Diversified strategy continues solid growth for ShopKo - Statistical Data Included

On March 9, a press release came across the wire announcing that ShopKo Stores had opened all quarterly conference calls not only to its shareholders, but to anyone who wanted to listen in.

"We've got a great story to tell," said ShopKo's president and chief executive Bill Podany about the invitation. "I want everyone to hear about it."

Whether Podany's candor is a result of his middle-American hospitality or a reflection of ShopKo's solid performance, Podany certainly does have a story to tell. He and an extensive team of associates, including Michael Bettiga, senior vice president of store operations and retail health services, have steered ShopKo toward success over the past several years. For its most recent quarter, ShopKo posted $749.6 million in sales, a 36.4 percent increase over last year.

Their business plan to success? A progressive growth strategy for ShopKo, the company's specialty discount unit; an aggressive acquisition plan for Pamida, its discount chain with dominance in rural towns; and a shareholder-focused plan for ProVantage, its former prescription benefits manager.

ShopKo keeps Pamida's growth at forefront

In a channel that is dominated by Wal-Mart, ShopKo considers itself to be "without very many competitors, which is the main reason why we like this business," according to Podany. In a reflection of that affection, ShopKo announced the acquisition of the 49-store discount chain P.M. Place Stores Co. valued at approximately $22 million in cash, including the assumption of $19 million in debt.

With stores in Missouri, Iowa, Kansas and Illinois, P.M. Place looks to further enforce Pamida's dominance in rural America, bringing Pamida's store count to more than 210. Bettiga said all the P.M. stores will be refurbished over the summer and re-opened during the fall, all sporting the Pamida banner. Corporate office functions will be consolidated at Pamida's headquarters in Omaha, Neb.

With the acquisition of P.M. Place, Pamida's square footage is expected to grow 35.5 percent in the fiscal year ending Feb. 3, 2001. That should boost ShopKo's total growth in square footage to 12.5 percent by the end of the year, surpassing ShopKo's corporate goal of eight to 10 percent square footage growth in 2000.

The P.M. Place locations do not now have pharmacies, but Bettiga said adding pharmacies will be explored in regions that may have a need for them. Pamida also doesn't plan to install pharmacies in a majority of its newly built stores.

Existing Pamida stores with independent pharmacies located nearby are more likely to gain pharmacies than are new stores since relationships with independent pharmacy owners generally yield pharmacy files when owners look to retire. Of Pamida's locations, 61 have pharmacies.

But P.M. is not the only deal that has kept Pamida busy. In May, Pamida opened six new prototype stores: in Mt. Carmel and Tuscola, Ill.; Greenfield, Archbold and Minerva, Ohio; and Whitley City, Ky. The stores have a new merchandising flow (aisle fixtures have been eliminated) and new eye-level signage. Podany added that Pamida is still working on turning around its women's apparel business, as well as linens and domestics.

While many of Pamida's changes concern additions, this year one initiative involved cuts: advertising. Due to heavy store volume, the number of pages and marked ad expense was reduced by about 15 percent. "Since ShopKo research shows Pamida's convenience concept draws 50 percent of its market into its doors every day, advertising can be reduced without impacting volume," Podany said.

Podany insisted that the reduction in advertising is a savvy move. He pointed to the fact that as other discounters move east, Pamida's growth is in remote towns with populations of 10,000 or less. Its stores now face a national big-box in less than 10 percent of its locations.

Rounding out the changes at Pamida include the addition of Robert Daughton as the chain's chief operating officer. Daughton assumes responsibilities for operations, finance, information systems and logistics functions at the company. Daughton reports to Mike Hopkins, president of Pamida. Pamida is still being integrated into ShopKo's systems so that the two can work off the other's synergies in dealing with issues such as store execution. Currently the synergy team is focusing on combining merchandising operations, or "buying power," as Bettiga refers to it. So far, ShopKo has centralized the legal, store planning, liability claims, management and construction departments.

Within the box

While ShopKo maintains a modest growth pace (it currently operates 162 stores), what's happening inside its box is where the company's focus lies. For the Second half of 2000, Bettiga said all eyes will be on the pharmacy and eye care departments, both of which are situated at the front of the store and together account for 15 to 20 percent of total store sales.

Within vision services, the term "eye care," for example, is now replacing ShopKo's long-lived "optical" term. By changing the Optical Center to The Eye Care Center, which staffs optometrists and offers glaucoma tests, ShopKo believes it is presenting a much better image to the customer.

"Customers will also be more aware that stores have an optician on site to help them with their needs," Bettiga said, thanks to improved store signage.

Merchandising changes within eye care have become more politically correct, too. Frames are now merchandised by lifestyle and price point rather than by gender. Other points of differentiation in The Eye Care Center are ShopKo's in-store labs and semi-private offices. Although optical departments are not being remodeled in existing stores, all stores will roll out the new merchandising plan.

The Drug Store @ ShopKo

ShopKo has also given its pharmacy an updated look. In its newest prototype, the retailer brings together the pharmacy and eye care departments under one banner: The Drug Store @ ShopKo. The first store with this new design opened last fall in Boise, Idaho. Five additional ShopKo stores featuring this redesigned pharmacy department are slated to open by fall.

The health and beauty aid department has been re-evaluated so that fewer SKUs of redundant weights, small sizes and slow-moving items are on shelves. Newer stores tout expanded HBA departments at the front end, featuring gondolas arranged on a wood floor to create a natural walkway. The department is adjacent to a dedicated bath and body care area and ShopKo's long-planned wellness center, which offers an expanded selection of vitamins, herbs and homeopathic products. According to Bettiga, the size of future wellness centers will be scaled back (presently 148 feet) "to make, sure it is given the proper space it deserves based on industry performance."

Making sure each of its departments operates efficiently is at the core of ShopKo's success. This year ShopKo's infrastructure plan is directly tied to improving inventory flow and upgrading advertising efforts. Paul Freischlag, chief financial officer at ShopKo, discussed the chain's advertising strategy at a Bear Stearns conference in New York on March 1. Under the slogan "Neat Stuff. Neat Store." ShopKo is looking to drive home to consumers its trend-correct merchandise and clean, tidy aisles. Competitors like Target, which compete in 69 percent of ShopKo's markets, have given ShopKo a run for its ad money until this point with ad campaigns that feature Target's trademark red and white bull's eye. But Podany is confident that ShopKo's ads will deliver the right message.

The chain's new approach is based on "year-long segmentation research and consumer focus groups," Freischlag said. "It turns out that consumers like our stores because we are neat and clean, our aisles are wide and light. It's not about selling price and product, it's about selling the shopping experience. That's our long-term goal."

The second change to ShopKo's infrastructure is a front-end simplification technology that enables payroll savings, faster customer checkout and an advanced automatic pulling system that alerts associates when stock needs to be pulled from the back room to the selling floor. The system is now rolling out company wide.

One area ShopKo has put on the back burner is its Internet strategy. Currently the ShopKo.com site offers the basic home page and category links explaining ShopKo's business. But the only plans for the immediate future include making surface and cosmetic changes.

"We are not a big player on the Internet, and we are proceeding cautiously with growth there since selling product on the 'net is still a very small business. It's not meaningful to us yet," Podany said.

But don't let Podany's pessimistic view of the 'net lead you to believe he's not forward-thinking. ShopKo currently has engaged IBM Global Services to capitalize on selling products to middle America, ShopKo's bread and butter market.

Selling ProVantage

At the time of this interview, ProVantage Health Services, a pharmacy benefits manager, was still a part of ShopKo. Podany had reiterated past statements regarding his interest in selling the division.

"In spite of the high performance of ProVantage, the whole PBM business has just plunged in terms of valuation. XpressScripts lost a fair amount of value, and to some degree ProVantage has been victimized too. We are still planning a 20 percent increase in revenue, but as I have stated before, at an appropriate time we will separate ProVantage as a part of our investment portfolio."

And separate it did. ShopKo sold ProVantage to MerckMedco Managed Care for $12.25 per share in a transaction that valued ProVantage at approximately $222 million. ShopKo had owned 64.5 percent of the 18.2 million outstanding ProVantage shares. Proceeds from the deal, if approved, would reel in approximately $143 million on a pretax basis and would be used for acquisitions, construction of stores, stock repurchase, debt reduction or other corporate purposes.

Podany said the transaction gives ShopKo more time to focus on its core discount retailing business. However, based on ShopKo's performance to date, Podany and his team's vision might not get much closer to 20/20.

COPYRIGHT 2000 Lebhar-Friedman, Inc.
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