SCHNUCKS EXECUTES CAREFUL GROWTH PLAN

ST. LOUIS -- Schnuck Markets' recent announcement it would jump across the border into Hy-Vee Supermarkets' territory in Iowa with a 65,000-square-foot store, scheduled to open in 2005, typifies how the chain has grown its base of operations over the last several years.Deeply rooted here for 65 years, Schnucks is slowly establishing a significant regional presence by studying fill-in real-estate opportunities

ST. LOUIS -- Schnuck Markets' recent announcement it would jump across the border into Hy-Vee Supermarkets' territory in Iowa with a 65,000-square-foot store, scheduled to open in 2005, typifies how the chain has grown its base of operations over the last several years.

Deeply rooted here for 65 years, Schnucks is slowly establishing a significant regional presence by studying fill-in real-estate opportunities within reach of its home-base distribution centers.

"We are trying to aggressively grow our business as rapidly as we can find long-term profitable locations," Craig Schnuck, chairman of the board and chief executive officer, told SN.

David Livingston, a retail consultant in Pewaukee, Wis., said Schnucks will never be guilty of getting in over its head by over-expanding. "They study the market carefully, and make slow, calculated moves," he said.

Such is the case in Iowa. Schnuck said they had been watching developments for quite some time in the Quad City area, which includes Bettendorf, Iowa, situated near the Illinois border where Schnucks will open a "market store" unit that highlights fresh produce and other perishables in the $30 million Duck Creek Plaza redevelopment project.

The No. 2 food retailer in the area, Eagle Food Centers, Milan, Ill., filed for Chapter 11 bankruptcy last year, and subsequently decided to sell or liquidate its 59 stores. Eagle closed 10 stores in Iowa. "When that occurred," Schnuck said, "it freed up enough potential business that we saw that area as a really good opportunity for us... It's within an area we can service quite readily. We have a store about 90 miles away in Peoria, Ill."

The site is already anchored by a new Home Depot and a relocated Walgreens, and will include Marshalls and Hallmark. Schnucks will enter its new store, which is being built by the developers, under a 20-year lease, the retailer said.

While Schnucks works with other developers to obtain the most attractive locations, it operates its own real-estate development company, the DESCO Group, which manages most of Schnucks' new building projects. Schnuck owns more than half of its stores. About three quarters of its recent and future developments consist of shopping centers that it controls and manages. These shopping centers are most often anchored by a Schnucks. Having a Schnucks unit anchored to a shopping center adds to the importance of the shopping trip, noted Schnuck.

Prior to the Bettendorf announcement, Schnucks had planned on building a store in Davenport, Iowa, on property that it owned. Yet, Wal-Mart Stores built a second new supercenter nearby, just a mile west of Schnucks' property. That move raised the competitive pressure, and turned Schnucks away from Davenport.

In Bettendorf, Schnucks will be competing with Hy-Vee and Wal-Mart, both non-union operators. It's unclear whether Schnucks' Bettendorf store will be unionized. Schnuck told local media that it would be up to the employees in the store and the makeup of the market whether the store becomes a union operation. However, he did emphasize that any unionized contract would have to allow Schnucks to be competitive in wages and benefits with the surrounding stores in order to survive over the long term.

Of Schnucks' 100 stores, 76 of them are unionized under the United Food and Commercial Workers. Last year, Schnucks' real-estate development was slowed down due to a 25-day strike in St. Louis by UFCW local 655. Under the new contract, Schnucks won concessions on controlling health care costs and flexible work rules.

Schnuck said the company competes directly with about 34 Wal-Mart Supercenters in Missouri and five other states in which it operates -- Illinois, Indiana, Mississippi, Tennessee and Wisconsin. With a larger-format store, Schnuck said it can compete with Wal-Mart on variety, quality of perishables and service. The company operates 100 stores and 93 pharmacies, most of them food-drug combos.

Livingston said Schnucks does a good job, and is a strong operator, but he noted that Hy-Vee is also strong and that Schnucks had trouble competing with Hy-Vee in Kansas City. Schnucks eventually sold its seven Kansas City stores to Hy-Vee in 1997.

It was a situation where Schnucks could not reach market saturation with additional stores quick enough to make it feasible to advertise and achieve the needed economies of scale, explained Schnuck.

SN ranked Schnucks No. 41 in its Top 75 list of U.S. food retailers. In 2003, Schnucks produced $2.2 billion in revenues for the year ending Sept. 30, 2003, up 4.7% over the previous year. During that period, Schnucks grew its store base by about 11%, or a gain of about 10 new units.

In 2002, Schnucks moved for the first time into Tennessee, Mississippi and Wisconsin. In 1996, Albertsons outbid Schnucks for Seessel's in Memphis, Tenn. Schnucks finally won its long-sought-after acquisition by purchasing 12 Seessel's stores from Albertsons when it decided to pull out of Memphis.

"We had been studying this group of stores [Seessel's] for a long period of time," said Schnuck. "We thought we had a basic understanding of the customers there, and thought we could really offer some differentiation to what was in the market. The rest of market is made up of Kroger and Wal-Mart and other independents."

Schnuck said the Memphis stores are off to a good start, but he admitted they have been challenged in establishing Schnucks' culture in Memphis.

"We learned shoppers' habits can be slow to change, and it has taken us awhile to have people learn that we are really different than what was there before," said Schnuck.

"Anytime you get a new owner and make changes, it upsets the customer base," noted Livingston. "You can expect a 20% decline with an ownership change. It takes a long time to implement programs. Morale becomes a big problem."

Schnucks has remodeled nine Seessel's stores, and closed one. This year, it will open three new stores in Memphis; one is a replacement unit.

Of the 100 stores Schnucks operates, 63 are located in metro St. Louis, plus it has seven other locations within the state. Schnuck said most of the development in metro St. Louis are relocations. The company has one new store currently under construction, and it has its sights on several other areas of opportunity, said Schnuck.

In 1998, Schnucks purchased Logli supermarkets in Rockford, Ill. The retailer moved into Janesville, Wis., with its fifth Logli store in 2002.

Last year, the company opened its fifth store in Evansville, Ind., a market it entered in 1985.

Bill Bishop, president of Willard Bishop Consulting, Barrington, Ill., sees Schnucks continuing to leapfrog over real-estate problems and Wal-Mart through smaller acquisitions. He also noted Schnucks' diversification into other businesses such as real estate, and cited its strong financial position.

"The biggest challenge any of these guys face today is finding growth that can be profitable in a reasonable time frame," said Bishop. "People are spending huge amounts of money to grow and even sustain market share. Schnucks' key challenge is to find growth that they can do profitably. That is a delicate balance. It is much more of a balancing act than was necessary five or 10 years ago because the competitive pressure has picked up, and the need for reasonable performance hasn't let up."

EYE ON IOWA

BETTENDORF, Iowa -- The $30 million redevelopment of the Duck Creek Plaza mall represents a model for Schnuck Markets' future expansion even though the project headed by outside developers, the Daly Group, Chicago, and Equity Growth Group, based here.

Schnucks has been growing its store base over the last few years through such shopping mall properties that it usually develops through its own real estate company, the DESCO Group, said Craig Schnuck, chairman and chief executive officer of the St. Louis-based Schnucks.

"Originally, it [Duck Creek Plaza] looked like a long shot," said Schnuck, who has been closely following business activity in the area over the last three years. "The developers have been able to pull it together."

According to local media, the city has frozen property valuation on the project at its current assessment of $9.9 million. This allows the developers to get the additional tax money from the value of the new development for 10 years after construction is complete.

Schnucks signed a 20-year lease for the 63,000-square-foot store that is scheduled to open in early 2005. The retailer will invest $3.5 million in fixtures and about $1 million in inventory, according to media reports.

Bettendorf, population 31,547, is ideally situated for Schnucks' entry into Iowa. The fast-growing city is within driving time from Chicago, Indianapolis, St. Louis and Milwaukee -- all within access to Schnucks' other growth markets. About 34 million people live within a 300-mile radius of the city. Bettendorf is a young, well-educated community with the median age at 34. Thirty percent of the citizenry is college-educated and more than 10% hold post-graduate degrees. The annual median household income is nearly $50,000.