Chairman and CEO,
KEY DEVELOPMENTS: Transforming the company through Albertsons acquisition while meeting financial goals.
WHAT'S NEXT: Capturing more efficiencies while boosting sales through multi-format store renovation and merchandising programs.
Jeff Noddle has orchestrated massive cultural and strategic change over the past 13 months, but the relative lack of chaos at Supervalu barely gives it away.
The chairman and chief executive officer of Supervalu credits the smooth integration of the Albertsons assets to a focus on people and culture. It thus far has allowed Supervalu, after acquiring Albertsons' “crown jewels” last June, to transform from a $20 billion wholesaler to a $44 billion retailer, all while meeting financial goals and continuing to serve customers.
“When we began the due diligence on our acquisition of key retail properties of Albertsons, we knew that one of the most important elements of a successful acquisition was a strong cultural fit and being able to build a healthy, respectful culture in the wake of the transformation that would be inevitable for our company,” Noddle told SN. “Along with my team, we made ‘the people piece’ one of the most important focal points as we moved forward.”
Specifically, Noddle said, he focused on building a team that utilized the best talent from the Supervalu and Albertsons organizations, in an effort that stretched down to the store level. “The end result is a leadership team and associate population that hopefully understands the goals and vision of the company and is united in attaining our ultimate goal of becoming the best place to work, shop and invest in our industry,” Noddle said.
Mark Husson, an analyst with HSBC Capital Markets, New York, said Noddle's attention to personnel and his gradual approach have been keys to Supervalu's success.
“What keeps a CEO up at night? It's not price spreads, or what the brand is doing, or sales and market share. It's people,” Husson said. “Jeff Noddle's challenge is a cultural one: getting the right people together to run a large, fragmented group. He has to make sure they have the right team — not just individuals — running the business.
“It seems like Supervalu has learned from some of the successful integrations like Kroger and Fred Meyer,” Husson added. “They're not trying to jam it together quickly — which was Albertsons' problem with integrating American Stores — but to build slowly.”
The pace of change at the store level is expected to pick up this year, but changes there should be welcome. The company plans to spend approximately $1.2 billion on around 100 store remodels and 25-30 new store builds this year, with around 70% of the work going toward the newly acquired banners. Many stores are slated to receive the newly crafted “premium fresh & healthy” format, which emphasizes fresh foods and service departments in a clean, vibrant setting.
“Our goal is to have a store network that is 80 percent new or newly remodeled within the past seven years,” Noddle said. “Many of the stores that we acquired are in excellent locations, but have not been remodeled in quite a while, so we are focused on revitalizing these stores — a move that not only has an impact on sales, but also helps us to best meet the needs of our shoppers.”
“Jeff's challenge is pretty clear,” Neil Stern, senior partner at McMillan Doolittle, Chicago, told SN. “You've bought all these assets, now you've got to make them run and be profitable. Jewel and Shaws and Acme are terrific brands and have terrific market share positions, but you have to make them work, when they really haven't for Albertsons or American Stores. I think it's a good idea they have announced a pretty aggressive capital plan for these brands.”
Having a broad range of store formats at his disposal — as well as expertise in distribution — offers Noddle a competitive advantage, Stern added.
“The weapons they bring to bear in a market are pretty considerable,” he said. “They can come to the market with conventional supermarkets, or [discount] formats like Save-A-Lot, or high-end formats like Bristol Farms. They've introduced Sunflower for the organics market, and they still are a wholesaler.”
Jeff Pylipow, Supervalu's executive vice president, human resources, said he considers Noddle's ability as a team-builder and communicator to be his best qualities.
“He is approachable, down-to-earth, and he truly believes in people,” Pylipow said. “All of this comes across in his leadership style and personal interactions.”
Success in crafting the new Supervalu into the second-largest supermarket operator in the U.S. earns Noddle the No. 1 ranking of influential industry leaders in SN's annual Power 50 list for 2007. He ranked No. 2 last year.
“Jeff is involved. As a longtime veteran of the company, he understands what it means to be in a distribution center, or merchandising a store, or supporting the business in a back-office function. When he makes a decision, he weighs input from his team, but also has the background to really understand what it means for the company as a whole — not just on paper, but from actually having been there,” Mike Jackson, president and chief operating officer, Supervalu, told SN.
“I believe that associates know that he understands their concerns — and he is always ready to address issues as they arise,” Jackson added. “Jeff isn't just a CEO who came to Supervalu; his commitment to the company's success is part of the legacy of his nearly 30-year career. This commitment and his sense of integrity are obvious to associates and are an important part of his ability to lead the company through the most transformational period in its history.”
— JON SPRINGER
Chairman and CEO,
KEY DEVELOPMENTS: Expanding financial-services offerings, rolling out Marketplace format and acquiring stores from two chains in the Midwest.
WHAT'S NEXT: Facing Tesco Fresh & Easy in the Southwest.
When reports emerged this year that Kroger Co. could be the target of a leveraged buyout, David Dillon sprang into action.
The chairman and chief executive officer of the nation's largest traditional grocer quickly fired off a letter to his company's 310,000 employees explaining, in plain English, that Kroger was absolutely not for sale. He repeated that assertion at the company's annual meeting last month.
“That tells me that he's a very forthright guy,” said Tom Jackson, president and CEO of the Ohio Grocers Association. “He didn't mince words and he didn't waste time. If I was out there running one of the [divisions], I'd want my leader to come out and put that stuff to rest. That doesn't do any good to the people who are putting their heart and soul into the company every day.”
While Dillon showed his quick reflexes in responding to the buyout reports, analysts cite his more deliberate nature as one of the keys to the $66 billion company's success. His patience in implementing changes at the chain beginning about five years ago, when Kroger set about slashing prices and streamlining its cost structure, has laid a solid foundation for the company, said Jason Whitmer, an analyst with Cleveland Research.
“They committed to some things early on that were so painful to go through in terms of gross margin investment, and there were a lot of headaches, but they just had the patience to deal with it,” he said. “Not many companies would have the patience to go through those kind of storms and come out on the other side, and I think Kroger is being rewarded for it. I give him a lot of credit and the team a lot of credit for standing tall through all that. It's been a seamless transition from [former Chairman] Joe Pichler to Dave Dillon, and I think he's done a really good job.”
Now that same patience is being applied to the company's more recent strategic initiative concerning customer segmentation, analysts said. Partnering with Dunnhumby USA, the same loyalty-data analysis firm that has helped Tesco secure its dominant position in the U.K., Kroger is slowly building a new layer of marketing savvy onto its foundation of low prices and efficient processes.
“They deserve credit for creating a strategy and then staying committed to that strategy, even when it is admittedly something that is going to take a long time,” said Neil Stern, senior partner, McMillan/Doolittle, Chicago. “When they moved to cut expenses and reduce prices, in the first year they weren't getting much traction, but the company stayed the course and now they are getting the benefit of that. Now the same thing is true of the work the company is doing around customer loyalty and segmentation, and that's really in the same vein.”
Such initiatives should help as Kroger increasingly faces new competition, analysts said, citing the expected debut of Tesco Fresh & Easy in the Southwest this year and a renewed emphasis on supermarket offerings by Target Corp.
At the annual meeting and during the company's first-quarter conference call, Dillon made much of Kroger's “Customer 1st” philosophy, which provides an overall guideline for executing the business from the corner office to the checkout and is guiding some of the strategic initiatives at the company.
“Kroger's Customer 1st strategy is creating a unique competitive advantage that positions us well for multiple-year growth and ongoing value creation for our shareholders,” Dillon said during the first-quarter conference call last month. He cited the company's expanded financial-services offerings, called Kroger Personal Finance, as an extension of that philosophy.
“I think the thing that David has done really well is that he and his team have put together a very simple strategy that the employees of the company can rally around,” said Whitmer. “The Customer 1st initiative, based around four very simple keys: price, people, shopping experience and products, I think is working.”
Kroger's stock price is up about 30% over the last two years as the company has been able to drive top-line growth not through the major acquisitions like those that turned it into a grocery goliath in the late 1990s, but through gains in same-store sales and strategic additions of small groups of stores in existing markets.
So far this year, the company has made two such deals already, picking up the Scott's Food & Pharmacy chain in Fort Wayne, Ind., from Supervalu, and buying 20 Farmer Jack stores in Detroit from A&P. Both markets are areas where Kroger already had a strong presence, but the deals allowed the company to further solidify its market share and spread its costs out across a broader store base, much as it has done in other markets around the country over the past few years.
While the acquisitions of today are helping upgrade the company's 2,500-unit supermarket fleet and drive incremental sales gains, the acquisitions of the past are also still bearing fruit, observers said. Kroger's highly regarded private-label program, for example, was enhanced through the acquisition of Ralphs and its Private Selection brand, Stern pointed out.
“They are taking the learnings where they can out of the companies they have, and that's making them a stronger company,” he said.
Similarly, Kroger's ownership of the Fred Meyer supercenter chain in Portland, Ore., has helped the company expand its large-format Marketplace stores, which offer a broader selection of general merchandise. The company now has 31 such stores and has identified six additional markets for the format.
Of course, Dillon himself is the product of an acquisition, having been born into the family that owned the Dillon's supermarket chain in Kansas before Kroger bought it.
“The great story about David Dillon is that he's from a division that was acquired by Kroger,” said Stern. “If you ask him if Kroger learns from the companies it acquired, he's the poster child.”
— MARK HAMSTRA
Chairman, CEO, President,
KEY DEVELOPMENTS: Revealed earnings potential of Blackhawk Network, a third-party gift-card business.
WHAT'S NEXT: Expanding Safeway's restaurant operation; working for health care reform.
The best news for Steve Burd this year was that he was not the primary focus of organized labor's ire in the latest round of contract talks in Southern California, or anywhere else for that matter, as he was in the last go-around three years ago.
That left the head of Pleasanton, Calif.-based Safeway free to concentrate on other matters, including the ongoing expansion of Blackhawk Network, the company's third-party gift-card business; the ongoing conversion of Safeway stores to the lifestyle format; the opening of Citrine Bistro, the chain's first freestanding restaurant; and the drive for improving the nation's health care system.
Investors have been aware of Blackhawk since it was launched in 2001, but they were generally not aware of its potential because the company did not talk about it until late last year, when Burd indicated he expects Blackhawk to contribute $100 million to pre-tax income.
The marketing effort to sell third-party gift cards for other retail business at its own stores and at other supermarkets and drug outlets has grown at a rate of 100% a year over the last five years, Burd told investors, with expectations it will grow at an annual rate of 80% going forward.
“If Blackhawk's business grows at the 80% level, then supermarket [earnings] growth could be anemic — around 5%, though we don't expect that — and we'd still hit a 12% growth rate,” he said last December.
Chuck Cerankosky, an analyst with FTN Midwest, Cleveland, said the disclosure of Blackhawk's potential surprised most people. “While everyone understood Blackhawk was growing, most didn't realize how much money it was generating, nor did we realize the strategy Safeway was pursuing in offering the program to supermarket competitors and drug store operators all over the country and, more recently, the world.
“For me, it's intriguing how much supermarket and drug store retailers have built this segment into a year-round merchandising effort. It literally changes the endcaps into a mini-mall by allowing people to do their shopping for Christmas and other gift-giving occasions across a variety of retail choices and to make purchase decisions that don't involve size, fit or color. It's just a great idea.”
In terms of lifestyle stores, Safeway anticipates 60% of its stores will be converted by the end of 2007 — a number that's expected to increase to 90% by the end of 2009, Burd said.
Speaking with investors in late April, Burd said all 10 of Safeway's operating divisions were showing positive identical-store sales — the first time that has happened since early 2001, he noted — “which underscores the fact that our [lifestyle store] strategy is working in all markets, regardless of the competitive elements, and that we're executing it well.”
Even at stores converted four years earlier — when the conversion program began — sales continue to be in excess of 50% of what they were in the first year, the same levels they achieved during the second and third years after their conversion, Burd noted.
The lifestyle stores represent “the most amazing, dramatic change I've ever seen at an existing retailer,” said Jonathan Ziegler, a Santa Barbara, Calif.-based analyst for Dutton Associates, El Dorado Hills, Calif. “Burd hit a wall with Safeway in the late 1990s, but he's revitalized the company with the lifestyle stores, and the executive team there has really transformed Safeway into a great place to shop.”
“Remodeling activity is always good for a chain,” Cerankosky said, “but the lifestyle remodels have been part of a well-defined strategy that dovetails nicely with the company's efforts to stress the total package in those stores, both fresh quality and value.”
Beyond lifestyle, Burd said Safeway is “entertaining the possibility” of trying different formats “that would represent a significant growth vehicle.”
He also said the company would consider new businesses related to its primary business — an apparent reference to Citrine Bistro, the restaurant Safeway opened in early June in Redwood City, Calif., as a vehicle to test culinary ideas for use at store level utilizing ingredients sold at the stores.
While Safeway has downplayed the significance of the first restaurant, the website for Citrine Bistro shows possible additional California sites in San Francisco, San Jose and Oakland.
A restaurant makes sense for Safeway, Cerankosky pointed out. “When people buy prepared foods at a supermarket, they're comparing quality and taste with that of a restaurant, not with what they make at home, so what better research and development device could Safeway come up with than a restaurant?
“It's obviously more of an R&D effort than a profit center, unlike Blackhawk, but opening up restaurants in different areas should help Safeway improve its prepared foods business at store level.”
On the matter of health care, Burd helped found a new group of businesses called The Coalition to Advance Healthcare Reform to lobby for change at the state and national level.
“We've assembled a coalition of people who believe business has a responsibility to make sure people get the health care coverage they need,” Burd said.
According to published reports, the coalition is seeking health care coverage for all people; subsidized insurance for those on low incomes; coverage of pre-existing conditions; incentives for healthy behavior and prevention; tax deductions for people who buy insurance; and full disclosure of the costs of care.
— ELLIOT ZWIEBACH
President and CEO,
KEY DEVELOPMENTS: Steering Wal-Mart through challenging times while influencing issues like sustainability.
WHAT'S NEXT: Rekindling same-store sales while supercenter expansion eases.
For Lee Scott, the hard part is only beginning.
Wal-Mart Stores' president and chief executive officer, who since 2000 has steered the Bentonville, Ark.-based retailer to unparalleled heights against unprecedented opposition, delivered news this spring that he would, for the first time, be piloting an organization that in the United States, at least, isn't purely about growth.
It seems that the thousands of Supercenters built over the last decade — a base that grew Wal-Mart into the hugely influential, $233 billion company it is today — need attention in order to maintain strong sales momentum as they mature. To that end, Scott this spring said Wal-Mart would open between 190 and 200 Supercenters this year, as opposed to previous estimates of 265 to 270; and thereafter reduce annual openings to around 170 new stores a year for three years. The move, Scott said, would allow the company to address same-store sales by devoting some capital toward existing stores.
That represents a one-year reduction in planned new stores of between 25% and 30%, and annual U.S. square-footage expansion in coming years of a modest 4%-5%. It also reflects a major shift in the organization's philosophy, and perhaps Scott's greatest challenge, sources said.
“Wal-Mart's really at a strategic crossroads,” Art Turock, president of Art Turock & Associates, a consultancy in Kirkland, Wash., told SN. “When they started building the supercenter, they had competitive advantage that looked solid and sustainable. Lately, though, we're seeing chinks in the armor, their strengths dramatically weakened.”
The building slowdown — which accompanies an 8.8% reduction in projected capital expenditures this year and a $15 billion company stock buyback plan — comes partly as a result of pressure from Wal-Mart stockholders frustrated with far too little earnings growth in recent years, sources said.
“He gave Wall Street what it wanted, which was a focus on getting more out of its existing asset base,” Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., told SN. “And if you look at Wal-Mart overall, that's a good idea, especially from Wall Street's point of view. The issue is that same-store sales have hit a wall, particularly outside grocery. That's where a lot of the profit leverage comes from at Wal-Mart. So like any retailer, if your profit model isn't working up to standard, you've really got to concentrate on that before you concentrate on growth.”
Scott this spring also emphasized a more rigorous real estate process that would reduce cannibalization, as well as efforts to improve store productivity through more tailored local offerings and more efficient use of labor. The goal of this productivity initiative, now in the second year of a three-year plan, is to boost sales, visits and shopping baskets by making Wal-Mart more relevant to its shoppers, he said.
“It was inevitable that Lee Scott would face this challenge of how to transform Wal-Mart from being a pure growth company, opening several hundred units a year, to one that is going to have to balance growth with profitability,” Neil Stern, senior partner with McMillan Doolittle, Chicago, told SN. “For the last 25 years, Wal-Mart was all about growth. They've had a culture that was focused on putting their heads down and growing, and that's been their priority. Now they need to cede some power to people who are profit maximizers.”
Though Wal-Mart's board of directors earlier this year made a show of throwing a vote of confidence to Scott, much is riding on the success of his strategies. He was unavailable for an interview for this article.
“He's been at the helm of this company [since 2000], longer than most CEOs are at the helm of their companies,” Stern said. “But the hard fact he has to face is that no matter what the extenuating circumstances are, and at Wal-Mart there's a lot of them, you're running the show and so you're accountable for the results. And the results have not been great.”
Observers don't put much beyond the abilities of Scott, who ranked No. 1 in SN's Power 50 a year ago. For example, Turock noted the influence Scott began to exercise in areas such as sustainability in recent times.
“Lee Scott is incredibly influential,” Turock said. “He's spoken often about having woken up after Hurricane Katrina and thought about the impact Wal-Mart had on the world. He began to see environmental sustainability as an issue they could have tremendous impact on.”
A companywide “no waste” mission sparked by Scott has seen Wal-Mart begin to influence how suppliers package their goods just as strongly as the retailer has influenced the prices it would pay for them.
“Every supplier now who does business with Wal-Mart is affected,” Turock marveled. “For the new energy-efficient light bulbs, all it takes is Lee Scott to talk to General Electric and say, ‘We'll take a huge order.’ That helped that product become more mainstream.
“I call it ‘universalization’ — taking a product or idea that's out of the mainstream and making it not price-prohibitive,” Turock added. “That's what Wal-Mart and Lee Scott can do.”
— JON SPRINGER
Chairman and CEO,
KEY DEVELOPMENTS: Ranked second-best supermarket in the nation in fall 2006 by Consumer Reports.
WHAT'S NEXT: Expand into new markets; keep product offerings consistent but relevant.
Dan Bane is one of the invisible forces behind Trader Joe's success.
Besides visiting each store three to four times a year and spending two to three days each week physically working with employees and customers, the chairman and chief executive officer of Trader Joe's, Monrovia, Calif., creates a passion for the company and its products, according to Laurence Knight, president of Fletcher Knight, a branding agency in Greenwich, Conn.
For example, he said, Bane and the rest of the company's associates don't have administrative assistants. “It's easy to perceive this as an efficiency savings, but it's another way to reinforce direct contact between consumers, companies and employees.”
The company is viewed as more of a collective entity by customers, said Neil Stern, senior partner with McMillan Doolittle, a Chicago-based retail consulting firm. “That is the skill of a good CEO. He has a team that can execute without leaving things to just a few individuals.”
Keeping in touch with the consumer also allows 280-store Trader Joe's to edit its assortment effectively, “and be inspired by what's in and what's out,” Knight said. This enables the retailer to offer fewer stockkeeping units than traditional supermarkets, at 3,200 SKUs on average vs. the norm of 60,000.
Trader Joe's has been able to differentiate from other stores by having a manageable store size, said Stern. “The product assortment is significantly reduced and primarily private-label.”
About 80% of the store's products are sold under several of the company's private labels and are unique to Trader Joe's. The idea behind each of these unique brands is “curiosity and celebrating flavors from around the world,” Knight said.
In addition, the products are often given quirky and irreverent names that connect with consumers, such as Trader Darwin's vitamins and the nickname given to the store's Charles Shaw Wine, “Two Buck Chuck.” Charles Shaw Chardonnay was named the best chardonnay in California by the judges of the California State Fair Commercial Wine Competition earlier this month.
“Consumers typically have a favorite product that is a hero to them. The brand has a deep personality that allows consumers to form a relationship with their local store,” Knight said.
The store has almost trained its consumers to be in an adventuresome mind-set when visiting the store, Stern said. “This allows Trader Joe's to carry an assortment that is different from everyone else's.” The assortment changes week to week as well. “The categories will always be there, but consumers do sometimes need to be willing to make compromises to get their needs fulfilled.”
Great customer service ensures that customers never have negative things to say and that employees can enjoy the brand too, Knight said. “It goes way beyond the classic push-pull marketing of many brands.”
“They are really in a mode right now of rolling out the concept across the country and into new markets without a lot of changes to the concept itself,” Stern said. “The products constantly change, but the business format, size, service and pricing approach have stayed intact.”
Trader Joe's is privately owned by a family trust set up by Theo Albrecht, CEO of Albrecht Discount, a supermarket chain based in Germany. Corporate sibling Aldi is short for Albrecht Discount, and it is aggressively expanding in the U.S.
— WENDY TOTH
Chairman and CEO,
Procter & Gamble Co.
KEY DEVELOPMENTS: Management realignment completes P&G/Gillette merger.
WHAT'S NEXT: Remain on the cutting edge of collaborative and product innovation.
If anyone has scored big in “the best a man can get” (Gillette's ad slogan) category, it is A.G. Lafley, who completed Procter & Gamble's integration of the $54 billion Gillette acquisition. When the acquisition was announced in 2005, billionaire investor Warren Buffet said the deal would create the “greatest consumer products company in the world.”
For Lafley, P&G's chairman and chief executive officer, the deal culminated five years of rapid growth since he secured the top spot at the Cincinnati-based company in 2000, and it followed the purchase of Clairol in 2001 and Wella in 2003.
The integration resulted in business and management realignment this spring when Gillette's global business unit was split, with Duracell going to Household Care and shaving going to Beauty Care. A third global unit — Global Health & Well Being — was also formed. Noting that P&G had tripled its business initiatives since 2000, Lafley said, “These changes are designed to help P&G's business consistently win at both the first [in-store] and second [at-home] moments of truth with consumers.” The reorganization also placed Susan E. Arnold in charge of all three units as president, global business units, and Robert A. McDonald as chief operating officer of all global operations. Both report to Lafley. All this led to media speculation that Lafley, 60, was lining up a successor as he gets closer to retirement.
“A.G. has put in place a structure and leadership team well aligned to meet the challenges of today's marketplace,” noted C. Manly Molpus, the former head of the Grocery Manufacturers Association, who retired in January.
P&G's momentum hasn't slowed during the first three quarters of this year, with impressive gains in net sales and earnings, up 14% and 19%, respectively, for the nine months ending March 31.
Driving the fast growth is innovation. Over the past year, the company launched Fusion, its five-blade shaving system, on which P&G closely collaborated with grocery retailers to get fast distribution into stores; it added flavors to tap water through PUR Flavor Options water filtration, and clinical strength to Secret antiperspirant/deodorant; it introduced a design for a Mr. Clean Performance Car Wash, slated to open in Deerfield, Ohio; and it reportedly is developing a light-based hair-removal product for women in partnership with Palomar Medical Technologies. P&G also is set to convert its entire line of liquid laundry detergent brands to 2X concentrated formulas by 2008, cutting in half the bottle size and thus producing environmental savings in fuel consumption, packaging material and water.
“It is not a consumer-product-goods chemical business anymore,” said Bill Bishop, chairman, Willard Bishop Consulting, Barrington, Ill., who pointed to the evolution of Swiffers being transformed into quasi-appliances. “Lafley has put a tremendous amount of emphasis on being sure innovation isn't something that happens in a test tube or in the specialist's domain. Innovation has become the flex fiber of the company,” he said.
The model is “connect & develop,” which seeks to “build a global innovation network by identifying and connecting with the talents and technologies of today's most prepared minds,” stated P&G. This means forging collaborative partnerships and alliances outside P&G's domain, as well as within the company across its many businesses.
Bishop noted that the company has become very aware of the growing impact of biotech and genetics. P&G Pharmaceuticals was well represented at the 2007 BIO International Convention in May, seeking opportunities in women's health, especially in gastrointestinal and musculoskeletal therapeutic areas, according to a P&G news release.
Steering P&G's vast global empire hasn't deterred Lafley from being involved in important industry issues, said Molpus. “A.G. has continued to lend his leadership in industry affairs, demonstrating his appreciation of the need for collective industry action.” Lafley applies his knowledge in a soft-spoken, pleasant manner, but he is decisive, Molpus added. “He is a very effective change agent.”
— CHRISTINA VEIDERS
President and CEO,
Costco Wholesale Corp.
KEY DEVELOPMENTS: Changed its returns policy on electronics as part of an effort to boost earnings.
WHAT'S NEXT: Introducing a new line of frozen and refrigerated meals from Martha Stewart.
Change comes slowly at Costco Wholesale Corp., so when the warehouse club altered its returns policy on electronics earlier this year, it was a significant development.
“It was a change that was two years in the making,” Patty Edwards, a Seattle-based analyst with Wentworth, Hauser & Violich, San Francisco, told SN. “Jim Sinegal does not move quickly.”
Sinegal is the chairman and chief executive officer of Issaquah, Wash.-based Costco.
Richard Galanti, Costco's chief financial officer, said Sinegal is careful about making any changes that could have a negative impact on members. “He prefers to talk things through for a long time and try everything else before we make a change.
“So over the last couple of years, as we saw our returns policy on electronics having a more negative impact on profits, Jim suggested we try to figure out what was causing the problem. Initially, we ran videos on TVs in the stores about how to install HDTVs; then we offered customers an 800 number they could call to get any questions answered.”
Ultimately, Costco decided to put a 90-day limit on electronics returns, with no restocking fee on open boxes and no questions asked — a policy that could save the company more than $100 million a year, Galanti said.
Sinegal said, “Our members trust us, so we're always looking for ways to exceed their expectations, and you don't give up on a return policy that is unique in American retailing without a viable alternative.
“It was a delicate situation, and it took us a long time to work out a solution. But we pieced together a policy that says we will exchange electronics products for only 90 days and extend the manufacturer warranty by a year.”
In terms of margins, Costco has traditionally maintained a maximum markup of 14% on branded goods and 15% on private-label products. The question of whether or not that will change is not clear, at least to outside observers.
“Margins have been hurt horrifically by the [old] returns policy,” Edwards said, “so the new policy should help with earnings growth. But Costco will not raise margins as long as Jim Sinegal is there.”
Adrianne Shapira, an analyst with Goldman Sachs, New York, said she believes it's possible that margins could increase. “Management seems to increasingly agree it's been underearning, and as a result, margins could be poised to move higher in 2008,” she said.
For example, the change in Costco's returns policy could create “a possible margin tailwind” next year, she said. Additionally, an increase in the mix of private-label brands could drive margins up, she pointed out — possibly led by the introduction later this year of Martha Stewart co-branded frozen and refrigerated foods.
While the markup policy takes into account only the cost of items from the manufacturer rather than those handled through its own distribution facilities, a move to include distribution center handling in the item cost could potentially increase margins, Shapira added.
According to Sinegal, “Our plans call for us to remain the hottest-priced operator in any of the markets where we do business, but that doesn't mean we can't do things in terms of purchasing or some other area to improve margins. But any change will not come at the customers' expense.”
Besides adding the Martha Stewart line, beginning later this year, Costco is testing more upscale cheeses at selected clubs and is continuing to expand fresh foods, particularly home meal replacement categories, Galanti said.
Given the ethics inherent in the way Costco manages its business, analysts said, it was no surprise when Sinegal and Galanti gave up their bonuses this year because of benefits from option grants in prior years.
“Everyone agrees Jim is an ethical guy who got inadvertently involved in something he did not do willfully, and he atoned for it,” Jonathan Ziegler, a Santa Barbara. Calif.-based analyst for Dutton Associates, El Dorado, Calif., told SN.
According to Edwards, “Costco management has always held itself out as trying to be like Ceasar's wife — above reproach,” she said. “It's not shocking that they would do this as a gesture of good faith to the investment community and shareholders.
“At the top of their code of ethics is the dictum, ‘Obey the law,’ and that's the way they run the business, with everything above board.”
— ELLIOT ZWIEBACH
President and CEO,
KEY DEVELOPMENTS: Renewed brand positioning for Food Lion and Kash n' Karry; regained investment-grade status.
WHAT'S NEXT: Turning a profit at Sweetbay; pursuing global growth opportunities.
Delhaize Group is reaching new financial and strategic heights under Pierre-Olivier Beckers, whom observers describe as a bold and visionary leader.
Bold moves have transformed Delhaize's operations in the Southern U.S. from nondescript, price-driven boxes to a series of vibrant brands that target shoppers with precision. Savvy acquisitions of companies like Cash Fresh in Europe and Victory Supermarkets in the U.S. have improved market positioning and buying power. Overall sales and profits are climbing despite aggressive capital programs.
Investors have rewarded these efforts by bidding Delhaize stock to all-time highs this year, while the company's debt service helped it re-gain investment-grade ratings for the first time since its pricey acquisition of Hannaford in the late 1990s.
Mark Husson, an analyst who follows Delhaize for HSBC, noted that while those moves are paying off now, they have been part of Beckers' strategic plan for years.
“Assessing the job of a CEO ought to be measured not in one year but over three or four,” Husson told SN. “And by that measurement Delhaize has been clearly successful.”
An ongoing rebranding of its Food Lion banner in the Southeast saw Delhaize attack entire markets one at a time. The most recent market renewal, in Washington, D.C., included the conversion of several stores to the upscale Bloom concept, and other stores to a new Bottom Dollar discount. In between, Food Lion locations were provided with merchandising and design changes that elevated the profile of the once drab chain while maintaining its reputation for thrift and neighborliness.
“If they hadn't done what they did at Food Lion, there's no question it would have become more and more marginalized,” Husson said. “They anticipated where the customers were going to go and they've been able to keep the price spread with Wal-Mart low. A few years ago there were maybe 50 SKUs of organic products in the entire store. Today there are more than 300. That's a dramatic change.”
In Florida, Delhaize is close to completing the switch of all of its Kash n' Karry stores to the service- and fresh-oriented concept Sweetbay. That concept will soon be profitable, Husson predicted, adding that there is potential to grow were Delhaize to consider making acquisitions of Albertsons stores in Florida.
Creating differentiated store concepts is one of five initiatives to drive sales, profitability and return on invested capital, according to Delhaize's recently published annual report. “Executional excellence” through employee training and technology; a commitment to being “a learning company” through the share of best practices; attracting a skilled and diverse workplace; and being responsible corporate citizens are the others.
In an interview with SN last year, Beckers described himself as “a fanatic about the strength of diversity in operations and the acceleration of new ideas.” (Beckers was unavailable for an interview for this article.)
Beckers has also positioned Delhaize to bolster its global profile, according to Neil Stern, a senior partner at McMillan/Doolittle, Chicago.
“[Beckers] has actually been quite a visionary leader from a global perspective,” Stern told SN. “They've taken risks to transform themselves into a global player and been successful at that, but there are still moves to come.”
Much of the talk involves a potential business combination with Ahold, which, like Delhaize, has a strong presence on the U.S. East Coast and in continental Europe. “If you look at it globally, they are strategic pieces of the jigsaw puzzle that can fit together in some form,” Stern said.
That Delhaize would rush into such a marriage, however, is unlikely, sources added. The company may not want to jeopardize its new investment grade status with an expensive purchase or invite antitrust scrutiny here or in Europe. These concerns, they said, will be among Beckers' challenges in the years to come.
— JON SPRINGER
KEY DEVELOPMENTS: Reached merger agreement with Pathmark, decided to sell Farmer Jack and Sav-A-Center chains.
WHAT'S NEXT: Implementing the Pathmark merger.
In the past two years, A&P has gone from being an over-the-hill has-been to an up-and-coming Wall Street darling.
By shedding its non-core operations, eliminating its debt and finalizing a long-awaited agreement to acquire Pathmark Stores, A&P, once a national powerhouse with small grocery stores operating nationwide, has solidified its stature as a strong regional player operating within driving distance of its Montvale, N.J., headquarters.
At the helm of this reformation has been the chain's chairman, Christian Haub, a scion of A&P's controlling family who, analysts said, made the bold move of stepping away from day-do-day management in order to focus on steering the company in a new direction. His efforts culminated in a handshake with Ron Burkle, the supermarket dealmaker who had amassed a significant stake in Pathmark through his Yucaipa Cos. and could end up with a share of the combined companies.
“[Haub] spent the last year working on the Pathmark deal, and he stuck to it,” said one analyst, who asked not to be identified. “It was a very long and very complex process, and you have to give him a lot of credit for sticking to his guns and the price he was willing to pay. It took a lot of fortitude. There were probably 10 reasons why he could have walked away, but he didn't, and that was important because the management team could focus on managing while he focused on the merger. At the end of the day it was a very impressive feat.”
The $1.3 billion deal is not expected to close until late this year, and it is currently under antitrust review by the Federal Trade Commission, but investors have reacted favorably.
“Several years ago, the investor community had less faith in [Haub's] ability to do right by the shareholders, and I think that's dramatically changed, because he has demonstrated that he is extremely shareholder-focused,” said Karen Short, an analyst at Freidman Billings Ramsey, New York. “One of the criticisms before was that you had this shareholder family that had little interest in growing shareholder value.”
A key aspect of the company's turnaround effort was the addition of Eric Claus as chief executive officer in July 2005. Claus, who had headed A&P's highly successful Canadian operations, quickly implemented sweeping changes in A&P's U.S. business following the sale of the Canadian stores. Using what had been learned in Canada, Claus launched a revamped remodeling effort in which most stores would be converted to the more upscale “fresh” format.
“I think in the last year or two, Christian has taken on a much more strategic role in the business, rather than actually running the stores,” said Short. “The nitty-gritty has been Eric Claus's focus, while Christian has been focused on this transaction. He should be commended for not feeling the need to be involved in the day-to-day business.”
It was important that Haub brought in an executive from outside the U.S. operations to run the business, said the analyst who asked not to be identified. “Sometimes a business needs a fresh look, and Eric was able to make a lot of changes to the management team and, more importantly, to the way they brought their offering to customers,” the analyst said.
In the wake of the Pathmark merger announcement, which had long been anticipated, A&P also completed the sale of its long-struggling Farmer Jack division in Detroit and has begun seeking buyers for its Sav-A-Center chain in New Orleans. Analysts estimated the company got about $1 million to $2 million per store for the 45 Farmer Jacks it was able to sell (21 were closed, according to reports), but they felt it could get as much as $110 million for the 21-store Sav-A-Center chain.
After those sales have been completed, A&P would have about 315 stores, with another 141 on deck from Pathmark, before some expected closures in overlapping markets.
“You can see what [Haub] was interested in was two things: One was unlocking the value that was sitting there, which was Canada,” said the analyst who asked not to be identified. “No. 2 was putting the proceeds to use to build a stronger store business in the U.S., and the accompanying decisions to remove themselves from Michigan and New Orleans were kind of a further extension of that strategy.”
Short noted that with Haub's newfound focus on the running the company for shareholder value, there could be more deals on the horizon.
“I think with this company, anything is on the table,” she said.
— MARK HAMSTRA
Chairman and CEO,
Whole Foods Market
KEY DEVELOPMENTS: Defending himself against various inquiries into his internal emails, CEO blog and cloaked Web postings, while protecting the company's proposed merger with Wild Oats.
WHAT'S NEXT: A refresher course in the benefits of discretion.
John Mackey once sent his top competitor a package containing the popular board game Risk, with a note reading, “Forewarned is forearmed.” The psych-out was vintage Mackey: impish and edgy, a tad arrogant.
These days, it's Mackey who's playing with Trouble — but this is no game. The Federal Trade Commission is opposing the Whole Foods-Wild Oats merger based on statements Mackey made in an internal email to board members; the Securities and Exchange Commission has launched a probe into his cheerleading, under a pseudonym, of Whole Foods stock in a Yahoo! investors' chatroom; and the company's own board of directors has convened a special committee to evaluate Mackey's potential liability regarding the postings.
“John has always had a reputation of being outspoken and passionate and anti-establishment, and right now he has a much bigger audience,” said Scott Van Winkle, managing director of Canaccord Adams, a Boston-based investment firm.
As co-founder of the nation's largest natural and organic foods supermarket chain, Mackey's preference for ignoring the conventional code of conduct governing chief executive officers has won him fans among consumers and employees, many of whom regularly follow his corporate blog on Whole Food's website. That online journal, along with a separate section focused only on the FTC's opposition to the proposed Wild Oats acquisition, was suspended last week and replaced by a statement in which Mackey apologized to stakeholders for his “error in judgment in anonymously participating on online financial message boards.”
Van Winkle is among those observers who say Mackey's indiscretions, though moderately negative, will not likely have enough merit to result in any charges, or block the $565 million Wild Oats merger.
“When you're the CEO of a public company, you can't shoot back. People criticize you on a daily basis, particularly on Wall Street and the media,” he said. Having the opportunity to do it a little covertly, I think he was probably smiling, having fun.”
Mackey himself has said his goal in starting the CEO blog five years ago was to communicate his own opinions directly to people instead of depending on the media.
“It is very frustrating to be continually misquoted and misinterpreted. Now I can speak directly for myself and that is very liberating,” he recently wrote.
It was this freedom of expression — in the form of an internal email sent to Whole Foods' board members prior to the Wild Oats announcement — that the FTC cited extensively in outlining its case against the deal. A preliminary hearing on the government's request to stop the merger is scheduled for July 31.
Meanwhile, Mackey's dalliances as “rahodeb” are attracting a whole new round of unflattering attention. The FTC paperwork on the merger revealed Mackey had used an anagram of his wife Deborah's name to engage followers of Whole Foods stock in a Yahoo! chat room. Over the course of several years, he defended the retailer's performance, while trashing Wild Oats and its leadership with a level of enthusiasm usually reserved for sports fans.
“People will watch this controversy quite closely to see if, indeed, it has a major and material impact on how the FTC rules in this particular case,” said Janet Eden-Harris, chief executive of Umbria, a marketing research firm specializing in blogs.
In the meantime, Whole Foods continues to behave like the progressive, forward-thinking company that it is. Mackey's difficulties are unfairly overshadowing the chain's heralded arrival in London, where a landmark 80,000-square-foot store opened in June, joining five Fresh & Wild shops it already owns in the United Kingdom.
In his most recent letter to stakeholders, Mackey highlighted milestones such as the company's third 2-for-1 stock split, joining the S&P 500 index and moving up to No. 449 on the Fortune 500 list.
Whole Food's financials have also slid a bit from their highs, but are still robust and growing in the double digits. In fiscal 2006, sales increased 19% to $5.6 billion, driven by 11% growth in comp-store sales. Average weekly sales per store were also up 11% to $539,000, and sales per square foot came in just shy of $900 — both records for the company. For the most recent quarter, ended in April, sales increased 11.6% to $1.5 billion, with a 6% increase in comparable-store sales on top of an 11.9% increase in the prior year.
Changes at shelf level include investment in private label, in part to offset aggressive expansion by another rival, South Pasadena, Calif.-based Trader Joe's, known for its quirky, premium store brands. Whole Foods increased its private-label count by 21% to roughly 1,800 stockkeeping units, helping to capture 16% of total sales in fiscal 2006.
Behind the shelves, Mackey took steps in the past year to stave off potential defections of top executives by recalculating compensation packages. He ordered an increase in the salary cap from 14 times to 19 times the average pay of a full-time employee, to roughly $608,000. Mackey himself voluntarily gave up everything except for a symbolic $1 annual salary, health insurance and a food discount card. All of his future stock options were to fund the company's two foundations, devoted to ecology and animal welfare.
Indeed, it's core values that continue to keep Whole Foods and John Mackey at the top of many a list. The retailer reserved about $12 million last year, or 6% of its after-tax profits, for a variety of causes, from local food sourcing to animal compassion. “We walk our talk when it comes to our core values,” wrote Mackey to stakeholders in his yearly letter. More than any other quality, this differentiation will sustain Whole Foods as it not only faces the immediate hurdles erected by the FTC, but ventures farther into the increasingly competitive retail food landscape.
”We are in the midst of what I would call an unprecedented expansion of the scope of responsibility and values associated with food,” said Bill Bishop, president of Willard Bishop Consulting. “Whole Foods has kind of been at the front of the parade, and as a consequence has taken some of the heat.”
— ROBERT VOSBURGH