News Article | 2/12/2007

Stater Bros. gives itself room to grow

Twenty-one years ago, Jack H. Brown was in the fight of his career.

He had just been ousted as president of Stater Bros. Markets and was entangled in a bitter battle with a New York investor for control of the grocery chain. Brown won by rallying company employees behind him to help expel the outsider.

Now the company’s chairman and chief executive is in another fight and drawing on his experience to fend off two of the world’s largest grocers in the highly competitive Southern California grocery market.

“The spirit of that time remains with us,” Brown said.

The Colton-based grocery chain, which long has proved it can compete against traditional supermarkets, is about to face competition on new fronts. Wal-Mart is eyeing the Inland region for more of its supercenters that combine a discount store with a supermarket. Meanwhile, British grocery giant Tesco plans to open small-scale markets here that focus on produce and ready-made meals.

To help entrench itself in the market, Stater Bros. has launched the largest capital expansion in its 69-year history: a 2.1 million-square-foot distribution center and headquarters on 160 acres in San Bernardino. The project, being built at the former Norton Air Force base, will cost more than $300 million.

In an industry with razor-thin profit margins, Stater Bros. says the center will allow the grocery chain to save millions of dollars by consolidating its current 13 distribution buildings in seven locations into one.

Brown said those savings will keep prices low and allow the company to stay competitive against other supermarkets.

Storage space has been strained for the 162-store grocery chain since 1999, when it grew nearly 50 percent in one year by acquiring 33 Albertsons stores and 10 Lucky stores. The company has leased extra space and even resorted to storing some of its nonperishable products in semi-trailers.

The distribution center’s larger capacity also will position the company, the Inland region’s largest private employer, for growth. Brown said once construction is completed in summer 2008, the company plans to open 10 stores per year.

The corporate office was scheduled to open this month, with the distribution center opening in the summer. But that timetable had to be revised because of complications in dealing with three federal agencies on the project, Brown said.

Competing With Wal-Mart

Analysts and grocery experts agree the other half of Stater Bros. strategy is simple: continue to preach its core marketing message of low prices and customer service while expanding its product selection.

“I think people have always worried about Wal-Mart, but it’s never been as bad as they thought,” said Carla Casella, an analyst for J.P. Morgan in New York.

She said grocery stores learned to compete with Wal-Mart by offering different kinds of products and ramping up customer service.

Brown long has touted Stater Bros.’ friendly, clean-cut workers. “My people have always been the head of my spear,” he said.

Meanwhile, the company has gradually expanded its produce selection and launched more heavily into organic foods.

“They can’t match Wal-Mart on price, but they can make it up somewhere else, and often that’s in their people, customer service,” said supermarket consultant David J. Livingston, who is based in Pewaukee, Wis. “Where’s Wal-Mart the weakest? It’s their perishables, fruits and vegetables. Stater can beat them there, too.”

Livingston said some grocers can even use Wal-Mart to their advantage to edge out other competitors. He compared Stater Bros.’ position to that of Publix, a large grocery chain in the southeastern United States.

“When Wal-Mart came into Florida, Winn-Dixie had to close more than 300 stores, and Albertsons closed some as well,” he said. “But Publix did really well. Any revenue they lost from Wal-Mart, they regained from the other stores closing.”

Casella said when a Wal-Mart comes to a town, many people try it but go back to shopping at regular grocery stores.

“They realize that they aren’t getting that much of a deal, and they are willing to pay more for the convenience of a traditional supermarket,” Casella said.

Stater Bros.’ strategy of keeping prices within 10 percent of Wal-Mart’s will prevent the company from losing as many customers as the other traditional supermarkets, said Bryan Hunt, a senior high-yield securities analyst for Wachovia Securities in Charlotte, N.C.

“Stater also has the reputation and brand position in that market to outmaneuver Ralphs, Vons and Albertsons against Wal-Mart,” Hunt said.

‘Know Your Territory’

Tesco, however, may be more of a challenge. Last summer, the British company announced plans to bring to Southern California more than 100 14,000-square-foot grocery stores, which are about one-third the size of the typical Stater Bros. The stores will focus on ready-made foods to appeal to busy families.

“It could hurt Stater,” Casella said. “Because it will mean people will eat more at home, but not stuff they’re making themselves.”

Brown insists he knows his new British competitor better than any of the other chains in Southern California. Stater Bros. was in a consortium of grocers with Tesco before the British company decided to open in the United States.

“You’ve got to know your territory, and no one knows this area better than us,” Brown said.

One former competitor also was optimistic about Stater Bros.’ chances against Wal-Mart and Tesco.

“Stater Bros. has a very great program going for them,” said Al Marasca, the former president and chief operating officer of Ralphs Grocery Co.

“They’re very people-oriented, very community-oriented,” said Marasca, who worked for Ralphs for 40 years. “They have quality stores. And Jack Brown is a very quality leader. He believes in taking care of his people.”

Face of Stater Bros.

In some ways, the future success of Stater Bros. is tied to its chairman, chief executive and sole shareholder. For more than 20 years, Brown’s name has been synonymous with the grocery chain.

He is also fiercely protective of his company’s family image and his own as its benevolent patriarch. Brown, 67, serves as the company’s chief spokesman, usually fielding all media inquiries himself. For photographs and public appearances, he typically dons a Stater Bros. trucker jacket instead of one of his outfits made by San Bernardino tailor Ariel Tello, whose custom suits start at $1,000.

Wachovia’s Hunt likened Brown’s spokesman role to that of the late Dave Thomas, the Wendy’s restaurants founder who died in 2002.

In the 26 years with Brown at its helm, the company has grown from 61 stores and $475 million in sales to 162 stores with $3.5 billion in sales last year.

But getting there wasn’t always easy.

Brown took part ownership of Stater Bros. in 1983 when its parent company at the time, Petrolane, sold 51 percent of the company to a New York investment group led by businessman Bernard Garrett and the remaining shares to a partnership controlled by Brown. In 1985, the company sold shares to the public. The Garrett group maintained ownership of 38 percent of the stock, Brown’s group kept 37 percent, and 25 percent was sold to the public.

The next year, Brown and Garrett began a proxy fight for control of the company. Garrett, the company’s then chairman, suspended Brown for 4 ½ months, alleging that Brown had manipulated the company’s profits to drive down the stock price for a buyout. Brown was later cleared of the accusation.

Brown won the fight with help from Craig Corp., the Los Angeles-based investment firm that underwrote Brown’s group when it bought Garrett’s stake in the company for $18.47 million.

“We learned a lot in the mid-’80s,” he said. “The challenge made us a stronger company than we could have been otherwise.”

During the proxy battle in 1986, Brown enlisted the support of the company’s employees and even local union members, who preferred to have a local businessman running the company. The employees bought shares of Stater Bros. stock in a bid to help Brown win control of the company. The suspended president even stood on picket lines alongside union members, who held signs that read “Bring Back Jack.”

“I told the union organizer at the time I felt sort of funny picketing beside him,” Brown recalled. “And he told me, ‘Just think how I feel.’ ”

Again during the months of late 2003 and early 2004, grocery union workers went on strike, but Stater Bros. avoided a lockout while other major grocery chains were crippled for a time. The extra business sent Stater’s sales in 2004 up nearly 40 percent and placed the company briefly in the Fortune 500.

Moving Forward

The company could break into that list again in the next decade. With a new distribution center able to serve nearly 400 stores, Brown is planning an ambitious growth trend of 10 stores per year. By 2015, it would put the company’s store count around 235.

Hunt, the Wachovia analyst, said it may be easier to buy other stores than to build them. The most logical next step for the company will be to move more aggressively into the Los Angeles market, he said.

Brown has continued to eye about 10 Albertsons stores in hopes of buying them to add to his chain.

To help prepare Stater Bros. for that growth, Brown brought in Jim Lee, a 25-year veteran of Ralphs, Southern California’s largest grocery chain, in 2002. Lee was Stater Bros.’ retail vice president, and last year, Brown named him president and chief operating officer to replace retiring Don Baker.

Lee, 55, was a clear departure from Stater’s tradition of promoting within the company, but his experience could help the company as it goes from a chain primarily based in the Inland Empire to one vying for a position as the Southern California market leader.

Despite that growth, Brown said building the new distribution center and headquarters in his hometown of San Bernardino will assure that the company that began in the “California heartland” will be anchored here for years to come.

Or, as he said, “This company isn’t going anywhere I don’t want it to go.”

15 YEARS of growth

From 1992 to 2007, Stater Bros. Markets saw its greatest growth.


Stores: 107

Employees: Nearly 10,000

Sales: $1.7 billion


Stores: 162

Employees: 17,000

Sales: $3.5 billion