Talk with Albertsons CEO Larry Johnston
Johnston was groomed at General Electric under the legendary Jack Welch. He was called in to troubleshoot at Albertsons at the end of 2000 after a merger with American Stores turned sour. The deal catapulted the new enlarged Albertsons to the number two spot in US grocery retailing behind Kroger. But a crushing legacy of debt and intractable integration problems were the price.
Johnston freely admits that, when the head-hunters approached him for the job, he had never even heard of Albertsons. German discounter Aldi North has, though — they own part of the company.
"I kill sacred cows"
Mr. Johnston, how should our readers interpret your giving an interview to a German newspaper in Paris? The last US retailer to give us the honour was Wal-Mart, and they entered Germany only months later...
We have shareholders and suppliers throughout Europe so I am frequently here for analyst meetings etc. Specifically regarding this interview, I happened to be in Paris co-chairing the Global CEO Forum. We have no near-term European expansion plans, but the supermarket and drugstore industries are going through global consolidation, and Albertsons is dedicated to becoming a world leader.
Under what circumstances would you ever consider expanding specifically to Europe?
Of course, we have made strategic analyses of potential opportunities in Europe and study every promising food or drugstore deal to see if it meets our criteria. We are looking for acquisitions that offer us No. 1 or strong No. 2 positions in major markets that can be supported efficiently by our logistics and at a price that would offer us an acceptable return on our capital investment.
If a deal met our criteria, we would not hesitate to hop across the pond, any pond, but, to date, this has not been the case.
Wal-Mart is increasingly playing the international distribution card when negotiating terms and conditions with major suppliers. Are you not worried that this will give Wal-Mart a growing competitive advantage over you in the USA?
Wal-Mart's enormous volume certainly gives it a competitive advantage in costs, and pricing, but technology and the excellent efforts of our energized associates are helping us narrow the cost gap. Also, with gargantuan size comes certain limitations on customer service, product variety and freshness, convenient neighborhood locations and other competitive factors that somewhat balance the playing field.
We don't wake up every morning worrying specifically about Wal-Mart. We have hundreds of competitors, both large and small, and any one of them can attract customers away from us if we lose our focus on making our customers lives easier.
The process of globalization in our industry will take decades. We hope to be one of the consolidators, but this is not our near-term priority, which is fixing the business in the US.
What do you mean by near-term?
We have no time frame. We still have a lot of the US market to fill out. We are only in 31 of 50 States. Don't forget that in the US half of the market volume is still done by small retailers and regional chains. It is still an industry where you can buy a no. 1 or 2 retailer in a major market. It's not easy, but it can be done.
In the unlikely event that Ahold ever sold its US operations, would Albertsons be a potential bidder, or would you be happy to let one of your competitors step up to the plate?
That's a very speculative question, and should they become available, one of the obvious questions is, what's the price? We will only act if a candidate meets our rigorous acquisition criteria. However, Ahold's footprint in the U.S. is intriguing, since it overlaps ours only in only one relatively small area in the north-east states.
Tengelmann's North American subsidiary A&P has been one long tale of woe for its shareholders. How do you rate A&P as a competitor in the US, and would you make a bid for them if they tried to sell?
A&P operates in few areas where Albertsons competes. We are, of course, very familiar with A&P, and we recently made a bid to acquire some A&P stores in the Midwest, but we couldn't reach an acceptable agreement. If and when A&P or some of its units are for sale, we will make a thorough evaluation of the opportunities.
How would you characterize your shareholder structure, what percentage does Aldi Nord still have in your company, and is there any strategic relationship between your two companies?
Approximately 80 per cent of Albertsons shares are owned by institutional shareholders, with the rest held by management, including the Albertsons family, and individual investors. Marcus Stiftung held 29.1 million shares at the end of 2002, i.e., just under 8 per cent. I have visited Theo Albrecht in Germany, but the relationship with Markus Stiftung is that of a large shareholder only.
How do you rate Aldi's longer-term chances in the USA, and to what extent do you see them as a competitor?
Aldi has pioneered the extreme value segment in the USA. We are not involved in this segment. Aldi's biggest competitor in the US is probably Save-A-Lot, which currently is somewhat larger than they are in America. We certainly believe there will be steady growth in the extreme-value sector, but Aldi and Save-A-Lot have encountered competition recently through dozens of new entries to the segment.
Aldi also owns Trader Joe's which operates about 200 stores in the US.
In the wake of Tesco's joint-venture with your competitor Safeway, Inc., has the pressure increased on you to find a European partner?
Tesco's partnership with Safeway is principally in the area of internet grocery retailing. Safeway is using the Tesco business model that has achieved some degree of success in the UK and seems to be doing well in the United States. Our business model for internet grocery retailing is significantly different from Safeway/Tesco and minimizes our capital requirements without limiting our growth potential.
Our internet retailing business is progressing on schedule, we have already attained profitability in one of our markets, and believe we are the largest internet grocery retailer on the West Coast — and perhaps also in the entire nation.
Retail concentration has steadily increased in the US, but is still considerably lower than in north-western Europe. Who will be the movers and shakers, and what part will Albertsons play in this process?
As a nation of more than 280 million people spread over an enormous geographic footprint, there understandably will be more major players in the US than in any European country. Still, there will be additional consolidation in the US, especially as the dual pressures of a sluggish economy and unprecedented competition take their tolls.
Currently, everyone is trying to get into the food business. Sears has just opened a test store in Salt Lake City called Sears Grand that devotes significant square footage to groceries. Target and Costco also are the food business now. Albertsons' goal is to be the No. 1 supermarketcompany in the US, and, eventually, in the world, but we have no specific timetable.
Currently, we have a big presence in the western States, especially in California, and we are also big in Texas, in Florida and in the massive Chicago and Philadelphia markets. However, we've moved out of markets where we don't have a realistic chance of becoming the no. 1 or no. 2 in a reasonable amount of time, for a reasonable capital investment.
Do you believe that good, but distinctly regional players, such as H.E. Butt, Publix or Meijer can survive longer-term?
They may be regional players, but they are very large companies in their own right — each with annual sales exceeding $10 billion — and they are doing an excellent job in their principal marketplaces. I have no doubt they can survive longer-term, unless the private ownership loses its lust for the business and opts to sell.
In future there will be fewer independents, but there will always be room for regional retailers with good retail brands. A number of our own fascias are also strong regional brands. For example, Acme is no. 1 in Philadelphia, Jewel-Osco is no. 1 in Chicago and Albertsons is no. 1 in San Diego.
Your merger with American Stores in 1999 catapulted Albertsons to the number two spot in US grocery behind Kroger, making it one of the largest retailers in the world. However, the merger brought problems and you were called in from General Electric at the end of 2000 to troubleshoot. What had gone wrong?
The merger occurred at the onset of the global economic malaise and coincided with the market incursion by highly efficient, non-traditional competitors such as Wal-Mart, Target and Costco. The traditional supermarket industry recognized that it would have to restructure if it hoped to remain competitive in a dramatically changed marketplace.
Unfortunately, Albertsons was caught right at the beginning of integrating two companies with diverse cultures in what was the largest merger in the US grocery industry history. Albertsons' board of directors decided that historic changes called for historic moves, so they went outside of the industry to recruit me from General Electric.
What measures are you taking to raise productivity at Albertsons?
We had not been as focused on efficiency as we should have been. Our cost structure had become bloated, and we're working very hard to bring that down. We are re-engineering our entire supplychain and implementing global quality standards like "Six Sigma" in our distribution centers and shops.
Six Sigma was innovated by Motorola and has been adopted by a number of leading companies such as General Electric and Honeywell. We would be one of the first retailers in the world to adopt it. Six Sigma allows one to map every process within a company and to re-engineer these processes for maximum efficiency.
Whether you're manufacturing a product or implementing a process, Six Sigma only allows 3.4 defects per million opportunities for a defect.
Maximizing our return on invested capital is also one of the strategic imperatives that have been imbedded into the DNA of everyone at Albertsons. This requires the increased use of technology and the energizing of our associates the 200,000-member family that is our greatest asset.
We are focusing on the quality, variety and freshness of our products and revving up our marketing engines with some of our industry's most creative promotions. We have culled more than 400 underperforming or non-core stores and right-sized our support staff above store level, without impairing our performance.
You talk of staff being your greatest asset, but this hasn't stopped you making considerable numbers redundant...
Unfortunately, when you pursue efficiency to remain viable with competitors so that you can make life easier for customers, which is our main goal, it means that some jobs are lost in the re-engineering process. If technology allows us to lower our costs by eliminating jobs without impairing our service to customers, that's something which shareholders expect us to go after, and we will.
As we see new forces in the industry, and Wal-Mart would be a good example, we have to re-engineer our processes to ensure survival. There are no sacred cows. We'll do anything that's legal and has integrity to make an efficient company that serves customers better.
We also have to re-engineer the labor contracts we have with many of our unions. A case in point is the 70,000 grocery workers on strike in southern California. These Albertsons, Safeway and Kroger associates have been told the companies can no longer afford to pay 100 percent of the health care costs for associates and their families.
The companies' cost for this insurance had gone up more than 50 percent in the past four years, and the proposed new contract would require associates to pay a small portion of these increased costs.
We spend a lot of time communicating with our associates about the realities of the industry so that they understand why we do some of the things we do, e.g., making them share in health care costs, so the company can continue to be a viable competitor and job-creator.
Are there any ways of reducing your personnel costs without paying people less or making them redundant?
Let me give you one example of the things we are doing in this area. We are implementing new hiring technology called Unicru, which allows us to screen applicants up front for the right attributes in advance and to assess their aptitude for customer service and our business.
If we hire the right people for the right jobs, treat them fairly and keep them motivated, we will significantly reduce our employee turnover. Excellence in associates translates to improved customer satisfaction, and improved customer satisfaction is reflected in increased sales. The final line of the equation is that market growth results in the creation of new jobs.
Less staff can also mean reduced customer satisfaction. Are there ways of squaring the circle?
Increased technological efficiency will lower out-of-stocks and reduce prices, which also are factors in increasing customer satisfaction. Furthermore, we are introducing a new service called Personal Shopper where customers can scan goods with a hand-held scanner as they shop along the store aisles.
We combine this new system with self-checkout and have found it to be very popular with our customers, who evidently enjoy using technology in the store. We are very enthusiastic about the potential of Personal Shopper and self-checkout. We are adding an additional 4,000 self-checkout lanes by the second quarter of 2004.
Does Personal Shopper also decrease shrink?
It increases customer satisfaction, and we have found no increase in shrink compared with our cash tills. At each self-check out lane we have one member of staff acting as a monitor who assists shoppers. We also do spot audits.
But are your investments in this area worth the expense, if only a minority of customers ever use self-scanning and self-checkout?
That's what most people once said about ATMs at banks, but everybody uses them today. Customers love to be in control of their own destiny, and this new technology increases consumer satisfaction. Of course, we also will give shoppers the option of traditional, associate-assisted services.
You are one of the few major US grocers who also run major drugstore chains. You also juxtapose them in a Combo-store format. Where are the advantages of the link?
The dual-branded combination grocery and drugstore is one of Albertsons' biggest competitive advantages and a major point of differentiation. We are America's second-largest supermarket company and fifth-largest drugstore chain. We operate under banners including Albertsons, Jewel, Acme, Osco Drug and Sav-on Drugs.
Each of these banners has enormous brand equity, and when one combines two of them under one roof – like our growing group of Jewel-Osco, Albertsons-Osco or Albertsons-Sav-on stores -- we have a retailing powerhouse.
Surely you don't have a chance against such thoroughbred drugstore operators as Walgreens, CVS or Rite Aid?
They are excellent competitors, but by using the combination store format we can open ten new drugstores for the cost of a single, stand-alone drugstore.
Could you describe the format in a little more detail and tell us how you came to develop it?
We drop a full-sized drug store down inside a food store. The concept was created and perfected in Chicago. There was once a Jewel grocery store and an Osco drugstore in direct proximity, but with separate entrances. When Jewel bought Osco they first connected the two different retail stores with a door.
But when later they knocked the joining wall down, they saw a dramatic change in the shopping habits of consumers. We found that the pharmacy customer, known for his or her loyalty and for making specific trips to a drugstore, bought 30 per cent more food. In addition, all of the drugstore items got a lift from our food clients.
This model provides a much higher return on investment. At first, I asked whether this was not just a phenomenon peculiar to Chicago, so we also tested it in Reno/Nevada and Tucson/Arizona. We took an Albertsons grocery store in one place and put an Osco drugstore inside, and then we took an Albertsons in another place and put a Sav-on Drugs store inside. The result was exactly the same.
So now we are investing substantially in this new idea, initially in those markets where we have strong brand equity with both grocery and drugstore banners.
How do you find the necessary space for a 11,000 to 12,000 ft² (1,022-1,148 m²) drugstore on your grocery sales surface?
Our food stores average around 50,000 to 60,000 ft² (4,645-5574 m²) and already had pharmacy departments within them of around 4,000 to 5,000 ft² (372-465 ft²).
When planning a combination store, we put the whole store through a complete rationalization. We analyze every SKU for its return on invested capital and delist every line that doesn't pull its weight. For instance, we might have eleven olive oils and end up with six. If you apply this to every category, it frees up enough space in the footprint to drop in the sizable drugstore.
Drugstores aren't the only shop-in-shop concept on your sales surfaces, why has Albertsons opened itself up to a number of external operators?
The power of brands is incredible! We have brought very strong brand partners into our stores such as Office Depot, Starbucks, Toys-"R"-Us, Krispy Kreme doughnuts etc. Our coffee bars used to do 5,000 dollars a week, with Starbucks I can put a coffee bar in which can do 10,000 dollars straight away, and in many stores Krispy Kreme sells 300 or more dozen doughnuts a day.
As regards Toys"R"Us, who do all our toys now, obviously we are not experts in procuring and merchandising toys. They handle everything except for distribution that goes through our own logistics system. They deliver to our 17 distribution centers and we pick and load. We get the power of the Toys" R"-Us brand in our in-store "Toy Box."
But don't all these different concepts impair your overall corporate identity, and what advantages do you bring to these brand partners?
Not at all, we operate big stores and have the space to do it. People want highly identifiable, quality brands, and these brand partners make us more credible with consumers.
In return we give them a whole new frequency. They don't have people in their stores two or three times a week like we do. Shoppers make 1.4 billion trips a year to our stores. That's tremendous additional exposure for our brand partners.
Do you plan to diversify further?
We believe that long-term you have to be in a variety of different segments. This diversifies risk and allows you to address all consumer segments. So you'll see us in the price segment and the up-scale fresh segment someday. We also have a new Hispanic format that we have introduced in southern California called Super Saver.
How about your own brands?
They make up around 16 per cent of total sales. We intend to increase this level, the very best US retailers having around 26 per cent. We have three tiers of own label: a generic type for entry level, a store brand, and a premium private label called Essensia. Essensia comes in a silver box and is very up-market, yet it is a value proposition vis-à-vis national brands and often exceeds them in quality.
You are one of the biggest food and drug retailers in the world. Where do you see the advantages of size and scale, and when is small beautiful?
We want to build a company that has strong financial strength and resources. We are the 35th-largest company in the US, but we want to be able to move fast and make quick decisions to satisfy our customers, our suppliers and our stockholders
So we don't want a lot of bureaucracy and are taking management layers out of the company. We are giving people more authority to make decisions more quickly.
You were groomed at General Electric under the legendary Jack Welch. When a head-hunter approached you at the end of 2000 to lead a company you'd never heard of, what made you say "yes"?
After more than 28 years at GE, I wanted to run my own show. When I was approached, I knew at that point that I wouldn't lead GE and had begun to explore different options. Jack Welch had always given me the tough turnaround challenges, which I love.
I had been brought up in New York State and lived in the northeast of the US where Albertsons didn't have any stores, so at first I wasn't really familiar with the company. On research I found that Albertsons was a sleeping giant with 1.4 billion shopping trips a year and strong shares in some of the nation's largest markets, but which had gotten off track.
It didn't have much national or global recognition, which I'm not so sure is such a bad thing, but had a lot of recognition from those who count, i.e., from the consumers who visit the markets we serve. One of my challenges therefore is to tell the Albertsons story in the USA and Europe.
In Germany retailers are a clique and learn their trade from the bottom up. There are few, if any, outsiders in top management positions in German retailing. What case would you make for the outsider?
When I came to Albertsons, many associates, suppliers and securities analysts questioned my ability to direct a company in a business that had no relationship to GE. But times and the marketplace have changed dramatically.
In the past doubtless it felt comfortable to have a grocer in the CEO's chair. But now the CEO must be a lot more. He or she must be skilled in management and administration, in finance and marketing, in government and industry relations, and in motivating the workforce.
I have eleven Executive Vice Presidents who report back to me. They have a total of 250 years experience in the industry so I have plenty of experts to guide me.However, I have also brought in talented outsiders because I think it desirable to have a healthy balance of experiences on one's team.
A fresh set of eyes at the top is very healthy especially in an industry that has never undergone much change and where nearly everyone grew from the bottom up. Otherwise, one becomes insular and fails to look outside oneself for best practices like Six Sigma.
You are now Chairman, President & CEO. From a European point of view, this appears a formidable concentration of power. Don't you think in these troubled times, where good corporate governance is at a premium, you are sending the wrong signals to investors?
Albertsons is at a critical stage in its turnaround, and quick, decisive action is required as we continue to drive costs out of the business in order to sharpen our competitive edge. At this time, I believe it would be redundant to have three separate people in each of the three top positions.
Our board of directors agrees, and most securities analysts have applauded the decision to reduce the executive payroll in order to improve the company's cost structure. We are hardly an autocracy. I have to answer to a demanding Board of twelve distinguished directors. I am the only "inside" member.
I also have to "answer" to an equally demanding executive council of Albertsons' senior managers. I report to the Board of Directors and serve at their pleasure. I have very specific goals and objectives, which we set together each year, and which they hold me to by signing off my performance appraisal once a year.
There are consequences, if I achieve my objectives — my salary bonus and compensation package being tied to results — and there are consequences, if I don't. I also work very closely with the lead director who governs process, which is a new concept in the US, as well as with a number of supervisory committees. We are all team players, but at the end of the day there can only be one leader.