Express Lane to Boise

By Kim S. Nash  |  Posted 2004-02-05 Email Print this article Print

Is Wal-Mart an unstoppable force? Larry Johnston may be the yardstick. The former GE Appliance savior is now trying to beat the nation's largest grocer at its own game—with a combination of brains and technology.

Express Lane to Boise

The problems facing Albertson's are to a large degree the very same problems facing almost every major grocer. The industry operates on razor-thin profit margins. Most players make a little more than a penny for every dollar in groceries they sell. Albertson's makes 1.4 cents on the dollar, Safeway .78 of a cent and Kroger about 2 cents.

Still, with everyone operating on the same terms, there historically had been room to make respectable profits while paying employees decent wages and benefits.

But as in general retailing, Wal-Mart has changed the rules of the game in the grocery business. It is using its massive purchasing power, cheap labor, big-box stores and automated distribution centers to outsell the old-timers. With Wal-Mart's prices so much lower than those of traditional grocers, it will pull in more than $1.1 billion in net earnings this year even if it makes just two cents on each dollar of grocery sales. That is twice as much profit as Albertson's will book on its smaller sales and thinner profit margin.

Yet Albertson's biggest momentum-killer is not another company's chain of grocery stores, but its own. The company is still recovering from the $12-billion acquisition of Salt Lake City-based American Stores in 1999.

The deal put more than 2,400 stores and 235,000 employees behind a single cash register. But the combination did not go smoothly. Culture clashes between Albertson's and American Stores executives hampered efforts to cut a promised $300 million in annual costs. In a financial filing for the 2001 fiscal year, Albertson's reported revenue of $36.8 billion, up 2.5% from $35.9 billion two years earlier. However, selling, general and administrative expenses had ballooned by 11.5% over that same period, from $7.8 billion to $8.7 billion.

In the midst of this, chairman and chief executive Gary Michael announced his intention to retire by the company's annual meeting in June 2001. By late 2000, Albertson's was on the hunt to replace him.

Johnston emerged onto the parched, scrub-grass landscape that surrounds Boise like a fresh spray of water. Standing 6'7", he was picked largely for his 28 years of training under tough, profit-minded Jack Welch at General Electric. Johnston had no experience in the grocery business. But Albertson's director Paul Corddry, a former vice president at Heinz who led the search for the new chief executive, lauded Johnston's management record.

Welch had credited Johnston with saving a struggling unit, GE Medical Systems-Europe, and for bringing labor harmony to GE's appliance division. The medical-systems division had been losing money for a decade despite the efforts of four different chiefs. Welch sent him in to either fix it or shut it down. Johnston closed high-cost operations in places such as Belgium and opened plants in emerging Eastern-bloc countries. Over a span of three years, he made 29 acquisitions and GE eclipsed Siemens as the number-one vendor in the market. Most important, the unit began raking in $100 million a year in profit.

Executives who worked with Johnston at GE call him a "motivational" and "inspirational" leader. Robert Nardelli, chairman and chief executive of Home Depot and a fellow GE Appliance alum, says Johnston is "a real hands-on, people guy, very approachable."

Johnston's persuasive optimism—honed during ongoing study of the "successful daily living" strategies of a Texas motivational speaker—came in handy in November 1999. Welch asked him to take over GE's troubled appliance division, a $6-billion unit mired in bitter negotiations with unionized employees at its massive appliance-manufacturing park in Louisville, Ky. GE had threatened to close the factory and move production to Mexico. While much of the hard bargaining had already been completed by the time Johnston got there, union negotiators credit him with being able to finesse the agreement through the final stages.

"When he came on board, one of the first things he did was hold a meeting with the union executive," says Randy Payton, president of the union local. "We saw that he wanted to get the deal done. He was a pretty straight shooter." Payton said the union feared Johnston would come in and try to renegotiate the work done to date, but Johnston quickly assured its leaders he wanted to wrap up the work and move forward.

In the end, the two sides reached an agreement to eliminate 400 jobs and in return GE committed to investing $200 million in new plant equipment. To celebrate, Payton and Johnston rode together into Appliance Park on top of a tractor-trailer bringing in the first batch.

While Johnston can sometimes come across as imposing, partly because of his frame, others say the Corning, N.Y., native can also let down his guard and have fun. Nathaniel Stoddard, former chairman of GE's Canadian appliance subsidiary, recalls the annual GE executive gatherings at the Boca Raton Resort and Club, dubbed "The Pink Palace." Johnston would pull out his guitar and lead a sing-along that would typically last for hours.

So, while Albertson's knew it was hiring a CEO with no experience in the cut-throat grocery business, it was confident Johnston had the right ingredients to fix the company. On his first day in Boise, Johnston walked into the chain's Columbia Village store and laid his cards on the table to store director Steve Oldenburg. "He said, 'I don't know anything about the grocery business. You have to teach me,'" recalls Oldenburg, who has spent 25 years with the company.

The lessons have not been easy.

Senior Writer
Kim has covered the business of technology for 14 years, doing investigative work and writing about legal issues in the industry, including Microsoft Corp.'s antitrust trial. She has won numerous awards and has a B.S. degree in journalism from Boston University.

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