PLANNING TO BE GRANDER

WAYNE, N.J. -- The state of the Union -- Grand Union Co. here -- is improving. Five months after completing a financial restructuring that eliminated nearly $600 million in debt from its balance sheet, Grand Union believes it is headed in the right direction and the retailer is winning the confidence of financial analysts.The company believes it now has the flexibility to broaden its customer base

WAYNE, N.J. -- The state of the Union -- Grand Union Co. here -- is improving. Five months after completing a financial restructuring that eliminated nearly $600 million in debt from its balance sheet, Grand Union believes it is headed in the right direction and the retailer is winning the confidence of financial analysts.

The company believes it now has the flexibility to broaden its customer base and become a stronger competitor in the Northeast.

"We want Grand Union to be known as a place where exciting things are going on," J. Wayne Harris, chairman and chief executive officer, told SN. "We want to be out there on the leading edge.

"We lost some of that edge in the last five years or so because we were leveraged to the point that management's emphasis was less on running great stores and more on eking out profits to make our interest payments, and the company lost its focus.

"What we're trying to do now is add a few new customers with each successive promotion while at the same time building up the loyalty of our existing customer base." Harris said Grand Union has been able to maintain a loyal customer base despite a decade of financial challenges -- including two bankruptcies and two restructurings -- that consistently limited its ability to spend money to upgrade stores and maintain a consistent marketing program.

"But when we talk with our customers, they tell us they still perceive Grand Union as a good place to shop because of its good produce and deli and friendly people," Harris said.

While Grand Union's customer base has remained loyal, "it tends to be older and more established," Harris said, "and while we're interested in maintaining that base, we also want to attract more younger shoppers with bigger families and more disposable income. "The stores we plan to open should give us an opportunity to appeal to those customers."

According to Harris, Grand Union plans to become more aggressive on several fronts, including the following:

Investing capital to open new stores and upgrade existing units.

Introducing a more contemporary look and more impactful perishables presentations at new and remodeled stores.

Supplementing its conventional store expansion program with a variety of alternate formats geared to specific marketing areas.

Revamping its private-label offerings.

Expanding its commitment to technology. Grand Union operates 221 stores in New Jersey, Connecticut, New Hampshire, New York, Pennsylvania and Vermont. Observers told SN they expect sales for the year ending April 3 to total $2.3 billion -- about even with last year.

The chain's management team, which has been in place for more than a year, consists of Harris, who left A&P, Montvale, N.J., to become Grand Union chairman and CEO in August 1997; Jack W. Partridge, vice chairman and chief administrative officer, formerly with Kroger Co., Cincinnati; Jeffrey P. Freimark, executive vice president and chief financial officer, formerly with Pueblo International, Pompano Beach, Fla.; and Gary M. Philbin, president and chief merchandising officer, formerly with the Cub Foods division of Supervalu, Minneapolis.

Even before the company emerged in August from its second bankruptcy in three years, the management team had begun implementing a new business plan that called for strengthening its existing store base, modifying locations that are not contributing adequately to operating performance, and maximizing advertising and promotional allowances from vendors.

Securities analysts told SN they believe Grand Union is on the right track.

"The company has clearly improved its financial condition, and management has developed a fairly reasonable plan to improve the business," said Ed Comeau, an analyst with Donaldson Lufkin & Jenrette, New York.

"Grand Union has a strong franchise in all areas except the Hudson River Valley, where it's outgunned by Hannaford and Price Chopper. But I believe the company has the potential to be turned around because management's overall strategy makes a lot of sense -- to manage what it has and spend money slowly to improve its existing store base to turn things around.

"Management understands that it needs to manage its capital wisely and invest in remodelings, store expansions and relocations to fix what it has, rather than spending a lot of money on new-store development. If it manages that process well, it wins."

Meredith Adler, an analyst with Lehman Bros., New York -- which owns 6% of Grand Union's equity -- also said the chain has the potential to reverse past declines. "There's a real earnings story there, and the potential exists to really upgrade the store base, do unique things with different formats, continue to cut costs and manage vendors better. "Prior management never took the opportunity to cut expenses. In some ways it was too insular. But the people running Grand Union now come from several good companies, and they have the perspective to compare expenses and find ways to cut them."

Adler said Grand Union's real estate has helped keep it in business through its years of high leverage. "Grand Union has a lot of stores that are too small, but many of them are in good locations with good demographics, especially in the metropolitan New York area. "If the company did not operate those stores, I doubt it would still be in business. You can't go through two bankruptcies and survive unless you have something going for you, and Grand Union has real estate, which is a big factor in the Northeast."

Ted Bernstein, a high-yield analyst with Grantchester & Co., New York, said Grand Union sales have held up "remarkably well through the company's financial difficulties, and there's probably a good base there from which to grow. But the company needs to spend capital to update its older stores and expand others.

"And although Grand Union faces some difficult competitive situations and is starting from further back, management has a good idea of what needs to be done, and the company has a corporate structure after the second bankruptcy that enables it to fix some of those problems."

Starting even before the restructuring was completed, Grand Union's management team has "done a lot of repair work to fix our operations," Harris said.

In the process, he said, Grand Union has achieved positive comparable-store sales numbers in three of the last four quarters, improved operating cash flow, boosted gross margins and reduced expenses.

With the groundwork laid, Grand Union is moving forward enthusiastically, with plans to open six to eight new stores and remodel 30 to 50 stores over the next two years at a projected capital outlay of $135 million -- and a projected $290 million for capital projects over a five-year period, Harris said.

"We have more projects going than we will probably get open this year or next, but that's a nice problem to have," Harris said.

"Our goal is to grow the company," Philbin told SN. "We're going 100 miles per hour to get the design work and fixtures in place so we can get our first new store done."

That store will be a 50,000-square-foot unit in Point Pleasant, N.J., which is scheduled to open in March. It will be followed in May or June by a 56,000-square-foot store in Carlstadt, N.J., built on the former site of Grand Union's dry grocery warehouse, which was closed in 1996 when the company began buying from C&S Wholesale Grocers, Brattleboro, Vt. While 90% of Grand Union's new stores will be conventional units, Partridge said, "Anytime we've talked to focus groups and consumer panels about various formats, there's a disproportionate interest in having something different, so we're looking at carefully selected locations where the demographics can handle something other than a traditional conventional store."

Partridge said Grand Union plans to introduce at least three other formats in new or converted stores: a limited-assortment format, a discount superstore format and a fresh store format.

"Each is intended for specific markets with specific needs," he said, "and that kind of flexibility is part of the strength of our capital plan. At Grand Union we're not going to sing just one note -- we're going to offer a variety of store types in several different wrappers."

Adler said the introduction of alternative formats provides a way for the company to make the best use of its existing facilities, "but how easy will it be to run so many different formats? But I have respect for the management team and I believe they should go for it, because they're smart enough to know what works and what doesn't, and they're not likely to hold on to things that aren't working."

In developing a prototype for its conventional stores, Grand Union management toured stores all over the United States "to settle on the elements we wanted to incorporate," Philbin told SN.

Companies visited, he said, included Ukrop's Super Markets, Richmond, Va.; Harris Teeter, Charlotte, N.C.; H.E. Butt Grocery Co., San Antonio; Randall's Food Markets, Houston; and Kroger.

Along the way the company hired Marco Design Group, Flint, Mich., which also designs stores for Harris Teeter, Philbin noted.

"What we're trying to capture in our new stores is a dynamic experience for the customer," he said.

"Because square footage in the Northeast is so limited, customers walking into most stores tend to feel very cramped and confined by narrow aisles and low ceilings.

"Customers entering our new stores will walk into an atrium-style area with a barrel roof 40 feet high that spans the entire power alley of perishables on the right perimeter of the store," he said.

"It's a wide-open kind of layout, with enough space to make impact statements and do all kinds of strong product presentations."

New Grand Union stores will feature a design package that includes "colors different from what you're used to seeing," Harris said, "with more earth tones and lavenders, plus deep-green cases and colored tiles on the floor."

One of the biggest statements Grand Union wants to make involves home-meal replacement, Philbin said.

"Grand Union has had its own commissary since the mid-1980s, even before HMR became so popular with customers, so we already have a working knowledge of how to do it," he said.

According to Harris, "This company was on the leading edge of fresh food for 12 or 15 years, and we still have those people and that culture in our stores. And even though our stores have lost some of their luster in the last few years, there's a real heritage here and a belief in perishables that's never been lost. "Even as a competitor before I joined the company, one thing I knew about Grand Union was that its people understood HMR and were very good at it. So that gives us a big head start.

"If we had to start training our people from scratch, it would be tough to do. But that job's already been done and our people believe in that kind of merchandising."

HMR merchandise will be located in the front corner of the store, opposite an expanded produce department and adjacent to the store's deli counter, Philbin said.

He said the new HMR sections will expand on the chain's existing meals-to-go program, which features entrees and side dishes, by offering additional selections in a stronger presentation. "Instead of using steam tables, we'll be trying to give our products more of an oven-prepared look and prepare the items closer to the point of purchase between 4 and 7 p.m. so they are fresher and hotter," he explained.

Adjacent to the stores' deli departments on the right wall will be a cheese alcove with expanded varieties, with a bakery in the back corner featuring 80% bakeoff products and some scratch offerings, Philbin said.

Opposite the bakery, new Grand Union stores will have a natural-food section, featuring organic produce, health food and a fresh fruit and juice bar -- what Philbin calls "an impact zone that serves as a focal point for the tail end of produce and brings the customers' attention to something different."

He said the natural-food section "introduces several new elements into our mix and gives us a power we don't have today."

The stores' back wall will feature service seafood and meat cases in separate alcoves "that jut out into the back aisle to slow the customer down and create a shopping point that shows off what we do best," Philbin explained.

At the end of the meat counter will be the dairy case, which will occupy the back left corner of the store and extend down part of the left perimeter, giving Grand Union sufficient space to make impact statements with larger varieties of such items as yogurts and refrigerated juices, Philbin said.

Extending from the end of the dairy case into an alcove at the front will be the frozen-food section, consisting of upright cases against the wall and coffin cases in the alcove.

That combination will provide "a powerful presence for frozen foods, which is hard to do when you're dealing only with upright cases," Philbin said.

The new-store design will also feature expanded selections of cards, party items and gift wrap, "with enough space to give a full, complete flavor to each one," he said; stores in some upscale areas will also offer a bath and shower section, Philbin added.

As Grand Union remodels stores, Harris said, the company intends to devote more space to perishables, frozen food and dairy, even in locations where it can't expand physically, "by doing more creative things to expand our capacity, even in the same-sized box."

In addition to building conventional stores, Grand Union will proceed on a parallel track to convert existing stores to one of its alternate formats, Harris said. "We're already going through a zoning process on new formats in certain locations," he told SN.

According to Partridge, Grand Union expects over the next two years to convert 12 to 15 stores to the limited-assortment format, with the first two scheduled to open in the next few weeks; to build or convert three to five larger stores as super-discount units; and to open three to five stores in the fresh format -- "numbers that make these alternate formats only a small part of our plan, not the central component," he emphasized.

The past experience of Grand Union management makes development of alternative formats quite feasible.

Harris formerly ran A&P's Canadian operations and helped convert more than 50 stores to that chain's Food Basics limited-assortment format. "Limited assortment is a great format for certain locations where you have really small units and where customers are interested mainly in price," he said.

"The format allows you to do a lot of unique things, but mostly the stores are designed to be efficient, with a lower cost of operations that can be reflected in the price." He said Grand Union will open its first limited-assortment location later this month at a 20,000-square-foot store in Winooski, Vt., that closed Jan. 2, and the second next month at a 35,000-square-foot store (which includes a pharmacy) in Brattleboro, Vt.

The company declined to indicate what those stores, or either of the other alternate-format stores, will be called.

Harris also has expertise in fresh stores from his association with A&P, which operates Food Emporiums. "Stores like Food Emporium or Kings [Super Markets, based in West Caldwell, N.J.] do very well with smaller stores where price is not an issue," he noted.

He said Grand Union has several locations in Connecticut, New Jersey and Long Island that are potential fresh units. The first is scheduled to open in June in a remodeled 10,000-square-foot unit in Garden City, Long Island, followed in August by a remodeled 25,000-square-foot store at an undisclosed Connecticut location.

Philbin's background with Cub Foods provides Grand Union with expertise in the discount-superstore format, "but we want to put our own stamp on it," he said.

The stores will offer strong perishables plus everyday low pricing, he explained.

"What we want to do is create a discount operation with a lower cost of operations to serve a demographic where price is meaningful -- in areas where people plan their shopping trips in advance, buy for a couple of weeks and look for price."

Philbin said the company has several 55,000-square-foot stores "that could be very impactful in this format.

"However, the first discount superstore that opens will be a ground-up unit in upstate New York that will probably open at the end of 1999, he said.

With the flexibility to convert stores to alternate formats, Harris said, Grand Union does not contemplate having to close many stores. "Most of our stores are already profitable, and with all we're doing to improve margins and take expenses out, we think they'll remain profitable," he said.

"But if some stores don't work out over the next four or five years, we may close them."

Philbin said Grand Union is working with its vendors to offer better pricing to its customers. "We're talking with them about year-round programs to drive cases," he said.

"As a result, rather than seeking short-term benefits from each program, we have a longterm outlook and make sure we deliver on our promises, which is the only way to have more leverage at the end of the day.

"We're trying to get the lowest possible cost and make sure we follow through on our commitments."

Some vendors have exhibited skepticism about those commitments, based on the chain's past practice, Philbin said, "so we're being greeted more with a breath of fresh air than with open arms. But in general, we're seeing double-digit gains in key category sales, including beverage, paper goods and cereal." One of Grand Union's problems in the past, Harris acknowledged, was an inconsistency in its pricing and marketing approach.

For example, in the company's Northern division of upstate New York and New England, "former management got caught in the trap of trying to run 50 or 60 different programs for 122 stores and trying to catch up to what the competition was doing, which left the company without a strong image of its own, plus a series of expensive programs that were out of control."

What current management has done, Philbin said, is to develop more consistent programs chainwide. "We're working with vendors to improve our cost of goods and to take costs out of the process, and we're offering customers a more contemporary, more consistent message that utilizes advertising dollars more efficiently."