Randall’s Food Markets, Inc.

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Randall’s Food Markets, Inc.

3663 Briarpark Drive
Houston, Texas 77042
U.S.A.
Telephone: (713) 268-3500
Fax: (713) 268-3602
Web site: http://www.randalls.com

Wholly Owned Subsidiary of Safeway Inc.
Incorporated: 1966
Employees: 17,650
Sales: $2.58 billion (1999)
NAIC: 44511 Supermarkets and Other Grocery (Except Convenience) Stores

Randall’s Food Markets, Inc. (better known as Randalls, sans apostrophe) operates a chain of 116 supermarkets in Texas, competing in Houston, Dallas, and Austin. The company’s stores operate under the names Randalls and Tom Thumb and feature an array of specialty departments. Designed as one-stop-shopping destinations, the supermarkets contain bakeries, florists, coffee shops, pharmacies, banks, delicatessens, gourmet counters, and video rental departments. Randalls has been credited with revolutionizing the grocery business in Houston, where the chain started as a family-owned business.

Origins

The celebrated legacy of the Onstead name in Houston’s grocery business began with the family’s patriarch, Robert Randall Onstead. Onstead gained his first experience in the grocery business as a teenager, when he delivered groceries for his uncle in Ennis, Texas. The son of a mail carrier, Onstead studied for a premedical degree at the University of North Texas before moving to Houston with his wife in 1954. He arrived in Houston to work for his father-in-law, Blocker Martin, who hired the 23-year-old Onstead to manage a grocery store he owned. Martin served as Onstead’s mentor, teaching his son-in-law the value of customer service and innovation. Martin was dynamic and charismatic, while Onstead was described as quiet and conservative, but the pair worked well together.

By 1960, Onstead had become president of the grocery business, which had expanded to include four stores. Although the business existed for only four years after Onstead took charge, the Martin and Onstead pairing made a lasting impression on local shoppers. When the company’s second store opened, the two grocery store innovators celebrated the grand opening by wrapping the store in Saran Wrap, a product that recently had made its debut on store shelves in the United States. The television program ’ Today” broadcast the event live, heralding the marketing flair on display.

The four-store grocery business was sold to Piggly Wiggly in 1964, but Onstead was only beginning what would become a lifelong career as a grocer. For his next foray into the grocery business, Onstead teamed with two industry veterans, Norman Frewin and Randall Barclay, in 1966. The trio started with $85,000 in capital—most of it borrowed—and purchased two Minimax stores in north Houston. The stores were renamed Randalls and tailored into discount supermarkets featuring merchandising innovations that would later become standard characteristics of grocery stores across the country. Special prices were advertised on the stores’ large front windows, hot delis were constructed inside, and other specialty departments— trademarks of an Onstead-owned supermarket—were added in a gradual process. The business expanded gradually as well, developing into a small, local chain renowned for catering to the specific needs of its customers. There were four stores by 1970 and eight stores by 1977. Expansion occurred at a measured pace, restricting the company’s territory of service primarily to the affluent western suburbs of Houston, but the stores’ reputation among customers was growing at a more energetic pace.

“We had a strong following around the sites of our stores,” explained Randall Onstead, the son of Robert Onstead and the future leader of the company. “Almost everybody in the area shopped at Randalls,” he said, in a May 1987 interview with Progressive Grocer. “But there were many neighborhoods in Houston where we had no presence. We needed a plan to expand our operations in the entire market.” By the late 1970s, the desire to accelerate expansion intensified. Houston, enjoying a remarkable surge in growth fueled by an oil boom, ranked as one of the fastest growing metropolitan areas in the country. Randalls, tremendously popular in the neighborhoods it occupied, stood poised to share in the growth of the city. At the time, the company controlled 4 percent of the grocery market in the city, the point from which it began pursuing its declared goal of developing into the market leader in Houston. Robert Onstead was ready to expand in earnest and see if his blend of customer service and elaborate supermarkets could attract more Houstonians than all his rivals.

1980: Spurring Expansion with Acquisitions

Onstead spent nearly 15 years forging Randalls’ reputation as a high-quality supermarket chain before striking out on the expansion trail with strident steps. The march began in 1980, when Randalls acquired four large retail stores recently vacated by Handy Andy, a supermarket chain that had flirted with the one-stop-shopping concept that would become Randalls’ signature trait. Each of the acquired stores was nearly twice as large as Onstead’s existing stores, giving him the space to actualize his vision of the premier supermarket. The stores also were situated in affluent Houston neighborhoods with ideal demographics. For future store sites, Onstead chose locations on the periphery of fast-growing Houston, establishing stores near new shopping areas where condominiums and houses would be built once the retail centers were completed.

To capitalize on the opportunity presented by the large, former Handy Andy stores, Randalls developed two supermarket concepts. Both of the concepts would serve as the company’s exclusive expansion vehicles for the 1980s. Ranging in size between 50,000 and 56,000 square feet, Randalls’ “super combo” stores were designed to make the company the market leader in Houston. The stores contained pharmacies, seafood sections, banks, florists, in-store restaurants, and cosmetic departments. The company’s other concept, its “flagship” format, was roughly the same size as a super combo with all the same specialty departments, but also included a French bakery and 5,000 upscale specialty items scattered throughout the store’s shelves.

Onstead’s son, Randall, joined the company as an assistant manager at the chain’s first flagship store. His arrival at the nine-store chain marked the beginning of an era of unprecedented growth. Between 1977 and 1982, Randalls’ market share leaped from 4 percent to 11 percent. By 1987, a year after Randall Onstead was appointed president and chief operating officer, the company had expanded into a 39-store chain with a firm hold on the competitive Houston market. Despite its longstanding policy of refusing to sell beer, wine, or any other alcohol, Randalls controlled 27 percent of the metropolitan

market by 1987, having leveraged its prestigious reputation to create a chain of domineering strength. The national business press took note of the company’s strident growth during the 1980s, which lifted annual revenues to $900 million by the decade’s end, but success engendered its own problems. To continue its remarkable record of growth into the 1990s, the Onsteads would have to look beyond Houston to satisfy their desire for expansion. By doing so, the father-and-son team was forced to complete a difficult evolutionary process. Randalls, once a local, mom-and-pop business, was transforming into a regional corporation.

Expanding into Dallas: 1992

By 1992, Randalls was a thriving 46-store chain with annual sales in excess of $1 billion. The chain ranked as the fastest growing company in Houston. From this point in its development, Randalls began to greatly accelerate its expansion, eclipsing the robust pace set in the 1980s. In 1992, the company acquired the chain of grocery stores from Cullum Companies. The acquisition doubled the size of Randalls, giving the company a chain of supermarkets that ranked as the market leader in Dallas. Next, in January 1994, Randalls acquired the Austin, Texas-based AppleTree chain, giving the company a presence in three cities and control over 125 supermarkets.

For several years after the acquisitions, Randalls struggled to contend with operational, competitive, and managerial challenges created by absorbing Tom Thumb and AppleTree. Now with stores in Dallas, Houston, and Austin, the Onsteads found themselves presiding over a $2-billion-in-sales regional grocery organization that forced them to change their leadership style. Since the company’s inception, Robert Onstead—an active Church of Christ member—had refused to sell alcohol, but the acquisition of the Tom Thumb chain, which sold beer and wine, forced a change in policy. In September 1994, Randalls rescinded its ban on alcohol—just one of several profound changes that occurred during the mid-1990s. In an October 1994 interview with Progressive Grocer, Randall Onstead explained: “The most challenging issue we’ re dealing with is digesting all of the acquisitions. As similar as our operations were, we couldn’ t have been more different in our managerial and organizational styles. Randalls had a top-down management style. All decisions were made at the top. Tom Thumb had a consensus-run or bottom-up management style. Well, it didn’ t take long to figure out that Randalls top-down management style was not going to work in a big company. Very soon after the acquisition of Tom Thumb it became obvious there was friction between the two styles.”

Company Perspectives:

The phenomenal growth of Randalls has not hampered its commitment to providing the best for its customers —the best service, the best prices and the best quality. If anything, thanks to continuous expansions, it can offer its customers a shopping experience that Randalls’ founders could not have imagined back in the twentieth century.

Eventually, the Onsteads realized they needed to relinquish some control over their company. The benign autocracy that had existed for more than a quarter of a century was replaced with a decentralized structure that ceded authority to lower levels of management. Store managers began to exert more influence over the operation of the company, and, for the first time, supermarket employees were asked for their opinions regarding the chain’s management. Structurally, Randalls was divided into three management groups to oversee the company’s stores in Houston, Dallas, and Austin. Ultimately, the operational problems stemming from the Tom Thumb acquisition were not completely resolved until Robert Onstead moved to Dallas in 1996 to serve as a liaison between Houston and Dallas. Concurrently, he relinquished his title as chief executive officer to his son, who assumed strategic control over the company as it entered the late 1990s.

Randalls’ operational problems began to disappear after 1996, but another aftereffect of the early 1990s acquisition continued to hound the company. The acquisitions had left Randalls strapped for cash and burdened with debt. Although the company continued to expand following the absorption of Tom Thumb and AppleTree, it did so at a lumbering pace, causing its revenue volume to stall at roughly $2.4 billion during the mid-1990s. “We’ ve been under serious capital constraint the last three years, which has made it difficult to grow at the pace we felt we needed to grow,” Randall Onstead remarked in the April 7, 1997, issue of Supermarket News. “We’ ve opened three or four new stores a year during those three years, and we’d like to grow at a faster pace.”

Late 1990s: The End of an Era

To resolve their financial dilemma, the Onsteads chose not to complete an initial public offering of stock, but allied themselves with a financial partner instead. In 1997, the New York investment firm Kohlberg Kravis Roberts & Co. (KKR) purchased a 61 percent stake in Randalls for $225 million. KKR was most widely known for its hostile takeover of RJR Nabisco in 1989, a $25 billion deal that ranked as the largest takeover in business history. Randalls’ partnership with KKR gave the Onsteads the capital to reduce their debt and fund the expansion and renovation of their chain. Of the $225 million, the company used $100 million to reduce its debt of $340 million. The balance was earmarked for expansion. Armed with a fresh supply of capital, the Onsteads announced that they were pursuing a goal of $3.5 billion in sales by 2000.

In the wake of the KKR equity investment, Randalls threw itself into an exhaustive renovation and expansion program. Within 18 months, the company had opened ten new stores and had remodeled 39 existing stores. In the spring of 1999, eight new stores were under construction and five major renovations were underway, excluding the $113 million the company planned to spend during the remainder of the year to add 16 new stores and to complete 53 store renovations. Although chainwide sales failed to increase substantially, the sales recorded at individual stores before the KKR investment and after the KKR investment increased an industry leading 8.7 percent as Randalls headed into the summer of 1999. It was at this point when industry observers heard startling news. The announcement marked the beginning of a new era at Randalls.

In mid-1999, Pleasanton, California-based Safeway Inc. acquired Randalls in a $1.43 billion deal. The $27-billion-in-sales grocery chain operated more than 1,500 supermarkets in the United States and Canada. Safeway had abandoned the Houston and Dallas markets during the late 1980s as part of a restructuring program. Its return to Texas’s major markets represented the fulfillment of the company’s self-described “fill-in strategy,” as it sought to flesh out its North American presence. For Randalls, the acquisition promised to greatly improve the chain’s ability to remain competitive. As it had expanded throughout its three-city territory, the company faced stiff competition from rivals Albertson’s, Inc. and The Kroger Co., national supermarket chains that enjoyed greater purchasing power than Randalls. By becoming part of the Safeway fold, Randalls gained the ability to negotiate larger discounts when purchasing products, enabling the chain, in turn, to lower its retail prices and more effectively compete against Albertson’s, Kroger, and others.

As Randalls entered the 21st century, the company was buoyed by the vast financial support of Safeway. Although the acquisitions of the early 1990s had delivered substantial physical and geographic growth to the chain, the process of absorbing the companies and evolving into a regional chain had proven difficult. Much of the 1990s had been spent resolving operational, managerial, and financial problems stemming from the Onsteads’ march into Austin and Dallas, but following its acquisition by Safeway, Randalls’ management hoped to conclude the near decade-long struggle. Despite the company’s growing pains, its reputation among Texas shoppers remained impressively strong. Randall Onstead stayed on as chief executive officer, and the chain’s stores retained their names as well, making the transition into Safeway ownership an imperceptible segue in the eyes of most shoppers.

Principal Subsidiaries

Randall’s Food & Drugs, Inc.; Randall’s Properties, Inc.; Gooch Packaging Company, Inc.; American Community Stores Corporation; Food Depot, Inc.; Randall’s Beverage Company, Inc.; Randall’s Management Company, Inc.

Principal Competitors

The Kroger Co.; H.E. Butt Grocery Company; Albertson’s, Inc.

Key Dates:

1966:: Robert Onstead and two partners open two grocery stores in north Houston.
1980:: Four Handy Andy supermarkets are acquired.
1986:: Randall Onstead, son of the company’s founder, is named president.
1992:: supermarket chain is acquired.
1997:: Kohlberg Kravis Roberts & Co. acquires controlling interest in Randall’s.
1999:: Safeway Inc. pays $1.43 billion for Randall’s.