Stater Bros. Holdings Inc.

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Stater Bros. Holdings Inc.

21700 Barton Road
Colton, California 92324
U.S.A.
Telephone: (909) 783-5000
Fax: (909) 783 3930
Web site: http://www.staterbros.com

Private Company
Incorporated: 1989
Employees: 13,500
Sales: $2.75 billion (2003)
NAIC: 445110 Supermarkets and Other Grocery (Except Convenience Stores)

Based in Colton, California, Stater Bros. Holdings Inc. owns and operates some 158 supermarkets concentrated in Riverdale and San Bernardino counties, the so-called Inland Empire. In addition, it has some stores on Kern, Los Angeles, Orange, and San Diego counties. The chain, the largest locally owned in southern California, is known for its strict adherence to an appearance and dress code, which requires that store-level employees wear white shirts or blouses and have closely trimmed hair. In addition, beards are banned, and mustaches must be closely trimmed. From the start of its history, Stater Bros. has been built on the principle of low shelf prices combined with outstanding customer service. In 2003, Consumer Reports ranked Stater Bros. Markets as the best place to buy groceries in southern California; nationally, the chain ranked ninth. Stater Bros. is a private company owned by La Cadena Investments, a general partnership majority owned by the chain's chairman, chief executive officer, and president, Jack H. Brown.

1930s Origins

Stater Bros. was founded by twin brothers Cleo and Leo Stater in 1936. At the time, 24-year-old Cleo, a high school dropout, was working at a small grocery store in Yucaipa, California, earning ten cents a hour to man the cash register, stack the shelves, work the meat counter, and sweep the floor. The owner, W.A. Davis, told the young man that he was willing to sell the store to Cleo and Leo for $10,000. Because they did not have the money, he would further accommodate them by accepting just $600 down and the balance through $300 monthly payments. With their cars serving as collateral, he brothers were only able to borrow $300. Cleo decided to take a chance, and he approached rival grocery store owner, as well as the richest and meanest man in town, D.M. Holsinger, to ask for a loan. Years later Stater recalled, "He just looked at me and said, 'If [Davis] is crazy enough to sell you his store, then I'm going to be crazy enough to give you the money.'" The brothers opened for business in August 1936.

According to Jack Brown, the area east of Los Angeles was not an attractive market at the time: "The L.A. chains didn't want to serve this area. This was cement plant country and a railroad town—very blue collar. So the Stater brothers developed their own niche." Frugality, on a number of levels, also became a watchword for the brothers. In the midst of the Great Depression of the 1930s, it was difficult to meet the monthly $300 payments. As a result, they agreed to avoid credit and pay for everything with cash. In this way, they would buy only what they truly needed. At the same time, they were committed to providing their primarily working-class customers with the lowest possible prices, leading to the company's motto: "The low price leader in your hometown." This approach quickly proved successful, as the Staters began to expand their operation in San Bernardino County. In 1937, they opened a grocery store in Redlands, followed in the next two years by stores in Bloomington, Colton, and Fontana.

The Staters' careers were interrupted in the 1940s by America's entry into World War II. While they were serving as Army Air Corps pilots, their parents, Clarence and Mary, were forced to step in to run the business. As a matter of necessity, in order to keep all the stores in operation, they sold half-interests to each store manager, a move that made sense at the time but would later cause legal problems. Upon their discharge from the service, the Stater twins returned to the business and were joined by another brother, Lavoy.

During the postwar years of the late 1940s, as the Baby Boom generation was born and their parents moved en masse to new suburban housing developments, grocers began to open larger formats, "super" markets, which were actually modest in size compared to most contemporary stores. Stater Bros. first entry into this new era of grocery retailing came in April 1948 when they opened a 12,500-square-foot supermarket in Riverside. Above the store was an apartment where some of the Stater family lived. This state-of-the-art store featured air conditioning, fluorescent lighting, and music playing over the public address system. According to Cleo Stater's recollection, "We opened that store, stocked it and we sold practically everything in there the first day. That gave us the idea that we had to start expanding fast, which we did. For about two or three years, we were making a 100% return on our investment." With this steady cash flow, the brothers were able to grow without taking on debt. Each new store essentially funded the next, which was paid for by the time it was opened.

Although the Staters lacked contemporary research data and software programs, deciding where to locate a new store was not entirely a matter of guesswork—and was not, in fact, that far removed from current retail strategies. Because Cleo was a licensed pilot, they were able to fly over their market area and look for major clusters of houses. They then bought property as close as possible to these areas. Nevertheless, it was a risky approach to expansion: a few bad decisions could have easily led to ruin.

Innovations and New Owners:
1950s to the Mid-1980s

In other ways, Stater Bros. was also ahead of its time. During the 1950s, nine of their stores featured coffee shops to offer dining to their customers. One of the two San Bernardino stores included a restaurant on a second floor balcony overlooking the shoppers. In 1951, the company headquarters was moved to a Colton, where a 9,000-square-foot office and warehouse facility was opened. All of the produce and meat were now distributed from this central location, as were many of the items purchased in bulk. For a while, the facility even operated a bakery that supplied the chains' coffee shops and restaurants. It was in 1952 that Stater Bros. found itself in trouble with the government over its practice of having equal partnership in all of its stores and was sued for antitrust violations. Although Stater Bros. won, it elected to incorporate the chain. In 1958, Stater Bros. incorporated, and all but five of the partnerships were dissolved, and the store managers were bought out with either cash or stock. It was not until 1964 that all of the stores were brought into the fold.

In the 1960s, Stater Bros. grew with the communities it served: Orange, San Bernardino, and Riverside counties. All three were among the fastest growing urban counties in the United States. Because all of the chain's growth was internal, the company formed a construction division in 1960 to plan and build new supermarkets and other facilities. A year later, Stater Bros. opened a new 37,000-square-foot warehouse in Colton, but business was so strong that just two years later an additional 115,000 square feet was added.

By the end of 1967, the chain operated 32 supermarkets located in 20 cities. (Also of note, the restaurant division was closed in July 1967.) Net sales over the previous five years had grown from $51.5 million to nearly $77 million. At this stage, the chain did not own a dairy or bakery operation but was involved in a growing private label business, offering such products as coffee, cheese, salad oils, and soaps. A year later, in July 1968, ownership of the chain passed out of family hands. Deciding it was time to exit the grocery business, the brothers sold the chain to Long Beach-based Petrolane, Inc. for stock and approximately $32 million.

Petrolane started out as a single-product company, liquefied petroleum gas, launched after World War II. By the early 1960s, management had concluded that Petrolane was in essence a marketing company and was capable of selling virtually any product within its area of operation. The company began to diversify, adding petroleum services as well as becoming involved in consumer products such as Mark C. Bloome tire stores and the Stater Bros. supermarket chain. Petrolane invested in the opening of new supermarkets, and by 1970 Stater Bros. became the second-largest contributor to the Petrolane balance sheet, trailing only the LP-gas division. At the close of 1970, the chain was 38 units strong and on the verge of reaching the $100 million mark in annual revenues. Three years later, the chain comprised 49 stores. By the end of the 1970s, there were 83 Stater Bros. stores and sales were in the $450 million range. Although Petrolane was quick to invest in new store openings, it was slow in introducing technology to the operation, which hurt profitability. It was not until 1977 that the company's accounts payable system was computerized, the first step in modernizing the chain. Scanning was introduced in 1979.

Stater Bros. entered the next decade with a strong push, opening ten new stores in 1980. Despite the expanding store base, however, the chain experienced a tailing off in profits. To help address this problem, in 1981 Petrolane recruited Jack Brown, who had a record as a turnaround artist, to serve as the president of Stater Bros. Locally born in 1938, Brown had worked his way up in the grocery business. At the age of eight, he lost his father, a San Bernardino County chief deputy sheriff who died from illness, and to help the family pay the bills he went to work at the age of 13 as a box boy at a San Bernardino grocery, Berk's MarketSpot. There, the owner, Mr. Berk, became something of a substitute father to Brown and taught him the business. After college, Brown made a career in supermarkets. When he was just 28, he became Vice-President of Sales and Merchandising for a San Bernardino chain, Sage's Complete Markets, then moved to Indiana, where he spent nine years as a corporate vice-president of a Midwest chain. He returned to California to become president of Pasadena's Pantry Markets and later assumed the presidency of American Community Stores in Omaha, Nebraska. According to Brown, he three times refused to take the Stater Bros. job before Petrolane made an offer he thought was too good to refuse.

Company Perspectives:

Since that first day in 1936, serving our "Valued" customers with the lowest prices on name brand and quality merchandise has been the goal of Stater Bros. Markets.

Brown's relationship with Petrolane would be short lived, however. In 1983, Petrolane decided to sell most of its non-energy assets, including the Stater Bros. supermarket chain. Brown and two other executives led an investor group that paid $110 million to acquire the business. The man with the bulk of the money was Bernard Garrett, who made his fortune from a Jerico, New York, electronics company, Instruments Systems Corp. In 1979, he set up a Los Angeles management firm to handle family investments. Garrett, who owned a 51 percent stake, became chairman of the board, while Brown stayed on as CEO and his management group controlled the remaining 49 percent interest.

From Private to Public and Back Again:
Mid- to Late 1980s

From the start, the new owners of Stater Bros. talked about eventually taking the chain public. In 1985, the company took steps to prepare for an initial offering of stock, forming a holding company to make the offering and house the subsidiaries. Kidder Peabody was contracted to serve as the lead underwriter. Brown began to conduct road shows later in the year to attract investors. However, one night while he was in Minnesota, according to Brown, he received a phone call from Kidder informing him that Garrett had been involved in some leveraged buyouts that had ended up in bankruptcy court and that one of the directors had once been involved in a bankruptcy. None of this information had been disclosed in the offering's preliminary prospectus.

To rectify this situation, the director was quickly removed, the prospectus amended, and the offering was completed in November at $10 a share. Initial estimates had ranged from $12.50 to $14.50. The intrigue, however, was just beginning. Early in 1986, Garrett called for an emergency board meeting where he announced that he had conducted an investigation of Brown which revealed wrongdoing. Brown was quickly suspended by a board dominated by people chosen by Garrett, and guards were dispatched to bar Brown from his office while the locks were changed. A subsequent suit filed by the company charged that Brown had ordered the chain's inventory to be arbitrarily reduced by $600,000, thereby reducing profits as a way to depress the price of the company's stock when it hit the market. In this way, Brown could allegedly buy shares on the cheap.

Brown vehemently denied the allegations, maintaining that the inventory decision was aboveboard, and he countered that Garrett, who now owned about 38 percent of the company, was trying to oust the management partnership that controlled about 40 percent. Brown was backed by both the community and the work force. In a highly unusual move, members of the Teamsters and United Food and Commercial Workers not only staged noisy demonstration in support of Brown, their union bought stock in an attempt to help Brown win an upcoming proxy fight for control of the business. Brown was admired by Stater Bros. employees in part because he was known to keep a box cutting knife on his desk to remind him of his own working-class roots. Moreover, during a strike against other supermarkets the previous year, he refused to lock out the Teamsters. After a five-month fight for control of Stater Bros., Brown emerged victorious, and Garrett was bought out. Craig Corporation, a Compton-based electronic distributor, helped to provide the financing. Craig and Brown's group, La Cadena Investments, then took the business private again in 1987. In 1993, La Cadena bought out's Craig's 50 percent share and became the sole shareholder.

Continued Success in the 1990s and Beyond

By the 1990s, Stater Bros. was generating more than $1 billion in annual revenues, but as one of only a handful of locally owned and relatively small grocery chains it faced a challenging retail environment. Smith's Food & Drug, a Salt Lake-based chain, moved into the southern California market early in the decade. The Utah outfit was expected to offer stiff competition for Stater Bros., but by 1996 Smith's decided to pull out. Given the opportunity to acquire some of the stores, Stater Bros. declined, preferring instead to open stores in locations of its own choosing, concentrating on areas where the chain was already strong. During much of the 1990s, the chain added only a handful of new stores—four in fiscal 1992, two in 1993, and three in 1994—while just four replacement stores were replaced. In 1996, Stater Bros. launched a $20 million renovation project that would enlarge and modernize 83 of the chain's 110 stores, the most aggressive program of its kind for the chain since Brown took over. In addition, Stater Bros. earmarked $15 million to open three larger format stores.

By a stroke of good fortune, Stater Bros. increased by 43 stores in 1999 when it became the beneficiary of a merger between supermarket chains Albertson's Inc. and American Stores Co., parent of the Lucky grocery chain. Because the $11.7 billion merger caused concern among state and federal regulators about the impact on competition in the southern California grocery industry, the two companies were ordered to divest a significant number of stores before the merger could be completed. As a result, Stater Bros. was able to acquire 33 Albertson's and ten Lucky supermarkets, many of which were located in areas where Stater Bros. was hoping to expand. Brown called it a "one-in-a-lifetime occurrence" for the company. At a cost of $147.2 million, Stater Bros. virtually doubled its presence in Los Angeles County and Orange County. All told, the Stater Bros. chain of supermarkets grew to 155.

Key Dates:

1936:
Cleo and Leo Stater acquire their first store.: 1958:
The business is incorporated.: 1968:
The company is acquired by Petrolane, Inc.: 1981:
Jack Brown named is president.: 1986:
Brown wins a proxy fight for control of the company.: 1999:
The company acquires 43 stores in a merger divestiture.

Although it was the largest locally owned independent chain, Stater Bros. hardly measured up in size to the national chains like Kroger, Ralphs, and Albertson's that had a strong presence in the southern California market. When Brown met with executives from the Big 3 chains in 2002 to discuss a strategy for upcoming contract talks with union employees, he was placed in a difficult position. The Big 3 wanted concessions on health, pension, and salary benefits and were determined to take a hard line. Because the southern California market represented a small percentage of their national business, they could ill afford to wait out a strike or initiate a lockout. The only private company involved, Stater Bros. operated entirely in southern California and could not afford a major loss of business. Brown was also advised that his employees had taken a vote, and 100 percent voted not to strike Stater Bros. In turn, he pledged not to lock out the union and took the unusual—and in the opinion of many, brilliant—step of accepting up front whatever agreement the union and the Big 3 eventually settled on. Thus, when talks broke down in the fall of 2003, leading to a supermarket strike that began on October 11, Stater Bros. was able to pick up an unprecedented amount of additional business. Not only was it a temporary windfall for the company, it was expected that at the end of the strike a large percentage of the new shoppers would remain Stater Bros. customers.

In 2004, Stater Bros. gained approval to build a new $200 million general office and distribution center on part of the former Norton Air Force Base in San Bernardino County. The new state-of-the-art distribution center would consolidate the operations of eight facilities and the resulting efficiencies were expected to save the chain millions of dollars. A number of communities in state and out of state attempted to attract Stater Bros., but in the end the native son and the local supermarket chain decided to stay home.