American Stores Company History

Company Perspectives:

The mission of American Stores Company is to be the premier, national, food and drug retailer, that understands and surpasses our customers' expectations for service, value, and convenience. Our success is directly dependent on our people who must work together as associates to fulfill this mission.

Company History:

Built largely through the drive and ambition of one family, American Stores Company has developed into one of the leading food and drug retailers in the United States and is the third-largest grocery store chain (following Kroger Company and Safeway Stores). Among the company's grocery operations are more than 180 Acme Markets in Pennsylvania, New Jersey, Delaware, and Maryland; more than 185 Jewel food stores and Jewel Osco combination food and drugstores in Illinois, Iowa, Indiana, Wisconsin, New Mexico, and Utah; and more than 430 Lucky Stores in California and Nevada. Company drugstores include more than 430 Osco Drug stores in 20 states, mainly in the Midwest, and more than 300 Sav-on and Sav-on Express units in California and Nevada. American Stores also operates 20 home health care superstores under the Health 'n' Home name in four states and RxAmerica, a pharmacy benefits management company operated through a joint venture with Geneva Pharmaceuticals.

Beginnings As a Drugstore Chain

The history of American Stores is inextricably linked to that of the Skaggs family. Samuel Skaggs, the patriarch, opened a drugstore in Utah in 1915. In 1926 his six sons, including Leonard S., Sr., helped build Safeway Stores, which have since developed into the nation's second-largest supermarket chain. In 1932 L. J. Skaggs split with his brothers and opened his first Pay Less drugstore in Tacoma, Washington. In 1939 Leonard S., Sr., founded the Skaggs Drug Center chain and bought the California operations of Pay Less. And at about the same time, L. L. Skaggs founded the Osco Drug chain.

The combined operations of Skaggs Drug Centers and Skaggs Pay Less was known as Skaggs Companies, and it remained a modest enterprise through the 1940s. In 1950 Leonard S., Sr., died and his 26-year-old son, Leonard S., Jr., inherited the business. At the time, Skaggs Companies had posted sales of $9.6 million, .05 percent of what American Stores would report nearly five decades later.

Leonard S. Skaggs, Jr., more familiarly known as Sam, had ambitious plans for the family business. But those plans waited during the 1950s and early 1960s. Skaggs Companies made little news during this time, except in 1956 and 1957 when General Electric sued a group of Western retailers over their practice of selling GE products at less than the recommended price. Skaggs filed a countersuit, and as a result of the controversy, courts in Utah and other Western states overturned so-called "fair trade" laws that prohibited the discounting of merchandise.

In 1965 the company was incorporated as Skaggs Drug Centers, Inc. That same year, Skaggs bought 30 Super-S general merchandise stores from Safeway. By 1969, it had expanded its retail drug operations to 80 stores in 13 Western states and in that year earned $4.7 million on sales of $172.2 million. At that point, Sam Skaggs contemplated a merger that would enlarge his company even further. Skaggs Drug Centers negotiated with People's Drug Store, a retailer that would have expanded Skaggs's geographical base with 245 stores in eight Eastern states, but talks broke down when the companies could not reach mutually acceptable financial terms. In 1970, however, Skaggs did merge with Katz Drug, a move noteworthy not only because it allowed Skaggs to expand into the Midwest, but also because Katz owned the non-California operations of L. J. Skaggs's old Pay Less chain.

Combo Stores Debuted in 1970

Also in 1970, Skaggs entered into a joint venture with Albertson's, one of the largest supermarket chains in the western United States, which resulted in the first successful combined drug and food superstores. Traditionally, it had been difficult for drugstores and supermarkets to cross over into each other's territory because their goods were marketed differently. Skaggs had experimented with "combo" stores by opening one in Las Vegas, Nevada, in 1969, but needed more managerial expertise in grocery retailing to make them succeed on a large scale. A connection between Albertson's chairman, Joe Albertson, and the Skaggs family was not unprecedented; Albertson had worked for Safeway when the Skaggs brothers were running the chain.

The joint venture proved to be a considerable success. Over the next seven years, Skaggs-Albertson's Properties opened 58 combo stores in Oklahoma and the southeast, and in 1976, the last full year of the partnership, it generated $624 million in sales. But in 1977, both Skaggs and Albertson's realized that the venture had grown so large as to become nearly unmanageable. A merger between the two partners would have been an elegant solution, but both feared that it would result in antitrust litigation. Neither had enough money to acquire the other outright, and neither wanted to take on the capital-gains tax obligations of selling out. Irreconcilable differences in management philosophies were also rumored to have played a part in the split. So Skaggs-Albertson's Properties was dissolved, with each partner receiving half of its assets.

Overall, Skaggs Drug Centers prospered during the 1970s. In 1978 it posted earnings of $25 million on sales of $1.1 billion and operated 202 drugstores, most of them in the West and Southwest. And amid widespread concern over the state of the American economy, Sam Skaggs remained confident in the future of his company. "We're more or less recession-proof," he told Business Week in 1977. "People are going to brush their teeth and cure their headaches all the time."

Even so, the expansion of Skaggs's combo store operations slowed without the help of Albertson's muscle. In 1978 the company worked out an agreement to merge with Jewel Companies, a major Chicago-based food retailer. Sam Skaggs had tried to merge with Jewel 12 years earlier, and this time around he believed that integrating its decentralized management structure into his own essentially one-person operation would facilitate further expansion. Jewel chairman Donald Perkins, for his part, saw combo stores as the wave of the future, as supermarkets began to stock more nongrocery items, and sought Skaggs's expertise. The merger seemed mutually advantageous, but was torpedoed at the last moment when some of Skaggs's directors, concerned that they would lose their autonomy under the deal, failed to approve it.

Major Mergers in 1979 and 1984

Momentarily set back but undaunted, Sam Skaggs soon resumed his quest for a merger that would further his goal of building a food-and-drug retail juggernaut. He found one in 1979, when American Stores Company agreed to merge with Skaggs Companies. American Stores was by far the larger organization, with 758 supermarkets, 139 drugstores, 53 restaurants, and nine general-merchandise stores in nine states, but Skaggs was the one that survived the merger. The resulting entity bore the American Stores name, but was controlled by Skaggs management.

Thanks to the merger, American Stores posted $83 million in earnings on sales of nearly $8 billion in 1983. But its presence was still weak in the Midwest, New England, and Florida. To help overcome these remaining geographical shortcomings, Sam Skaggs made yet another attempt to merge with Jewel in 1984. But Weston Christopherson, who had succeeded Donald Perkins as chairman of Jewel, was opposed to a merger and Skaggs was forced to engineer a hostile takeover. On June 1, 1984, American Stores tendered an offer worth $1.1 billion for 67 percent of Jewel's outstanding shares at $70 per share.

For two weeks, Jewel management refused all comment on the offer, maintaining its silence even at a stormy shareholder's meeting before which Jewel shareholder groups controlling 20 percent of the company's stock had come out in favor of negotiating with American Stores. Finally, on June 14, Sam Skaggs and Jewel president Richard Kline reached an agreement after an all-night bargaining session. American Stores raised its bid for Jewel's preferred stock, increasing the total bid to $1.15 billion in cash and securities. In return, Jewel dropped plans for a defensive acquisition of Household International and accepted American Stores' offer. To help raise cash for the deal, American Stores sold its Rea & Derick drug chain in December 1984 to People's Drug, a subsidiary of Imasco Limited.

The acquisition of Jewel also returned L. L. Skaggs's Osco Drug chain to the Skaggs family ownership. And Sav-on Drug, another Jewel subsidiary, had been founded by C. J. Call, who had once been a business partner of another of Sam Skaggs's uncles, O. P. Skaggs.

Jewel added 193 supermarkets, 358 drugstores, 140 combo stores, 301 convenience stores, and 132 discount stores to the American Stores empire. But in 1985, American Stores found itself in legal trouble through its new subsidiary. A salmonella food-poisoning outbreak affecting some 20,000 people in the Midwest was traced to a Melrose, Illinois, dairy that had supplied tainted milk to Jewel stores. Two years later, Jewel was found not liable for punitive damages in Cook County Circuit Court, but agreed to pay compensatory damages estimated at $35 to $40 million.

Late 1980s Acquisition of Lucky Stores Ran into Snags

After two decades of intense merger-and-acquisition activity, American Stores was the largest drug retailer in the United States, but only the third-largest grocery retailer. Furthermore, its 210-store Alpha Beta chain in California was struggling, plagued by high prices and a reputation for poor service. On March 22, 1988, American Stores made an unsolicited tender offer for Lucky Stores, an Alpha Beta competitor noted for high efficiency and low prices.

Lucky refused American Stores' first offer, worth $1.7 billion, or $45 per share of Lucky stock. By the end of the month, American Stores proposed to up its bid to $50 per share if Lucky would agree to a friendly takeover. Again Lucky rejected the offer as inadequate and was said to be contemplating defensive strategies. In May, Lucky agreed to a $2.4 billion, $61-per-share buyout by a company set up by Lucky management and the investment-banking firm Gibbons Green van Amerongen. On the one hand, this move seemed very much like a bid by Lucky managers to retain control of their company. But on the other, it could also have been a ploy to milk American Stores for a higher bid, since later that month Lucky allowed American Stores to examine confidential financial information that it had been withholding for several weeks and gave its suitor one week to respond with a better offer. On May 17 American Stores upped its bid to $2.5 billion, or $65 per share.

Five days later, Lucky accepted. American Stores was about to become the largest supermarket chain in the nation, leapfrogging over Kroger and Safeway Stores. Interest payments alone on its acquisition debt cut the company's earnings in 1988 by 36 percent from the previous year, but analysts called the deal worthwhile.

California Attorney General John Van de Kamp took to the warpath against the acquisition. In August, Van de Kamp asked the Federal Trade Commission to void it, claiming that a Lucky-Alpha Beta juggernaut would cost California consumers $400 million by reducing competition. The FTC refused (although it did force the divestiture of 37 Alpha Beta stores, which were sold in December 1988, the same month 38 Lucky stores in Arizona were also sold). Van de Kamp then took his case to court, and on September 29, a federal judge in Los Angeles issued a preliminary injunction against the merger. American Stores appealed, and in April 1989, an appeals court judge in San Francisco overturned the injunction. Van de Kamp appealed this reversal to the U.S. Supreme Court; meanwhile, American Stores continued to plan its assimilation of Lucky.

In 1988 Sam Skaggs reached the mandatory retirement age of 65, and in December of that year the company named vice-chairman Jonathan L. Scott to succeed him as CEO. It marked the end of an era for American Stores in more ways than one; not only would it be without a member of the Skaggs clan to handle day-to-day operations for the first time, but it would experience a profound change in management style as well. "Mr. Skaggs is a builder," Scott told the Wall Street Journal. "He's always been aggressive in acquisitions. My forte is more in how we operate those companies and how we grow them." So American Stores finished out the 1980s in a mood to consolidate.

1990s Retrenchment and Organizational Overhaul

The 1990s unfortunately got off to a rough start when the Supreme Court in April 1990 ruled in favor of the California attorney general. Subsequently, and wishing to avoid additional, lengthy litigation, American Stores the following month reached an agreement with Van de Kamp whereby the company was allowed to convert 14 Alpha Beta stores to the Lucky name but also had to sell--within five years--161 southern California stores, 152 Alpha Betas, and nine Luckys.

By this time, American Stores was burdened&mdash′imarily because of its purchase of Lucky Stores--with a long-term debt of $3.4 billion, an indication that it had perhaps overreached in its ambitious acquisitions strategy. Reducing this debt load became the prime challenge for the company; doing so was mainly accomplished through asset sales. In addition to the June 1991 sale of the Alpha Beta stores to Yucaipa Cos. for $251 million, American Stores also divested: 44 Buttrey Food & Drug stores located in Montana, Wyoming, Washington, Idaho, and North Dakota, through an October 1990 management-led $184 million leveraged buyout; 51 Osco Drug stores in Colorado, Utah, and Wyoming, which were sold in June 1991 to Pay Less Drug Stores, a division of Kmart Corp., for $60 million; and 74 Jewel Osco stores in Arkansas, Florida, Oklahoma, and Texas, sold to Albertson's for about $455 million. The company also put its 275-unit Acme Markets chain on the block in early 1991, but shortly thereafter decided not to sell Acme, apparently because the bids it received were not deemed sufficient. Despite this nonsale, by the end of fiscal 1992 long-term debt was down to $2.1 billion. In August 1992 Scott resigned as CEO and was replaced by Victor L. Lund, an American Stores executive with a financial background who had joined the company in 1977.

At the same time that it was making its major divestments of the early 1990s, American Stores also looked for opportunities to make strategic minor acquisitions, ones that would enhance its position in the main markets that it wished to serve. The company's California drugstore operations were enhanced through the early 1992 $60 million purchase of 85 CVS units, which were soon converted to the Sav-on banner. The following year the Midwest region received a boost when 55 Reliable Drug stores in Indiana, Illinois, Iowa, Kansas, and Missouri were bought. These were soon rebannered as Osco Drug stores.

American Stores continued to tinker with its holdings during the mid-1990s. In August 1994 its 33-store Star Market chain, fifth in market share in the Greater Boston area, was sold to an investment group for $285 million in cash and the assumption of debt. Star, which had come to American Stores as part of the 1984 acquisition of Jewel, was deemed expendable because the company wanted to focus on markets where it held first or second place in market share. In January 1995 the company sold 45 Acme Markets located in New York and northern Pennsylvania to Penn Traffic Co. for $94 million. The following month, American Stores spent about $37 million for 17 Clark Drug stores in southern California, which were then converted to the Sav-on name.

In an extension of its core drugstore business, American Stores in November 1995 launched a new category-killer format called Health 'n' Home, which was a 28,000-square-foot, 18,000-item home health care superstore. The first Health 'n' Home opened in Phoenix, Arizona, and by late 1997 there were 20 of them in four states. American Stores was also involved in the growing managed health care market through its joint ownership--with Geneva Pharmaceuticals, a subsidiary of Novartis Pharmaceuticals Corporation--of RxAmerica, a pharmacy benefits management company which existed to manage the prescription drug benefits provided to individuals through health care plans. RxAmerica also operated mail-order facilities offering prescriptions, vitamins, and other health care products at significant discounts.

Also in 1995, Sam Skaggs relinquished the chairmanship of American Stores to Lund. Skaggs still held an 18.3 percent stake in the company and a seat on the company board, and when he announced in July 1996 that he was exploring options for his stake, speculation about a possible takeover ran wild. But in February 1997 an agreement was reached between American Stores and Skaggs whereby the company would repurchase about 12.2 million of Skaggs's shares for $550 million, with the remaining shares subsequently being sold to the public through a secondary offering. Skaggs would lose his seat on the board when his stake was reduced to five percent.

For much of the 1990s, American Stores was focused on debt reduction and cleaning up its portfolio of holdings. By 1996 the company was ready for more radical changes. American Stores had long been run as a decentralized holding company, but in order to compete in the fierce environment of the late 1990s the company decided to transform itself into an integrated operating company. As part of this transition, the company also began to centralize companywide its procurement, warehousing, inventory control, distribution, and marketing operations. Another aspect of the plan involved the consolidating of the central support organizations of the drugstore and grocery store operations. At the same time, American Stores sought to initiate faster growth, this time primarily through the opening of new stores--not through acquisitions. A three-year plan was launched in 1996 which aimed to open 300 new stores, with an average of $1 billion spent each year on capital investments. For 1996 American Stores opened 111 new stores and acquired another 11; it also, however, closed 77 underperforming stores.

Because of its various divestments and store closings, American Stores had fewer stores in its empire in 1996 (1,695) than it did in 1990 (1,848). Consequently, net sales had fallen from $22.16 billion to $18.68 billion. The company, however, was already more profitable, as net earnings increased from $190.1 million in 1990 to $287 million in 1996. These trends, combined with its organizational transformation and aggressive organic expansion plan, added up to a promising--and perhaps less volatile--future.

Principal Subsidiaries: Jewel Companies, Inc.; Acme Markets, Inc.; Jewel Food Stores, Inc.; American Drug Stores, Inc.; RxAmerica, Inc.; Health 'n' Home Corporation; The Open Pharmacy Network, Inc.; American Food and Drug, Inc.; Jewel Osco Southwest, Inc.; Lucky Stores, Inc.; American Stores Properties, Inc.; American Stores Realty Corp.; Skaggs Telecommunications Service, Inc.; American Procurement and Logistics Company; ASC Services, Inc.; Kap's Kitchen and Pantry, Inc.

Further Reading:

• Coleman, Calmetta Y., "Biggest Holder to Sell Stake in American Stores," Wall Street Journal, February 24, 1997, p. C19.
• Foust, Dean, and Tim Smart, "The Merger Parade Runs into a Brick Wall," Business Week, May 14, 1990, p. 38.
• Gradt, Cathy, "Quick Meals Featured in New Format by American," Supermarket News, July 15, 1996, p. 23.
• Grover, Ronald, "How Two Big Grocers Are Bringing Home the Bacon," Business Week, April 24, 1989, p. 141.
• Marcial, Gene G., "American Stores May Wind Up in a Shopping Bag," Business Week, May 2, 1988, p. 117.
• Nelson, Emily, "Kodak Has Pact to Be Exclusive Supplier of Photofinishing to American Stores Co.," Wall Street Journal, September 30, 1996, p. B9.
• Ross, Julie Ritzer, "American Stores Revives Troubled Pharmacy Network," Stores, October 1995, pp. 28--29.
• Smart, Tim, and Ronald Grover, "Pumping Up a State's Power to Bust Trusts," Business Week, January 15, 1990, p. 25.
• Steinhauer, Jennifer, "It's a Clashing of the Guard (Old vs. New) at American Stores," New York Times, August 28, 1996, pp. D1, D6.
• Tosh, Mark, "Pressure Points at American Stores," Supermarket News, June 20, 1994, pp. 1, 9, 53.
• Zwiebach, Elliot, "American Accord Eases Operations," Supermarket News, January 8, 1990, p. 1.
• ------, "American Turns Attention Toward Reducing Its Debt," Supermarket News, June 18, 1990, p. 1.
• ------, "American's Council Pursues Change," Supermarket News, July 10, 1995, p. 1.
• ------, "American's Three-Year Plan: $3 Billion, 300 New Stores," Supermarket News, June 3, 1996, p. 7.
• ------, "Centralized Procurement Program Set by American," Supermarket News, April 29, 1996, p. 1.

Source: International Directory of Company Histories, Vol. 22. St. James Press, 1998.