Lean to the bone, F&M cuts prices to clobber rivals

June 13, 1993|By Michael Dresser | Michael Dresser,Staff Writer

From the second you enter F&M Distributors' store i Baltimore, the company pounds home its message.

Just inside the front door are two vending machines -- one selling Coke, the other Pepsi, for the circa-1979 price of 35 cents. Affixed to the machines is the F&M slogan: "Why Pay More?"

Point made.

There's nothing subtle about the Warren, Mich.-based deep discounter of health and beauty products. Price is its main reason to exist, and everything about its stores -- from the sleek efficiency of the layout to the explicit price comparisons attached to every product -- reinforces that image. Selection is a close second, and if 450 shampoos won't convince you, perhaps the 4,000 cosmetics and fragrance items will.

That broad selection and price-consciousness make F&M a textbook example of "category-killer" retailers that include such chains as Home Depot, Staples and Sports Authority. Understand how F&M operates, and you'll have a good idea of how retailing will be practiced in the mid- to late 1990s.

F&M is named after its founders, Fred and Margaret Cohen, whose original discount store in Ferndale, Mich., became a magnet for penny-pinchers throughout the Detroit area. Little remains of the mom-and-pop business that opened in 1955 -- except an abiding ethic of frugality.

Less than a decade ago, F&M was a 25-store chain concentrated in the upper Midwest. Today, it is a public company with 118 F&M superstores and $737 million in annual sales -- and its headquarters is still in a warehouse.

"I know so many companies -- they go public, they build a big monument to themselves," said Phil Johnson, president of the Leo Shapiro & Associates market research firm in Chicago. "There's no fat in the organization. There's none in the way they run their stores."

F&M's cost-control ethic affects virtually every aspect of its business. It advertises little, relying instead on word-of-mouth and direct mail. Payrolls are tight -- about 50 staffers for a 38,000-square-foot store -- and employees are cross-trained so just about anyone can run a register. And Mr. Johnson said F&M is a tough negotiator with suppliers -- never accepting a price increase without a struggle.

"It's an extraordinarily efficient way to get commodity-style goods close to the consumer," said Mr. Johnson, who does surveys for F&M. "They do it better than Wal-Mart."

Through its expansion, F&M's lean management team has maintained a disciplined strategy that emphasizes profitability over empire-building. It dominates its niche in the Midwest and ,, Northeast but has shown little inclination to invade other markets -- so far.

When F&M does enter a market, it moves fast, adding stores quickly. "They want to go into markets they can dominate," said Christopher Vroom, retail analyst at Alex. Brown & Sons in Baltimore.

Theresa A. Matacia, a retail analyst with Hancock Institutional Equity Services in San Francisco, applauds that approach, contending that F&M can double in size over the next five years simply by filling the gaps in its existing markets. "They're better-served by staying in their own markets because they facilitate economies of scale and name recognition."

One market F&M has set out to dominate is Baltimore, where it already has a formidable presence. Since 1987, the company has opened nine area stores, and it expects to add five in the next few years. Even with fewer than a dozen F&M stores here, company surveys show increasing gains in name recognition and consumer perception when measured against such competitors as Giant and Rite-Aid.

F&M has a similarly focused view of what it sells. Unlike some competitors, F&M has not ventured into such areas as toys and clothing, said Patricia Klein, vice president of marketing.

Health and beauty aids, cosmetics and fragrances are the core of its stock, but it also sells greeting cards, snacks, cleaning products and videocassette tapes. What these products have in common, Ms. Klein said, is that all are frequently replaced household consumer goods.

Like most category-killers, F&M operates out of a "big box" -- 38,000 square feet under the most recent prototype. Large stores let F&M devote considerable space to storage, Ms. Klein said, making it possible to operate without company-owned warehouses. All truckloads are shipped directly to the store from the manufacturer or are broken up at a "cross-docking" facility without going into storage.

Once the goods are in the store, sales are tracked by a point-of-sale scanning system that relays a constant stream of data to F&M headquarters. In some cases, computers reorder products as inventories fall low, without human intervention, said Laura Kendall, chief financial officer.

That technological sophistication "has been a big advantage for F&M because its allows them to efficiently manage their inventory, and that's where Drug Emporium and Phar-Mor have gotten into trouble," Ms. Matacia said.

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