When an executive recruiter first called Larry Johnston in late 2000 about the top job at grocery chain Albertson’s, his response was simple: He’d never heard of it. Intrigued, however, Johnston, then 53 and the head of GE Appliances, did some investigating. He found that Albertson’s, founded in Idaho in 1939, had $37 billion in revenues and some 2,500 stores spread over 36 states. But it needed an overhaul.
“Once I got to doing my homework, I saw an incredibly attractive opportunity to turn around a company and become a market leader,” says Johnston. “This is a great space to be in -- and we think we can be No. 1.”
Easier said than done. No one company has more than an 11 percent market share among grocery chains. In fact, the top five together have less than 40 percent of the total grocery market. Seeing an opportunity to take the skills he learned at the Jack Welch school of management and put them to use in an industry that hadn’t yet really consolidated, Johnston accepted the post and wasted little time establishing his agenda.
When he arrived in April 2001, Johnston immediately began cutting costs. He reduced operating divisions from 19 to 11, closed underperforming stores and began selling nonstrategic assets -- 80 of the company’s Osco Drug outlets in New England, for example. Albertson’s exited markets where it wasn’t No. 1 or a strong No. 2, such as Houston, Memphis, Nashville and San Antonio. Johnston also sold off surplus real estate.
The new CEO has eliminated 20 percent of administrative and infrastructure overhead, a move he expects will save the company $500 million cumulatively by the second quarter of 2003.
With a market capitalization of $11 billion, Albertson’s recently traded at about $28, down from $31 when Johnston took over 18 months ago.
The stock was as high as $67 in 1998, but then Albertson’s merged with American Stores Co. The “marriage of equals” in 1999 melded together a patchwork of supermarket chains, including Albertson’s, Jewel and Acme Markets, as well as drugstore chains Sav-on and Osco. The friction among the companies and their executives greatly increased costs.
Born in Corning, New York, Johnston earned a BA in business administration from Stetson University in Deland, Florida, in 1972. During his 29-year career at GE, he more than proved his abilities, rising from a salesman in the appliances division to boss of the unit, with a stint as head of European medical systems along the way.
Earnings for Albertson’s fiscal year ended January 2002 were $501 million on revenues of $37.9 billion. Although sharply lower than the $765 million the company earned on $1.2 billion less in revenue the year before Johnston took over, Albertson’s is back on track. For the first quarter of fiscal 2002 (ended May 2), the company reported a net loss of $81 million, but without restructuring costs the company would have netted $233 million, compared with $186 million during the same period of 2001.
Net margins are roughly 2.5 percent, and Johnston says he “doesn’t see any structural reason why it can’t get to 3 percent.” Johnston recently discussed his plans with Institutional Investor Staff Writer Rich Blake.
Institutional Investor: People still have to eat. Has Albertson’s benefited from a flight to “safe haven” stocks?
Johnston: It’s no secret that grocery stocks have benefited from this notion and will continue to benefit. But with everything that’s going on in corporate America, it’s more than just the idea that people have to eat. The grocery business is easy to understand: There’s a lot of cash, the accounting is not that complex. Our company was run so squeaky clean it was considered corny. Now corny is kind of cool.
What’s it like to be a CEO these days?
We have town hall meetings. The first question I always get is, ‘Mr. Johnston, are we going to be okay?’ I tell them they can be very proud of this company and the way it is run. Albertson’s was built by a guy from Boise, Idaho, and the accounting and management to this day is considered conservative. There are no off-balance-sheet partnerships, no synthetic leases. Even the pension fund contributions are all made in cash.
What lessons did you take from the Enron Corp. collapse?
After the Enron collapse we knew there would be extra scrutiny across corporate America. We took the company through an exhaustive physical -- and what we see is an ethical company with a strong balance sheet.
How will Albertson’s benefit from your GE experience?
At GE Medical Systems we drew a picture of a hospital. Then we told our teams, ‘Let’s go into every room in the hospital, and let’s find out what else is in there that we might be able to sell.’ We are doing a similar exercise now with our stores around the country to see how we can more effectively leverage the traffic coming into them. That’s how we plan to grow.
Even with 2 percent margins?
In a business where you keep only 2 cents for every dollar you bring in, obviously you have to be enormously productive. We get 1.4 billion shopping trips a year in our stores, so it’s important we increasingly look for ways to take advantage and leverage each trip. This means we are coming up with more ideas -- florists; gas; we now have arrangements with Starbucks; we just brought in Krispy Kreme doughnuts. We are exploring more ways to grab more of the consumer dollar.
Can a grocer be a growth company?
Remember we’re also in the drugstore business. We’re the only major grocer that owns a major drugstore chain. Actually, we own two: Sav-on and Osco. Drugstores are high growth. The demographics link up with the aging of America, so it’s compelling as a growth proposition. Right now we think our dual branding combination project with grocery and drugstores rolled into one is the No. 1 proprietary competitive advantage we have versus the rest of the industry. That’s the combination store we plan to roll out across the U.S.
How has dual branding worked so far?
Extremely well. It was perfected in Chicago, where we own Jewel Food and Osco. For years at the largest location, the two stores were next to each other, with separate entrances and a common wall. One day the managers decided to knock down the wall, and ever since then the dynamics in-store changed. It became a unique place for shoppers. The average ticket jumped -- pharmacy customers bought a lot more food. Today in the Chicago market we are No. 1.
What do you bring to the table as an outsider?
I was able to address some of the sacred cows. For example, the old Albertson’s didn’t believe in customer loyalty cards where preferred customers are eligible for discounts. Albertson’s belief was that everyone gets the same deal, but as more companies evolved toward doing this, we saw that perhaps it was a tradition that wasn’t serving us.
How has management responded to having someone who knew nothing about the grocery business taking over the company?
Peter Lynch, our president, and I competed for this job. It was either him or me, and they chose me. The board felt the time was right for fresh eyes from outside. But one of the most important moves I made early on was convincing Peter to stay. This is someone who knows the industry, knows the company inside and out. I knew without him I had little chance of succeeding. We had it out, and I told him straight up, ‘I’m the coach and you are the quarterback.’ I don’t even see myself as the boss -- I walk around and ask a lot of stupid questions. I put him on the board, so in a real sense I report to him.
What is the single greatest lesson you learned from Jack Welch?
The secret at GE is people. The company is all about having the best possible group of people. I am very focused on building a strong leadership team.
Do you see Albertson’s becoming a global company?
Right now we are focused on expanding in California and other strategic markets, Florida being one, but I have said it is our vision to be the largest food and drug chain in the world. We are on a journey, and that is the destination.
