The Vons Companies, Incorporated

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The Vons Companies, Incorporated

618 Michillinda Avenue
Arcadia, California 91007-6300
U.S.A.
(818) 821-7000
Fax: (818) 821-7933

Public Company
Incorporated: 1906 as Vons Grocery Company
Employees: 32,900
Sales: $5.6 billion
Stock Exchanges: New York
SICs: 5410 Grocery Stores

The Vons Companies, Incorporated is the ninth-largest retail supermarket chain in the United States and the largest in southern California, with a total of 346 stores throughout southern and central California and Clark County, Nevada, in 1993. Vons Supermarkets and Vons Food and Drug Stores accounted for over 80 percent of this total, a situation which was expected to change by the mid-1990s as the company expanded its Pavilions and Tianguis ‘theme’ chains. Vons also operates the Jersey maid Milk Products Company, which manufactures dairy products and ice cream, and Williams Brothers, a chain of supermarkets located in the Central Coast of California.

Vons Companies’ success in an increasingly competitive industry is attributable to several related factors. The company is unusually well-attuned to regional markets, and customizes product selections and displays in individual stores to reflect local customer preferences. This concept was taken one step further in 1987 with the opening of the first Tianguis superstore targeted at southern California’s fast-growing Hispanic population. Throughout its history, Vons has also placed great emphasis on increasing efficiency through the use of state-of-the-art technology. Vons was one of the first retailers in the United States to introduce debit cards at checkouts, begun in the Los Angeles area in 1985, and the company continues to innovate with computerized inventory control and pricing systems. As a result of its focus on both markets and technology, the company has a turnover per square foot considerably higher than the industry average, a fact which contributed to record profits in 1991.

Vons was created by Charles Von der Ahe, an entrepreneur instrumental in the development of the modern supermarket. Von der Ahe’s first experience in the grocery business was as a delivery boy in Illinois. On the way to California, where he would eventually settle, Von der Ahe worked in several markets, observing merchandising techniques and customer buying patterns first hand. In 1906, with a total capital investment of $1,200, Von der Ahe opened a small grocery store named Von’s Groceteria on the corner of Seventh and Figueroa in Los Angeles. Over the next few years, he opened additional stores, implementing a number of innovative strategies which fueled dynamic growth in his business. Von der Ahe was the first grocer to introduce cash-and-carry and self-service. In leasing his open storefronts to produce vendors and butchers, Vons also pioneered the combination store concept which would later lead to his first supermarket. By 1929, the Vons Grocery Company numbered 87 stores.

Von der Ahe had the foresight to sell his stores to McMarr Stores in 1929, before the stock market crash decimated the value of commercial properties. McMarr would in turn eventually be purchased by Safeway. In the meantime, Von der Ahe enjoyed three years of retirement before being lured back into the grocery business by his sons Ted and Wil, who decided to open a new chain of Vons stores in the Los Angeles area. Von der Ahe helped his sons out with investment capital and industry expertise, and Vons stores began to multiply. The partnership culminated in the opening of a 50,300 square foot food market in downtown Los Angeles in 1948. The prototype of the supermarket, this location boasted a number of innovative features which today are taken for granted, notably self-service produce, meat, and delicatessen departments. The store confirmed the Von der Ahe family’s role as innovators in the retail food industry.

In 1960, Vons merged with Shopping Bag Food Stores, bringing the total number of stores under family management to 66. Particular emphasis was placed on understanding local markets and arranging shelf space accordingly, a practice which has continued to the present day. In 1967, the merger was challenged by the Federal Trade Commission. The case went all the way to the Supreme Court, which ordered Vons to divest itself of the Shopping Bag locations immediately. In 1969, Vons was bought out by the Household Finance Corporation, now Household International, which added the chain to its Household Merchandising division.

The expansion of Vons Stores into the San Diego area during the 1970s corresponded with a period of dynamic growth when the chain widened operations to include wholesale marketing to other retailers and fast-food chains. In the mid-1970s, Vons opened a series of mid-sized units called Value Centers, which sold food and drugs in one location. This ‘combo’ concept would develop into Pavilions Stores in 1987. In the early 1980s, Vons expanded north into the Fresno area. In the same period, the company began to stress the importance of combining coupon promotions with in-store product demonstrations as a means of persuading more conservative customers to try new foods. Vons was among the first stores to operate its product promotion department as a profit center funded by fees from participating companies.

Vons scored a tremendous coup in 1984 when the company was designated the official supermarket of the Los Angeles Olympics. Under a deal worked out with the Olympic Committee, the chain agreed to provide food for over 12,000 athletes, coaches and trainers in the Olympic Village. Food worth $8 million was provided to the committee at cost for preparation by an independent food service organization. The balance, worth $2 million, was donated by the company. In return, Vons was guaranteed a number of exclusive merchandising and advertising opportunities. Store decor was changed to highlight the Olympic theme, and the Olympic logo was placed on a number of perishable items which were considered to have particular nutritional value.

In January 1986 top management in the Household Merchandising branch of Household International negotiated a $757 million leveraged buyout of their division. The deal, which was the largest retail buyout in the United States at the time, was masterminded by Roger E. Stangeland, who went on to become chairperson of the newly-independent Vons Companies. Stangeland had been an executive at Household International since 1961, and had been responsible for Vons Stores since 1982. While the buyout successfully separated Vons from Household International, it also burdened the company with an unacceptable level of debt. Stangeland announced that reducing the debt-to-equity ratio would be a priority over the next few years. In the meantime, he added the ten-store Pantry chain to the Vons portfolio. He also charged William S. Davila, the company’s president, with developing an expanded ‘combination store’ concept. Started in 1986, the year of the leveraged buyout, the Pavilions sub-chain would number 28 stores by 1991.

At 75,000 square feet, the first Pavilions store was the company’s largest to date. A combination store, Pavilions offered a huge food and non-food section. Different departments were identified with banners and decked with white awnings which created the effect of tented ‘pavilions.’ Joe Raymond, a merchandising executive with Pavilions, described the concept as “breaking away from the pack.” Important features included the plain white decor, designed to focus customer attention on the items on display. The store carried a greater selection of produce than comparable stores, and shoppers were invited to sample new products at a permanently-staffed demonstration booth. In order to emphasize the freshness of the perishable goods, all food preparation was done in full view of the shopping public. At the same time, the non-foods area stressed value for money, with a large variety of health and beauty aids offered at discounts of up to 30 percent on average retail prices, and a professionally-staffed pharmacy selling prescription drugs at discounts of up to 50 percent. In some areas, Pavilions competed directly with adjacent Vons stores, a situation that traditional marketing strategists would tend to avoid. Vons executives remained unruffled, however, articulating their belief that if Pavilions did not go head-to-head with the older stores, a competitor certainly would.

In December 1986, Vons announced that a $700 million deal had been struck with Allied Supermarkets, Inc., a publicly-listed Detroit retail and wholesale food marketer. The goal of the merger was to take Vons public while controlling the company’s debt load. Roger Stangeland became chair and chief executive officer of Vons Companies Incorporated, and William S. Davila was named president and chief operating officer. Since Vons had no ambitions to expand to the midwest, Allied’s Detroit assets were sold to members of the existing management. The merger achieved its goal; Vons went public on the New York Stock Exchange in early 1987.

Constantly in search of new merchandising techniques, Vons executives turned their attention to the ethnic composition of their customers in 1987. They observed that by 1990 an estimated 40 percent of southern California’s population would be of Hispanic origin. In January 1987, the company opened its first Tianguis superstore in Montebello, California, designed to cater to the specific needs of Hispanic customers, especially first-generation immigrants. Tianguis, meaning marketplace in Aztec, denotes the place where the community met to shop and to socialize; commenting on the choice of name, CEO Stangeland said in August 1986 that Vons hoped to “position our stores as an important center in the community” and to “differentiate ourselves strongly from the competition.” By 1991, the company was operating nine Tianguis stores throughout southern California and had plans to open two to three stores per year in the foreseeable future.

Tianguis differed from its predecessors in many ways. All advertising and store signs were bilingual, as were the stores’ employees, hired from the local community. The produce section was greatly expanded to include a wide variety of Mexican herbs, fruits, and vegetables, while some product categories were eliminated completely. As in the Pavilions stores, meat preparation was done in front of customers. The grocery section included an extensive selection of Mexican imports, sharing shelf space with their U.S. counterparts. Distribution of imports was guaranteed through the early establishment of a subsidiary called Central de Abastos Internacional in 1986. To enhance the social aspect of the stores, aisles were widened to allow patrons to stop and chat. Diaper-changing rooms were installed at the back of each store since, in Vons President Davila’s words, “shopping tends to be a family event for Hispanics.” The introduction of the Tianguis stores was widely discussed in the industry. Vons had demonstrated once again its strength in adapting to the changing needs of the market before its competitors.

On August 29, 1988, Vons took over 172 of Safeway’s southern California operations, paying $297 million in cash and giving up 11.67 million shares of Vons common stock. As a result of this transaction, the number of stores under Vons control doubled, but the company’s debt load also soared. In spite of its highly-leveraged position, the company immediately embarked on an ambitious remodeling of the former Safeway stores, spending an average of $1.3 million on each location. Together with more efficient inventory control and labor scheduling, the remodeling was intended to increase per-store profitability, money which in turn would be used to pay off debt. A number of in-store innovations were also implemented, including an electronic coupon program and other cost-saving technology. The strategy worked. By November 1990, sales per square foot at the former Safeway stores had risen to $615 from an average of $447 at the time of the buyout. The industry average at the time was $550. Meanwhile, corporate finances also improved. Vons went from a $25 million loss in 1989 to a $50 million profit in 1990 and a $65 million profit in 1991. By 1991, the company’s debt-to-total capitalization ratio had dropped to 60 percent. The company’s financial position was also strengthened by a successful equity issue in 1991.

In January 1992, Vons acquired family-owned Williams Brothers Markets for $48 million in cash and a liability of $10 million on Williams Brothers’ outstanding mortgages. The transaction was financed using Vons’s existing revolving loan. Located in central California, the 18 Williams Brothers stores were well-known for their customer service and successful niche in marketing to local communities. As such, they integrated well with other stores in the Vons portfolio, while allowing Vons to expand further north.

During the course of the riots in Los Angeles in May 1992, several Vons stores were looted and burned. The cost of restoring the damaged properties, however, was largely covered by insurance. In the aftermath of the riots, attention was focused on the dearth of quality supermarkets in south central Los Angeles. Vons Companies announced that the chain would commit $100 million to developing markets in neglected areas over the next few years. Then in January 1993, an outbreak of food poisoning in Washington state that claimed the lives of three children was traced to hamburgers purchased at the Jack-in-the-Box fast-food chain, which had purchased the meat tainted with the deadly E. coli bacteria from Foodmaker, parent company of Jack-in-the-Box. Vons, as the meat processor for Foodmaker, was involved in the early stages of the investigation. After being commended by health authorities for its clean processing facility, Vons aided health authorities by tracing the source of the contaminated beef to one Foodmaker beef supplier. The incident had wide-ranging implications for United States Department of Agriculture inspection procedures, which were deemed inadequate.

In the early 1990s, Vons renewed a commitment to technological progress by announcing a dramatic increase in its Information Systems (IS) budget. IS initiatives were piloted in a number of metropolitan locations and included electronic shelf tags, which would be updated automatically when the checkout scanner price was changed. This system is expected to enhance customer service and decrease labor costs.

Vons Companies continued to run a well-managed and diversified group of supermarket chains, notable for their focus on the needs of local communities in general, and ethnic communities in particular. Having reduced its debt load and streamlined its operations through the implementation of state-of-the-art technology, Vons seemed well positioned to continue its ambitious growth strategy well into the 1990s. The company’s earnings for the quarter ending January 3, 1993, nearly doubled those of the same quarter of the previous year. In October of 1991 Fortune magazine named Vons as one of the hundred fastest-growing companies in America. The publication identified the company’s key competitive advantage as an ability to wring “ever higher sales per square foot out of its stores.”

Principal Subsidiaries

Jerseymaid Milk Products Company; Central de Abastos Internacional (Mexico); 4-U Fund Incorporated; HMI Subsidiary Incorporated; R. J. Blanco; White Credit Incorporated.