04:31 PM PST on Saturday, February 12, 2011

The Press-Enterprise

The grocery business is no picnic these days. Costs are up, profits are down and competition for the American food dollar has grown increasingly intense.

Like other businesses heavily concentrated in the Inland Empire, Stater Bros. has been hit with the worst the recession has had to offer, including unemployment rates that hovered in the 15 percent range and home-foreclosure rates among the highest in the country.

As a result, the company’s profits were down 29 percent in fiscal 2010 from 2009, after they fell 14.4 percent in 2009 from the year before. The most recent results, for the first quarter of fiscal 2011, show continued challenges, with sales down about 2.7 percent overall and earnings, hit by one-time expenses, down 81 percent.

But Jack Brown, the company’s longtime chairman and CEO, said profits dropped by design, and the economy is at last showing signs of turning around.

“They say you need food, shelter and love to exist,” Brown said. “I think you need hope, and I see a little more hope out there now.”

The company, which was founded during the Great Depression and celebrates its 75th anniversary this year, has suffered downturns before. When unemployment spiked in the mid-1990s, the company assembled a plan to keep its customers by lowering prices and cutting costs with the idea that, when the economy rebounded, sales would return.

“We knew our sales would go down because our customers didn’t have the money, but our feeling was that, when things turned around … I didn’t want to go look for my customers,” Brown said.

When the most recent recession took hold, Stater Bros. dusted off the plan and held out on price hikes even as costs increased. Although sales declined, customer counts held, Brown said. Some weeks, they increased. “Our families appreciated that we were kind of sharing the pain with them,” Brown said. “Now, being a privately held company we can do that, because we don’t have the pressure of Wall Street.”

The grocery chain got its start in 1936, when brothers Cleo and Leo Stater sold a car to cobble together a down payment on a small storefront in Yucaipa. They left home to serve as pilots during World War II and then returned to continue building their business, one new store at a time.

Coming through the Great Depression, the brothers learned to pay cash for the land, fixtures and inventory for each new store and avoided piling up debt.

Brown said no one can afford to do it that way anymore, but Stater Bros. has continued to take a conservative approach to expansion, staying within arm’s reach of its core Inland Empire markets despite opportunities for expansion into Nevada, Arizona, New Mexico and Northern California.

“We’ve maintained the value of our prices, of our service and of our dedication to the communities we serve,” he said.

From 1936 to 1988, Stater Bros. grew to 100 stores. The company took a big leap forward in 1999 when it paid $147.2 million for 43 former Albertsons and Lucky stores. Today, it is the Inland Empire’s largest employer with a work force of more than 18,000. A third of them have been with the company for at least 20 years, Brown said.

The chain operates 167 stores currently, according to its website.

In recent years, traditional grocers like Stater Bros. have faced increased competition from Walmart, Target and other retailers who have turned to food sales as a way to boost sales.

Jack Plunkett, CEO of Houston-based Plunkett Research and author of “The Next Boom,” said Walmart came in and slashed profit margins, which already are traditionally low in the grocery business, with the idea that customers coming in for groceries will buy other items, too.

But it’s not just big-box stores. Dollar stores have stocked up on food items, as have drug-store chains such as Walgreens and CVS, said David Browne, a senior analyst with market research firm Mintel. And many retailers are beefing up private-label brands to attract cost-conscious shoppers.

At the same time, the population is aging and household sizes are shrinking, so the idea of stocking up at the grocery store is giving way to consumers who buy what they need in the short term and are willing to shop around, Browne said.

To hold on to market share, grocery chains have had to lower their profit margins and find ways to be more efficient, Plunkett said. They also have learned to focus on value-added sales, things that other retailers don’t offer, such as a full-service butcher counter, better fresh-seafood options or prepared foods.

Brown, who got his start in the industry more than 60 years ago as a bagger, said retailers have often turned to grocery sales when the economy gets tough, but they don’t stay with it.

“They’re not used to the very low, low profits in groceries. They’re used to doubling their money, and in the supermarket industry it just isn’t that way,” Brown said.

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