STRONG SECOND HALF SEEN, DESPITE WAL-MART

Retailers are anticipating a good second half -- despite encroachments from Wal-Mart supercenters -- with a strong economy likely to continue well past the fall elections, according to interviews conducted by SN."Consumers are still buying many additional items they wouldn't normally buy except in a good economy," said Ron Pearson, chairman, president and chief executive officer of Hy-Vee, West Des

Retailers are anticipating a good second half -- despite encroachments from Wal-Mart supercenters -- with a strong economy likely to continue well past the fall elections, according to interviews conducted by SN.

"Consumers are still buying many additional items they wouldn't normally buy except in a good economy," said Ron Pearson, chairman, president and chief executive officer of Hy-Vee, West Des Moines, Iowa.

"That includes a whole array of general merchandise and specialty gourmet foods and, as a result, we anticipate that sales will remain strong through the second half."

Although Hy-Vee faces an influx of Wal-Mart supercenters, "we still believe our sales will be good," Pearson said.

K-VA-T Food Stores, Abingdon, Va., is also optimistic about the second half, despite expansion of Wal-Mart in its trade area. "Our same-store sales have been positive and, with the addition of stores we acquired and reopened last year, we're running well ahead of the previous year, and we expect that trend to continue in the second half," said Steve Smith, president and chief operating officer.

"But there's still a scramble for dollars out there, and with more square footage coming into the market, sales per square foot continue to be stressed. So it will be a little tougher for some people out there, though we are positive we will be one of the winners."

Jack Brown, chairman, president and CEO of Stater Bros. Markets, Colton, Calif., also is optimistic about the second half because of his company's acquisition last fall of 43 stores from Boise, Idaho-based Albertson's.

"Our sales in the second half will be stronger, and earnings will be much stronger, now that we've completed the conversion of the 43 stores," Brown said. "We've installed service meat departments in all 43, which has nearly doubled our meat sales, and expanded the produce departments by adding triple-deck cases."

Food-service operations will be a key to success in the months ahead, Pearson pointed out. "Because a good economy affords consumers more opportunities to [eat out], I think supermarkets that don't have their own food-service operations or meals-to-go will be hurt more than others," he said.

Gary Philbin, president of Grand Union Co., Wayne, N.J., also mentioned meal replacements as one key to his company's second-half expectations. "With the strong economy, we see people looking for ways to save time, and we're trying to cater to that desire with meals-to-go," he told SN.

Grand Union expects sales to increase in the second half because of the scheduled opening of six or seven new and replacement stores during the balance of the year, Philbin added.

Tom Dahlen, president and CEO of Furr's Supermarkets, Albuquerque, N.M., said he is feeling "very bullish" about the second half following the launch of Furr's Project 2000, a series of initiatives he said have enabled the company to increase comparable-store sales, average transaction size and customer counts.

However, he was reluctant to disclose details of the initiatives.

Bob Piccinnini, chairman, president and CEO of Save Mart Supermarkets, Modesto, Calif., is also optimistic about the second half. "We had a great year last year, and there have really not been any major changes since, so we're looking for another good year," he told SN. "The economy remains strong, and there's nothing devastating happening in the industry to affect the status quo."

Brown said the economy is "booming" in the Inland Empire (the Riverside-San Bernardino County area where Stater operates), "and the general economy is strong, and the national elections won't have any effect on that -- whichever party wins will be able to ride the strong economy."

Smith also said he expects the economy to remain strong, "[but] I'm not sure a strong economy is best for the grocery business," he added, "because when the economy is soft, people are more cautious with their money and they tend to eat at home more often.

"And the strong economy has led to a tightness in employment and to problems hiring and retaining good help, so the strong economy will continue to challenge us."

Regarding competition from the Internet, Pearson said Hy-Vee has seen "a little erosion, though not much."

For Piccinnini, the jury is still out. "A lot of people think it will revolutionize the industry, [but] I'm not one of them. I believe the grocery store will remain a place people will want to go. And if the Intenet does become a major factor, then it will be survival of the fittest, and I believe we try hard to provide the public with what it wants."

The retailers' complete comments follow:

Steve Smith president, CEO K-VA-T Food Stores Abingdon, Va.

For our company the second half looks very positive. I say that with cautious optimism because four Wal-Mart supercenters will open against us in the half, and that's a lot of square footage. But we will open two new stores on the heels of three new stores that opened in March and April, so we're fairly optimistic.

We had a good first quarter, though I can't say it was great because everyone is scrambling for business. But our same-store sales were been positive, and with the addition of stores we acquired and reopened last year, we were running well ahead of the previous year, and we expect that trend to continue in the second half.

Obviously one variable is the minimum wage. Although we hire above the minimum, if it increases by 35 cents or 50 cents a hour, we will raise our higher-end rate, and that will add to our expenses. But it's an all-industry challenge, and we're all on a level playing field on that issue.

But there's still a scramble for dollars out there. With more square footage coming into the market, sales per square foot continue to be stressed. So it will be a little tougher for some people out there, though we are positive we will be among the winners.

In an election year like this one, we expect to see a lot of people doing all they can to keep the economy strong -- though I'm not sure a strong economy is best for the grocery business, because when the economy is soft, people are more cautious with their money and they tend to eat at home more often. And the strong economy has led to a tightness in employment and to problems hiring and retaining good help. So the strong economy will continue to challenge us.

As for consolidation, it hasn't affected us much. There's been some consolidation among companies we compete with -- Kroger and Food Lion, for example -- but not in our marketing area.

Gary Philbin president Grand Union Co. Wayne, N.J.

For us, obviously, what's ahead for the second half is to focus on new stores, getting new stores up and remodelings done. We have probably six or seven openings scheduled for the second half of the year, including replacements, and clearly new stores drive incremental volume. We have a very positive outlook regarding our ability to get capital into the system.

With the strong economy, we see people looking for ways to save time, and we're trying to cater to that desire with meals-to-go and experimenting with dry cleaners, 30-minute photo programs and other extra services in our stores.

Ron Pearson chairman,president, CEO Hy-Vee West Des Moines, Iowa

Looking ahead to the second half for Hy-Vee, the economy is still good for us and consumers are still buying many additional items that they wouldn't normally buy except in a good economy. That includes a whole array of general merchandise -- we've expanded GM sales dramatically -- and specialty gourmet foods, where we've seen sales going up at a much faster rate for products like cheese, gourmet canned foods and special vinegars.

As a result we anticipate that sales will remain strong through the second half. But we've had more competitive activity than ever in the first half, all from the openings of a lot of Wal-Mart Supercenters, and we expect more of that in the second half, though we still believe our sales will be good.

For the supermaket industry, I think there's a lot more competition than ever in the form of other eating alternatives, and because a good economy affords consumers more opportunities to visit them, I think the supermarkets that don't have their own food-service operations or meals-to-go will be hurt more than others.

In addition, mass merchandisers and other alternative formats have continued to move in and carry more traditional supermarket items, and they're doing a good job marketing them. Supermarkets that have not responded to this onslaught will be negatively affected as we continue to see an erosion of sales of the basic consumer items supermarkets have sold over the years.

So the industry must find ways to be more competitive in this area and must find other things they can sell -- for example, more general merchandise, health products, natural foods, vitamins and minerals -- so we can be thought of as THE stopping place. Our imaginations should be even more attuned to lifestyles in terms of what people want.

We've also seen a little erosion, though not much, from the Internet, but that's still very small right now.

Jack Brown. chairman, president, CEO Stater Bros. Markets Colton, Calif.

I believe our sales in the second half will be stronger and earnings will be much stronger now that we've completed the conversion of the 43 stores we acquired from Albertson's last fall. We've installed service meat departments in all 43 stores, which has nearly doubled our meat sales, and expanded the produce departments by adding triple-deck cases.

The industry will do well during the second half. The merger of the majors is reflected in their stock prices, which are moving back up, and that will help everyone in the industry since the Top 5 chains account for about 40% of all supermarket business.

The economy in the Inland Empire is booming, with new-home construction bringing in more families and therefore more customers. The general economy is strong, and the national elections won't have any effect on that -- whichever party wins will be able to ride the strong economy.

Tom Dahlen president, CEO Furr's Supermarkets Albuquerque, N.M.

We're feeling very bullish about the second half. As a result of a series of initiatives we're pursuing -- under the heading of Furr's Project 2000 -- we're continuing to make progress in terms of increased comparable-store sales, increased average transaction size and increased customer counts. In addition, we're getting great support from our board of directors and investors to increase capital spending so we can continue to grow our business.

For the industry, the second half will still be very competitive as the industry seeks its new level as a result of all the consolidations and mergers. Consequently, it will remain dynamic and ever-changing but still very competitive.