Giant looks toward Philadelphia

September 25, 1994|By Jay Hancock | Jay Hancock,Sun Staff Writer

PHILADELPHIA -- Giant Food boss Israel Cohen didn't say "read my lips," but his message two years ago was clear: The company wasn't going to open any supermarkets in the Philadelphia area.

He was wrong.

A few weeks ago Giant agreed to buy a 10-acre plot in the Philadelphia suburb of Cherry Hill, N.J. A spacious, shiny "Super G" grocery store will open there next year.

And Giant officials are intently scouring the Main Line, Chester and Bucks counties and other Philadelphia suburbs for more sites. They hope to have as many as a dozen stores in the Wilmington/Philadelphia region within three years, and more later.

"We think we can carve out a niche in that market," Giant Food Inc. President Pete Manos said in a recent interview at the company's Landover headquarters. "It's Giant country. There are people out there that like the kind of operation we run."

It's not Giant country yet, actually. It's Acme, Pathmark, ShopRite, Super Fresh and Genuardi country. A market with "some serious price wars" already, said Meg Major, editor of Food Trade News, a monthly trade publication that covers the area.

The fact that conservative, stay-at-home Giant changed its mind and wants to do battle there says much about the industry and the company.

Supermarket operators everywhere are finding they can't increase earnings without adding stores. Low inflation means they haven't been able to raise prices. Profit margins are as thin as generic-brand plastic wrap.

For Giant, which made less money last year than it did six years ago, the pressure to improve results has been growing.

Its home markets of Washington and Baltimore already have wall-to-wall Giant stores. To expand, it must look down the road.

The move to the Delaware Valley corridor won't be easy. It brings big challenges of supply, marketing, cost-control and real estate.

"I don't think that anybody in this marketplace is going to roll over and say, 'Come on in,' and roll out a welcome mat" for Giant, said Thomas N. Hughes, director of advertising and design for Clemens Markets, a 14-store, family-owned chain of upscale supermarkets in Philadelphia's suburbs.

Grocery experts, though, firmly believe that Giant, with 160 stores now, will run a successful operation in the region. What they're not sure about is whether the foray will help profits much.

"I'd be loath to bet against Giant Food," said Guy W. Ford, a retail analyst for Scott & Stringfellow Inc., a Richmond, Va.-based investment company. "They've got a terrific operating record, terrific balance sheet. Will they be successful in Wall Street terms? Short term, I suspect not. It's going to be a real struggle."

With its clean, modern stores and unusual, in-house advertising, construction and manufacturing operations, Giant is one of the most admired grocery sellers on the East Coast.

That is little comfort to Giant shareholders. The company's stock has been a longtime wallflower, hitting $36 a share in 1989 and bouncing between $17 and $30 since then. On Friday, Giant's Class A shares closed at $21.375.

The problem is competition. Penetration of the food trade by Kmart, Wal-Mart, discount pharmacies and warehouse clubs has stripped sales from grocery stores, forcing lower prices and lower profits among all players. Add growing grocers such as Super Rite Foods Inc.'s Metro chain, and the Baltimore/Washington area has become hotly contested.

Giant earned $95.23 million for the fiscal year ending Feb. 26 on $3.567 billion in sales. Those profits jumped 14.4 percent compared with the previous year but were substantially lower than the company's record -- $118.89 million for the year ended February 1991.

Its net profit margin fell to 2.7 percent last year from 3.5 percent four years ago.

The good news for Giant is that its sales have stopped falling. It has retained a near-30 percent piece of nonrestaurant food spending in the Baltimore/Washington area, according to Food World, a trade publication.

Such defense of its home turf helped persuade Giant's cautious managers to expand. If they can make 2.7 cents on the dollar here, they figured, they can make it in Philadelphia.

Early expansion plans

They had considered the area for a long time. Giant decided to build stores in northern Delaware several years ago. But a push into Philadelphia was deemed too ambitious. Mr. Cohen, Giant's 81-year-old chairman and chief executive, ruled out such a move at the company's shareholder meeting in 1992.

Sales continued to be lackluster, however, and it became clear that a Delaware strategy alone might not be the best way to boost them. Not when there was a metro area of 4 million people just up the river.

The greater Delaware Valley area -- from Wilmington into New Jersey and north and west of Philadelphia -- had attractions for Giant besides its population and $8.56 billion in annual supermarket sales. It was nearby. The dozen trucks needed to supply each store weekly could make the round trip in one day from the company's Maryland warehouses.

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