Dominick’s Finer Foods, Inc.

views updated

Dominick’s Finer Foods, Inc.

711 Jorie Boulevard
Oak Brook, Illinois 60523
U.S.A.
Telephone: (603) 891-5000
Fax: (630) 891-5210
Web site: http://www.dominicks.com

Wholly Owned Subsidiary of Safeway Inc.
Founded: 1918
Employees: 20,000 (est.)
Sales: $2.4 billion (2002)
NAIC: 445110 Supermarkets and Other Grocery (Except Convenience) Stores

A subsidiary of Safeway Inc., Dominick’s Finer Foods, Inc. is Chicago’s second-largest supermarket operation, trailing only the Jewel chain. Most of the company’s 116 outlets combine food stores and drugstores, many under the Dominick’s Fresh Store banner, which offers in-store cafés, floral departments, and expanded produce sections. To provide prepared foods sold in its stores, Dominick’s also operates a commissary. Dominick’s has proven to be a poor fit for Safeway, which purchased the chain in 1998. As part of a temporary agreement to settle contentious contract negotiations in 2002, Safeway has promised to make a good faith effort at selling Dominick’s.

Dominick’s Established in 1918

The roots of Dominick’s reach back to 1909 when Sicilian-born Dominick di Matteo immigrated to America, settling in Chicago. In 1918, he established a small deli, squeezed into a 20-by-50 foot location on Chicago’s west side. In that same year, Dominick di Matteo, Jr. was born. As soon as he was old enough, the young Di Matteo began helping out with the business. He was only 16 years old when he took over the management of a second store, launched in 1934. It was a time of transition in the grocery business, which was making the switch from orders being filled by clerks to self-service, a concept pioneered by Clarence Saunders and his Piggly Wiggly stores. Next came the supermarket concept that flourished in the years following World War II. In 1950, the Di Matteos opened their first supermarket. The facility was 14,000 square feet in size and inaugurated the rise of a major Chicago-area chain of large format stores. It was also one of the first of the new supermarkets to introduce in-store delicatessens and a frozen foods section.

By 1968, the Dominick’s chain totaled 19 stores, at which point the Di Matteos elected to sell the business to Fisher Foods Inc., a Cleveland company run by John and Carl Fazio, who in a short period of time had transformed a six-store chain into a 74-store operation. The Di Matteo family continued to run the Chicago stores, and although Fisher Foods had the financial resources to grow the chain to 71 units, the Di Matteos were not happy with the arrangement. In 1981, the family bought back the chain for $100 million, the same year that Dominick di Matteo, Sr. died.

Dominick’s continued to expand during the early 1980s through new store openings, the remodeling of older units, and the acquisition of Kohl and Eagle stores. As a result, it made serious inroads on the market share of Chicago’s leading supermarket chain, Jewel, whose own growth had been curtailed since it had been acquired in 1984 by Salt-Lake City-based American Stores Co., now undergoing internal problems. At the time, Jewel had a 35 percent share of Chicago’s $6 billion market, while Dominick’s controlled just 13 percent, according to Supermarket News. Two years later, however, Jewel saw its share slip to 34 percent while Dominick’s had improved to 22 percent, prompting some observers to speculate that within five years Dominick’s might actually passed Jewel in marketshare. Also impressive was the fact that with only half as many stores as Jewel, 88 compare to 175, Dominick’s was able to achieve two-thirds of its competitors’ marketshare. Dominick’s was especially successful in its remodeling program, which both improved the shopping experience and added selling space. It also introduced floral and cosmetic boutiques, as well as expanded deli and seafood sections. Jewel countered by offering similar features but lacked Dominick’s flair.

James di Matteo Replaces Father as CEO in 1985

In 1985, Dominck di Matteo, Jr. stepped down as chief executive officer, replaced by his son James, although as chairman he continued to hold sway over the business. While Do minick’s remained the trendsetter among the Chicago supermarket chains during the rest of decade, but it did not close the gap on marketshare with Jewel, which was especially well established in city neighborhoods. Dominick’s was primarily making its mark in the suburbs, which were now receptive to some of the chain’s innovations, such as prepared foods. It even joined forces with Starbucks Coffee to install coffee bars in several of the suburban stores. In 1990, well before the Internet had become a major force, Dominick teamed with the Prodigy online service to provide a way for customers to order groceries from their personal computers. Moreover, it was well ahead of the curve when it began testing a shopping cart that included a computer screen, which not only displayed a store directory but also recipes and advertisements. On the other end of the grocery business, Dominick’s took steps to counter the rise of warehouse stores, in 1987 introducing Omni Superstores, massive stores (more than 85,000 square feet) that sold both food and non-food items 24 hours a day.

In 1993, Dominick di Matteo died, leading to speculation that his heirs would soon sell the business. Although James di Matteo vowed to keep running the family-owned operation, the local press reported that he and his four sisters did not appear to share their father’s passion for the supermarket business. At the time of James di Matteo’s death, Dominick’s, with an estimated 26 percent share of the Chicago market, operated 86 Dominick’s stores and 16 Omni Superstores, altogether generating around $2 billion in annual sales. Although there was no shortage of suitors, more than a year passed before the family did indeed decide to sell the business. As Goldman Sachs & Co shopped the company, prospective buyers included Kohlberg Kravis Roberts & Co., Kroger Co., Albertson’s Inc., Super Valu Inc., as well as European supermarket heavyweights Sainsbury Plc of Great Britain and Koninklijke Ahold N.V. of the Netherlands. In the end, the Di Matteo family sold the chain to an investment partnership headed by Yucaipa Co., a rapidly growing Los-Angeles-based supermarket holding company. The purchase price was $692.9 million, of which $420.9 million bought the stock, which was mostly held by the Di Matteo family, and $272 million covered debt. Also involved in the deal was the New York investment firm Apollo Advisors L.P. For Yucaipa and its head, Ronald W. Burkle, it was a crafty deal. The firm put up only $20 million of the funds and immediately received $14 in handling fees, as well as arranging to be on the receiving end of an annual management fee of 2 percent of cash flow. The Di Matteo family as well as senior management also retained a small stake in the business.

Burkle had roots in the grocery industry; his father managed a Claremont, California, supermarket, part of the Stater Bros, chain. From the age of five, Burkle spent time with his father at the store, sweeping up and stacking shelves. As a teenager and college student, he worked part-time at the store, saving up some $3,000, which he successfully invested in the stock market. As an adult, Burkle maintained a dual interest in investing and the grocery industry. Although he intended to study dentistry at the California State Polytechnic College, he dropped out in 1973 and went to work full-time for the Stater chain. In 1981, Stater’s corporate parent, the energy firm of Petrolane, decided to sell the chain. Burkle and his father, who was now Stater’s president, assembled a buyout group which through a series of fortuitous circumstances grew to include Warren Buffet’s partner, Charles Munger. Although the Burkles’ bid had the support of Petrolane’s president, the father and son team failed to vet their interest with the chairman of the board. When they made their pitch to the board of directors, they were promptly sacked.

Ron Burkle busied himself with his investments until 1986, when he decided to form a holding company with two former Stater colleagues to invest in supermarkets. He named the new company Yucaipa after the town he lived in west of Los Angeles. The firm’s first deal came in 1987 when it acquired the Kansas-based Falley’s chain. A series of other acquisitions followed, all with a similar pattern: the deals were highly leveraged, with Yucaipa contributing a modest amount of the funds and taking back a portion in cash fees. It was often a high-wire act but one that Ron Burkle performed skillfully.

Company Perspectives:

A third generation of Di Matteos is carrying on the traditions of Dominick’s Finer Foods. And despite its size and success, Dominick’s fundamental business model remains intact. Now as part of Safeway Inc., it continues its original focus: primary attention to the needs of shoppers partnered with the highest standards for all of its merchandise. It is a positioning that is basically identical to the one expressed by the legendary ‘Mr. D’, Dominick Di Matteo, in 1918 in his 20x50 foot deli: ‘Dominick’s belongs to the customers’

Fresh Store Concept Flourishes in Mid-1990s

Yucapia planned to continue Dominick’s expansion program, which included rolling out more stores adopting the chain’s new European-style, open market “Fresh Store” concept that featured in-store dining, restaurant quality take-out food, upscale meat and produce departments, specialty bakeries, and floral shops. Not only did consumers like the Fresh Stores, these units produced higher grosses and stronger profit margins than conventional supermarkets. In fiscal 1996, Dominick’s opened eight Fresh Store outlets, followed by another 15 the following year. The Omni warehouse format, on the other hand, had fallen out of favor with consumers, and management opted not to open any news units. Another improvement to the bottom line was expected to come from the introduction of upscale products carrying a new private label called Private Selection, replacing the tired Heritage House brand Dominick’s had been carrying. Another initiative the chain was pursuing during this period was the introduction of in-store banking branches, in partnership with First Chicago NBD Corp., the first opening in 1995. To help fund the chain’s growth, Yucapia also looked to cut operating costs, realizing some savings through administrative efficiencies and even more by closing down less profitable stores. Although it opened more Fresh Store units, Dominick’s remained essentially the same size and even lost some market share. Moreover, sales were flat, in the $2.5 billion range, but a $7.5 million profit in 1995 turned into a $10.6 million loss a year later, the result of servicing the debt taken on by Yucaipa in buying the chain. While Dominick’s was losing marketshare in Chicago, Jewel edged over 31 percent and other competitors entered the fight. To gain some much needed cash, Yucapia took Dominick’s Finer Foods public through a parent entity known as Dominick’s Supermarkets. In October 1996, the offering was completed, raising $144 million on the sale of eight million shares of common stock priced at $18 per share. Most of the money was used to pay down bank debt.

Following its initial public offering, Dominick’s launched another expansion and remodeling effort, and once again made gains in marketshare. In 1997, the chain acquired two area Byerly’s Inc. grocery stores and also decided to convert its 17 Omni stores to the more profitable Fresh Store format. It appeared once again that Dominick’s was on an upward trajectory, as reflected by the company’s rising stock price. At this point Burkle elected to sell the chain, considered a prize catch in the rapidly consolidating grocery industry, which was becoming national if not global in scale. For any of the major supermarket holding companies that wanted to gain an immediate presence in the desirable Chicago market, acquiring Dominick’s was a quick fix. The early favorite in the spring of 1998 was the Dutch giant Ahold, but by the autumn of the year it was California-based Safeway Inc. that succeeded in buying Dominick’s at a price tag of $1.2 billion, as well as the assumption of $646.2 million in debt. For Burkle and his partners, their ownership of Dominick’s, which lasted less than four years, resulted in a tidy profit, an estimated sevenfold return. Safeway, on the other hand, gained a major stake in the Midwest, augmenting the stores it already owned in Indiana.

Safeway brought in their own man to run Dominick’s, Tim Hakin, and instituted a number of changes to bring the chain in line with the way the corporate parent did business. Most of those steps proved to have adverse, and in some cases disastrous, consequences that resulted in the steady erosion of marketshare. Safeway tried to save money by having the California office handle buying, in the process eliminating a host of middle managers who knew the tastes of local consumers. While pricing and marketing executives were lopped off, other significant members of management quit on their own, resulting in Dominick’s losing touch with its market. Familiar products were replaced by the higher-margin Safeway Select house brand of products, foreign to Chicago consumers. For years Dominick’s had carried a wide selection of products. But now, as the Wall Street Journal explained, “a chain with a ‘reputation for having truffle oil and four different kinds of sun-dried tomatoes’ had shelves filled with unfamiliar products.” Moreover, Safeway ended a longstanding practice of Dominick’s filling customers’ special order requests, indicative of Dominick’s di Matteo’s formula of offering personalized neighborhood service that had made the chain a success in the first place. Customers did not like the changes and showed their displeasure by shopping elsewhere, resulting in Dominick’s marketshare dropping to 22.8 percent by the end of 2001. It was a perilous time to be losing a grip on customers, as several major players prepared to enter the Chicago market, including Target Corp., Kroger Co., and Wal-Mart Stores Inc.

In 2002, Dominick’s faced new difficulties, this time from a labor negotiation. Management insisted the leaders of the United Food and Commercial Workers union, representing nearly 9,000 Dominick’s employees, accept a cut in wages, putting them in line with non-union Jewel, as well as sharing costs in health care. Should the union strike, Safeway maintained that it would not attempt to operate any of the Dominick’s stores and would simply shut down the subsidiary. When workers voted to reject management’s offer and authorized a strike, management attacked the credibility of the vote, claiming that some employees were intimidated or given misleading information about the offer and demanding that the union conduct a revote. The two sides had clearly reached a stage where neither side trusted the other. Ultimately, a short-term deal was reached that allowed Safeway enough time to find a buyer for the Dominick’s chain. The agreement was set to expire by the end of July 2003.

Once again Dominick’s was on the block, with Safeway expected to only receive a fraction of what it paid for the chain just four years earlier. Ironically, Burkle and Yucaipa, which had profited nicely from their involvement with Dominick’s, emerged as a leading candidate to buy the company. The union had enjoyed good relations with Yucaipa management and reportedly approached the company about reacquiring Dominick’s during the recent labor fight. If Yucaipa indeed reacquired Dominick’s, unlike the first time around, it would be taking on a chain in need of a turnaround rather than a business that was in the midst of an expansion program. It was likely, however, that the union would be more receptive to granting givebacks to Yucaipa than it was with Safeway, although in return the workers might gain an ownership stake.