Shopko Stores Inc. Business Information, Profile, and History

Company Perspectives:

To us at ShopKo 'Neat Stuff. Neat Store' is more than a catchy saying. At ShopKo, it's how we do business. Since we opened our first store, we've been dedicated to providing customers with the merchandise, service and brands of casual apparel, home, family and health care products that deliver quality and value - Neat Stuff. And, our stores, web site and circulars are all designed with one purpose: customer convenience. So you'll find what you're looking for quickly, easily and pleasantly - Neat Store.

History of Shop Ko Stores Inc.

Shopko Stores Inc. is one of America's largest mass merchandisers, with over 360 stores in 23 states. The company operates two divisions: the 141-store namesake chain and 222 stores under the Pamida banner. ShopKo has carved a niche in the ruthlessly competitive world of mass merchandising by making its competitors' weaknesses its strengths. One key aspect of this strategy is its focus on underserved rural communities of the Midwest. Another strength is its emphasis on health care, in the form of in-store pharmacies and optical centers.

Early 1960s Origins and Growth

ShopKo was incorporated in 1961 by James Ruben, a native of Chicago who moved to Green Bay, Wisconsin, and opened his first discount store there in 1962. While most department and discount stores were located in and around major metropolitan areas, Ruben was among the first retailers to recognize the untapped potential of small-to-middling markets in the hinterlands. In these early days, ShopKo's merchandise targeted male consumers with its concentration in such "hardlines" as automotive parts and sporting goods. By 1969, Ruben had four stores in Wisconsin and had opened a fifth in Marquette, Michigan. Within less than a decade, the founder had built ShopKo's annual sales to $41 million.

The ten-store chain was acquired by Minneapolis-based Supervalu, one of America's largest food wholesalers, in 1971. Over the course of the next year, Ruben groomed newcomer William J. Tyrrell to succeed him as president of ShopKo. In 1972, Ruben advanced to a vice-presidency at the parent company, and Tyrrell took his place at ShopKo.

Later described as "a parent company that's been like a banker," Supervalu provided more financial than managerial support to ShopKo during its quarter-century of ownership. That relative autonomy was passed down through the ranks; though middle and upper executives guided the chain's general strategies, store managers were allowed to choose particular merchandise lines and models to suit their local clientele. As a result, ShopKo's merchandising emphasis began to shift to housewares such as small kitchen appliances and some soft goods, including clothing, during the 1970s. Perhaps most importantly, the company pioneered several new categories for discount stores. ShopKo was among the first discounters to include pharmacies in its outlets beginning in 1971. In 1978, it became one of the first to not only sell eyeglasses but also to offer in-store eye examinations. With virtually no competition in its local markets, a bevy of new merchandising strategies, and the financial backing necessary to carry them out, ShopKo grew dramatically over the ensuing decade. Sales more than tripled from $41 million in 1971 to $135 million in 1978 and topped $335 million in 1982, as the chain grew to a total of three dozen stores throughout Wisconsin and the upper Midwest.

Growth and Increased Competition in 1980s

ShopKo's vigorous growth continued in the 1980s. The company began to move westward late in the decade, penetrating Montana and Idaho in 1986 and Utah in 1988. The chain supported these new operations with distribution centers in Nebraska and Idaho. By 1988, the company had 87 stores and had established itself as one of the nation's fastest-growing super-regional discounters, with revenues reaching over $1 billion and earnings totaling $67 million for the year.

Under the continued direction of William Tyrrell throughout the remainder of the decade, the chain opened its 100th outlet in 1990. With revenues of $1.65 billion in 1991, ShopKo capped 11 consecutive years of sales and earnings increases to rank eighth among the nation's discount chains. Astonishingly, the Midwest chain's operating profit was second in its retail segment that year. In 1989, publicity-shy Tyrrell was named "Discounter of the Year" by the readers of Discount Store News. Analysts agreed that it seemed as though ShopKo was doing everything right.

However, challenges loomed on the horizon. Over the course of the 1980s, three mass merchandisers emerged as national powerhouses: Kmart Corporation, Target Stores, and Sam Walton's Wal-Mart. Though Kmart and Target both entered head-to-head competition with ShopKo earlier than Wal-Mart, the fast-growing Texas company was perceived as the greatest threat. Wal-Mart had by the mid-1980s taken the nation's discount merchandising industry by storm, growing from a middling regional retailer early in the decade into America's biggest and most profitable mass merchandiser. Writing for Forbes in 1992, Mary Beth Grover compared Wal-Mart to "a tornado uprooting any retailer that stood in its way." Finding itself in the path of this whirlwind, ShopKo created a special task force in 1986 to formulate new competitive strategies to withstand the Wal-Mart gale.

Top executives at ShopKo quickly realized that they would not be able to battle Wal-Mart on price, especially in both chains' strongest area, hardlines. Roger "Skip" Chustz, ShopKo's general merchandise manager of apparel, later reflected on the strategizing, noting that "We realized that we couldn't position ourselves as the low-price provider in the marketplace, that someone else owned [read Wal-Mart] that position." President William Tyrrell put it succinctly: "[you] can't out-Wal-Mart Wal-Mart." Instead, the company elected to pinpoint the behemoth's weaknesses and make them ShopKo's strengths. This differentiation lay at the core of what would become "Vision 2000," ShopKo's strategy for success.

Vision 2000 Reshapes ShopKo in the Early 1990s

ShopKo's watershed came in 1991. That year, longtime parent company Supervalu sold a 54 percent stake in the discount chain to the public. The proceeds of the offering were used to pay down ShopKo's debt to its parent. Dale Kramer, a former pharmacist whose career at ShopKo stretched back two decades, succeeded William Tyrrell as president and CEO, while Tyrrell assumed the newly created chairman's seat. Perhaps most importantly, Kramer and Tyrrell pinned their hopes to "move up and challenge the Big Three" via Vision 2000, launched that same year.

The plan encompassed several key elements: remodeling the entire chain; automating distribution and inventory; honing merchandising; and enhancing and augmenting ShopKo's niche in health services. Specifically, ShopKo's simplified new look aimed for a department store atmosphere by eliminating clutter, opening up the floor plan, and adopting a bright color scheme. An emphasis on customer service brought tangibles like "no-hassle refunds" and no-fee layaways as well as a friendlier atmosphere. Behind the scenes, the company phased out its outdated mainframe computer system in favor of a local area network that facilitated electronic data interchange. New "Quick Response" allocation and replenishment systems accommodated the latest barcode technology, thereby reducing personnel costs and cutting lead times by as much as two-thirds. An emphasis on maintaining sufficient stocks of advertised items reduced rain checks by two-fifths.

ShopKo's new merchandising strategy could be characterized as the antidote to Wal-Mart. As CEO Kramer told Discount Store News in 1993: "the chain is not looking to offer its products at the lowest prices, but [to] offer the best quality product at the lowest price available." ShopKo strategists surmised that this tactic would not only sidestep competition with Wal-Mart, but would also prove to be the discount industry's primary area of growth. ShopKo avoided Wal-Mart's strongholds, instead focusing on five product groups: fashion, home, health, seasonal, and everyday basics. Within these broad categories, the company emphasized the hottest lines, which in the early to mid-1990s included: housewares, bed and bath, casual furniture, special-sized clothing, and intimate apparel.

Retail health care was perceived as a particularly important growth opportunity for ShopKo. As a complement to its existing pharmacies and vision centers, the chain created ProVantage, a mail-order pharmacy and prescription benefit manager, in 1993. This new business was created to capitalize on an early 1990s trend that saw health insurance companies and health maintenance organizations contracting out many functions in order to streamline their own operations. ProVantage performed claims and benefit processing, management, and administration. Initially focused on prescriptions, ProVantage added Vision Benefit Management Service by mid-decade, soon boasting a network of 4,500 eye care providers. Encouraged by the new venture's rapid growth--ProVantage revenues totaled $14 million by 1995--ShopKo acquired the Bravell claims management company, including a network of 40,000 retail pharmacies, in 1995 and acquired the vision benefit management division of United Wisconsin Insurance Company in 1996.

Though it had clearly been making progress toward its goals, the company stumbled in 1993. Sales flattened at $1.7 billion, and net earnings dropped by more than one-third from $50.1 million in 1992 to $32.1 million in 1993. ShopKo blamed the anemic economy, but unhappy shareholders carped about executive salaries, and retail trade magazine WWD dubbed the company "Dropko." At least one industry analyst, Don Longo of Discount Store News, pegged the odds of ShopKo surviving the early 1990s recession at six-to-one.

Basking in Success: The Mid- and Late 1990s

However, in 1995 ShopKo emerged as the only profitable chain among the nation's top regional players. Vision 2000 and the executives who implemented it garnered much of the credit. In 1996, Discount Store News called ShopKo's strategic plan "a visionary stroke made at a time when many other retailers were still confidently practicing the same strategies that had brought them success in the 1980s." That year, the readers and editors of Discount Store News selected Dale Kramer "Discounter of the Year." The proud CEO told Discount Store News's Dawn Wilensky that "few other retailers can claim such far-reaching change as ShopKo has achieved in just a few short years. We have a visionary strategy for general merchandise, a rejuvenated store base, logistics capability to support growth, an outstanding health services strategy and world class technology to take us into the future."

The ProVantage start-up had proven particularly auspicious; its sales grew from $14 million in fiscal 1995 to $100 million in 1996 and to over $300 million by fiscal 1997. By that time, the benefits management division was contributing about 15 percent of sales and 8 percent of operating profits. In fiscal 1997, the company filled over 10.2 billion pharmaceutical and optical prescriptions. That same year, ShopKo launched a four-city test of a new concept: stand-alone eye care centers dubbed Vision Advantage Stores. Though ShopKo had yet to surmount its high-profit mark of $50 million set in 1992, sales advanced by more than one-third, from $1.7 billion in 1994 to $2.3 billion in 1997, while net earnings advanced more than 40 percent, from $32 million in 1994 to $45 million in 1997. In his 1997 letter to shareholders, CEO Kramer compared ShopKo's performance to the Super Bowl champion Green Bay Packers, noting that "The Packers created their own destiny, through planning, intelligence, logic, hard work and, of course, teamwork--putting team goals over personal goals. They put the pieces in place and labored hard to make their dream come true. As did we."

That July, ShopKo achieved complete independence from longtime parent Supervalu when the latter company divested its remaining 46 percent stake in ShopKo. ShopKo paid about $150 million to repurchase about one-fourth of its own equity, while the remaining 21 percent stake was offered to the public.

Though merger negotiations with Youngstown, Ohio-based Phar-Mor Inc. broke down in April 1997, a major acquisition or merger appeared to be in ShopKo's future. Analysts also speculated that a deal with troubled discount chain Hills Stores Co. could be in ShopKo's future. ShopKo's chief financial officer, Jeffrey Jones, hinted at the possibility, telling WWD that "The company is scouting for deals that would bring us growth opportunities." That year, ShopKo acquired Penn-Daniels and its 18 Jacks Discount Stores, but its truly big move was not made until 1999.

Challenges in the New Century

By the end of the 20th century, ShopKo had "carved a niche as an upscale, lifestyle-driven discounter," according to DSN Retailing Today. However, President and CEO William Podany, who succeeded the retiring Dale Kramer in 1999, determined that major market saturation by the "big boxes" would prevent ShopKo from ever becoming a national chain. Like his predecessor, Podany hoped to establish a nationwide reach by focusing on his key competitors' weaknesses.

That year, ShopKo acquired Pamida, a chain of 148 discount stores. Podany characterized the retailer as "a 20th century version of the general store," with everything from milk to hunting and fishing gear. A key to the Pamida concept was its presence in rural markets, often towns of 10,000 people or less and not coincidentally, far from a Wal-Mart, Target, or Kmart. ShopKo envisioned an aggressive expansion of the chain to 500 stores nationwide. To that end, the parent company acquired PM Places' 49 units in 1999 and converted them to Pamida stores.

That year, ShopKo also sold the ProVantage pharmacy benefit manager operation to pharmaceutical giant Merck for an estimated $222 million. The corporation capped a decade of steadily rising revenues with record sales of $3.9 billion and earnings of $102.2 million that year.

In 2000, ShopKo added 76 Pamida stores, bringing the chain to nearly 240 units by the end of the year. Everything seemed to be going according to plan, but the rapid expansion soon took its toll. Distribution problems began to emerge, ShopKo's debt load increased to $840 million, and a recession hit the retail industry particularly hard. Known as a decisive leader fond of dramatic strokes, Podany wasted no time bringing a halt to the expansion strategy. In January 2001, he instituted a drastic restructuring, shuttering 23 stores and a distribution center, and furloughing 2,500 employees.

ShopKo continued to retrench in the ensuing years, slashing its debt by nearly half, reducing inventories and controlling expenses. Management fine-tuned operations and tweaked the mostly print advertising campaigns. Nonetheless, the corporation suffered a net loss in 2000 and sales declines in the ensuing two years. William Podany stepped down in April 2002, and Sam Duncan was recruited to succeed him as president and CEO that October.

Having reduced its debt significantly, refined its internal business practices, and weathered a lingering recession, ShopKo planned to resume investment in growth and rejuvenation in 2004. A key focus of the expansion would be on what insiders called "retail health," namely pharmacies and optical shops. This business center constituted more than one-fourth of the ShopKo division's revenues and 16 percent of Pamida's sales by 2003. The corporation hoped to capitalize on this strength not only by growing the number of pharmacies in Pamida stores, but also by testing new stand-alone drug stores featuring optical departments. As CEO Duncan told Laura Heller of DSN Retailing Today in 2003, "There are not too many industries growing at the rate that drug stores have in the last 5 to 10 years. And long term, it's projected to grow at 11% to 14% a year for many years to come." It was the kind of growth ShopKo had not seen since the heydays of the 1990s, and the only segment of the corporation's business that had seen any kind of comparable store gains since the year 2000. It seemed ShopKo's best hope for the future.

Principal Operating Units: ShopKo Retail; Pamida Retail.

Chronology

• Key Dates:
• 1961: ShopKo is founded by James Ruben.
• 1962: First store opens in Green Bay, Wisconsin.
• 1971: ShopKo is acquired by Supervalu and in-store pharmacies are introduced.
• 1978: In-store prescription eyewear shops are launched.
• 1990: The 100th store is opened.
• 1991: Supervalu divests a 54 percent stake in ShopKo to the public.
• 1993: ShopKo launches ProVantage, a mail-order pharmacy and prescription benefit manager.
• 1997: Supervalu divests its remaining stake in ShopKo.
• 1999: ShopKo acquires Pamida stores.