Fred Meyer Stores, Inc. History

Address:

3800 Southeast 22nd Avenue
Portland, Oregon 97202
U.S.A.

Telephone: (503) 232-8844
Toll Free: 800-858-9202
Fax: (503) 797-5609

Wholly Owned Subsidiary of The Kroger Co.
Incorporated: 1923
Employees: 92,000
Sales: $14.9 billion (1998)
NAIC: 452110 Department Stores; 452910 Warehouse Clubs and Superstores

Company Perspectives:

An important part of Fred Meyer's competitive advantage is its emphasis on national brand products, such as Levi's, Jockey, Arrow, Vanity Fair, Columbia Sportswear, Nike, Keds, Kitchen Aid, Krups, Sony, Pioneer, Kohler, and Makita. Also included are many private-label products that offer high-quality alternatives at lower prices.

Key Dates:

1923:: Fred Meyer Inc. is incorporated in Oregon.
1928:: Meyer opens what many regard as the world's first self-service drug store.
1959:: The company acquires four Marketime drug stores.
1960:: Fred Meyer goes public.
1964:: Roundup Wholesale Grocery Co. is purchased.
1981:: Fred Meyer is acquired by KKR in a leveraged buyout.
1986:: The company goes public for a second time.
1997:: Fred Meyer adds Smith's Food & Drug Centers Inc. to its holdings.
1998:: The company buys Quality Food Centers Inc. and Food 4 Less Holdings Inc.
1999:: The Kroger Co. acquires Fred Meyer in a $13.5 billion deal.

Company History:

Fred Meyer Stores, Inc. operates the third-largest group of supercenters in the United States. It has approximately 130 stores, ranging from 130,000 to 200,000 square feet in size, that provide over 225,000 food, apparel, and general merchandise products to shoppers in the Northwest. Fred Meyer significantly increased its holdings in 1997 and 1998 by acquiring Smith's Food & Drug Centers Inc., Quality Food Centers Inc., and Food 4 Less Holdings Inc. The company and its subsidiaries, including Fred Meyer Jewelers, were purchased by The Kroger Co. in 1999. The $13.5 billion deal secured Kroger's position as the largest grocery chain in the United States.

Entrepreneurial Beginnings

The history of Fred Meyer, Inc. revolves around its founder, Fred G. Meyer, who guided the company until his death in 1978. In 1908, 22-year-old Frederick Grubmeyer, son of a Brooklyn grocer, moved to Portland and began selling coffee to workers at the farms and lumber camps that surrounded the burgeoning town of Portland. The horse-drawn route prospered, but young Grubmeyer, who eventually changed his name to Fred G. Meyer, wanted more. In a few years, he moved to Alaska to seek other business opportunities. Alaska was overrun with would-be entrepreneurs, however, and Meyer returned to Portland and founded the Java Coffee Company, selling coffee, tea, and spices from a storefront in the market district.

The Java Coffee Company, later renamed the Mission Tea Company, prospered, while many neighboring businesses succumbed to the uncertain economics of the time. Meyer snapped up their properties and soon was landlord, and sometimes operator, of several specialty food operations.

In the early 1920s, the center of commercial activity moved uptown, and Meyer moved with it, consolidating his several specialty businesses into a single location that became the flagship store for the Fred Meyer chain. The store, which opened in 1922, had 20 employees, with Meyer serving as buyer and manager. Its seven departments included meat, delicatessen, coffee, lunch, homemade mayonnaise, grocery, and tobacco. In 1923, Fred Meyer incorporated his business in Oregon, and a second store was opened that featured grocery and dairy products.

Fred Meyer continued expanding throughout the 1920s. Across the street from the parent store, he opened a packaged food store selling sugar, dry beans, rice, macaroni, spaghetti, coffee, and dried fruits. Then, in 1928, he opened what many regard as the world's first self-service drugstore. The store's lower labor costs meant lower prices, and Meyer's reputation as a value merchandiser was established.

The company prospered despite the stock market crash of 1929 and the ensuing Great Depression. Meyer opened four new stores between 1929 and 1932: a toiletry store, a department store in the outlying Portland neighborhood of Hollywood, and his first stores outside Portland, in the towns of Salem and Astoria, Oregon. The Hollywood store marked Meyer's recognition of the growing importance of the car in retailing. Finding that customers were often double-parking in front of his downtown stores and getting ticketed in the process, Meyer would pay the tickets. Meyer did an informal survey and found that many customers lived in the Hollywood section of Portland, about five miles from downtown. This led to the opening of the Hollywood store, which included an off-street parking lot and an automobile lubrication and oil service.

Throughout the 1930s, Meyer ran a series of aggressive promotions that highlighted the company's low prices. Meyer saw these entertaining promotions as ways of getting customers into stores during cash-starved times. He rented movie theaters and gave children free admission if they brought three My-Te-Fine store-brand labels. He had newspapers add peppermint to their ink, giving his candy ads a sweet smell.

These and other promotions helped make Fred Meyer a major player in Portland, but the company was not without competition. Drugstores banded together to stop the company from obtaining a prescription license. Retailers threatened to drop lines if manufacturers sold to Fred Meyer. An anonymously sponsored radio show spent all its time lambasting the quality of Fred Meyer goods. However, all of these tactics were to no avail.

Expanding the Product Line in 1930s

Fred Meyer began adding new products in the early 1930s, and the stores began selling men's and women's wear in 1933. Automotive departments, housewares, and other nonfood products followed in succeeding years. The middle of the decade saw the opening of a central bakery, a candy kitchen, an ice cream plant, and a photo-finishing plant. These facilities paved the way for house brands such as Vita Bee bread, Hocus Pocus desserts, and Fifth Avenue candies. Fred Meyer capped the decade with large new stores in northeast and southeast Portland.

As with other retailers, Fred Meyer was challenged by World War II. Demand was high but supplies were low, and many employees were called to service. After the war, a more modern Fred Meyer began to emerge. Old stores were renovated and standardized, and new Fred Meyer stores were built from the ground up instead of being housed in existing space. A new management team, still working directly under Meyer, began adding departments such as home improvement, nutrition centers, fine jewelry, audio, and photo services and products. Some experiments, such as carpet and draperies, major appliances, furniture, and automotive service did not meet expectations and were eventually dropped.

The 1950s saw Fred Meyer opening a stream of successful outlets in suburban Portland. These stores were larger than previous Fred Meyer outlets, at 45,000 to 70,000 square feet. Meyer often led or kept pace with developers and was able to spot prime retail space on major suburban thoroughfares before suburban traffic patterns were apparent.

Major Acquisitions: Late 1950s to Mid-1960s

The mid-1950s also saw the construction of Fred Meyer's first modern distribution facility at Swan Island, Oregon. Also located at Swan Island was a new dairy plant and a central kitchen for the company's in-house food operation, Eve's Buffet Restaurant. In 1959, the company made its first major acquisition. For stock worth close to $1 million, Fred Meyer acquired four Marketime drug stores in Seattle, Washington.

In 1960, when there were 20 Fred Meyer stores with combined annual sales of $56 million, the company went public. Meyer then made a series of large acquisitions. In 1964, the company acquired Roundup Wholesale Grocery Company of Spokane, Washington, including 14 Sigman supermarkets in Washington and Oregon and three B & B Stores in Montana. The following year, Fred Meyer purchased seven Market Basket stores in Seattle and one in Yakima, Washington.

In 1966, management again upgraded the look of Fred Meyer stores. Tiled aisles and carpeted apparel departments replaced concrete floors. Displays were made more colorful, and new marketing ideas were introduced throughout the store. By year's end, earnings had reached $1.56 million on sales of $170.8 million.

Fred Meyer also continued to develop a vertical management organization. The heads of each of up to 11 departments per store would eventually report to corporate vice-presidents in charge of those departments rather than to an individual store manager. Individual departments became as strong as specialty stores and operated as such, complete with their own checkouts.

Although business was booming, not every venture went as planned. In 1968, Fred Meyer sold the Market Basket stores it had bought three years earlier, as the small stores did not fit in with other operations. This move meant a $225,000 writeoff against 1968 profits. Nevertheless, sales and income continued to grow.

Meyer, by now in his early 80s, continued to rule the company. A younger management team was beginning to take at least some of the reins of power, however. In 1969, Jack Crocker, a 20-year employee of the company, became president of Fred Meyer, Inc., with Meyer as chairman. Crocker's presidency coincided with Fred Meyer's opening of its Levi jeans centers.

Difficult 1970s

While profits continued to increase, the early 1970s were a difficult time for Fred Meyer's management. In 1971, Meyer suffered a stroke that left him weakened but still alert. In November of the same year, Crocker tendered his resignation, effective January 1, 1972. In March 1972, the Fred Meyer board elected Cyril K. Green to replace Crocker as president and Oran W. Robertson as first vice-president of the company.

The new management team continued relentless expansion. The main focus was on additions to existing stores, but plans also called for three new stores in 1972 and one in 1973. Acquisitions were also part of the plan. In 1973, Fred Meyer acquired five Valu-Mart stores in Oregon from Seattle-based Weisfield's Inc., ending the year with 52 stores and a thriving business in the Pacific Northwest.

In 1975, the company ventured into finance, buying a local savings and loan with deposits of $3.8 million. The idea was to install S&L in each of his full-service stores. The S&Ls would make money through banking and by bringing more customers and money into the stores. Although many in the banking industry were skeptical, Fred Meyer Savings and Loan Association grew rapidly, bringing in small depositors who probably had not saved at all before opening their Fred Meyer accounts. The company drew on its retailing experience to build the bank, offering free loaves of bread and steaks for customers opening accounts. The Fred Meyer Savings and Loans also stayed open longer hours than their competitors.

In 1975, Fred Meyer bought three Baza'r outlets and nine more department stores from Weisfield's Inc. of Seattle, including two Valu-Mart stores and six Leslie's stores located in Seattle, Spokane, and Yakima, Washington, and Anchorage, Alaska. All were to be merged into Fred Meyer operations.

In 1976, Fred Meyer retired from the day-to-day affairs of the company and became chairman of the executive committee. Oran B. Robertson was named chairman of the board and chief executive officer. Cyril K. Green remained president, and Virgil Campbell became executive vice-president.

In 1978, Meyer died. The success of Fred Meyer, Inc. was a testament to his hard work, intuition, and intelligence. His stores dominated the Northwest and continued to expand. Their net profit margin of 1.9 percent was better than those of big national chains, such as Winn-Dixie Stores (1.7 percent), Lucky Stores (1.5 percent), and Safeway (0.9 percent).

Meyer's death inspired many testimonials, but it also set the stage for a power struggle among the four executors of his will; Meyer owned 29.1 percent of the company's outstanding stock. On one side was Oran B. Robertson, chairman and CEO. Opposing him was G. Gerry Pratt, a Meyer protégé, and chairman and chief executive of Fred Meyer Savings and Loan. Other executors included a Fred Meyer vice-president and Warne H. Nunn, Pratt's friend and longtime local power company executive.

The struggle over Fred Meyer's will was further complicated by Pratt's troubles at Fred Meyer S&L. Pratt, a former journalist and talk-show host, was hired by Meyer in 1972. Two years later, he was made head of Fred Meyer S&L. With Pratt's innovative flair, the Fred Meyer S&L grew fast, but when the cost of money skyrocketed in 1979, the S&L was overextended and lost $1 million. The savings and loan's loss ended nearly 20 years of quarterly profit increases. In May 1980, chairman and CEO Oran B. Robertson fired Pratt and replaced the Fred Meyer S&L board with Fred Meyer executives. Pratt responded with a lawsuit that was later settled. Fred Meyer sold its savings and loan.

Going Private Then Public: The 1980s

With the death of Meyer, outside investors began showing an interest in the company. In September 1980, the investment firm of Kohlberg Kravis Roberts & Co. (KKR) offered to buy the entire organization for $45 a share--more than $300 million. Ultimately KKR successfully negotiated a leveraged buyout in December 1981 with the Fred Meyer management as equity participants for $55 per share, or $435 million. This took Fred Meyer stock out of circulation and made the company private once again. In the meantime, the company had sold Roundup Wholesale to West Coast Grocery. The leveraged buyout split Fred Meyer into two companies. The retail operations continued as Fred Meyer, Inc., and the real estate assets were transferred to a separate partnership, Fred Meyer Real Estate Properties Ltd., which leased properties back to Fred Meyer, Inc. Occupancy expenses rose dramatically due to the spinoff of real estate holdings, and initially the company operated in the red.

Despite higher occupancy expenses and the cost of debt normally associated with leveraged buyouts, Fred Meyer continued to expand aggressively. Over the next five years, it built 11 new stores and acquired the Grand Central chain, which had stores in several Rocky Mountain states. The company sold Grand Central's New Mexico and Nevada stores but kept its 21 stores in Utah and Idaho, remodeling 15 of them. Furthermore, it cut costs by consolidating departmental checkouts.

Overall, during the time the company was private, Fred Meyer grew from 64 to 93 stores. Net income increased from $5.2 million in fiscal 1982 to $22.5 million in fiscal 1986. Sales jumped from $1.1 billion to $1.7 billion over the same period.

Management attempted and failed to bring Fred Meyer public again in 1983. By 1986, management felt investors were ready to buy Fred Meyer stock. In the fall of 1986, the company issued 6.75 million shares of common stock, 4.5 million new shares and 2.25 million from existing shareholders, at $14.25 per share.

Through the late 1980s, Fred Meyer continued its expansion, adding several new stores yearly as well as replacing and expanding existing stores. The Pacific Northwest had become a more competitive market with the entrance of discounters--such as Dayton Hudson's Target stores and the grocery chains Food 4 Less and Cub Foods--but most analysts believed Fred Meyer's one-stop shopping centers gave it a unique niche in the market.

In 1988, under the leadership of newly hired CEO Frederick Stevens, the company began a major overhaul of its stores and management organization. Fred Meyer also unveiled a new prototype store with a flexible design to facilitate layout changes without expensive remodeling; the first store in the new format opened in 1989. In 1990 and 1991, the company opened eight large new stores, closed ten small stores, and remodeled several other stores. The closings and remodelings led the company to take a $49.3 million restructuring charge in 1990 ($8.3 million of which was reversed in 1991); consequently, Fred Meyer posted a loss of $6.8 million in 1990. In January 1991, Stevens resigned unexpectedly; in August of that same year, Robert G. Miller took over the CEO spot, after most recently serving as executive vice-president of retail operations for the Albertson's supermarket chain.

Expansion and Reorganization: Mid-1990s and Beyond

As the 1990s progressed, Fred Meyer continued to fine-tune its store formats and locations in order to fend off increasing competition that cut into sales and earnings. The rise of category-killers was particularly troubling, especially in the areas of hardware and home electronics. In response, Fred Meyer reduced the amount of space devoted to lumber and building materials and began to phase out computer hardware. In 1993, Fred Meyer altered its growth strategy, deciding to concentrate on adding stores in areas where the chain was already strong; in some cases smaller-than-typical Fred Meyer stores were subsequently opened in smaller markets within these areas. A byproduct of this strategy was the chain's 1994 exit from the northern California market, into which it had only just begun to expand. The company incurred a $15.98 million charge as a result, leading to a profit of only $7.2 million for the fiscal year. Results for 1994 were also affected by an 88-day strike which centered on the number of part-time employees at the company. Sales increased at a more healthy rate in fiscal 1995 and 1996, buoyed by a surge in sales in Fred Meyer's nonfood departments.

The mid-1990s saw the company make its most dramatic moves outside the realm of one-stop shopping supercenters. Fred Meyer had entered the fine jewelry business in 1973. Over the next two decades, it had built up a chain of about three dozen Fred Meyer Jewelers standalone stores, which were located within malls, and it had also included Fred Meyer Jewelers departments in nearly 100 of its supercenters. In 1995, the company acquired 22 mall jewelry stores located on the West Coast, then the following year purchased 49 Merksamer Jewelers mall stores spread throughout 11 states. In the summer of 1997, Fred Meyer further bolstered its jewelry operations with the acquisition of Fox Jewelry Company and its 44 Fox Jewelry stores located in malls in six Midwest states--Michigan, Wisconsin, Indiana, Illinois, Iowa, and Ohio. With the addition of Fox Jewelry, which had been founded in 1917 with a store in Grand Rapids, Michigan, Fred Meyer became the fourth-largest fine jewelry chain in the country.

An even larger acquisition the summer of 1997 brought Fred Meyer an enhanced presence in food retailing. In a $2 billion deal, Fred Meyer purchased Smith's Food & Drug Centers, Inc., a leading regional supermarket and drug store chain with more than 150 stores in the southwestern and mountain states of Arizona, Idaho, New Mexico, Nevada, Texas, Utah, and Wyoming, making for an ideal geographic fit. Founded in 1948 and headquartered in Salt Lake City, Smith's large stores combined full-line supermarkets with drug and pharmacy departments and operated under the names Smith's, Smitty's Supermarket, and PriceRite Grocery Warehouse. Smith's reported sales of $2.89 billion for 1996.

Fred Meyer's growth continued in 1998. In March, Quality Food Centers Inc. (QFC) was added to the company's arsenal. QFC operated 89 supermarkets in the Seattle area and had been expanding by making strategic acquisitions over the past several years, much like Fred Meyer. The company purchased a second retailer that month, Food 4 Less Holdings Inc., an operator of 264 Ralphs stores in California and 80 Food 4 Less warehouses. Overall, Fred Meyer's merger activity catapulted it into the upper echelon of retailers with $15 billion in annual sales.

During the remainder of the 1990s, it was expected that the company would need to concentrate on issues of integration, including administrative, purchasing, information systems, distribution, and manufacturing functions. The management team charged with this responsibility was Ronald W. Burkle, CEO of Smith's, who was named chairman of Fred Meyer, and Miller, who remained president and CEO. Consolidation in the industry continued, however, and by this time Fred Meyer had become a very attractive acquisition target.

Sure enough, in October 1998, The Kroger Co. made a 13.5 billion play for Fred Meyer. Kroger stood to gain handsomely from the deal. The transaction would secure its spot as the leading supermarket chain in the United States, a position for which competitors Albertson's and Wal-Mart Stores were vying. Kroger gained several new retailing formats--including jewelry stores, warehouses, and department stores--and strengthened its foothold in the western United States. The company also expected the combined operations would secure cost savings of $75 million in the first year of operation, $150 million in the second year, and $225 million in the third year. The Federal Trade Commission gave its nod for the union after Kroger agreed to divest eight of its stores. Fred Meyer and its subsidiaries were integrated into Kroger in May 1999.

Kroger president David B. Dillon assured consumers that little would change at its stores in a May 1999 Portland Oregonian article. "Customers will continue to see the neighborhood chain they are familiar with today," he commented. "The combined company will have 18 food-store divisions, each with the authority to establish operating, merchandising, and pricing strategies in response to the demographic, economic and competitive conditions in each market."

As part of Kroger's growing list of holdings, the company operated as Fred Meyer Stores, Inc., the third-largest supercenter operator in the United States. In the early years of the new century, it continued to focus on pleasing its customers by offering a variety of national brand and private label products. It also kept pace with consumer demand, making necessary adjustments to its product mix. One example was the addition of Naturally Preferred, a line of natural and organic items that was found in the Natural Choice departments of its stores. In March 2003, Fred Meyer began offering its customers Naturally Preferred magazine, which included information and coupons. While Fred Meyer had certainly come a long way from its roots in the 1920s, its focus on customer satisfaction and low prices was sure to remain in effect for years to come.

Principal Competitors: Albertson's Inc.; Safeway Inc.; Wal-Mart Stores Inc.

Fred Meyer Stores, Inc. History

Company Perspectives:

Key Dates:

Company History:

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