts are taking a skeptical, wait-and-see approach to the company's revitalization.

For his part, Fisher said results in general are continuing to improve, "and I believe we will be on the plus side shortly."

The key to Penn Traffic's ultimate success, he said, will be to promise only what it can deliver and deliver on what it promises -- a formula Fisher said was successful when he ran Big V Supermarkets, Florida, N.Y., in the early 1990s.

"Delivery to customers is the area I want to concentrate on so we can deliver on our promise," Fisher told SN. "This business is centered on satisfying customers, and, at Big V, we were able to consistently improve sales quarter after quarter and report good same-store sales increases" -- the kind of thing he'd like to see at Penn Traffic.

Big V's success was not based on any magic potions or silver bullets, Fisher said. "We simply delivered to customers what they wanted and what we said we would deliver, and along the way we developed a strong customer loyalty," he explained.

"It's an evolutionary process, and it's very easy to make claims. At Penn Traffic we want to be sure we can deliver on what we promise."

Fisher said the slashing of debt by more than two-thirds -- following a prenegotiated Chapter 11 financial restructuring earlier this year -- will give Penn Traffic the ability to deliver what customers want.

But while pursuing that goal, Penn Traffic must also contend with persistent trade reports it will sell off one division or another.

Fisher told SN Penn Traffic has no plans to sell any of its divisions, including Big Bear Stores, Columbus, Ohio, the object of much industry speculation. "We're in business to run stores, not sell them," he said. "Nothing we operate is for sale."

After about a year on the job, Fisher said the company is not at a point yet "that I'm satisfied that we've done all we need to do in many of our stores. But we're working on our priorities to get the best and quickest returns."

Fisher said his optimism regarding Penn Traffic's long-range prospects is based on the following:

Investing $100 million in the company over the next 15 months, including more than $40 million this year, to fund approximately 40 capital projects.

Introducing a new Whole Health program built around the stores' pharmacies.

Reinstating the general manager position at the division level.

Improving the stores' perishables offerings.

PennTraffic operates 213 stores in four divisions: Big Bear Stores, Columbus, Ohio, which operates 71 units in Ohio and West Virginia; P&C Foods here, which operates 63 units in central and upstate New York and northern Pennsylvania; Quality Foods, Jamestown, N.Y., which operates 34 stores in northwestern Pennsylvania; and Bi-Lo Foods, Dubois, Pa., which still operates 45 stores in eastern and western Pennsylvania. (Earlier this year, Penn Traffic sold 30 Bi-Lo stores in eastern Pennsylvania and closed 20 others.) The company also runs a wholesale division out of Dubois that serves 81 independent customers and 47 licensees operating under the Big M banner in New York and the Riverside and Bi-Lo banners in Pennsylvania.

Overall, sales for the year ended last January were $2.8 billion -- down from $3.3 billion in the year ended January 1997 and just over $3 billion in the year ended January 1998; the company also experienced a loss of $317.1 million last year, compared with smaller losses in the two prior years. Operating cash flow changed from 6.3% in early 1997 to 1.5% a year ago to 3.2% in the second quarter of this year.

John Wlodek, a high-yield securites analyst wtih Imperial Capital, Beverly Hills, Calif., asked, "Can the company operate at a 3% [operating cash flow] margin level and make money? The long-term outlook is still questionable. But the company is still doing a lot of wound-licking following its restructuring, so it's hard to say."

However, with 213 stores, Penn Traffic controls a hefty volume, despite the declines, "and it will be a while before anyone can 'competition' it out of existence," Wlodek said.

But the company still will have a significant challenge in Ohio keeping Big Bear viable, he pointed out. "Big Bear needs to get aggressive in Columbus, but Kroger, its primary competitor, can subsidize short-term losses there for years with profits from elsewhere, which can make it difficult for Big Bear to return to its position as Penn Traffic's crown jewel."

Ted Bernstein, a high-yield analyst at Grantchester Securities, New York, said Penn Traffic faces a host of larger, well-capitalized competitors -- including Price Chopper, Tops and Wegmans in upstate New York, Weis Markets and Giant Food in Pennsylvania, and Kroger in Ohio -- "and that puts the company under a lot of pressure.

"So the challenge is to find ways to differentiate itself and attract customers, rather than being an also-ran. However it goes about doing that, it has a lot of work to do."

In an attempt to end its financial slide, Penn Traffic went through a financial restructuring in the spring, filing a prenegotiated Chapter 11 petition in March and emerging in June with its debt load of $1.4 billion reduced to about $335 million -- "very manageable for a company of our size," Fisher told SN.

Although the company was on the verge of the Chapter 11 filing when Fisher arrived last November, the outlook was not particularly negative, he said. In contrast to other chains that have filed for bankruptcy protection, "Penn Traffic didn't languish for a long time before we filed," he explained.

"The company was investing heavily in capital improvements in the 12 to 18 months before we hit a snag in 1996, and we were turning out strong results. Although many of our stores are in smaller towns, particularly in upstate New York, we were expanding and replacing a large number of units and enjoying a lot of success.

"But we fell on hard times in 1996 when sales began tailing off, and although the company was still making solid operating cash flow numbers, nothing effective was done to turn the sales trend around, and the cost reductions we made proved inefficient because they were not aimed at building an effective organization. So all of that combined to put the company into a severe downward spiral -- and with the debt load we had, we didn't have the ability to recover.

"But each division, except for eastern Pennsylvania, remained a solid performer and did a good job satisfying customers, and by getting in and out of Chapter 11 quickly, we were able to reduce our debt and put ourselves on a solid financial footing."

Fisher's arrival at Penn Traffic followed a stormy period that saw the retirement of Claude Incaudo as president and CEO in 1995; the retirement of Incaudo's successor, John Dixon, for health reasons after nine months in late 1996; the resignation of Dixon's successor, Phil Hawkins, after 17 months in August 1998, and Incaudo's return on an interim basis until Fisher was hired.

"So I had the benefit of spending a lot of time with Claude [who had been with Penn Traffic 27 years] and getting a quick but thorough primer on what went on at Penn Traffic before I got here," Fisher said. "He helped me fill in a lot of missing pieces and helped me hit the ground running."

Before joining Penn Traffic, Fisher, 57, spent 18 years with Purity Supreme, North Billerica, Mass. (later acquired by Stop & Shop Cos., Quincy, Mass.) and the subsequent 6-1/2 years as president and CEO of Big V.

In the wake of its emergence from Chapter 11, Penn Traffic has budgeted to invest more than $40 million in capital expenditures by the end of its fiscal year Jan. 29, compared wtih only $14.4 million in cap-ex spent for all of the prior fiscal year, Fisher pointed out.

"We were never capital-starved, but with the restructuring, we've been able to get our capital spending back on track again, and we're in the process of planning 40 projects," he said, including remodelings, expansions and store replacements, "and we're refilling the pipeline with new store projects."

He said Penn Traffic expects to complete 25 projects by year-end. However, he does not expect the company to open any new stores for 12 to 15 months, nor would he pinpoint where the first new one is likely to be. "It will take time for us to put a prototype store together, but the principles and concepts that will be included in that store will be seen in many remodeled and expanded units before then," Fisher said.

Some of the company's new thinking is reflected at two remodeed units that reopened Oct. 2, a Big Bear Plus in Cerrido, W. Va., and a Big Bear Plus in Huntington, W. Va., both part of a repositioning of the company's 100,000-square-foot Plus stores, Fisher said.

"We're a food store first, so we want to improve our offerings by adopting more of a home/health/food approach rather than offering broad lines of apparel, electronics and sporting goods," he explained

One of the chain's new concepts, Fisher said, is the development of "whole-health" departments of 8,000 to 10,000 square feet, centered around the stores' pharmacies, including expanded health and beauty care offerings combined with nutrition- and health-oriented products such as vitamins, herbals and nutritional supplements.

"We've always operated well-developed pharmacies in our Big Bear stores, and whole health builds on that program," Fisher explained.

While he declined to pinpoint sales results, Fisher said the company is beginning to roll out whole-health sections where they are appropriate at remodeled stores beyond the Plus units, "and we're expanding the concept onto the food side as well with expanded offerings of natural foods, naturally raised meats and organic produce," he added.

Another area of focus will be perishables, including expanded assortments and varieties tailored to each store's individual needs, Fisher said. "Our goal is to get into each store and give it the specific things it needs to compete in the marketplace, whether that's organic produce or ethnic specialties -- whatever is called for -- plus full-service delis, seafood sections, meat and bakery.

"At Big Bear, in particular, bakery is one of our areas of strength -- we have the reputation for operating the best bakeries in Ohio, and we want to play off that strength."

Penn Traffic introduced a new "Gold Label" meat program chainwide Oct. 2 designed to offer higher quality standards in all branded and unbranded lines, Fisher said. Branded items include Black Angus beef, Butterball fresh turkey parts and Hormel Always Tender pork at all stores, plus Ohio-grown premium-grade chickens at Big Bear and the return of Perdue chicken and all-natural chicken at the other divisions.

In groceries, the company is implementing category management "to reexamine our variety, shelf-management principles and specialty foods to make sure we provide the right items to every customer," Fisher said.

"Although most changes are subtle, we're seeing positive improvements," he added, though he declined to be specific.

Since he was hired last November, Fisher has made only a handful of executive changes, he said, including the hiring of Les Knox from Weis Markets, Sunbury, Pa., as chief merchandising officer to develop stronger selling programs, and John Kistle from Steinmart, Jacksonville, Fla., as vice president for general merchandise, to reposition the nonfood offerings, plus the rehiring of two Penn Traffic veterans: Roy Flood and Jerry Suppa.

Flood was named senior vice president and general manager of Penn Traffic's Big Bear division, and Suppa was named general manager of P&C Foods and Quality Foods, which operate as a single administrative entity.

"Before Phil Hawkins came on board, each division was operating autonomously, with its own administrative, accounting and procurement structure," Fisher pointed out. "He consolidated things so everything came out of Syracuse, which made sense from the standpoint of economies of scale and cost reductions.

"But I felt we needed senior people in each division to link the field marketing organizations and to communicate back to Syracuse about the needs of each division, with Syracuse as a central merchandising and procurement agent, and to have someone to hold accountable for the results of each division.

"With someone like me who was new to the company, we wanted strong people in the field, so we brought both Flood and Suppa back."