Skip navigation

OTHER RETAILERS SELLING FOOD

21 SIR TERRY LEAHY CEO, Tesco KEY DEVELOPMENTS: Prepared the launch of Tesco's new Fresh & Easy Neighborhood Markets in U.S. Southwest. WHAT'S NEXT: Growing a 300-store chain in a crowded market with entrenched competitors. In a gritty industrial section of Hawthorne, Calif., a prototype lies in wait, preparing to end food retail as we know it. Yes, speculation has been running high about Tesco's

21

SIR TERRY LEAHY

CEO, Tesco

KEY DEVELOPMENTS: Prepared the launch of Tesco's new Fresh & Easy Neighborhood Markets in U.S. Southwest.

WHAT'S NEXT: Growing a 300-store chain in a crowded market with entrenched competitors.

In a gritty industrial section of Hawthorne, Calif., a prototype lies in wait, preparing to end food retail as we know it.

Yes, speculation has been running high about Tesco's new stores — for now kept under wraps inside a California warehouse — so high, in fact, that Sir Terry Leahy, chief executive officer of the world's third-largest grocer, has the unusual distinction of being the only retailer on this year's Power 50 currently operating no stores in North America.

The facts known about Tesco's vision are well rehearsed at this point: With about 10,000 square feet of selling space, their Fresh & Easy Neighborhood Markets will offer high-quality perishables and prepared foods, tortillas, beer, wine, liquor and all-natural grocery items in convenient neighborhood locations. Tesco plans to open 100 of these stores in Southern California, Nevada and Arizona by the end of 2008, eventually building up a chain of as many as 300 stores in the region. Bilingual fliers have been sent to locals.

In case anyone doubts Tesco's sincerity, the company is also constructing an emphatic 820,000-square-foot distribution center in Riverside County, Calif., that will host the world's largest rooftop solar panel array.

It remains to be seen how such a significant bet will pay off in an overcrowded U.S. retail market, but Leahy seems like a calculating gambler. In a recent interview with the Wall Street Journal, he noted that before designing the U.S. prototype, his team “stayed in people's homes. We went through their fridges. We did all our research, and we're good at research.”

Indeed, one factor that has helped build the hype to such a fever pitch is the unflappable confidence that Leahy and his team continue to display in interviews with major news outlets in the U.S. and Europe. He consistently shrugs off the stateside misadventures of Sainsbury's and Marks & Spencer, notes that the U.S. is a place that rewards innovation, and says that Tesco will offer something new and different.

That confidence may be well placed. Tesco so far has been successful in China, Japan and Southeast Asia — all uniquely challenging markets that it approached with similar deliberation. And, under Leahy's leadership, Tesco has cultivated opportunities in the United Kingdom that were previously overlooked or ignored by competitors. Just consider England's floral market.

“They recognized that the supply chain had to be improved,” explained Terry Johnson, president of the Horticultural Marketing Group, Mission Viejo, Calif. “It wasn't rocket science; they just started applying similar cold-chain management standards to flowers as they did to other perishables.”

The result? Tesco's flowers would last in their customers' homes for two or three weeks, instead of three or four days.

“It was basic supply chain management, and it helped the U.K.'s floral industry to go from being relatively stagnant, to being an industry that has almost tripled during the past six years,” said Johnson.

Whatever the final result of the Tesco launch, the outlook is certainly rosy for Southwestern consumers. In interviews with SN earlier this month (see “Retailers in Southwest Prepare to Face New Competition,” July 9, 2007, Page 28) executives from Stater Bros. Markets, Bashas' and Albertsons said that a renewed focus on fresh food offerings and customer service would help prepare them to face their new competitor.
MATTHEW ENIS


22

ROBERT J. ULRICH

Chairman and CEO, Target Corp.

KEY DEVELOPMENTS: Building larger food presence in new and remodeled stores.

WHAT'S NEXT: Self-distribution in perishables.

“Eat Well. Pay Less.” Robert Ulrich, chairman and chief executive officer of Minneapolis-based Target, is taking the corporation's motto — “Expect More. Pay Less” — and applying it to the grocery side of the mass merchandiser's business. Although food sales are small in scale compared to Wal-Mart Stores, Ulrich's dedication to increasing Target's food offering is becoming a force that few can ignore.

“Although Wal-Mart is slowing down, Target is talking about building more SuperTargets, and while we haven't seen them appear yet in many places, people [in the food industry] are beginning to view them the same way they've viewed Wal-Mart,” Bob Piccinini, chairman and CEO of Save Market Supermarkets, Modesto, Calif., recently told SN in response to a question on the changing competitive landscape.

Target is ranked No. 4 behind Wal-Mart, Kroger and Sears on the 2006 Top 30 North American Retailers list, published by Planet Retail, the online research company. Target ended its 2006 fiscal year on Jan. 31 by reporting a net sales gain of 13.1% to $59.4 billion and net earnings up 15.8% to $2.79 billion for the 53-week period. Food (consumables and commodities) represented 32% of sales, or about $19 billion, up two percentage points from the prior year.

Target's supercenter entry came in 1995 with the first store opened in Omaha, Neb., late behind Wal-Mart's and Kmart's first supercenters, in 1988 and 1991, respectively. By the end of this year Target expects to have 200 SuperTargets among a total of about 1,500 stores.

“They are building at a snail's pace,” noted David Livingston, principal, DJL Research, Pewaukee, Wis.

Last year the pace began to pick up, however, when the company announced expanded food assortments in remodeled stores, with 50% more space devoted to food, and a new prototype, P2004, which included a broader mix of groceries slated for new and converted stores. Target also upped the number of food gondolas from 24-26 to 34 sides per store. In addition, the company introduced organic products into its Archer Farms label and became a certified organic retailer by the U.S. Department of Agriculture.

In conjunction with its expanded food efforts, Target will open its first perishables distribution center next year in Lake City, Fla. The company plans to invest half a billion dollars over the next several years in more DCs.

Said Ulrich during a March fourth-quarter conference call, “We believe that within the first 12 months of operation, we will achieve the sufficient scale to deliver the appropriate economic benefits that we're expecting out of this supply chain strategy.”

Currently, Supervalu, Minneapolis, and C&S Wholesale Grocers, Keene, N.H., provide food distribution services to Target.

“Target's position in the marketplace has to be distinct and a step up from Wal-Mart,” said Mark Husson, a New York-based analyst with HSBC Global Research, London. “You can't be better than Wal-Mart on perishables if you got a long distribution system. You need to shorten it down and keep the product younger in the supply chain. That is why Target is spending all that money in getting it right,” he said.

A challenge Ulrich may face in food sales may not come from Wal-Mart, but from Tesco, said Husson. “If Tesco is right and people are going to start shopping closer to home for food, then having a lot of remote big boxes may not be the right place to sell fresh food,” he commented.

But Ulrich, a Minnesota native who has lived and breathed mass merchandising for the last 40 years, is serious about food as a growth vehicle. “Ulrich is clearly not an apparel merchant dabbling in food.” Husson said.
CHRISTINA VEIDERS


23

JEFFREY A. REIN

Chairman and CEO, Walgreen Co.

KEY DEVELOPMENTS: Undergoing smooth management transition, moved into specialty pharmacy via acquisition as store growth continued.

WHAT'S NEXT: Mostly organic growth of stores and in-store clinics, complemented by opportunistic acquisitions.

On the surface, the past year could be seen as tumultuous for Walgreen Co., Deerfield, Ill.

Competitor CVS Corp., Woonsocket, R.I., passed the perennial chain drug leader in the number of stores, although not retail sales volume. Later, CVS bought prescription benefit manager Caremark Rx, Nashville, Tenn., to become the nation's largest pharmacy and pharmacy services company.

Wal-Mart Stores, Bentonville, Ark., launched its $4 generic prescription drug program.

Long-time executive, chairman and son of the founder, Charles R. Walgreen, Jr., died at age 100.

Finally, the torch of company leadership passed from David Bernauer to Jeffrey Rein, with the final step in the transition coming just two weeks ago as Bernauer stepped aside as chairman. Rein is now chairman and chief executive officer and Gregory Wasson is president and chief operating officer.

What does all this change mean to Rein and to Walgreens? “Very little,” he wrote in the company's annual report. Walgreens declined to speak to SN for this story.

Rein is described by many as a typical Walgreens executive. A pharmacist who happens to have an accounting degree, he started in the stores and rose through the ranks — an embodiment of the company's primary strategy of growing organically.

While in the last year the company has bought specialty pharmacies, made a rare acquisition of another drug chain — 76-unit Happy Harry's in Delaware, which continues to operate under that name — and in-store clinic operator Take Care Health Systems, observers expect no seismic changes similar to CVS' purchase of some 1,200 Eckerd stores and Caremark.

More likely is continued growth by building stores on choice lots on busy corners — adding 476 stores in 2006 and 500 in fiscal 2007 — and continued small and opportunistic acquisitions. The company recently opened its first store in Maine — it's now in all 48 contiguous states, with more than 5,750 stores — and has plans to start opening in Hawaii. Last month, Walgreens opened its 12th full-service distribution center in Anderson, S.C., and the chain plans to have 400 in-store health clinics by the end of next year.

The annual report actually used the word “boring” to describe the company's chosen path to success.

“The personalities may be different, but not the strategy. We all build on the shoulders of those who came before us, and work to improve this company for those who follow,” Rein said in the report.

Investor concerns about retail pharmacy chains have come from developments like Medicare Part D, Wal-Mart's $4 generics and now the Medicaid reforms, said Andrew Wolf, managing director, BB&T Capital Markets, Richmond, Va. “These issues have come and gone, and they've had absolutely no effect on Walgreens. They have had record profits.”

Commenting on the company's 19% earnings growth in its third quarter, Rein said, “With the first of 78 million Baby Boomers turning 65 in 2011, the demand for pharmacy services will get bigger and bigger. We intend to be the best-positioned pharmacy chain in the country to serve that need, and we're on track to exceed our goal of 7,000 stores in 2010.”

One of Rein's challenges will be to convince Wall Street that “as well as the company has been doing, it should be able to do so in the future,” Wolf said, describing the stock as “undervalued.”

“Walgreens has the reputation, justifiably, for running the tightest operation in the pharmacy industry,” said Roy White, vice president, sales, the Food Institute, Elmwood Park, N.J. “They do everything right, and doing it right stands higher and taller than almost anything else. They've also got a hierarchy where virtually everybody in the top management is a pharmacist.”

While others may move faster, Walgreens is “predictable, proven and they deliver results,” said Don Stuart, managing director, Cannondale Associates, Wilton, Conn. “You don't hear about major reorganizations at Walgreens. They move deliberately, and I think Rein's appointment was deliberate, well-thought-through and very much in line with past actions.”

Walgreens is not about being the biggest, but being the best, said Neil Stern, senior partner, McMillan Doolittle, Chicago. “They are the envy of any retail company in terms of their ability to consistently perform, and that is in any sector.”

One way Walgreens can improve is in its offerings of food and consumable goods, said Bill Bishop, president of Willard Bishop, Barrington, Ill. Because of their choice locations, “they are an absolute natural to handle an increasing share of the convenience kind of shopping trip. Up to now, they really haven't stepped up to that opportunity fully. I'm waiting for the next act to be thrilled and impressed.”
DAN ALAIMO


24

JOSEPH DEPINTO

President and CEO, 7-Eleven

KEY DEVELOPMENTS: Making major investments in fresh foods.

WHAT'S NEXT: Plans 1,000 new stores over the next four years.

Joseph DePinto, president and chief executive officer of Dallas-based 7-Eleven, took the convenience store retailer's helm two years ago after a successful tenure as president of GameStop Corp., the video game retailer.

He leads a retail giant that is shaking off the last vestiges of the Pac-Man era and embracing Xbox speed with upgraded merchandising and new investments in growth.

“Customers are demanding more on-the-go solutions now,” he said in a recent presentation at the Grocery Manufacturers Association/Food Products Association Executive Summit. “Also, sales of cigarettes continue to decline, so we need to be prepared to replace that business.”

A big part of that replacement will be fresh food assortments. The parent company's Asian stores lead the rest in terms of fresh food expertise. In the U.S., the Hawaii-based stores top the pack, with up to 24% of sales being fresh foods, while the average is 10% in the other states.

“Food service is the next natural order of things for the company,” said John Lofstock, editor of Convenience Store Decisions, a sister publication to SN within Penton Media. “7-Eleven will lean on the Japanese fresh foods model as they grow that business.”

DePinto is gearing up major investments to prepare for growth in fresh foods, which include fruit, sandwiches and salads.

“We are spending $1 billion over the next four years to renovate the inside of our stores to make them more presentable from a fresh foods perspective,” said DePinto, whose responsibilities include the U.S. and Canada.

The retailer is currently testing a hot food program in Salt Lake City and also hopes to boost its fresh food distribution system to enable more frequent deliveries to stores. 7-Eleven's initiatives are proceeding with one eye on competitors, such as WaWa and Sheetz, and another on Tesco, which will be coming to the U.S. later this year with its Fresh & Easy Market format.

However, while Tesco is expected to focus on fresh food merchandising with a convenience-oriented format, a number of observers believe its assortments and format size will compete more directly with meal solutions programs marketed by supermarkets, a view that DePinto shares.

The privately held 7-Eleven is a unit of Seven & I Holdings of Japan, which oversees retail operations in 17 countries encompassing more than 32,000 stores, including more than 7,200 in North America. Seven & I recently said it will invest $2.4 billion over the next four years to open 1,000 new stores in the U.S. while upgrading existing ones.

7-Eleven is pinning hopes for sales growth on a strategy that targets local marketing, DePinto emphasized.

“Regional and local product assortments will win the day,” he said, citing the example of differences in top coffee brands by U.S. region. “It happens in every category. Differences by regionality and by individual store.”

The drive toward localization is joined by a quest for quick-turning, innovative items across all categories.
DAVID ORGEL


25

JIM SKINNER

Vice Chairman and CEO, McDonald's

KEY DEVELOPMENTS: Divested Chipotle, franchising of nearly 1,600 existing restaurants in Latin America and the Caribbean, new products, significant same-store sales increases.

WHAT'S NEXT: Focusing on people and talent development, growth in China, Russia, India and the U.S.

McDonald's is focusing on being better, rather than growing bigger. The company's “Plan to Win” strategy, which focuses on products, people and places, has long since proven its reliability, with 2006 marking the company's fourth consecutive year of sales and profit growth.

Jim Skinner, vice chairman and chief executive officer of the Oak Brook, Ill.-based company, told SN that he plans to maintain that momentum.

“Our revitalization is anchored in financial discipline, being better vs. bigger, reimaging existing restaurants to enhance the customer experience, and a strong focus on operations excellence and leadership marketing,” Skinner said.

“We are seeing record results, and as long as we stay focused on our ‘Plan to Win,’ we're on the right path. Since 2003, when we launched the ‘Plan to Win,’ we've grown systemwide sales by almost 40%, our stock price has quadrupled, dividends have quadrupled and we're serving 52 million customers a day — that's six million more customers than we did four years ago.”

A combination of developments and achievements has brought the company success in the past year, according to Ron Paul, president of Chicago-based food-service consulting firm Technomic.

“He's done, by definition, a number of great things,” Paul told SN.

“I think it starts with making sure that he's a good listener in terms of franchisees. He's made major steps forward in improving the relationships between the franchisees and McDonald's, which I think is important.”

Paul said Skinner's move to extend hours helped the company increase same-store sales, and cutting back on new store openings gave McDonald's a chance to focus on existing restaurants, which has proven to be a successful strategy.

“Results speak louder than words, and his results are very, very impressive,” Paul said.

Additionally, Paul said he believes McDonald's has been investing effectively based on trends and customer feedback, and he noted that increases in same-store sales may also reflect increased customer satisfaction, particularly in the U.S.

“We're driving innovation, menu relevance, quality, convenience and value in all of our markets,” Skinner said.

“Our system is relentlessly focused on things we do well: our core menu with our customer's favorites, plus the addition of new menu items to add to our choice and variety. We're seeing some great focus on being our customers' most convenient choice, with extended hours or 24/7 service in markets around the globe.”

Skinner has been successful in bringing new products, such as more salads, the snack wrap and the partial rollout of the 1/3-pound Angus burger, said Paul.

“I think the formula is pretty clear: intensive marketing, and new products that make a difference in sales,” Paul told SN.

“I'd say right now, for 2007 and well into 2008, the Angus burger will probably be a very important product for them. I wouldn't be surprised to see another chicken product introduced, as well as a new fish or seafood product. But a lot of activity on the new-product front — that's what will keep them growing.”

Looking ahead, the focus is on people, both customers and employees.

“We've got to have the right people in the right places to continue our success,” Skinner said.

“That means having our 1.6 million employees around the world focused on the customer experience on a daily basis. We have infinite opportunities ahead, as long as we stay aligned and tuned into what our customers want. We are listening to what is important to our customers, staying ahead of trends, and that's reflected in our growth in sales and guest counts.”
AMY SUNG


26

JEFF BEZOS

Founder and CEO, Amazon.com

KEY DEVELOPMENTS: Launched grocery store, which now offers 22,000 non-perishable items.

WHAT'S NEXT: Expanding selection of grocery products, possibly including perishables.

It was inevitable that Amazon.com, whose mission is to be the website where shoppers can buy anything, would get around to selling groceries.

And so last July, Amazon launched its grocery store, starting with 10,000 non-perishable products. (The total has grown to 22,000, about half of them organic or natural.) This immediately made Jeff Bezos, Amazon's 43-year-old founder and chief executive officer, a force in food retailing, and earned him a position on SN's 2007 Power 50 list.

It's only the latest in a long list of accomplishments for Bezos, who was Time magazine's Man of the Year in 1999.

Launching one of the Internet's first retail sites in 1994, Bezos initially sold just books but gradually added all manner of consumer products, including music, movies, computers, consumer electronics, home and garden, toys, fitness and automotive.

In 2003 he ventured into consumables with a gourmet food store, partnering with third-party retailers like Godiva and Omaha Steaks. That year Amazon also opened a health and personal care store and followed in 2004 with a beauty store, adding pet supplies along the way, and finally groceries last year.

The big remaining question is whether Amazon will start offering perishable foods to go along with its non-perishable items, which would make it a much bigger threat to traditional food retailers. While that might seem to be a stretch for an international operator like Amazon, Bezos has often demonstrated that there is little he won't attempt (including a human space flight start-up called Blue Origin he founded in 2004).

“We're always looking to expand our selection, and that could include perishables,” said Maria Renz, Amazon's vice president of consumables. “Perishables would require special handling and additional shipping charges, and we're committed to free shipping for orders over $25. But it's a possibility.”

Perhaps a clue to Bezos' intentions can be gleaned from his annual letter to shareholders in 1997, which he reprints every year. It reads, in part, “We will make bold rather than timid investment decisions where we see a sufficient probability of gaining market leadership advantages.”

Unlike most other online grocery sites, whether Internet-only or part of a conventional food retailing operation, Amazon ships its grocery products via third-party delivery services. That shields it from some of the cost pitfalls that befell ill-fated online grocery operations like Webvan, said Renz. And Amazon sells groceries in multipack sizes, more like a club outlet than a typical supermarket. “Customers value the convenience of not having to order [non-perishable items] as often,” she said.

Another difference is that Amazon, which is much less constrained by space than conventional grocers, carries very deep selections of many products. “We have more than 300 varieties of green tea and more than 80 varieties of Jello,” Renz said. “We want people to find anything they want online.”

Amazon promotes its “super-saver” free shipping service for orders of more than $25 across all of its product categories. Those orders take between three and five days to arrive at a consumer's home. But Ken Boyer, associate professor, supply chain management, Michigan State University, East Lansing, Mich., questions whether shipping food long distances, especially for free, is economically viable. “Food is a low-margin item; shipping adds dis-economy to the equation.”

But Bezos is unafraid to push the economics of selling groceries online. In May, Amazon launched “Subscribe & Save,” which offers shoppers discounts of 15% plus free shipping for committing to automatic reorders of designated products. “It's very popular,” said Renz.

Publicly traded Amazon, which expects total sales to be between $13.4 billion and $14 billion this year, does not break out sales by category in its financial reporting. Renz said that grocery story sales are “going well” and noted that the company “continues to devote resources to growing the [grocery] business” with programs like Subscribe & Save.

Asked whether its grocery business is profitable or intended to serve as a traffic-builder for more lucrative categories, Renz acknowledged that grocery “lends itself to more frequent shopping, which can have a positive impact on the business as a whole.” But, she added, “we're looking to do this is a profitable way.” Amazon posted its first full-year profit in 2003, its 10th year of operation.
MICHAEL GARRY