Shoppers Food Warehouse Corporation

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Shoppers Food Warehouse Corporation

4600 Forbes Boulevard
Lanham, Maryland 20706
U.S.A.
Telephone: (301) 306-8600
Fax: (301) 306-8855
Web site: http://www.shoppersfood.com

Wholly Owned Subsidiary of Supervalu Inc.
Incorporated: 1956 as Jumbo Food Stores
Employees: 5,000
Sales: $971.7 million (2002)
NAIC: 445110 Supermarkets and Other Grocery (Except Convenience Stores)

A subsidiary of Supervalu Inc., Shoppers Food Warehouse Corporation operates a chain of 57 warehouse-style supermarkets, serving Delaware, Maryland, Virginia, and the Washington, D.C., markets. The company's headquarters is located in Lanham, Maryland. Although its takes a no-frills approach—items are presented for sale in their own packing cartons and customers bag their own food—Shoppers offers a wider range of products and services than other warehouse chains, including baked goods, cookware, produce, salad bars, and prepared food.

Founder Opens First Grocery Store in 1929

The founders of Shoppers were two brothers, Irving and Kenneth Herman. Their parents were Russian immigrants who opened a small delicatessen in northwest Washington, D.C., in 1919. The boys worked in the store, sweeping floors and stocking shelves, while the family lived in the back. Irving did not intend to devote his life to the grocery business and was instead interested in becoming a lawyer. While attending George Washington University Law School, however, he opened a grocery store in Washington, financed by a $300 wedding present and a loan of some $500, and ran it with his wife Toby. After finishing law school the next year, he was prepared to get out of the business and start practicing law, but with the country lapsing into the Great Depression of the 1930s, his prospects for a legal career were dim. His bank loan officer, who had been keeping tabs on Herman's grocery store, weighed in with his opinion, "I've seen many unemployed lawyers. Stay in business." Herman took his advice. Several years later, he was joined by his brother, and in the late 1930s they launched the first Jumbo Food Stores—Shoppers' predecessor.

With the population boom during the post-World War II years and the rise of the supermarket concept, the Herman brothers successfully added several Jumbo stores in the area surrounding Washington, D.C. Irving's son, Michael, also became involved in running the business. By the mid-1970s, however, the company grew stagnant and was in trouble financially. In order to stay afloat, it had to seek concessions from an employee union. Desperate for a way to turnaround the company, the Hermans decided to try the warehouse approach and opened their first Shoppers Food Warehouse in 1978. A key factor in the move was the computer technology that by this time had become instrumental in the supermarket industry. By scanning items at the cash register, the Hermans realized, a store could maintain much better control of both inventory and prices. The concept was to eliminate private-label goods and sell only name brand products, but at prices 20 to 30 percent lower than conventional supermarkets. Shoppers would be able to maintain a pricing edge by keeping employment and services to a minimum. Hence, items were simply stacked in their packing boxes and customers bagged their own groceries.

The Shoppers formula worked, and the company began to convert all of its Jumbo stores to the new warehouse format. In 1986, the company dropped the Jumbo name in favor of Shoppers. The Hermans were not the only grocers to try the warehouse format, but they were more successful at its implementation than others, a key factor in the highly competitive Washington market. The area was dominated by Giant and Safeway, and a number of major chains—Acme, Grand Union, Memco, and Pantry Pride—had all attempted to break into the market and failed. Shoppers was able to take advantage of the situation, buying some of the shuttered stores and opening warehouse units in their place. As a result, Shoppers, with 11 stores, rose to third place in the market, albeit a distant third, controlling just 5.7 percent, or $211 million of a $3.6 billion market.

Ownership Changes in the Late 1980s–Early 1990s

Shoppers reached a turning point in 1988. Irving Herman was ready to retire, and his son Michael wanted to exit the business to pursue other interests. As a result, the family was open to selling part of the company and found an ideal suitor in Dart Group Corp., which operated the Trak Auto discount auto parts chain and the Crown Books chain. Dart's chairman was Herbert Haft, who was also the son of Russian immigrants and had attended high school and George Washington University with Kenneth Herman. Haft had made his fortune in the drugstore business. His father had owned a Baltimore drugstore, where Haft worked as a child, and after becoming a pharmacist he opened his first Dart drugstore in downtown Washington in 1954. He eventually built his business into a 73-store discount chain and became a major player in real estate. Haft's son Robert, who held a Harvard MBA, joined Dart in 1977 and launched Crown. Two years later, Dart established the Trak Auto. In 1984, Dart sold off the original drug store chain and the Hafts became involved in takeover bids as a way to enter the supermarket business. They failed in their attempts to land Safeway Stores Inc., Supermarkets General Corp., and Stop & Shop Co. However, they made money selling their shares at a premium, which led to the perception that they were not truly interested in food retailing, just stock speculation. The hope was that by becoming involved with Shoppers, the Hafts would gain some credibility as food retailers, and when making future bids in the industry they would not simply be dismissed as hostile raiders.

Upon the completion of the sale of a 50 percent interest in Shoppers to Dart, for approximately $17 million, Irving Herman retired as chairman and son Michael resigned as executive vice-president. Shoppers' board would now be co-chaired by Kenneth Herman and Herbert Haft. Although Dart now held a controlling interest in Shoppers, Herman retained an option to reacquire one share and regain control of the company. The Hermans continued to run the chain on a day-to-day basis, while Dart was expected to help the chain grow internally by using its knowledge and connections in drugs and cosmetics to bolster sales in those areas, help in improving the look of the stores, and use its real estate expertise in the selection of new locations.

Over the new few years, Shoppers enjoyed steady growth. Its market share in Washington increased to 7.7 percent in 1989, 8.5 percent in 1990, and 10.3 percent in 1991. The total number of stores also grew to 27. The chain's success was due in part to a recession that made the chain's price-conscious approach more appealing to many consumers, as well as an aggressive advertising campaign. The Shoppers logo was prominently displayed on the scoreboard at Washington Redskins football games at RFK Stadium, and newspaper ads featured comparisons of cash register tapes from Shoppers, Giant, and Safeway. Shoppers' television advertisements were also prevalent. Although Giant and Safeway remained the undisputed market leaders, Shoppers' inroads forced the larger chains to take countermeasures, such as doubling coupons. Shoppers positioned itself for further growth by continuing to open new stores and acquiring existing stores from smaller competitors, such as Basics. In 1992, the chain opened seven new stores, and its market share improved to 11 percent. Nevertheless, all was not well with the company. Much of its recent success was due to the large number of new store openings. Same-stores sales, however, were either flat or negative. Some of the problem stemmed from the real estate choices made by Dart, which sometimes located stores too close to one another, more concerned with what was good business for the real estate unit rather than what made sense from a food retailing point of view.

Shoppers' relationship with Dart was also complicated by a Haft family feud that broke out in 1993 and soon turned into a virtual soap opera. Herbert Haft, 72 years old, had made plans to retire as Dart's CEO and turn over the reins to his 40-year-old son Robert. However, he changed his mind, which according to some sources was prompted by a Wall Street Journal article that called Robert the "de facto chief executive for the last two years." At a contentious board meeting, Herbert's wife Gloria took the side of their son, and Herbert responded by having both of them ousted from the board. She then divorced him after 50 years of marriage, ultimately winning a $14 million settlement, and the son sued over being fired, winning $40 million. Herbert Haft promoted younger son Ronald to the presidency of Dart, but this faction in the family squabble—which pitted them against Gloria, Robert, and a sister named Linda—proved short-lived. They would fall out when Ronald accused his father of borrowing $18 million from Dart without board approval and insisted he return the money. The two then began hurling accusations at each other in stormy board meetings, which in recent years had become a forum for family squabbles. In an attempt to shelter control of Dart from his wife, Herbert had sold his voting shares to Ronald, who now took advantage of the situation to sell those shares back to the company, thus diluting his father's controlling interest to less than 50 percent. In this way, he was able to have his father removed as chairman.

Another person with whom Herbert Haft had a falling out during this period was his old friend Kenneth Herman. In June 1994, Herman elected to exercise the option to reacquire one share of Shoppers and wrested back control of the chain. In this way, Shoppers would no longer be pushed into unsuitable locations and Herman's son, Robert, would be in line to succeed him as chairman. According to press reports, Herbert Haft opposed the nomination of Robert Herman to the top post, preferring instead to have the chain brought under his management control.

Company Perspectives:

Your one-stop shop for groceries, prescriptions, and all your banking needs.

Over the next four years, Shoppers operated with Dart and the Herman family each owning 50 percent of the company. Despite internal friction during this time, the chain managed to add stores and market share. In 1996, Shoppers totaled 34 units, generating $830 million in sales with a 13.5 percent market share. Shoppers also introduced a new, larger format, some 75,000 square feet in size, called Shoppers Club. These four units combined elements of price clubs and warehouse supermarkets. In addition, Shoppers began introducing cafes in its 30 other warehouse stores. Both the Hermans and Dart were by now interested in severing their ties and dissolving the uncomfortable board arrangement of Kenneth Herman, Robert Herman, Herbert Haft, and Ronald Haft. However, any sale would be subject to the terms of a complicated buy-sell agreement, which stipulated that if one side wanted to sell, it had to set a price. The other side then had 120 days to either buy half the business at that price or sell its half. Thus, there was a great deal of pressure on the initiating partner to set the right price: too low and the other side bought the business on the cheap, while too high a price would likely saddle the initiating partner with a heavy debt load. As a result, neither side wanted to make the first move. To speed the process along, Shoppers hired New York-based investment firm Lazard Freres to help in determining the market price of the chain, but Dart was clearly in a position where it needed to take action. In December 1996, Dart triggered the buy-sell provision, setting a $210 million price for a 50 percent interest in Shoppers. The Herman family agreed to sell its stake, and the transaction was completed in February 1997. Two months later, Dart settled its differences with Herbert Haft, who agreed to a $41 million settlement to relinquish control of the company and step down as CEO and chairman.

Late 1990s and Beyond

Shoppers was only fully owned by Dart for little more than a year. In April 1998, Richfood Holdings Inc., a regional wholesale distributor, agreed to acquire Dart's outstanding stock in order to acquire Shoppers. Dart's other assets—Trak Auto, Crown Books, and Total Beverage—were either sold or spun off. The addition of Shoppers, along with the acquisition of the 45-store Farm Fresh supermarket chain a month earlier and 17 Metro stores already owned, made Richfood into a regional powerhouse in the area with nearly 100 stores. Acquiring Shoppers was also a necessity for Richfood because its supply contract with the chain was set to expire, and the distributor could not afford to lose the business—although Richfood's CEO, John E. Stokely, maintained that Richfood did not "do things for defensive reasons."

With the supermarket industry undergoing a period of intense consolidation, Richfood was dealt a severe blow in 1999 when major wholesale customer Giant Food Stores elected not to renew its contract to buy dry goods through Richfood after 1999. The decision came in anticipation of Giant's corporate parent acquiring Pathmark Stores and establishing its own internal distribution operation for its extensive supermarket holdings. Less than two months later, Richfood was sold to Minneapolis-based SuperValu Inc. for $882 million, a move that both parties had to make given the consolidation going on in the industry.

Despite a number of changes in ownership during a short period of time, Shoppers continued to grow in the Washington market. With Supervalu's backing, the chain acquired four former Superfresh stores in Maryland and Virginia. In 2003 and 2004, Supervalu demonstrated its commitment to the Shoppers format by converting all of the 15 Metro supermarkets acquired from Richfood to Shoppers. When the conversion was completed, the Shoppers chain had 58 stores in the Washington, D.C., area. In the meantime, in September 2002, Shoppers co-founder, Irving Herman, the law school graduate who decided to sell groceries rather than practice law, died at the age of 95.