Smith's Food & Drug Centers, Inc. History

Address:

1550 South Redwood Road
Salt Lake City, Utah 84104
U.S.A.

Telephone: (801) 974-1400
Fax: (801) 974-1662

Wholly Owned Subsidiary of The Kroger Company
Incorporated: 1932 as Smith and Son's Market
Employees: 1,800
NAIC: 445110 Grocery Stores

Company Perspectives:

Our mission is to be a leader in the distribution and merchandising of food, health, personal care, and related consumable products and services. By achieving this objective, we will satisfy our responsibilities to shareowners, associates, customers, suppliers, and the communities we serve.

Key Dates:

1911:: Lorenzo Smith opens a small dry goods grocery store in Brigham City, Utah.
1932:: The family business is named Smith and Son's Market.
1952:: After refurbishing and expansion, the original store is reopened as Smith's Super Market.
1969:: Smith's acquires its first nonfood business, the Utah-based Souvall Brothers.
1980:: Having diversified its range of products and services, the company begins using the slogan, "We're not just a food store anymore."
1989:: Smith's Food & Drug Centers makes an initial public offering.
1997:: Smith's is acquired by Portland, Oregon-based Fred Meyer.
1999:: Smith's parent company, Fred Meyer, is acquired by Kroger Company.

Company History:

Smith's Food & Drug Centers, Inc., a subsidiary of The Kroger Company, is a leading regional supermarket chain operating in the intermountain, Southwest, and Pacific Northwest regions of the United States. Smith's has realized great success by expanding its traditional supermarket model to include takeout food, photo processing, video rentals, and other services. After completing a merger with Portland-based Fred Meyer in 1997, Fred Meyer was in turn acquired by Cincinnati-based Kroger in 1999, making Kroger the largest supermarket chain in the United States.

Origins of a Family Business: 1911

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 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's 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.

Exponential Growth in the 1940s and 1950s

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 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 established a firm base for expansion. Gross sales quadrupled from 1956 to 1957 and profit rates, although only 3 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 workforce nearby. Smith received concession rights for all services, including groceries, a restaurant, and a barber shop, to the residential construction camp. The operation was a guaranteed market and solidly profitable.

Expansion Through Strategic Acquisition in the 1960s and 1970s

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 was 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 more than 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 southwestern United States and sat on a very profitable base of eight stores, which had sales of more than $13 million.

But like any successful business, Smith's recognized the need for continued growth to fend off competitors. In January 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 workloads. He streamlined the management structure and instituted bonus incentives for managers while, at the same time, cutting salaries. An intensive labor effort also was 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 was 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 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 reflected this instability; sales increased 30-fold but profits only multiplied four times due to the company's cash flow problems. A severe financial crisis 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 southwestern 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. In addition, for the first time, Smith's had to deal with a unionized workforce that went out on strike. After reaching an agreement, however, the stores quickly achieved profitable levels of operations.

Launching the Combination Outlet Concept in the 1980s

Although it continued to acquire stores, Smith's Food'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--more than 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 11-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 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 drugstores 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 this end, the company planned to build a one million-square-foot, fully integrated distribution facility to warehouse the goods for the region.

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 in 1989. 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 CEO Jeff Smith owned or controlled 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.

In the early 1990s Smith's ten-year plan was to invest $1.4 billion in opening 120 stores with annual sales growth targets of 20 percent. The California market would be extremely competitive and some industry analysts expected price wars. Further, the California stores would be unionized, unlike most of Smith's other stores. Yet there were more people in the southern California region than in all of Smith's other markets combined, and the store could offer competitive prices. The degree of growth realized, however, would likely depend on the state of employment in the region in the next decade and on the outcome of the battle with such chains as Von's Grocery Co., Lucky Stores Inc., and Albertson's Inc., each of which already had more than 100 stores in the region. Smith's predicted it would be able to capture about 6 percent of the region's market when its first 50 to 60 stores were opened.

Keeping Pace with Industrywide Consolidation in the 1990s

Despite the seeming promise of high population density on the West Coast, and although Smith's had fared well in competition with such formidable chains as Von's, Lucky, and Albertson's in other regions in the past, the southern California market proved particularly difficult to penetrate. By the mid-1990s, with 34 stores open in the region, Smith's resolved to pull out of southern California. Smith's incurred $84 million in restructuring charges for the closure and sale of its southern California operations, but the decision to redeploy assets back to Smith's core market in the Southwest proved propitious, as it led to a major acquisition that ultimately benefited shareholders.

Smith's broad restructuring came into full swing in 1996, when the company signed a merger agreement with Yucaipa, one of southern California's prominent grocery store operators. Under the terms of the $239 million agreement, Smith's acquired the 28-store Smitty's Supermarkets Inc., Yucaipa's Phoenix, Arizona-based chain. Yucaipa's Ronald W. Burkle became CEO of Smith's, and the company hired former Albertson's executive Allen R. Roland as president and chief operating officer. With the addition of the Smitty's stores to its ranks, Smith's became the top supermarket chain in the Phoenix area.

In the rapidly consolidating supermarket industry, Smith's further advanced its competitive position only a few months later when it agreed to merge with Portland, Oregon-based Fred Meyer, Inc., a dominant regional retailer of a broad range of products, including general merchandise, home improvement items, fine jewelry, and apparel. Under the terms of the "merger of equals," which was structured as a stock-for-stock exchange, Ron Burkle became chairman of the board, while Fred Meyer's chief executive, Robert G. Miller, became president and CEO. Together, the two companies' operations amounted to 265 stores in 11 states in the Pacific Northwest, Southwest, and intermountain regions, with an anticipated $7 billion in sales for 1997. The merger was completed by September 1997.

Little more than a year later, the Smith's-Fred Meyer merger was eclipsed when Cincinnati-based Kroger Company moved to acquire Fred Meyer. Already the biggest supermarket chain in the United States, Kroger paid $13.5 billion in stock and assumed debt to acquire Fred Meyer, boosting the parent company's projected annual sales to $43 billion. When the merger was complete in May 1999, the combined company operated 2,200 stores in 31 states. Ron Burkle lauded the deal, calling himself a "firm believer" in the benefits of consolidation, and many viewed Kroger's bulking up as a necessary step to compete effectively with the industry's reigning goliath, Wal-Mart. Indeed, Kroger received a major endorsement from the Federal Trade Commission when, despite the company's huge increase in size, it was required to sell only eight stores to meet antitrust conditions.

Kroger aimed to give its subsidiary stores as much autonomy as possible, and the merger had little effect on Smith's Utah stores. In Arizona, however, where Kroger already operated Fry's, a well-positioned chain, the majority of Smith's stores were subsumed under the Fry's name. In combining the operations of the two chains, Smith's stores received a total makeover, including new computer systems, new store decor, and new merchandise, replacing Smith's signature label products with those of Fry's. By consolidating operations to a single chain in Arizona, Kroger aimed to cut costs significantly. Moreover, the parent company projected across-the-board cost cuts as a result of the merger with Fred Meyer, estimating annual savings of $225 million by the third year.

While major shifts occurred at the corporate level during the late 1990s, Smith's prepared to enter the 21st century by initiating numerous marketing programs at the store level that were designed to gain and retain loyal customers. In 1997 Smith's introduced its "Fresh Values Frequent Shopper Card," whereby customers received savings by using the card instead of clipping coupons and the company gained the ability to track customer spending habits in the process. In 1999, Smith's installed automated checkout systems in many of its stores in response to customer demand for greater speed and convenience at the checkout counter. In 2000, the company entered a partnership with Priceline.com that allowed customers to bargain for their groceries on the Internet before going to the grocery store to pick them up. In 2001, the company began installing fuel pumps in its parking lots and offering customers a discount on gasoline with their grocery purchase. Under the umbrella of the mighty Kroger, and with its dedication to identifying and satisfying customer needs, Smith's was poised for continued success in the 21st century.

Principal Competitors: Albertson's, Inc.; Associated Food Stores, Inc.; Safeway Inc.

Smith's Food & Drug Centers, Inc. History

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Key Dates:

Company History:

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