Yucaipa Cos.

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Yucaipa Cos.

10000 Santa Monica Boulevard, 5th Floor
Los Angeles, California 90067
U.S.A.
(310) 789-7200

Private Company
Employees: 57,000 (est.)
Sales: $11 billion (1995 est.)
SICs: 5411 Grocery Stores; 6799 Investors, Not Elsewhere Classified; 6719 Holding Companies, Not Elsewhere Classified

Yucaipa Cos. is an investment firm specializing in leveraged buyouts of grocery stores and supermarkets. By the mid-1990s, it held controlling interest in three major regional supermarket chains operating more than 600 stores in 11 states. These chains—Ralphs Grocery Co., Dominick’s Finer Foods, and Smith’s Food & Drug Centers—had number one or number two market shares in Los Angeles, Chicago, Salt Lake City, Phoenix, Las Vegas, and Albuquerque. Stores controlled by Yucaipa operated under the names of Ralphs, Food 4 Less, Food Co., Cala Foods, Bell Markets, Dominick’s Finer Foods, Falley’s, and Smith’s Food & Drug Centers. In 1995, the three chains employed approximately 57,000 people and had estimated revenues of about $11 billion. Ronald Burkle is the chairman and managing partner of Yucaipa Cos.

Early History

The grocery business has been putting food on Ronald Burkle’s table for a long time. His father worked for, and eventually became president of, Stater Brothers, a southern California supermarket company. Ronald Burkle went to work at his father’s store in 1966, when he was only 13, boxing groceries after school. In college, Burkle studied dentistry, but found his real interest was the stock market. He dropped out of California State Polytechnic University in 1973 and returned to Stater. While moving up in the company, he played the market as much as he could and watched the beginning of the leveraged buyout activity in the late 1970s. By 1981, when he was 28, Burkle was vice-president in charge of administration for Petro-lane Properties, Stater’s parent.

When Petrolane decided to sell Stater that year, Burkle convinced his father and other management personnel to back him in making an offer for the company. With Berkshire Hathaway putting up half the equity, Burkle’s team made a bid—22 percent less than Petrolane’s bankers had promised they could get for the company. Burkle was fired the day his bid was rejected.

The 1980s

Undeterred by the Stater experience, Burkle began buying. He started with a small candy company and then added a Chevrolet car dealership in southern California. But he concentrated on grocery stores, investing in supermarket stocks and making money as chains began consolidating.

In 1986, Burkle bought his first grocery chain, Jurgensen’s, a small, gourmet food chain in Los Angeles. This was soon followed by the purchases of Cala and ABC Markets. By 1989, Yucaipa was operating 24 stores, including Food 4 Less warehouses in the San Bernardino and Moreno Valley areas of California and Falley’s Inc. in Kansas and Missouri. It also franchised Food 4 Less warehouses in 17 states.

That year Breco Holding Company merged with Yucaipa Holding Company. Breco operated 70 stores in California, and its senior executives had worked with Burkle at Stater Brothers. The merger, which cost $375 million, created a chain of nearly 100 stores, including the 24 in the Los Angeles-based Boys Market chain, the Hispanic-oriented Viva Mart stores introduced by Boys in 1988, and other supermarkets in the Los Angeles and San Francisco Bay areas. The combined company, according to the Los Angeles Times, was expected to have revenues of $1 billion per year. Burkle became chairman of the combined company.

At the same time, another Burkle company, Yucaipa Food Corp., announced it was buying Almac’s Inc., Rhode Island’s largest grocery chain. Yucaipa announced it would operate the stores independently under their current management. Burkle told The Boston Globe Yucaipa had no plans to divest of any stores and that the company expected to spend “well into ten figures” remodeling existing stores and adding new stores over the next two years.

Acquisitions in the Early 1990s

Burkle’s purchases followed a pattern. He targeted businesses in Watts and East Los Angeles, inner-city black and Hispanic neighborhoods, which other large chains, such as Von’s and Lucky’s, had abandoned. As a result, although security costs were higher, the stores could charge higher prices to cover those costs, so long as they offered what customers wanted.

By the early 1990s, Burkle had consolidated his various enterprises into Yucaipa Cos. and was operating his supermarket chains under his Food 4 Less Supermarkets, Inc. subsidiary. Financier George Soros invested $75 million in equity in Food 4 Less, becoming Yucaipa’s first outside investor.

In 1991, Burkle began negotiating with American Stores for its Alpha Beta grocery chain, one of the largest in southern California and valued at around $400 million. American was forced to sell its Alpha Beta stores as part of an antitrust settlement when it bought the Lucky Stores chain in 1988. With $400 million in financing from Bankers Trust New York Corp., Citicorp, and Manufacturers Hanover Corp., Burkle bought 145 Alpha Beta stores for about $250 million. The buyout doubled the size of the Food 4 Less unit to about 215 stores, 22,000 employees, and $3 billion in annual sales in the southern part of the state, and put Yucaipa in second place, behind Von’s, in the number of supermarkets in the greater Los Angeles area. Although most of the Alpha Beta stores were small (less than 30,000 square feet), and at least 40 were marginal, Burkle did not close them down. Instead, he began converting many of those that were borderline to Viva stores and promised to keep the others open. During the next three years Food 4 Less Supermarkets spent more than $120 million upgrading and renovating the Alpha Beta chain. In exchange, the United Food and Commercial Workers Union asked its members to give up triple-time pay for certain holidays and was considering a training wage below the negotiated starting salary of $8 an hour.

Later in the year, Burkle sold the Almac’s chain in Rhode Island to Leonard Green, netting Yucaipa $75 million on its $5 million investment in just two years. That sale helped to reduce the company’s debt of more than $500 million. But with Yucaipa’s operations generating about $115 in cash flow, it was easily able to cover interest payments.

The year 1992 was difficult for businesses in Los Angeles. A total of 36 of the Food 4 Less stores were damaged during the riots in Watts and south-central Los Angeles, and the slow economy in the state affected sales throughout the chains. In December 1992, Food 4 Less instituted its “Caring 4 You” program in its southern California stores to handle employees’ workers’ compensation problems and questions. The program was created by management and unions; the company hoped to keep costs down and avoid lawsuits, and the unions wanted to be sure members got their benefits without a lot of hassle.

Under the program, representatives from Health Management Center West, an employee assistance company, worked with employees injured on the job to make sure they got appropriate medical attention, investigated late checks, and helped with cumbersome paperwork. A coordinating committee of management and union representatives met monthly to make sure the program was running smoothly.

The coordinating committee also instituted a temporary labor program, providing employees with jobs they could perform while they were healing from their injury. Employees received full pay for the temporary jobs, which were not open positions that could be filled by another employee and could last no longer than six weeks. As Linda McLoughlin Figel, a company vice-president, explained in a 1993 Stores article, “There are things we would like to have done in the stores, that have fallen on the back list of priorities. If a person is normally loading trucks it may be he can check orders or sweep trucks out. We are doing it in conjunction with the unions because we don’t want to take away from existing union jobs.”

Southern California was the country’s largest retail market based on dollars spent, and it was probably the most competitive. As price wars heated up in 1993 among supermarkets, drug stores, discount units, and clubs, Food 4 Less Supermarkets took a different tack for its 250 stores, focusing on good service, an efficient distribution system, and a diverse mix of products other than food. “We know we can’t be all things to all people,” Vice-President Larry Ishii told Supermarket Business in its December 1993 issue. “What we can be is a complete supermarket chain, and we need to stress our strengths to the customer.” Because of the small size of many of its outlets, the company concentrated on providing space to products that had high consumer demand. That meant highlighting toothbrushes, toothpaste, and shampoo, and cutting back on upscale brands of cosmetics.

To improve scheduling and delivery of its merchandise, the company invested in vehicle locators and computers/recorders for its trucks. The software for the onboard trip computer/ recorders made it possible to develop a seasonal delivery schedule based on a customer’s volume swings and to plan routing each day to each customer’s door. The technology improved fuel efficiency by ten percent and raised the rate of on-time deliveries from 80 to 92 percent.

As part of its ongoing expansion strategy, Food 4 Less moved into the San Diego market. Plans called for opening 26 new stores—Boys Market, Viva, Alpha Beta, and Food 4 Less warehouses—as part of a $60 million capital spending program.

As the largest employer in inner-city Los Angeles, the Yucaipa stores also attempted to differentiate themselves from their competitors by their commitment to their communities. For example, over a three-year period, the Boys Viva Supermarket Foundation and Alpha Beta contributed about $10 million to the Los Angeles Unified School District to support after-school interscholastic athletics programs.

The year 1994 saw the introduction of the company’s new private-label brand, EQuality. The new line offered 250 health and beauty care items and general merchandise at prices 15-30 percent lower than national brands. The first items introduced in the stores were cough and cold remedies, vitamins, baby wipes, toothbrushes, and nail products. But even before these were on the shelves, an earthquake hit Los Angeles in January. Food 4 Less had to close 34 stores briefly where the loss of electricity damaged or spoiled merchandise.

The big action in 1994, however, was more buyouts and consolidation. In June, Yucaipa bought Smitty’s Super Valu, Inc., a 28-store chain operating in Phoenix and Tucson, for $138 million. And in September, Yucaipa announced the management-led buyout of Ralphs Grocery Co. for $1.5 billion. Ralphs was to be merged with Food 4 Less in the largest supermarket merger in California history. The merger made good sense; Ralphs operated conventional-format stores in middle and upper-middle income areas, whereas Food 4 Less operated price impact warehouse stores that were doing well and conventional stores that were doing less well.

Yucaipa paid Ralphs stockholders $525 million, assumed $980 million of Ralphs’ debt, and became the majority stockholder in the new company, which kept the Ralphs Grocery Co. name. After all, as Ralphs president Al Marasca explained to Supermarket News, “We’ve been here since 1873, and we’re the oldest supermarket chain west of the Mississippi, with a strong customer franchise and a fine reputation for how we operate.”

Ralphs was also a pioneer in the supermarket industry. In the late 1950s it was the first major chain to centralize its meat-cutting. Ralphs chairman and CEO, Byron Allumbaugh, initiated the experiment when he started at the company. In a 1996 Supermarket News article he recalled, “Stores used to get beef hanging on hooks and disassemble it in the stores—a massive, labor-intensive job. I always thought there had to be a simpler way. So we set up a disassembly factory at a central location. There we did all the major production work centrally and put beef in smaller pieces in shrink-wrap and shipped it to the stores for the final cuts.”

The first scanners west of the Mississippi appeared in Ralphs checkout aisles in 1974. “Scanning changed the whole world of food retailing,” Allumbaugh told Supermarket News. “For the first time, food retailers knew more about what they sold than the manufacturers. All of a sudden we had the information that helped us set up stores, reorder, decide what to promote. Before that, manufacturers told us what to sell, how to set it up on the shelves, and how to promote. It was now a whole different world.” Ralphs was also one of the first supermarkets in the country to use a computer (in 1958) and to use that technology to transmit orders between company headquarters and the headquarters of its suppliers.

Ralphs was owned by its founding family for 95 years. But, in 1968, the family sold the company to Federated Department Stores. Twenty years later, Federated was the target of a hostile takeover by the Canadian company, Campeau Corporation. Shortly afterward, Ralphs executives and Campeau Corporation separated Ralphs from Federated in a leveraged buyout. In 1992, to pay off a debt, Campeau gave Ralphs stock to Edward J. DeBartolo, and the supermarket chain became part of his mall development company. Within a year DeBartolo began selling off assets, and Allumbaugh and Ralphs began looking for a merger partner.

At the time of the merger announcement in 1994, Ralphs had 370 conventional stores and Food 4 Less operated 133 conventional Alpha Betas, 24 conventional Boys, 15 conventional Vivas, and 30 Food 4 Less warehouse outlets in the southern part of the state. The company planned to close about 20 stores, primarily Alpha Betas, and eventually operate 360 stores. Conventional stores would all be called Ralphs and the warehouse, price-impact format would operate as Food 4 Less. In the process, the names Alpha Beta and Boys, which had been around for more than 70 years, as well as the six-year-old Viva name, would disappear.

Before the merger could be completed, however, the California state attorney general required that the company sell 27 stores. As he told Supermarket News in December, “We view this merger as potentially problematic from an antitrust perspective in that the combination of Ralphs and Yucaipa Cos. stores could have adversely reduced competition in a number of neighborhoods. A significant reduction in competition within a neighborhood can result in higher prices for consumers.”

Delays in the Ralphs merger did not stop Yucaipa from bidding on other chains, and in November Burkle announced Yucaipa had acquired three stores in southern California from the bankrupt Megafood chain. These were reopened by the end of the year as Food 4 Less warehouse stores.

1995 and Beyond

As Business Week reported in its May 8, 1995 issue, consolidation was the word in the supermarket industry. The reasons for this were low multiples, low inflation in food prices, and new technologies. “With technology, there are a lot of things we can do now that would have been impossible a few years ago,” Burkle told Business Week. For example, Yucaipa eliminated Food 4 Less’s distribution centers and replaced them with automated racking systems. Big grocery chains were also learning from other large retailers how to use sophisticated information systems to study consumer buying patterns to target their advertising and even to link up with frequent-flier programs.

Yucaipa started the year by announcing it was buying Do-minick’s Finer Foods, the second largest grocery chain in the Chicago area, with about 100 stores. In addition to Yucaipa, the investment group for the $750 million deal included senior managers from Dominick’s and financiers George Soros and Leon Black. The DiMatteo family, who founded Dominick’s in the mid-1920s, kept a minority interest in the company. According to a February 6, 1995 Supermarket News story, the purchase increased Yucaipa’s sales base by close to $9.25 billion. This included $2.5 billion from Dominick’s, $5.5 billion from the merger of Food 4 Less and Ralphs, $300,000 from stores in northern California, $650,000 from Smitty’s Super Valu in Arizona, and $300,000 from Falley’s in the Midwest. Although Dominick’s would remain a separate chain with Burkle as chairman and CEO, Yucaipa expected to make the most of the buying power of its three companies in working with suppliers.

The Ralphs/Food 4 Less merger became final in June 1995, with Burkle as chairman, Byron Allumbaugh remaining as CEO, and Al Marasca continuing as president and COO. George Golleher, who joined Yucaipa in 1989 with the Breco merger and was president and CEO of Food 4 Less, assumed the newly created position of vice-chairman. Yucaipa now operated more than 500 supermarkets, controlling 30 percent of the southern California market, 24 percent of the Chicago market, and 24 percent of the Phoenix market. While continuing to look for more acquisitions, Burkle also addressed the needs of each of his companies and divisions.

For Dominick’s this meant making better use of software systems for accounting and delivery and expanding the chain into the suburbs. In Arizona, increased market share was the goal, as Yucaipa spent about $25 million to remodel 17 Smitty’s stores. The Midwest region, with 38 stores, continued to absorb the ten Food Barn locations it purchased in 1994. That region operated six conventional stores under the Falley’s name and 32 Food 4 Less outlets.

In the San Francisco Bay area, where it operated 25 stores, Yucaipa concentrated on opening more warehouse-size stores under the Food Co. name. The name difference was necessary because another company had the license for the Food 4 Less name in that part of the state. “With only six warehouse stores there now, we don’t have enough volume to operate a distribution facility,” Burkle explained in a July 3, 1995 Supermarket News article. “Opening more warehouse stores [instead of conventional format Cala Foods and Bell Market stores] will add enough volume to enable us to look at opening a perishables warehouse.”

For the new Ralphs, the focus was on the conversions and improving same-store sales. A big ad campaign using radio, TV, and newspapers stressed the merger and the savings to be passed on to customers as a result of the new company’s buying powers. Ralphs also had to sell the 27 stores required by the state attorney general and it announced that it was closing or selling up to 16 other stores. In addition, the company planned to spend more than $130 million on capital expenditures in 1995, including five new Food 4 Less stores and four new Ralphs units. By October, most of the conversions to the Ralphs name had been completed, and by the end of the year, 20 Ralphs stores had been changed to the Food 4 Less format.

In January 1996, Ralphs named George Golleher as CEO, succeeding Byron Allumbaugh, who resumed his former position as chairman. Al Marasca remained president and COO, with responsibility for all of the company’s stores. As part of the management change, Burkle stepped down as chairman. The same month, Burkle handed over the position of CEO at Dominick’s to Robert Mariano, the company’s president, but remained as chairman.

Although most of the conventional stores had been converted to Ralphs stores, many of the older, smaller Alpha Beta units did not realize the anticipated five percent sales boost. The early part of the year saw Ralphs lay off some 1,000 employees, about 3.8 percent of its work force. Most of these were part-time workers at 28 stores the company closed because of underper-formance or because they were competing with another chain store for customers. As Jonathan Ziegler of Soloman Brothers explained in a March 11 article in Supermarket News, “After an LBO, a company needs to sharpen its cost structure, and Ralphs will really have to fine-tune its operations to make them more productive.” The company anticipated rehiring a large portion of these workers as it opened new stores during the year.

Ralphs responded to concerns about price competitiveness with its “Extra Savings Every Day” marketing campaign. The program was aimed at communicating the value, prices, and expanded products available since the merger. The campaign included double coupons, customer testimonials, and more Sunday ads, and emphasized the fresh produce now available.

In May 1996, Smitty’s Supermarkets, Inc. merged with Smith’s Food and Drug Centers, Inc., a public company. Smith’s issued stock to Smitty’s shareholders and entered into a management services agreement with Yucaipa. Under the agreement Burkle became CEO of Smith’s and Yucaipa gained several director seats. The new company operated 149 stores in Arizona, Utah, Nevada, New Mexico, Texas, Idaho, and Wyoming, and had number one or number two market shares in its four principal markets of Salt Lake City, Phoenix, Las Vegas, and Albuquerque.

The company appeared focused on taking advantage of both its loose structure and large size through a “best practices” program, in which store and chain representatives came together to study issues ranging from marketing to real estate to management information systems. “We have 35 or 40 projects at some stage of development right now as we attempt to facilitate bringing all the companies together,” Tom Dahlen, senior president of Food 4 Less explained in an April 1996 issue of Supermarket News.

In just ten years, Burkle increased Yucaipa’s holdings from a single, small gourmet chain to more than 600 stores generating annual sales of more than $11 billion. With that type of sales base, Yucaipa did not appear concerned about its debt payments.