Smith's Food & Drug Centers, Inc. - Company Profile, Information, Business Description, History, Background Information on Smith's Food & Drug Centers, Inc.

1550 South Redwood Rd.
Salt Lake City, Utah 84104

History of Smith's Food & Drug Centers, Inc.

Smith's Food & Drug Centers, Inc., with 119 stores in Arizona, California, Idaho, Nevada, New Mexico, Texas, Wyoming, and Utah, is a leading regional supermarket chain operating in the intermountain, southwestern, and southern California regions of the United States. The company was originally founded by Lorenzo Smith and his son Dee Smith in 1948 as a one-store grocery business. When Dee Smith took over his father's store in 1958 it was valued at $60,000. Since then, the company has grown into a chain worth more than $1 billion. The company went public in 1989 but still remains in the control of the third generation of the Smith family of Brigham City, Utah. Smith's Food & Drug Centers, open 24 hours, are combination food and drug stores that also offer take-out food, photo processing, and video rentals. Smith's plans to expand its operations into new regions and markets in order to remain a top competitor in the food retailing industry in the 1990s.

The story of Smith's Food & Drug Centers, Inc., can be traced back to 1911 when Lorenzo Smith rented a space for a small grocery market stocking such staples as rice, flour, and dry beans. Smith's store was similar to other stores in Brigham City at that time, and it took Smith about ten years to accumulate enough capital to buy a larger store across the street. The family business, named Smith and Son's Market in 1932, remained afloat during the Great Depression, but growth was virtually nonexistent as many former customers were forced back into subsistence farming. Smith took most of his earnings and purchased property in the area, which was available at rock bottom prices.

In 1942 business picked up after the U.S. Army built a hospital near the Smith market. Dee Smith returned from service in World War I and had worked in various jobs, mainly as a promoter of boxing and wrestling matches. He used these skills to promote the grocery store and was also was instrumental in encouraging his father to modernize and expand the store in the late 1940s. With financial backing from his father, Dee Smith and his partner George C. Woodward opened a 10,000 square foot grocery store, the first of its kind in Brigham City. By the end of World War II, Smith and Son recognized that the neighborhood mom-and-pop store was becoming obsolete. Pent-up spending power from the war was being unleashed, and the dynamic expansion of production led to new demands by the average consumer.

From 1946 until Lorenzo Smith's death in 1958 the company grew exponentially, with Dee Smith leading the aggressive growth campaign. The store was refurbished and expanded by 50 percent, an advanced refrigeration system was installed, and the name was changed to Smith's Super Market. Reopened in December of 1952, the store posted huge sales increases; by 1954 Smith's was able to acquire American Food retail stores, a major grocery wholesaler and the primary supplier of Smith's. Soon after, another major store was opened in Brigham City with four times the space as Smith's Super Market.

These moves by Dee Smith and laid a firm base for expansion. Gross sales quadrupled from 1956 to 1957 and profit rates, although only three percent, were high by industry standards at the time. The purchase of Thiokol Chemical Corporation stock, an important business move, provided the duo with further capital for expansion. Thiokol had opened a plant north of Brigham City and was awarded a large Air Force contract. The investment reaped huge dividends, with the stock increasing in market value more than 12-fold by 1960.

With demand picking up as wages and employment grew in Brigham City, Smith and Woodward launched a growth plan which included large ad campaigns and diversified product selection. Bolstered by increased highway construction that would provide access to residential markets, Smith's was also awarded the concession contract for Morrison-Knudsen Construction Company which was building a causeway in the area and was housing its work force nearby. Smith received concession rights for all services, including groceries, restaurant, and a barber shop, to the residential construction camp. The operation was a guaranteed market and solidly profitable.

By 1958 it appeared that the grocery market in Brigham City was becoming saturated, and Dee Smith was forced to look outside the area to new geographical markets. The 1960s were a time of massive expansion for Smith, but growth was uneven. For instance, its first takeover of a Safeway store in Boise, Idaho ended in failure after the discovery that the previous owner had been doctoring the books. A major success was a contract Smith won to supply concessions to a construction camp for workers who were building Flaming Gorge Dam, a ten year project that would provide stable demand for Smith's products. Smith also opened a new store called Food Giant.

Other successful takeovers followed as Smith expanded into wholesale trade, giving him more control over suppliers and distribution. Woodward purchased three Success Markets in Salt Lake City, and by the early 1970s Smith's had obtained over 160 stores. The pattern was to buy failing stores at low prices, modernize them, and turn them into profitable operations. This strategy gave Dee Smith the needed funds and enabled him to build the large supermarkets that would become the standard in the industry. Although Smith was left with a high debt to assets ratio, his company was leading the industry in the southwest United States and sat on a very profitable base of eight stores which had sales of over $13 million.

But like any successful business, Smith's recognized the need for continued growth to fend off competitors. In January of 1968 Dee Smith announced the purchase of Mayfair Markets, a move that Howard Carlisle referred to in The Dee Smith Story: Fulfilling A Dream, as a "million-dollar transaction." By the end of the year Smith had acquired 16 of the Mayfair stores, expanding his empire to 23 stores in several Utah cities. Following a proven strategy, Smith and his associates had purchased the Mayfair stores at bargain prices because they were losing money and, after putting the company in a highly leveraged position (for example, Mayfair's Utah operations lost $1.5 million in 1967 while Smith's total net worth was less than $700,000), eventually turned a profit on them.

Smith achieved this task by reorganizing management, slashing wages, and intensifying work loads. He streamlined the management structure and instituted bonus incentives for managers while, at the same time, cutting salaries. An intensive labor effort was also launched to redecorate and reorganize all of the stores. Sales soared, but the company's profits were being strangled by its heavy debt service load which limited cash flow. Nonetheless, the reorganization campaign left the company in a good position to cut prices. The discount pricing strategy helped revive sagging sales at some of the former Mayfair stores, thus expanding market share.

To further enhance its overall profit margins, Smith acquired its first nonfood business, the Utah-based Souvall Brothers, in 1969. Souvall's sold a diverse line of products--from beauty aids and housewares to yarn--and had sales of $3 million and a considerably higher profit margin than Smith's. This acquisition, according to Carlisle in The Dee Smith Story, kept the company afloat during the recession years of the early 1970s.

With the nonfood portion of the business growing faster than the grocery side, the company began experimenting with combination stores, gaining a jump on its competitors and momentum that lasted well into the 1980s. In addition to its many acquisitions, Smith also constructed new stores throughout the late 1960s and early 1970s, building new stores in Ogden, Roy, and Magna, Utah as well as expanding the Souvall warehouse facilities in Salt Lake City. The biggest project was the construction of a 150,000 square foot warehouse and distribution center in Layton, Utah. This facility, centrally located and near major highways, enabled Smith's to provide its own wholesaling and warehousing and gain greater cost and inventory control. Acquisitions had cut into profit margins, however, and coupled with the recession of 1973 and Nixon price controls, the company's cash flow problems threatened to become acute. Thus, the need for external funding sources to finance the new warehousing center in Layton were vital. The public sector stepped in to foot the bill, selling $1.5 million of low interest bonds which would be repaid over 15 years. Subsequently, Smith's realized huge cost cutting success from its direct control over distribution and wholesaling operations.

By May of 1974, however, the company was back on the acquisition trail, buying up two small chains in the populous and lucrative southern California market. Smith's had acquired 110 stores in seven years and the debt service became immense at a time of recession in the early 1970s. Competition was fierce as one-third of the retail food companies were experiencing losses. Smith's record in the decade ending in 1975 reflects this instability; sales increased 30 fold but profits only multiplied four times due to the company's cash flow problems. A severe financial crises ensued in 1975 which led Smith to develop a new long-term competitive strategy.

After soliciting the advice of consultants and advertising experts, Smith's cut prices furiously and launched a large, general advertising campaign while operating stores under distinct names. Most important, Smith's began further experimentation with the combination superstore, sized at either 31,000 or 45,000 square feet. These changes immediately improved the bottom line of the company.

Smith's achieved further success throughout the 1970s as distribution centers were made more efficient, construction was initiated on new super combination stores, and weaker stores were sold off (notably four of the California stores). Although Dee Smith became more cautious in his acquisitions, he continued his growth through acquisition, acquiring six K-Mart stores. Two of the K-Mart stores were in Albuquerque, representing the company's first foray into the southwest market. The new region was solidly profitable and, in 1978, Smith's bought 23 Foodway stores in New Mexico, the second-largest acquisition in the company's history. Also, for the first time, Smith's had to deal with a unionized work force that went out on strike. After reaching an agreement, however, the stores quickly achieved profitable levels of operations.

Although it continued to acquire stores, Smith's main plan was to continue to expand by building more large combination outlets. The company built a total of 22 stores in 1977 and 1978 and planned an expanded production of the new outlets into the 1980s. Smith's used market research to tap new varieties of products, add more services, and merchandise new products. For instance, Smith's was one of the first retailers to market no-name, generic products--over 200 generic items in addition to name brand items. In 1980 the company began using the slogan "We're not just a food store anymore." The diverse mixture of departments sent sales up by 27 percent in 1978 and cash flow also improved. By 1979 the company was earning a 30 percent rate of profit on its equity.

The recession in the early 1980s only minimally affected the company's profits. During recessionary times, it became much cheaper to purchase failing businesses, and Smith's did just that. Specifically, Smith's purchased a group of eight stores in southern California. By this time about half of Smith's business had been acquisitions. Sales were slow but steady, and in 1983 the company weathered an eleven-week strike by Las Vegas workers. The strike did not prevent Smith's from becoming the second largest privately held supermarket chain by the end of 1983. The California stores, operating under the name Smith's Food King, were sold in 1985 at a profit of $50 million.

In 1984 Dee Smith's five- and ten-year plans were implemented, but Smith died during the year and left the company to the control of the third generation of Smith sons. The new management team that was assembled nearly doubled sales and profits from 1984 to 1988. Jeff Smith took over for his father as chief executive officer, and under his reign the company has experienced accelerated growth. Dee Smith's plan to "phase out smaller, older conventional stores and superstores and replace them with larger combination food and drug centers" was successfully carried out by his sons despite intense competition. By 1990 76 of the company's 95 stores were combination food and drug stores ranging in size from 45,000 to 84,000 feet. New stores constructed in 1990 and 1991 averaged 72,900 square feet, continuing the modernization plan. The expansionist policy included replacing existing stores and pursuing intense cost-cutting strategies. This was supported by expanding and modernizing the company's warehouse facilities to vertically integrate the processing and distribution of perishable goods; achieve greater in-house warehousing to capitalize on economies of scale; and reorganize its transportation and distribution facilities.

To raise the money necessary to gain a foothold in the highly competitive California market (a planned 60 stores in five years), Smith's management decided to take the company public. Management first created Smith's Management Corporation, which was merged into its wholly owned subsidiary, Smith's Food & Drug Centers. Next, in an effort to keep the company in the Smith family and also foil takeovers, certain classes of stock were designated for ownership solely by the Smith family. The value of the shares skyrocketed initially but stabilized within the year. In the early 1990s chief executive officer Jeff Smith owned or controls 48.2 percent of the voting stock (mainly from shares held in a trust for his mother Ida). The next biggest block, 8.3 percent, was held by the Church of Jesus Christ of the Latter-Day Saints as part of Dee Smith's estate and will be completely liquidated by 1999.

The future competitive position of Smith's Food & Drug Centers depends on both the success of the move into the southern California market and the company's ten-year plan to spend $1.4 billion and open 120 stores with annual sales growth targets of 20 percent. This effort will include a one-million square foot fully integrated distribution facility to warehouse the goods for the region and an average store size is 70,000 square feet.

The California market will be an extremely competitive and some industry analysts expecting price wars. Further, the California stores will be unionized, unlike most of Smith's other stores. Yet there are more people in the southern California region than in all of Smith's other markets combined, and the store can offer competitive prices. The degree of growth realized, however is likely to depend on the state of employment in the region in the next decade and on the outcome the battle with five other chains, such as Von's Grocery Co., Lucky Stores Inc., and Albertson's Inc., which already have over 100 stores each in the region. Smith's predicts it will be able to capture about six percent of the region's market when its first 50 to 60 stores are opened. Although this figure is dwarfed by Smith's 40 percent market share in Salt Lake City and its 35 percent share in Las Vegas, the company has gone head-to-head with Von's, Lucky, and Albertson's in these markets in the past.

Additional Details

Further Reference

Carlisle, Howard M., The Dee Smith Story: Fulfilling A Dream, Brigham City, Utah, Ida Smith, 1992.Lowenstein, Roger, "Smith's Food & Drug Gets Mixed Reviews As It Enters Big, Crowded Phoenix Market," Wall Street Journal, September 28, 1989.Silverstein, Stuart, "Heating Up the Supermarket Wars," Los Angeles Times, September 8, 1991.Smith's Food and Drug Centers, Inc., "General Fact Sheet," 1993."Smith's Food and Drug Centers Reports Increased Sales and Net Income For First Quarter 1993," (press release), April 27, 1993."Smith's Scores with One-Hour Photo," Progressive Grocer, October, 1992.Taylor, John H., "Mr. Smith Goes to Riverside," Forbes, February 17, 1992.

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