Quality Food Centers, Inc.

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Quality Food Centers, Inc.

10112 Northeast 10th Street
Bellevue, Washington 98009
U.S.A.
(206) 462-2178
Fax: (206) 462-2146

Public Company
Incorporated: 1954
Employees: 4,200
Sales: $729.8 million (1995)
Stock Exchanges: NASDAQ
SICs: 5411 Grocery Stores

The largest independent supermarket chain in the Seattle/ Puget Sound area of Washington State, Quality Food Centers, Inc. (QFC), operates more than 60 supermarkets in western Washington. QFC’s stores are open 24 hours and stock a wide breadth of traditional grocery store merchandise, as well as specialty items, such as espresso, flowers, and take-out food. An extensive remodeling program was implemented during the mid-1980s when the QFC chain comprised approximately 20 stores. During the ensuing decade, as the number of stores tripled, the company recorded the greatest financial growth in its history. Annual sales climbed from $136 million in 1985 to $730 million ten years later, when QFC officials were considering expanding beyond western Washington for the first time in the company’s history.

Origins

QFC began its rise to prominence as a grocery store chain in 1954 in Seattle, and the retailer confined its expansion to the surrounding Puget Sound region for the first 40 years of its existence. The first three decades of the company’s existence were decidedly quiet, at least compared to frenetic activity that would take place later in its history. At first, expansion was pursued methodically and financial growth was realized slowly, but beginning in the mid-1980s both yardsticks of the chain’s magnitude—its financial and physical growth—began to record prodigious jumps. The agent of change responsible for QFC’s dramatic burst of growth was Stuart M. Sloan, who first joined QFC in 1986.

Prior to joining QFC, Sloan spent two decades honing his skills as a retailer in the Seattle area. A graduate of the University of Washington, Sloan served as the president of Schuck’s Auto Supply for nearly 20 years, developing a talent at the auto supplies chain for spearheading the pace of expansion that he would later orchestrate at QFC. During his first year as president of Schuck’s in 1967, the auto supplies chain comprised eight retail units. By the time he left the company in 1984, Schuck’s had grown dramatically under Sloan’s watch, blossoming into a chain boasting 58 retail units. Annual sales at the company mirrored its physical expansion, swelling from $1 million in 1967 to $60 million by the time of Sloan’s departure in 1984. From Schuck’s, Sloan moved on to another Seattle-based retailer in 1984 named Pick N Save Corporation, but his tenure there as executive vice-president was brief, lasting two years.

1986 Leveraged Buyout

In January 1986, Sloan and the president of QFC, Jack Croco, teamed up with a group of investors to buy QFC, spending $34 million in a leveraged buyout that marked the beginning of a definitive new era in the retailer’s history. Immediately upon assuming control over QFC, Sloan implemented a series of changes that quickly reshaped the image of the approximately 20 retail units composing the QFC chain. Some of the changes introduced in 1986 were prompted by a market research study of the grocery stores’ customers. According to the information gleaned from the study, typical QFC customers during the mid-1980s did not regard QFC stores as their primary grocery shopping destination because the merchandise selection was not broad enough. Sloan responded to the news by adding various specialty items to the stores’ shelves, including cold cuts, baked goods, flowers, and espresso, which in addition to drawing more customers to QFC stores also boosted profits since the sale of specialty items yielded higher profit margins than traditional grocery store products.

The revenue generated from the sale of specialty items grew strongly during the remainder of the decade, rising to 12 percent of total sales by the beginning of the 1990s as Sloan transformed QFC into a chain that customers would regard as a one-stop shopping destination. To further bolster this perception in customers’ minds, Sloan opened the stores 24 hours a day in 1986 and began remodeling existing units. Although the push to remodel QFC units had begun before the Sloan era—12 of the 22 stores composing the chain in 1987 had been remodeled during the previous six years—the reconstruction of store units represented one of the hallmarks of Sloan’s tenure at QFC. During his first decade of control over the grocery chain, Sloan increased the chain’s total square footage consistently and substantially by remodeling existing units and by either acquiring or erecting additional stores, but during the first several years of his stewardship the remodeling of stores was of singular importance in his mind. The company’s penchant for acquiring stores would manifest itself later, particularly during the mid-1990s.

Sales by the end of 1986 amounted to $158 million, up from the $136 million generated in 1985. As the company prepared for 1987, plans were announced to remodel or enlarge eight stores and open two new stores during the year and establish another two stores in 1988. In March 1987, Sloan took the company public, making an initial public offering of 1.3 million shares. The proceeds gained from the public offering were used to pay off the debt incurred from the $34 million leveraged buyout completed the year before, putting the company in the enviable position of being debt-free as it embarked on what would become a prodigious expansion program. Despite QFC’s conversion to public ownership, Sloan retained resolute control over the future direction of the chain by holding on to a 61 percent stake in the company after the stock offering.

Annual sales grew significantly following the 1987 public offering. In 1988, the company earned $7 million on $231.5 million in sales and the following year earned $12.8 million on $318.7 million in sales. After opening three new stores in 1990, two of which were acquired, QFC comprised 27 stores by 1991, when earnings swelled to $20.6 million and sales rose to $395 million. Three new stores were scheduled to open in 1991, each containing more than 30,000 square feet of retail space and one, a 38,000-square-foot store, offering the chain’s first Asian food take-out service, a leased department that was called Asian Choice Kitchen. By the end of 1991, the company was planning to open two new stores in 1992, but those plans were exceeded when the company acquired two existing grocery stores and erected one of its own, giving it a total of 33 stores by the end of the year.

After the expansion completed in 1992, which included the remodeling of six stores, the chain’s total square footage had increased 18 percent during the year. Although the company was expanding at a robust pace—the chain’s total square footage doubled between 1986 and 1992—expansion had not been achieved at the expense of the stores’ profitability or by saddling the company with debilitating debt, the two common side effects of rapid growth. Instead, expansion had been funded solely with cash generated by the company’s network of stores, leaving it debt-free, and its sales per square foot ranked well above the figures recorded by most other grocery store operators in the country. During the early 1990s, QFC stores collected annual sales of $756 per square foot, a total that compared favorably against the industry average of $552 in sales per square foot.

Animated Expansion During Mid-1990s

Following the 18 percent increase in square footage realized in 1992, Sloan increased the chain’s square footage by 19 percent in 1993, when five stores were opened during the year. The stores added in 1993 brought the total number of QFC stores to 40 by the year’s end, or roughly twice the number constituting the chain when Sloan arrived in 1986. Regarding plans for future expansion, the company’s management was reticent, preferring to keep its specific plans out of the press and offering only that QFC would continue to increase total square footage through acquisition and store remodeling in the Puget Sound region. Comments from the company’s executive management at annual shareholder meetings, however, did offer a peek into the minds of QFC’s senior management. At the 1993 shareholders meeting, statements by Dan Kourkoumelis, QFC’s president and chief operating officer, and Sloan revolved around future expansion. Kourkoumelis, who first joined QFC as a box boy in 1967, summed up the expansion philosophy that had predicated the company’s operation in the past, explaining, “We are aggressive, yet opportunistic in selecting our new store locations. We are highly selective. We will not grow for growth’s sake.” Sloan’s words pointed more to the future expansion philosophy of QFC and were decidedly less restrained. “We remain committed to our aggressive expansion plans,” he informed the gathering of shareholders. “I don’t want anyone to miss that. We’re not backing off; we’re going full bore,” he said.

True to his words, Sloan greatly accelerated QFC’s expansion plans as the company entered the mid-1990s. On the heels of reporting $518 million in sales for 1993, Sloan greeted shareholders in 1994 with the announcement, “We can double the number of stores we have,” citing the existence of “great growth opportunities” in the Puget Sound region. It was a bold pronouncement, though without a proposed deadline for completion, but Sloan achieved great strides toward reaching his ambitious goal in 1994. In three separate deals completed during the year, Sloan added seven new locations to the QFC chain, including a transaction that represented the largest acquisition in the company’s history. In May 1994, QFC agreed to acquire five of the six stores operated by Johnny’s Food Centers, all of which were located south of Seattle and in neighborhoods where QFC did not operate stores. By itself, the acquisition increased QFC’s total square footage 15 percent, accounting for the bulk of the 22 percent increase in square footage recorded in 1994 and perpetuating the company’s record of increasing total square footage at least 17 percent each year for the previous five years.

Once the Johnny’s Food Centers stores were added to QFC’s fold, the chain comprised 45 stores. Given the company’s rapid pace of expansion and the increasing role acquisitions were playing in its expansion strategy, industry analysts were beginning to speculate whether or not QFC could maintain the high profit margins it had become renowned for as it quickly added to its store count. Responding to this concern, Sloan explained, “We are building our business for the long-term, and we recognize and accept the fact that there will be some short-term pains that we must endure on a quarter-to-quarter basis as we strive to produce long-term gains.” Sloan, in other words, was not going to be deterred from his plan to double the number of QFC stores, and in late December 1994 demonstrated his commitment to expansion by announcing an acquisition more than twice the size of the Johnny’s Food Centers acquisition. The acquisition, which was completed in March 1995, added 12 grocery stores operated by Lynnwood, Washington-based Olson’s Food Stores, four other stores in various stages of development, and the rights to several future sites. The addition of the Olson’s Food Stores lifted QFC’s store count to 57, added $150 million in annual sales to the company’s growing revenue volume, and strengthened the company’s second-place ranking in the Seattle area from a 13.5 percent market share to a 18.5 percent market share.

Trailing only Safeway, which controlled 27 percent of the market in the Seattle area, QFC recorded the greatest physical growth in its history in 1995. Total square footage during the year leaped 46 percent, by far eclipsing any annual gains achieved previously. In the years ahead further expansion seemed assured as Sloan began to hint at embracing a much broader expansion strategy. In mid-1995, halfway toward collecting $730 million in sales for the year, he noted, “We are not confined geographically. We plan on expanding, developing, and acquiring other stores outside [the Puget Sound] area.” Sloan hinted further about QFC’s future expansion strategy, stating “We have no immediate plans, but we could also see ourselves outside of Western Washington.”

Sloan’s plans to expand beyond Western Washington, which were offered as a possibility in 1995, crystallized in September 1996, when the company announced its intentions to expand outside of the Puget Sound area and concurrently announced it was going to form a holding company for QFC. According to industry observers, the formation of a holding company signalled QFC’s intention to significantly stretch the boundaries of its operating territory. As QFC charted its course for the late 1990s, company representatives were reportedly scouting locations in several Northwestern states and in the metropolitan Portland, Oregon, area in particular, which represented a dramatic shift in strategy for the regional supermarket chain. Whether expansion into neighboring states was to occur remained to be seen, but QFC’s stalwart position in the Puget Sound area augured well for the extension of the company’s presence into distant markets.