SALT LAKE CITY (FNS) -- Although it is now a wholly owned subsidiary of Smith's Food & Drug Centers here, the 28-store, Phoenix-based Smitty's Supermarkets chain will "indefinitely" retain the Smitty's name.
Robert D. Bolinder, Smith's executive vice president, told shareholders at the annual meeting here that "for the time being we will be satisfied to operate in Arizona under both names." He cited Smitty's strong reputation and 35-year presence in the state. "The worst thing we could do is to take away the consumers' choice," Bolinder
added, acknowledging that Smitty's has recently led Smith's in Phoenix market share.
Bolinder said Smith's will move ahead with melding many aspects of the two organizations, including a combining of advertising and a refiguring of merchandising, store size and supply arrangements for Smitty's. As reported, shareholders approved the recapitalization agreement, plan of merger and related transactions, which resulted in Smith's assuming control of Smitty's, along with $1.38 billion in debt.
All told, Smith's predicts $25 million of annualized net cost savings over a foreseeable three-year period as a result of integrating its 30-store Arizona operation with that of Smitty's, said Rowland.
In addition to the $7 million expected to be saved through advertising consolidation; administrative efficiencies are estimated at $13 million; purchasing economies, including vendor contracts and private label, are pegged at $6 million; warehousing and transportation savings are set at $4 million, and direct store delivery and front-end efficiencies are projected at $2 million.
These annual savings total $32 million, but Smith's has projected that each year it will probably reinvest about $7 million of that amount.
Bolinder said that Smith's expects to realize about one-third of that $25 million in savings this year, with the full amount being achieved in the following years. The company sees the operating synergies as representing "permanent savings" that will extend beyond the projected three-year period.
The merger plan gave Yucaipa, a private investment group that controlled Smitty's, an ownership and management position in Smith's. Under the merger terms, Smith's agreed to a management services pact with Yucaipa under which Ronald W. Burkle, the firm's managing general partner, has become Smith's chief executive officer.
The Smith family owns about 24% of the stock and controls the vote, and Jeffrey P. Smith remains chairman of the board. The former Smitty's shareholders, including Yucaipa, own about 17% of the stock and 2% of the vote, while all other shareholders control 59% of the stock and 56% of the vote.
Bolinder noted that when sales are combined, Smith's and Smitty's hold a 24% share of the Phoenix market and predicted that they will be "nip and tuck" for the No. 1 share-of-market spot with Fry's, which also has an estimated 24% share.
According to information presented at the annual meeting, Smith's holds the leading position in each of its other "core" markets: Salt Lake City (30%), Las Vegas (30%) and Albuquerque (27%).
Combined with Smitty's on a pro forma basis, Smith's estimated the last 12 months' revenues at $3 billion, with a total of 148 stores, mostly food and drug administration units, in seven Western states.
In an important change, Smith's and Smitty's will combine advertising in the next few weeks, noted Bolinder. The jointly tagged ads will use the TV and radio spots and print format currently being used by Smitty's.
Speaking at the annual meeting, Allen R. Rowland, Smith's chief operating officer, reiterated projections revealed in various recapitalization/
merger-related documents that have estimated annual advertising consolidation cost savings at about $7 million. In a major merchandising change, the "huge selection" of general merchandise at Smitty's 21 super combination stores will be whittled down over the next couple of years as these units, averaging 105,000 square feet, are partitioned to reduce their size to be more in line with the 54,000- to 60,000-square-foot food and drug combination stores that Smith's has been opening over the past few years, Bolinder said.
Bolinder said Smitty's Phoenix headquarters will probably close about July 1. He also said that negotiations are under way with Fleming, Smitty's supplier, that would enable Smith's to become its subsidiary's primary supplier. Fleming would remain as Smitty's secondary source for a time, said Bolinder, after which Smith's would become Smitty's only supplier.
Independent of the savings from operating synergies are the $17 million in capital expenditures and $15 million in other expenses that will be required to integrate the Arizona operations. In this area, Bolinder reported that most Smitty's stores have already been rewired to accommodate Smith's front-end computer systems.
