DW, RD And ROI

April 24, 2006
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GRAND RAPIDS — Part of the charm of D&W Food Centers is the eclectic mix of varied, and sometimes bizarre, grocery items. The stores are filled with tens of thousands of products, some unique to each location, others just plain unique.

And while some shoppers might consider NoneSuch brand mincemeat pie filling and Just-Rite hot dog chili indispensable food staples, Spartan Stores Inc., which took over the D&W chain earlier this month, is more inclined to see many of D&W’s more unique offerings as clutter on already crowded shelves. So when Spartan incorporated the D&W stores into its inventory management system, it had a monumental task ahead of it: to reduce some of the clutter in D&W’s product mix without making the stores seem, in every sense of the words, too spartan.

“One of the problems D&W struggled with most was having enough space in the store for the items that customers wanted most,” said Craig Sturken, chairman, president and CEO of Spartan Stores. “So, you would find holes in their stores of all of the fast-moving stuff that customers wanted most, because all the space was taken up with the items that didn’t sell.”

One of the first steps in remedying that problem was to compare the product list of D&W with products carried in existing Spartan stores.

“We did a match of their (product) file and our file, and we found that the non-match items were in the tens of thousands,” said Sturken.

To figure out which of those products are most popular, which are slow-movers, and which simply didn’t deserve the space they took up on the shelves, Spartan got scientific. The grocery wholesaler and retailer used data from the market research firm ACNielsen Co. as well as its own product and price data to determine what would stay and what would go.

In the end, several thousand items disappeared from D&W inventories. In some cases, they were replaced by Spartan private-label brands. In other cases, they were replaced by more popular national brands as determined by the ACNielsen data. And, among the products that stayed on the D&W shelves, there were other changes.

“We have lowered prices on 14,000 items,” said Jeanne Norcross, Spartan’s vice president of corporate affairs. “There needed to be some significant changes to win back some customers that we may have lost just because prices weren’t as competitive as they needed to be.”

Sturken, who is a strong adherent to scientific category and price management, concurred.

“The price strategy was a bit convoluted. They really didn’t have the right science in place,” said Sturken. “We have a pricing department that does price checks daily with all of our competitors. We run a ‘market basket’ price comparison for all the competitors everywhere we operate. So we are constantly benchmarking the competition.”

In addition to a pricing makeover, Spartan made several strategic decisions to make D&W as competitive as possible. The original deal with D&W involved 20 stores throughout West Michigan. Prior to closing on the deal, D&W decided to close four of those stores. Of the remaining 16, Spartan decided to re-brand six to become Family Fare stores and keep 10 as D&W stores. But, according to Sturken, those D&Ws would be “more D&W than they had been.”

“Over the past several years, the D&W folks felt that it had to have more of a mass appeal,” he said. “Remember: The D&W thing was about having a cachet. It was in different neighborhoods. It appealed to certain people. They had different products. It was all about quality, assortment, service. And I think they lost the focus on that part of the brand, and became more into price. I think they sort of watered down the brand.”

So much so, Sturken said, that D&W became too much like Family Fare. Spartan is now out to correct that.

“D&W is a brand that is very important to us. And we don’t want to contaminate that brand with Family Fare-isms,” Sturken said. “This is a developing process. And as time goes on, you’ll see that it is going to be very different from Family Fare — more different than it is today.”

For Spartan, the D&W stores present a unique opportunity. Taking over the chain gave Spartan two stores catering to East Grand Rapids shoppers, a market the company previously did not serve. It also introduced Spartan’s retail presence in Oakwood, one of Kalamazoo’s more affluent suburbs. Having access to upper-income customers and presenting them with a fine-tuned, up-scale grocery offering could mean a sizable jump in revenue for Spartan.

That is good news for a company that has already been burned once by investing in retail operations. Prior to Sturken’s arrival in 2003, Spartan made an ambitious rush into the retail market. That proved costly. The company lost $122 million in fiscal 2003. Its stock was trading below $2 per share. When Sturken joined the company, he sold off much of the company’s retail holdings, and fine-tuned what was left. Less than three years later, the stock is trading in the mid-$13 range, and the company showed a healthy profit in fiscal 2005. The addition of D&W could mean more strong results to come.

Spartan is counting on it. In addition to the $42.8 million it spent to acquire D&W, it is investing an additional $15 million in capital improvements in the 16 stores.

According to Sturken, careful expansion of Spartan’s retail holdings will be among its keys to future growth. On numerous occasions, he has referred to retailers using Spartan as their “exit strategy” when they’re ready to retire from the grocery business.

In fact, the D&W acquisition began as an effort to get Spartan’s private-label products back on the retailer’s shelves. During those discussions, it became clear that the owners of the privately held company were interested in being bought out.

Sturken said there is bound to be more of that kind of activity in the future.

In late March, Spartan announced that it had added 13 more stores to its distribution base, including Duthler’s Family Foods’ four West Michigan stores. Could Duthler’s be the next D&W?

“There’s always that possibility,” Sturken said. “Like I said, for a lot of these guys, we’re their exit strategy.”    

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