The PayoffBy Kim S. Nash | Posted 2004-02-05 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 gamewith a combination of brains and technology.
Albertson's has been able to cut costs in certain areas, most notably by getting rid of 165 money-losing stores. But even with the half-billion dollars of savings Johnston has achieved, some key costs are going up. Administrative and operating expenses rose 2.4% between fiscal 2000 and fiscal 2002, from $8.4 billion to $8.6 billion.
Sales have been hammered by the strike in California, but even before that, Albertson's managed only a 1% increase in sales in the first three quarters of 2003 compared to the same period the year before. That compared to a combined 3% growth rate for five major competitors, including Kroger and Safeway.
Wal-Mart, meanwhile, stormed ahead over the same period, growing 10% overall. Grocery sales now comprise about 22%, or $56 billion, of Wal-Mart's total annual sales.
Albertson's has made gains on its technological revolution. Results from those efforts will start showing up in increases to same-store sales this year, Johnston promises. However, the strike has dealt a severe blow to his dreams of becoming the number-one grocery retailer. That ship has sailed, and Wal-Mart is firmly at the helm. Wal-Mart already sells 50% more groceries than Albertson's and with plans in 2004 to open 30 more Wal-Mart Neighborhood Markets and 210 Supercenters, the gap may become insurmountable. Combined, those stores will add about $4.5 billion in grocery sales to Wal-Mart's lead.
"It's probably going to get worse for [Albertson's] before it gets better," says Dan Geiman, a retail analyst with Seattle brokerage firm McAdams Wright Regan. "The whole sector is under some pretty severe price pressure and Wal-Mart just keeps rolling out into more of their markets." Whalen, the California retail analyst, says the strike has gone on long enough for loyal Albertson's shoppers to develop other habits. "Some of those customers are not going to come back. It could take several years to repair the damage," he says.
Burt Flickinger, managing director of Strategic Resource Group, a New York retail-consulting firm, agrees this will be another terrible year for Albertson's. However, he thinks Johnston's on target with his plans and results will follow. "The previous management postponed the company's technology problems. He's had to make up for a decade of foot-dragging," says Flickinger.
One advantage Albertson's does have is that unlike its closest competitors Kroger and Safeway, it has strong drugstores among its holdings, operating under the Sav-on and Osco brands. Margins are much better there than in groceries. Plus, many Albertson's stores are in urban centers, such as Chicago, which Wal-Mart has found difficult to penetrate. "It's a significant weapon, because whereas the grocery business is not growing, America is certainly keeping itself well-medicated," says Neil Stern, a drugstore analyst with Chicago firm McMillan Doolittle.
All agree, however, that Wal-Mart's charge into the markets Albertson's most covets, particularly California, is only just beginning.
The clock is ticking. At the same executive conference in New York where Johnston spoke, Dick Cavanaugh, president and chief executive of The Conference Board, discussed his research regarding "outsider" CEOs: Executives who switch industries when they take over a company "have really high performance during their first four years and relatively low performance during their last four years," he said.
Johnston checked his watch and chuckled. He'll enter year four in April.
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