Giant looks toward Philadelphia


PHILADELPHIA -- Giant Food boss Israel Cohen didn't say "read my lips," but his message two years ago was clear: The company wasn't going to open any supermarkets in the Philadelphia area.

He was wrong.

A few weeks ago Giant agreed to buy a 10-acre plot in the Philadelphia suburb of Cherry Hill, N.J. A spacious, shiny "Super G" grocery store will open there next year.

And Giant officials are intently scouring the Main Line, Chester and Bucks counties and other Philadelphia suburbs for more sites. They hope to have as many as a dozen stores in the Wilmington/Philadelphia region within three years, and more later.

"We think we can carve out a niche in that market," Giant Food Inc. President Pete Manos said in a recent interview at the company's Landover headquarters. "It's Giant country. There are people out there that like the kind of operation we run."

It's not Giant country yet, actually. It's Acme, Pathmark, ShopRite, Super Fresh and Genuardi country. A market with "some serious price wars" already, said Meg Major, editor of Food Trade News, a monthly trade publication that covers the area.

The fact that conservative, stay-at-home Giant changed its mind and wants to do battle there says much about the industry and the company.

Supermarket operators everywhere are finding they can't increase earnings without adding stores. Low inflation means they haven't been able to raise prices. Profit margins are as thin as generic-brand plastic wrap.

For Giant, which made less money last year than it did six years ago, the pressure to improve results has been growing.

Its home markets of Washington and Baltimore already have wall-to-wall Giant stores. To expand, it must look down the road.

The move to the Delaware Valley corridor won't be easy. It brings big challenges of supply, marketing, cost-control and real estate.

"I don't think that anybody in this marketplace is going to roll over and say, 'Come on in,' and roll out a welcome mat" for Giant, said Thomas N. Hughes, director of advertising and design for Clemens Markets, a 14-store, family-owned chain of upscale supermarkets in Philadelphia's suburbs.

Grocery experts, though, firmly believe that Giant, with 160 stores now, will run a successful operation in the region. What they're not sure about is whether the foray will help profits much.

"I'd be loath to bet against Giant Food," said Guy W. Ford, a retail analyst for Scott & Stringfellow Inc., a Richmond, Va.-based investment company. "They've got a terrific operating record, terrific balance sheet. Will they be successful in Wall Street terms? Short term, I suspect not. It's going to be a real struggle."

With its clean, modern stores and unusual, in-house advertising, construction and manufacturing operations, Giant is one of the most admired grocery sellers on the East Coast.

That is little comfort to Giant shareholders. The company's stock has been a longtime wallflower, hitting $36 a share in 1989 and bouncing between $17 and $30 since then. On Friday, Giant's Class A shares closed at $21.375.

The problem is competition. Penetration of the food trade by Kmart, Wal-Mart, discount pharmacies and warehouse clubs has stripped sales from grocery stores, forcing lower prices and lower profits among all players. Add growing grocers such as Super Rite Foods Inc.'s Metro chain, and the Baltimore/Washington area has become hotly contested.

Giant earned $95.23 million for the fiscal year ending Feb. 26 on $3.567 billion in sales. Those profits jumped 14.4 percent compared with the previous year but were substantially lower than the company's record -- $118.89 million for the year ended February 1991.

Its net profit margin fell to 2.7 percent last year from 3.5 percent four years ago.

The good news for Giant is that its sales have stopped falling. It has retained a near-30 percent piece of nonrestaurant food spending in the Baltimore/Washington area, according to Food World, a trade publication.

Such defense of its home turf helped persuade Giant's cautious managers to expand. If they can make 2.7 cents on the dollar here, they figured, they can make it in Philadelphia.

Early expansion plans

They had considered the area for a long time. Giant decided to build stores in northern Delaware several years ago. But a push into Philadelphia was deemed too ambitious. Mr. Cohen, Giant's 81-year-old chairman and chief executive, ruled out such a move at the company's shareholder meeting in 1992.

Sales continued to be lackluster, however, and it became clear that a Delaware strategy alone might not be the best way to boost them. Not when there was a metro area of 4 million people just up the river.

The greater Delaware Valley area -- from Wilmington into New Jersey and north and west of Philadelphia -- had attractions for Giant besides its population and $8.56 billion in annual supermarket sales. It was nearby. The dozen trucks needed to supply each store weekly could make the round trip in one day from the company's Maryland warehouses.

And some of the big players there -- American Stores Co.'s Acme Markets division, especially -- were deemed vulnerable. Acme, with nearly 30 percent of the region's supermarket sales, has been slow to renovate its stores and update its offerings, analysts and rivals said.

"If you look at the competition up there, you will not find a lot of clean stores," said Barry F. Scher, Giant's vice president for public affairs, speaking generally. "They're not well merchandised."

Last year Giant quietly hired an outside property buyer-broker, something it had never done, to scout the Philadelphia region for store sites.

Launching the expansion

Its northern expansion was launched several months ago with the opening of a "Super G" market in the Wilmington suburb of Bear. Because of a trademark agreement, the company can't use the Giant name in Pennsylvania.

The Cherry Hill store and another Wilmington store will open next year, and Giant officials say they have identified at least two dozen other regional communities in which they would like to do business. They hope to nail down several other sites by the year's end.

"They're sitting on a quarter of a billion dollars in cash, so they certainly can afford to finance this," said Kurt Funderburg, a retail analyst with investment house Ferris, Baker Watts Inc.

The battle, when fully joined, will be one of price and advertising competition, store cosmetics, neighborhood demographics and gauging local consumer tastes.

Future rivals are getting ready.

"We're familiar with them, been down to see some of their stores, realize they're a formidable competitor in their own right," Clemens' Mr. Hughes said of Giant.

Acme has boosted its budget for rebuilding and expanding stores over the next five years, although managers declined to say by how much. "I wish I could say it was in response to Giant, but it's not," said Acme spokesman Edwin Spragg.

Mr. Spragg declined to comment on assertions that Acme's upkeep has lagged.

"Giant is a threat to Acme and anyone in the market because they're bringing additional numbers of supermarkets," he said. "Obviously, we take them seriously."

But maybe Giant's biggest challenge isn't a rival chain. It's finding enough affordable, 10-acre plots near populations sufficient to support a 65,000-square-foot store.

Such tracts have always been hard to find in developed areas. But now that office supplies, consumer electronics, lumber, sports equipment and so many other goods are sold in supermarket-like, "big-box" stores, the sites are even scarcer.

'Not an easy undertaking'

"It's not going to be an easy undertaking," for Giant, said Ms. Major, of Food Trade News. "These kinds of sites are not just going to present themselves without a little legwork."

And a little cash. Supermarket space in Philadelphia goes for $12-$15 a square foot. Mr. Manos made it clear that Giant will look at site quality first, price second.

"We're not up there to try to whittle everyone down," he said. "If we get a good location, and it's $15 or $18 or $14, we'll run the numbers before we decide whether to move ahead. And if the pro forma says it will work, we'll pay whatever we have to."

Even so, good sites won't be plentiful. That will allow Acme and other competitors to focus their fire each time Giant adds a spot.

And it will limit Giant's overall growth of stores, sales and profits up north.

Even if Giant reaches its initial, informal goal of 12 Delaware Valley outlets by the end of 1997, it would boost its bottom line by just $11.4 million, or 12 percent. That assumes stores of 65,000 square feet, yielding Giant's average profit of $14.65 per square foot.

And there's no guarantee that the new stores will hit the profit average, at least right away.

Costs of expansion

Giant's expansion won't increase expenses at its headquarters, plants or warehouses. Labor costs are about the same. But shipping costs for the northern stores will be higher. Real estate costs may be higher. Price wars could hurt.

And advertising costs initially will be bloated. For example, Giant is already buying regular spreads in the Wilmington News Journal daily newspaper -- even though it has only one store in the area. "If we had three stores there it would be a heck of a lot better," Mr. Manos said.

That will take time. "Giant would rather do it right and do it slow than do it wrong," Mr. Ford said. He isn't recommending the stock.

Mr. Funderburg doesn't believe Giant's expansion will pay off right away, either. But "two or three years from now, you'll see them get back to double-digit growth," he said. He rates the stock a "hold."

Mr. Manos is optimistic. Asked whether the company is moving quickly enough, he said, "I think we're moving at a very nice pace. It seems slow at first, but once things start clicking we feel that our shareholders will be satisfied."

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