250 Parkcenter Boulevard
VISION: Albertsons is a unified team of energized associates obsessed with creating the world's number one food and drug retailer in the areas of market value, scale, profitability, customer service and associate satisfaction.
MISSION: Guided by relentless focus on our five imperatives, we will constantly strive to implement the critical initiatives required to achieve our vision. In doing this, we will deliver operational excellence in every corner of the Company and meet or exceed our commitments to the many constituencies we serve. All of our long-term strategies and short-term actions will be molded by a set of core values that are shared by each and every associate.
Albertson's, Inc. (the company omits the apostrophe in its brand marketing) is the second largest operator of grocery stores in the United States, trailing only the Kroger Co.--although in overall food retailing it also trails Wal-Mart Stores, Inc., the leader in that category. Following the April 2004 $2.47 billion acquisition of the Shaw's and Star Markets chains, Albertson's operated more than 2,500 stores in 37 states, mainly in the West, Southwest, Midwest, Mid-Atlantic, and New England. The units include about 1,350 combination food-and-drug stores as well as around 420 conventional supermarkets (under the Albertsons, Acme Markets, Jewel Food Stores, Shaw's, and Star Markets names); about two dozen warehouse stores (Max Foods and Super Saver Foods); and more than 700 stand-alone drugstores (Osco Drugs and Sav-on Drugs). Among the combination stores were a number of outlets operating under dual banners: Albertsons Osco, Albertsons Sav-on, and Jewel-Osco. More than 230 of the company's stores include onsite gasoline stations. Albertson's had small-town beginnings but had evolved by the early 2000s into a suburban-oriented operation; despite its expansion into a coast-to-coast operator, it also remained a predominantly western chain, with more than half of its stores located in that U.S. region. The company's history turns on the expansion of the one-stop shopping concept upon which it was founded, which led to the growth of larger stores carrying more diverse products and eventually to the jumbo food-and-drug stores that were the key to Albertson's tremendous success.
In 1939 Joe Albertson left his position as a district manager for Safeway Stores and--with partners L.S. Skaggs, whose family helped build Safeway, and Tom Cuthbert, Skaggs's accountant--opened his first one-stop shopping market, called Albertson's Food Center, on a Boise, Idaho corner. Albertson thought big from the start--his first newspaper ad promised customers "Idaho's largest and finest food store." Indeed, the store was huge by contemporary standards; at 10,000 square feet it was approximately eight times as large as the average grocery store of that era. The store included specialties such as an in-store bakery, one of the country's first magazine racks, and homemade "Big Joe" ice cream cones. Customers liked what they saw, and the store pulled in healthy first-year profits of $9,000 on sales of more than $170,000.
Albertson's grew slowly at first. Sales remained constant during the war years, and in 1945 Joe Albertson dissolved the partnership and Albertson's was incorporated. By 1947, the chain had six stores operating in Idaho and had established a complete poultry processing operation. In 1949 the Dutch Girl ice cream plant opened in Boise, and Albertson's adopted the Dutch Girl as its early trademark.
Albertson's expanded during the 1950s into Washington, Utah, Oregon, and Montana. In 1957 the company built its first frozen foods distribution house, which served its southern Idaho and eastern Oregon stores. Albertson's also operated a few department stores during the 1950s, but these were phased out rapidly as the company decided to focus on the sale of food and drugstore items. In 1959 Albertson's introduced its private label, Janet Lee, named after the executive vice-president's daughter. The company also went public in 1959 and with that capital began to expand its markets aggressively.
Albertson's moved into its sixth state, Wyoming, in 1961, and opened its 100th store in 1962. In 1964 the company broke into the California market by acquiring Greater All American Markets, based in Los Angeles. The same year, Albertson turned the position of chief executive over to J.L. Berlin, although Albertson continued to chair the executive board.
Under Berlin's leadership, the company strengthened its Californian position by merging with Semrau and Sons, an Oakland-based grocery store chain, in 1965. This added eight markets in northern California, which Albertson's continued to operate under the name of Pay Less. In 1967 the company purchased eight Colorado supermarkets from Fury's Inc., a Lubbock, Texas concern. Between these purchases and construction of new units, Albertson's operated more than 200 stores by the end of the decade and annual sales were substantially more than $400 million.
In the late 1960s, Albertson's set several company policies that would secure its snowballing success. One of these was the company's ongoing renovation program. In 1980 Vice-Chairman Robert D. Bolinder pointed out that "almost every failure of previously profitable supermarket companies can be attributed to stores becoming outdated." Albertson's avoided this pitfall by constantly upgrading its facilities, remodeling and enlarging older stores, and closing those that had become obsolete.
Anticipating the ever increasing competition for profitable operating sites, Albertson's also took care during the 1960s to build a sophisticated property development task force of lawyers, economic analysts, negotiators, engineers, architects, and construction supervisors that allowed the company to stay on top of industry trends. In addition, it expanded its employee training and incentive programs to encourage employees to make a lifetime career with the company.
Combination Format in the 1970s
During its first three decades Albertson's primarily sold groceries, although it did introduce drugstore departments into units where possible. In 1970, however, the company pioneered a unique and exceptionally profitable concept in supermarket design. J.L. Scott, who had become chief executive officer in 1966, announced in 1969 that Albertson's would enter into partnership with Skaggs Drug Centers, Inc., based in Salt Lake City, Utah, and headed by Albertson's former partner, to jointly finance and manage six jumbo combination food-and-drug stores in Texas. Whereas the average contemporary supermarket was 30,000 square feet or smaller, the combination stores covered as much as 55,000 square feet. In addition, while conventional stores carried strictly grocery items, which have a slim profit margin of 1 to 2 percent, the Skaggs-Albertson's combination stores stocked not only groceries but also nonfood items such as cosmetics, perfumes, pharmacy products, camera supplies, and electrical equipment. Banking on the higher profit margin of nonfood items as well as on an aggressive five-year plan, Scott also predicted in 1969 that Albertson's sales would double within five years. His optimism was not unfounded. By 1974, sales reached $852.3 million, with net earnings of $8.9 million.
The first Skaggs-Albertson's combination stores were opened in Texas in 1970, the year after the New York Stock Exchange began to trade Albertson's shares. In the early 1970s, Albertson's and Skaggs considered merging, but ultimately decided against the move. Albertson's continued its beneficial partnership with Skaggs until 1977, opening combination drug and grocery stores throughout Texas, Florida, and Louisiana.
Along with rapid growth, Albertson's faced some minor setbacks during the early 1970s. In 1972 Albertson's had acquired Mountain States Wholesale of Idaho, a subsidiary of DiGiorgio Corporation. In 1974 the Justice Department filed a civil antitrust suit against Albertson's, asserting that at the time of the purchase Albertson's was the largest retail grocer in the southern Idaho and eastern Oregon market, while Mountain States carried 43 percent of the wholesale grocery market, and that Albertson's purchase created an illegal monopoly.
Robert D. Bolinder, CEO from 1974 through 1976, claimed that the suit was without basis and that Albertson's had in fact preserved competition in the area by acquiring Mountain States. Bolinder still claimed that the Justice Department had misunderstood Albertson's reasons for buying the wholesaler, noting that the subsidiary was not financially integral to the company but accounted for only 3.4 percent of its total sales in 1973. The settlement, in 1977, required Albertson's to divest Mountain States and barred the company from acquiring any retail or wholesale grocery businesses in southern Idaho or eastern Oregon for five years.
Also in 1974, in the Portland, Seattle, and Denver areas, the Federal Trade Commission (FTC) found fault with Albertson's advertising practices. The company complied with an FTC order requiring that advertised sale items be available to customers and that rain checks be issued when sale items were out of stock, although Bolinder maintained that Albertson's had not violated any laws and emphasized that compliance would not require any change in the company's previously established advertising policies.
In 1976, after chairing the board for 37 years, Joe Albertson became chairman of the executive committee. Warren McCain, who began his career with Albertson's as a merchandising supervisor in 1951, became chairman of the board and CEO. In the same year, Albertson's began to build superstores, which would carry an even higher ratio of nonfood items. A slightly smaller version of the combination store, the superstores ranged in size from 35,000 to 48,000 square feet and featured more fresh foods and perishables. It was during 1976 that the corporation slowly began to phase out its conventional markets. Although a few profitable ones remained open, most were closed or converted into larger stores during the late 1970s and early 1980s. Albertson's also installed its first electric price scanner in 1976. By the late 1980s, 85 percent of Albertson's stores used scanners.
Relying principally on outside distributors, Albertson's successfully penetrated markets located throughout a broad geographic area, but the rapid expansion of its markets during the 1970s called for expansion of company-owned distribution facilities. Two of the company's four full-line distribution facilities were built during this period. The first of these went up in 1973 in Brea, California, and the other was completed in 1976 in Salt Lake City. All Albertson's distribution facilities were built, and operated, as profit centers, contributing a return on investment that equaled or exceeded that of the company's retail stores.
Continued Expansion in the Late 1970s and 1980s
In 1977 Albertson's and Skaggs dissolved their partnership amicably, splitting their assets equally. For Albertson's, the breakup resulted in the formation of Southco, the company's Southern division. Southco assumed operation of 30 of the 58 combination stores formerly run by the partnership. Albertson's continued opening combination stores, concentrating them principally in Southern states, but also opening a few in South Dakota and Nebraska. In 1978 Albertson's strengthened its stronghold in southern California by acquiring 46 supermarkets located in the Los Angeles area from Fisher Foods, Inc.
In 1979 Albertson's took the "bigger is better" concept to the drawing boards again and introduced its first warehouse stores. As inflation drove prices up, Albertson's needed to cut overhead to preserve its profit margin. To this end, it converted, between 1979 and 1981, seven stores into full-line, mass merchandise warehouse stores run under the name Grocery Warehouse. These no-frills stores carried nonfood items but emphasized groceries, with substantial savings on meat and liquor. Although these stores continued to be successful, they did not eclipse the profitability of the more broadly appealing superstores.
The introduction of the combination store and the continuing readaptation of older stores (87 percent of the company's stores were newly built or completely remodeled during the 1970s) allowed Albertson's to prosper despite the economically hostile environment of the late 1970s and early 1980s. In 1983, just after the country's most severe recession since the Great Depression, Albertson's boasted 13 years of record sales. The combination stores, both jumbo and smaller, were in large part responsible for this success. In 1983 these units accounted for only one-third of the chain's 423 stores but were the source of 65 percent of its profits.
Because Albertson's had grown by expanding over a wide geographic region rather than increasing its dominance in a smaller area, it did not hold superior market share in many of the areas where it operated. But it was this diversification, in part, that had allowed Albertson's to weather the economic storms of the 1970s and 1980s so successfully. As it happened, the areas of Albertson's concentration were the areas of relative economic prosperity. In 1981 Albertson's was operating in 17 of the fastest-growing standard metropolitan areas, as identified by the U.S. Department of Commerce. Stores in comparatively stable areas helped balance losses in more depressed markets.
Although Albertson's did break into the Nebraska and North and South Dakota markets in 1981, during the 1980s it concentrated principally on increasing its presence in established markets. For example, in an effort to expand its market in Texas, Albertson's modified its advertising strategy. In 1984 Albertson's reentered the Dallas-Fort Worth area, a competitive market that no new firm had entered since Skaggs opened its first store there in 1972. The standard advertising strategy was to offer gimmicks such as double-value coupons and promotional games to attract customers. Albertson's had used such techniques, but chose to approach the Dallas-Fort Worth market with an "everyday low-cost" image instead. Store circulars explained, "We won't be advertising weekly specials ... we'll pass the savings on advertising costs on to you. Tell your friends and neighbors to help us keep prices down." The campaign sparked fierce competition, but the Albertson's units continued to prosper. Although the company traditionally held an upscale profile, it began to extend the new image to other suitable markets.
As Albertson's continued to build larger concentrations of stores, its behind-the-scenes operations continued to grow. In 1982 retail management was reorganized into four operating units/regions: California, Northwest, Intermountain, and South. This subdivision allowed each regional director and management team to more effectively focus marketing and retail sales strategies as well as to more closely guide employee and real estate development. Albertson's built another distribution center in the Denver area in 1984 and completed its first fully mechanized distribution center in Portland, Oregon, in 1988. In addition, the Salt Lake City facility was expanded substantially in late 1988 and the Brea, California, center was expanded and mechanized in 1989.
Innovation and Improvements in the Early 1990s
The expansion of Albertson's distribution network, combined with new computerized inventory and checkout scanners, enabled the chain to begin to handle its own distribution in 1990. By 1993, almost two-thirds of the items purchased by Albertson's stores were distributed by its own system.
In December 1991 Albertson's announced a five-year expansion plan that called for a $2.4 billion investment in the construction of 250 new stores, the renovation of 175 older stores, and the acceleration of computerization chainwide. By the end of fiscal 1991 (January 1992), more than half of Albertson's stores had computerized time and attendance systems, all of the pharmacies had automated prescription systems, and 96 percent of the stores were equipped with checkout scanners. In 1992 the company acquired 74 Jewel Osco food-and-drug stores in Texas, Oklahoma, Arkansas, and Florida from American Stores Company, along with a nonfood distribution center in Ponca City, Oklahoma--all for a total of $442 million. Albertson's had ambitious plans at this time, especially considering that it took the company all of the 1980s to build or acquire 283 stores. Albertson's was targeting its growth for California, Texas, Florida, and Arizona, some of the United States' fastest-growing markets. CEO Warren McCain targeted growth for smaller cities and suburbs where plentiful, inexpensive land allowed Albertson's to maximize profits.
Gary Michael became chairman of the board and CEO of Albertson's on February 1, 1991, and initiated the "Service First" employee award program. The plan recognized and rewarded excellence in customer service. Michael also implemented a quarterly video news program that promoted employee understanding of Albertson's goals and objectives. The employee relations efforts resulted in a 16 percent decrease in the worker turnover rate.
Public relations in the 1990s focused on "Service First" and a new advertising theme, "It's Your Store." It was hoped that the slogan would instill in customers a sense of partnership through convenience, quality, competitive pricing, and service. The HOPE (Helping Our Planet's Ecology) line of environmentally safer paper products reinforced Albertson's commitment to the ecosystem.
By January 1992, Albertson's ran 562 grocery stores in 17 western and southern states, employing 60,000 workers. The company's 1991 sales and earnings hit record highs for the 22nd year: net income rose 10.3 percent to $258 million and sales grew 5.6 percent to $8.68 billion. Sales surpassed the $10 billion mark in 1993, the year that Joe Albertson died at age 86. Although modern business sensibility had cultivated Albertson's multibillion-dollar success, the solid, small-town philosophy of founder Albertson--giving customers quality merchandise at a reasonable price--was at its root.
Achieving Number Two Position by Decade's End
By the mid-1990s, Albertson's was the number four grocery chain in the United States, with about 800 stores in 19 states and revenues approaching $12 billion. The company continued building its distribution system, with a new, one-million-square-foot center in Plant City, Florida--a facility dedicated to reviving its struggling 74-unit Florida operation--opening in early 1994. By mid-1996, with the opening of a center in Houston, Albertson's had a total of 12 distribution centers. Meantime, in early 1996, Richard L. King, a 28-year company veteran, was named president and COO, with Michael remaining chairman and CEO. Also in 1996, Albertson's introduced Quick Fixin' Ideas. This concept included offering time-starved customers recipes and all the ingredients to make them in one convenient location, as well as offering several prepackaged entrees for heat-and-serve meals (the latter an example of the trend toward home meal replacement). Having been hurt by chains such as Safeway Inc. taking business away through their aggressive promotional programs, Albertson's began to put a greater emphasis on advertising and promotion to bolster its longstanding everyday-low-price approach, an approach that some analysts said bored customers. At the same time, Albertson's took steps to improve its customer service and speed up the checkout process.
Albertson's was the object of several class-action lawsuits filed in 1996 and 1997. The suits charged that the company systematically permitted its workers to work "off-the-clock," without paying them. Albertson's was potentially liable for about $200 million in back pay and damage awards. The management contended that the suits, sponsored by the United Food and Commercial Workers, were part of an effort by the union and its allies to unionize the company's stores, only a third of which were unionized. Eight suits were eventually merged into one consolidated suit. Late in 1999 Albertson's elected to settle the lawsuit by setting aside $22 million for potential payments to claimants meeting certain eligibility requirements.
During the late 1990s, Albertson's continued its ongoing program of store remodeling and achieved some growth through organic expansion. It was through acquisitions, however, that Albertson's vaulted to the number two position in grocery retailing by the end of the decade. At the end of the fiscal year ending in January 1998, Albertson's operated 878 stores in 20 states and had revenues of $14.69 billion. Less than two years later, the company had grown to a nearly nationwide chain of more than 2,400 units in 39 states, with revenues of approximately $33.4 billion, which trailed only Kroger's $43 billion (the latter the product of a May 1999 merger of Kroger and Fred Meyer, Inc.).
During the year ending in January 1999, Albertson's made several acquisitions that added some 80 stores to its system and brought the company into five new states: Georgia, Iowa, Missouri, North Dakota, and Tennessee. These included the purchase of Seessel Holdings, Inc., which included ten Seessel's stores in Memphis, Tennessee; Smitty's Super Markets, Inc., which included ten Smitty's stores in southwest Missouri; three Super One stores in Des Moines, Iowa; 14 Bruno's stores in the Nashville and Chattanooga, Tennessee, metro areas; and Buttrey Food and Drug Stores Company, which included 44 stores in Montana, North Dakota, and Wyoming. To gain approval from the FTC for the last of these acquisitions, Albertson's had to divest itself of nine Buttrey stores and six Albertson's units.
In June 1999 Albertson's made its biggest deal ever--valued at $11.7 billion, including $3.4 billion in debt--to acquire American Stores Company, the successor company to Skaggs Drug Centers, Albertson's former combination stores partner. At the time of the merger, Salt Lake City-based American Stores had 288 combination stores, 514 supermarkets, and 783 stand-alone drugstores. To gain FTC approval, Albertson's agreed to divest 145 stores plus four store sites (in overlapping markets in California, Nevada, and New Mexico), in what was believed to be the largest divestiture ever ordered in relation to a retail merger. As with other consolidation moves of the late 1990s, the acquisition was driven by projected cost savings from synergies created by the merged operations. Company officials estimated that $100 million would be saved in the first year, $200 million in the second, and $300 million per year thereafter. Albertson's also announced that it would take $700 million in after-tax charges over a two-year period to cover merger-related costs. Around the time of the completion of the merger, King resigned his executive positions to "pursue other opportunities," with Michael initially assuming his responsibilities; in March 2000 Peter L. Lynch, who had been a senior executive at American Stores, was named the new president and COO.
The American Stores deal provided Albertson's with four more grocery store brands--Acme (in the Mid-Atlantic region), Jewel and Jewel-Osco (Midwest), and Lucky (West Coast)--but the Lucky outlets were converted to the Albertsons banner shortly after the merger. In addition to increasing the number of units it operated to more than 2,400, the acquisition also provided Albertson's with its first freestanding drugstores (under the Osco and Sav-on names) and placed the suburban-oriented company into its first two urban markets, Chicago and Philadelphia. During the five years following the merger, Albertson's planned to spend about $11 billion on capital projects, including building 750 combination stores, 500 drugstores, and 600 fuel centers. The company had been experimenting with some success with fuel centers that had been added to its combination stores, featuring three to six gas pumps and either pay-only kiosks or small convenience stores. Albertson's also planned to remodel about 730 units. An area of possible concern was the meshing of Albertson's mostly nonunion workforce with the three-quarters unionized American Stores staff. But overall, the deal dovetailed with the company's goal of becoming a truly nationwide chain in order to better compete with the likes of behemoth Wal-Mart Stores, Inc., which was rapidly and aggressively delving into the food retailing sector.
Restructuring in the Early 2000s
In the fiscal year ending in January 2001, the first full year following the American Stores merger, Albertson's reported profits of $765 million on revenues of $36.76 billion. The resulting profit margin of 2.1 percent was well below the 3.5 percent average for Albertson's in the late 1990s. The company's travails were traced to difficulties integrating the American Stores acquisition, which had brought together two very different companies. For example, Albertson's had adopted a no-frills approach to marketing and its stores were of the cookie-cutter variety, whereas American took a much more aggressive marketing stance and designed its stores more for the local market.
When Michael announced that he intended to retire in 2001, the Albertson's board concluded that it needed to go outside the company for a new leader to implement a much needed restructuring. In April 2001 Lawrence R. Johnston was named chairman and CEO, becoming the first outsider to lead the company. A veteran of General Electric Company (GE), Johnston most recently headed up GE's appliance manufacturing business. Possessing neither a grocery nor drugstore background, he was nonetheless a well-respected manager with much experience in integrating acquisitions. Though passed up for the top spot, Lynch stayed on as president and COO until July 2003, when he resigned as part of a flattening of management. Johnston added the title of president at that point.
Johnston wasted no time making changes at Albertson's. In July 2001 he announced that more than 1,300 corporate and administrative jobs were to be cut, four of the 19 divisional offices would be closed, and 165 underperforming stores spread across 25 states would be closed or sold. In early 2002 the company exited from the New England drugstore market by selling its 80 Osco outlets in that region to Maxi Drug Inc., operator of the Brooks Pharmacy chain, for about $240 million. Then in March 2002 Albertson's launched the second phase of its restructuring, which involved the complete exit from four underperforming markets: Memphis and Nashville, Tennessee; and Houston and San Antonio, Texas--including the closure or sale of 95 stores and two distribution centers in Houston and Tulsa, Oklahoma. The number of divisional offices was reduced further, to 11. All told, these moves were aimed at paring annual operating costs by $750 million by the end of 2004. The freed-up capital was earmarked for remodeling existing stores, opening new stores in key markets such as California and Florida, and bolstering technology in such areas as ordering, distribution, and online shopping (the existing albertsons.com online business in Seattle, San Diego, and Vancouver was expanded to include Los Angeles, San Francisco, and Portland).
Albertson's also took two pages out of the American Stores playbook. The latter company's chains had joined in the trend toward frequent-shopper programs, but Albertson's had been a holdout. Under Johnston, Albertson's reversed this policy, and the Albertsons chain began rolling out its Preferred Customer membership program in the summer of 2002. American Stores had also brought to Albertson's its dual-branded Jewel-Osco combination food-and-drug stores. Albertson's transferred this strategy to the Albertsons chain. Stores in Tucson and Phoenix, Arizona; Omaha, Nebraska; and El Paso, Texas, were converted to Albertsons Osco combo stores. At the same time, Albertsons Sav-on combo units were launched in Reno, Nevada; and later in Las Vegas, Nevada, and southern California. Another new development, launched in the fall of 2003, was a store-within-a-store initiative designed to make the company's stores more of a one-stop shopping destination. Through a partnership with toy retailer Toys "R" Us, Inc., more than 1,100 Albertsons stores began opening small Toys "R" Us "Toy Box" sections carrying about 500 products priced under $25. Similarly, in an alliance with retailer Office Depot, Inc., 18 of the company's supermarkets in Chicago, Los Angeles, and Phoenix began sporting small Office Depot departments that featured more than 700 products, principally school and office supplies. Johnston hoped to complete similar deals with other retailers.
Not all the news at Albertson's was positive. The company, along with Kroger and Safeway, endured a four-and-a-half-month strike in southern California--the longest grocery strike in U.S. history. By the time the strike ended in late February 2004, it had cost Albertson's $90 million in profits and $700 million in revenues in the fourth quarter of fiscal 2003. Overall at Albertson's, sales for 2003 remained flat, at $35.44 billion, while the profits of $556 million translated into a profit margin of just 1.6 percent. In 2004 the company launched a new divisional consolidation that would further reduce the number of divisions to seven.
As its three-year-long restructuring neared completion, Albertson's stepped back into the acquisition arena in April 2004, snapping up the Shaw's and Star Markets chains--202 stores in all--from their British parent J Sainsbury plc for $2.1 billion in cash and the assumption of about $368 million in capital leases. Albertson's thereby gained its first presence in the supermarket sector in New England with slightly higher-end stores that would be easier to differentiate from low-priced Wal-Mart outlets. Annual revenues at Albertson's were now expected to surpass $42 billion as the company neared its goal of becoming the number one operator of supermarkets in the country. Toward that end, the company was likely to pursue additional acquisitions, particularly smaller deals involving individual stores or groups of stores rather than whole chains as there were few attractive opportunities for the latter.
Principal Subsidiaries: Acme Markets, Inc.; American Drug Stores, Inc.; American Food and Drug, Inc.; American Stores Company; Jewel Companies, Inc.; Jewel Food Stores, Inc.; Jewel Osco Southwest, Inc.; Osco Drug of Massachusetts, Inc.; Osco Drug of Texas, Inc.
Principal Competitors: Wal-Mart Stores, Inc.; The Kroger Co.; Safeway Inc.; Royal Ahold N.V.