Hughes Markets, Inc.

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Hughes Markets, Inc.

14005 Live Oak Avenue
Irwindale, California 91706
U.S.A.
(818) 856-6060
Fax: (818) 856-6020

Wholly Owned Subsidiary of Quality Food Centers, Inc.
Incorporated: 1952
Employees: 5,100
Sales: $1.25 billion (1996)
Stock Exchanges: NASDAQ
SICs: 5411 Grocery Stores

A respected operator in the southern California supermarket industry, Hughes Markets, Inc. operates a chain of grocery stores in the greater Los Angeles area. For 45 years Hughes Markets was privately owned and family-operated, but in 1997 the company was acquired by Quality Food Centers, Inc., a Seattle, Washington-based supermarket chain. During the late 1990s, the company operated 56 stores and controlled 5.5 percent of the southern California market.

Origins

The key to Hughes Markets’ success in the fiercely competitive southern California grocery store industry was its adherence to a simple and focused operating philosophy, the originator of which was the company’s founder, Joseph Hughes. Hughes spent his adulthood working in grocery stores, starting in 1934 when he went to work for Thriftmart in New Jersey. He stayed with Thriftmart for nearly 20 years, then packed his bags in 1952 and made the transcontinental trip to southern California, where he would lay the foundation for one of the region’s largest supermarket chains.

Although Hughes had spent nearly a lifetime’s work at Thriftmart in New Jersey, he would spend another 30 years working as a grocery store operator in southern California. Hughes embarked on the second half of his lengthy career in 1952, when he opened a Thriftmart franchise in Studio City. From there he opened two more Thriftmart franchises during the next two years, one in Van Nuys and another in Hollywood. The opening of his next store, which was located in then-rural Granada Hills, marked a symbolic moment in Hughes’s life. When he opened the doors to his fourth store, gone was the familiar Thriftmart sign marking the entrance. For the first time in 20 years, Hughes had no ties to Thriftmart. The sign above his store—the first store he could genuinely call his own—read: Hughes Market. Over the course of the next four decades, the sign that debuted in Granada Hills would become a fixture in the southern California supermarket industry, as Hughes and his family shaped the company into a powerful regional force.

Joe Hughes was brought up in an era when running a grocery store was a relatively uncomplicated task, a period when small, family-owned stores blanketed the country, dominated their industry, and rarely tried to be anything else than a grocery store. This would all change during Hughes Markets’ development into an industry stalwart. During the latter half of the 20th century, grocery stores became shopping destinations aspiring to fulfill a broad spectrum of consumers’ needs. As the size of stores swelled beyond 50,000 square feet, banks, pharmacies, lawn and garden departments, bakeries, on-site cooking establishments, and sundry other “concepts” made their debut, transforming the definition of the grocery store format. During this sweeping revolution within the grocery store industry, Hughes Markets rarely strayed from the original course charted by Joe Hughes, and when it did, success was generally the result.

This constancy of the Hughes Markets enterprise stemmed, in part, from its distinction as a privately owned, family-operated business. Two generations of the Hughes family bridged Hughes Markets’ founding and its acquisition by Quality Food Centers, and it was clearly evident that the second generation learned much from the first. Roger Hughes, the son of Joe Hughes, began working at the family’s grocery stores during the early years of the company. While his father slowly expanded the number of Hughes Markets operating in southern California, Roger Hughes divided his time between school and the grocery store business, attending Loyola High School during the day and managing the liquor department at the Studio City store during his off-hours. Roger Hughes did not initially commit himself to a career as a grocery store operator and the inheritor of the family business, but after a two-year stint in the U.S. Navy and after being graduated from the University of Southern California, Hughes resolved to devote himself to the perpetuation of the growing Hughes Markets enterprise. He would have a long wait.

Joe Hughes worked tirelessly at developing Hughes Markets into a success, working six days a week and spending the seventh driving around in his car to visit the stores in his fiefdom. Expansion, which many of his supermarket brethren financed by accumulating hefty bank debt or by relinquishing control to investors in exchange for cash, was pursued slowly and achieved debt-free. Joe Hughes expanded by acquiring small grocery store owners and parts belonging to larger operators. He stressed simplicity and a narrow focus, yet occasionally he emerged as an industry innovator. In the early 1960s, while Hughes was cementing his reputation as a traditionalist, he donned the hat of a pioneer by becoming the first supermarket chain operator in southern California to feature fresh fish markets in his stores.

Hughes’s son Roger, meanwhile, had ample time to absorb all the nuances of his father’s leadership style. After holding a variety of positions at the company’s stores following his completion of studies at the University of Southern California, Roger Hughes was eventually promoted to manager of the company’s Sherman Oaks store in 1962. Three years later, he was promoted to general manager of the store. It was at this point—in 1965—that he copied a page from his father’s ascent in the grocery store business by arranging with Joe Hughes to operate the Sherman Oaks store much like a franchise. This arrangement, with Roger Hughes in charge of the Sherman Oaks store and his father in charge of all the rest, existed for the next two decades; its conclusion ushered in a new era of leadership at Hughes Markets.

Second Generation Takes Command in 1982

Joe Hughes died in 1982, 30 years after he had arrived in southern California to open a Thriftmart franchise. During his years in the Los Angeles area, Hughes had built his namesake company into a roughly $400 million in sales grocery concern that was known for its emphasis on fresh produce, meats, fish, and customer service. Hughes Markets was regarded as a quiet and conservative member of the southern California supermarket fraternity. Roger Hughes inherited this legacy, and did little to alter it. Having spent more than 20 years learning the grocery business under his father’s tutelage, Roger Hughes was imbued with his father’s business perspective and, consequently, carried out his executive duties much like his father would have done.

Although Roger Hughes stuck close to the course charted by his father and continued to direct and present Hughes Markets as a quiet, conservative enterprise, he was more growth-minded than his father. By the end of the 1980s, Roger Hughes’s influence over the fortunes of the company was readily discernible. Revenues more than doubled during his first seven years of control, rising to $885 million, and the number of Hughes Markets increased to 45 stores. Although the pace of growth was decidedly more animated under the stewardship of Roger Hughes, the way in which the growth was achieved was done in much the same way as during Joe Hughes’s tenure: debt-free and in small bursts, as opposed to one massive boost via a merger or acquisition.

1990s: Expansion and New Ownership

Hughes Markets stayed to its tried and true course as it entered the 1990s, conspicuous by its absence from the spate of megamergers that swept through the southern California supermarket industry during the late 1980s. Massive, sprawling chains such as Vons Stores, Lucky Stores, and Ralphs were made even larger after they swallowed up large competitors. Public stock offerings filed by these supermarket chains helped fill their war chests, giving them the cash to make large acquisitions and to finance expansion. When public stock offerings were not an option, banks were. Supermarket chains borrowed heavily to build a string of new stores and to tailor their stores to reflect the trend of the day. Inside, as the square footage increased dramatically, supermarkets were replete with specialty items and services to attract all tastes and fulfill nearly every desire. Nothing, it seemed, was outside the pale of the supermarket format.

Hughes Markets, the old-fashioned member of the supermarket constituency in the Los Angeles area, bucked nearly all the trends its competitors embraced during the 1980s and early 1990s. The company was privately owned (a rarity). It was family-operated (a further distinction). And its stores, which generally measured 25,000 square feet, focused on a single and simple format (another characteristic that set it apart from the other large supermarket chains). In these respects Hughes Markets appeared to be behind the times; a quaint and stodgy chain that had failed to adopt what were perceived as the successful attributes of a supermarket operator. The company’s stature, however, belied this assessment. In 1990, Hughes Markets reached the billion dollar mark in sales, a figure that would have put it at the top of its industry in almost any other market except southern California. The spree of megamergers had transformed giants into behemoths, making Hughes Markets relatively small when compared to the upper echelon of its class, but few could argue with the company’s success—least of all Roger Hughes.

Hughes was unlike his father in at least one respect. No chairman of Hughes Markets had ever talked to reporters from the business press until Roger Hughes broke the silence in 1989. In fact, the company operated without a public relations department. When Roger Hughes finally did share his thoughts with inquiring journalists, the succinct phrases that followed mirrored the traditional, unassuming nature of Hughes Markets and, perhaps, Joe Hughes himself. When questioned about his company’s reliance on a single format and its refusal to delve into specialty markets, Hughes stated flatly, “We can’t walk and chew gum at the same time.” When pressed further on the same topic, Hughes answered, “The simple things are working. They’ve been working for 30 years.” In reference to the money that could be raised by converting to public ownership like many of his competitors had done, Hughes explained, “I guess public capital would be nice, but I’m not comfortable with the trade off. Looking at quarter-to-quarter results for the benefit of someone back in New York—I’m not very good at that. I just don’t see an IPO (initial public offering) in the picture for us, unless we get really desperate.” When asked why his stores were smaller than the rest of the chains with at least $1 billion in sales, Hughes answered, “We think that’s [Hughes Markets’ store size] big enough for our locations, and for who we are. We’re not big in general merchandise, we don’t have pharmacies, and we’re not trying to draw from all over town. We like it that way ... and the rent’s a lot cheaper.” In defense of his refusal to ape the expansion pace set by his competitors, Hughes responded, “If we wanted to go out and build 20 stores next week, we’d have no problem. We just don’t feel like we can grow any faster and hire the kind of quality personnel that we know it takes to run these stores. We want to grow as fast as we can grow realistically and still be Hughes Markets.”

The company entered the 1990s as the largest privately owned Los Angeles-based supermarket chain and was in the process of ensuring that no rival usurped its reigning position. Although Roger Hughes was opposed to rapid growth, he had initiated a slightly accelerated expansion program while his competitors celebrated monthly store openings. Hughes Markets opened four stores in 1989, five more in 1990, and slated five additional stores for their debut in 1991. When the company announced it had eclipsed the $1 billion mark in revenues in February 1990, there were 52 stores composing the chain. That milestone achievement was reached the same month the company presented itself as an industry pioneer by becoming the first regional chain to implement a storewide recycling program.

As this program was being put into place and the celebratory mood springing from the achievement of collecting $1 billion in sales was in full swing, the telltale signs of economically bleak times were already appearing. A nationwide recession began to stifle economic growth during the early 1990s, and Hughes Markets responded by shelving its strategy of opening between three to five stores per year. Instead, the company concentrated on renovating more stores than usual, and bided its time until the stormy economic climate cleared.

Although the pace of store renovations picked up, the company did not abandon its expansion strategy entirely during the early 1990s. Between 1992 and early 1994, five new stores were opened, and in 1993 construction of a new office and warehouse complex in Irwindale was completed. The distribution complex, comprising three buildings, consisted of a 36,000-square-foot office building, a 137,000-square-foot facility for produce, delicatessen, and meat, and a 443,000-square-foot warehouse for dry groceries, general merchandise, and liquor. The size of the complex suggested there were high expectations for future growth, despite the less-than-ideal economic conditions. The warehouse, projected to meet the company’s needs for the ensuing 10 years, had sufficient capacity to handle three times the number of Hughes Markets in existence in 1993, which pointed to the anticipation of aggressive growth in the decade ahead.

Hughes Markets’ rate of expansion resumed its pre-recession pace by the mid-1990s, when four new stores were opened in 1995. Two more stores debuted in 1996, helping push sales up to $1.25 billion and lifting the company’s store count to 56, but by November 1996 the focus on expansion took a back seat to momentous news from company headquarters. After nearly a half-century of operating as a privately owned, family-run company, Hughes Markets was preparing to join ranks with a publicly owned supermarket chain and bring an end to its distinction as the quiet independent competing against publicly traded chains.

In November 1996, Quality Food Centers, Inc. (QFC), a 64-store supermarket chain based in Seattle, Washington, announced it had signed a merger agreement to acquire Hughes Markets for $360 million in cash. Under the terms of the agreement, Roger Hughes would relinquish his title as chairman, retain his chief executive officer title, and his management staff and all Hughes Markets employees would remain in place, with Hughes Markets and QFC slated to operate af separate business units under a holding company formed by QFC. For QFC, the deal represented the first move out of its home state and a significant step toward the realization of its ambitious expansion strategy. For Hughes Markets, the merger allowed it to keep its personnel in place and provided funds for future expansion. Said Hughes, “One of the family’s concerns with any sale was that we didn’t want to disturb the employees, and we were able to consummate this and have all our people remain in place. Once the merger is completed, we’ll have more financial clout and we’ll be in a better position to grow.”

The acquisition was completed in March 1997 for $358.8 million. With Hughes serving as president and chief executive officer, Hughes Markets, under the auspices of QFC’s holding company, planned to open three or four stores a year into the late 1990s. Acquisitions of smaller grocery store chains were in the offing as well, thanks to the added financial reserves gained from the deal with QFC. With its 45-year history as a privately owned company behind it, Hughes Markets embarked on a new future in the public spotlight. The essence of the company, however, remained the same.