The Vons Companies, Incorporated Business Information, Profile, and History

History of The Vons Companies, Incorporated

The Vons Companies, Incorporated--wholly owned by Safeway Inc. since April 1997--is the second largest retail supermarket chain in southern California, trailing only Ralphs Grocery Co. The company has about 330 stores in southern California and in Nevada, under two main brands: Vons supermarkets and Pavilions stores, the latter of which are larger-format stores featuring wider selections of items and enhanced services.

Entrepreneurial Origins

Vons was created by Charles Von der Ahe, an entrepreneur instrumental in the development of the modern supermarket. Von der Ahe's first experience in the grocery business was as a delivery boy in Illinois. On the way to California, where he would eventually settle, Von der Ahe worked in several markets, observing merchandising techniques and customer buying patterns first hand. In 1906, with a total capital investment of $1,200, Von der Ahe opened a small grocery store named Von's Groceteria on the corner of Seventh and Figueroa in Los Angeles. Over the next few years, he opened additional stores, implementing a number of innovative strategies which fueled dynamic growth in his business. Von der Ahe was the first grocer to introduce cash-and-carry and self-service. In leasing his open storefronts to produce vendors and butchers, Vons also pioneered the combination store concept which would later lead to his first supermarket. By 1929 the Vons Grocery Company numbered 87 stores.

Von der Ahe had the foresight to sell his stores to McMarr Stores in 1929, before the stock market crash decimated the value of commercial properties. McMarr would in turn eventually be purchased by Safeway. In the meantime, Von der Ahe enjoyed three years of retirement before being lured back into the grocery business by his sons Ted and Wil, who decided to open a new chain of Vons stores in the Los Angeles area. Von der Ahe helped his sons out with investment capital and industry expertise, and Vons stores began to multiply. The partnership culminated in the opening of a 50,300-square-foot food market in downtown Los Angeles in 1948. The prototype of the supermarket, this location boasted a number of innovative features which today are taken for granted, notably self-service produce, meat, and delicatessen departments. The store confirmed the Von der Ahe family's role as innovators in the retail food industry.

In 1960 Vons merged with Shopping Bag Food Stores, bringing the total number of stores under family management to 66. Particular emphasis was placed on understanding local markets and arranging shelf space accordingly, a practice that has continued to the present day. In 1967 the merger was challenged by the Federal Trade Commission. The case went all the way to the U.S. Supreme Court, which ordered Vons to divest itself of the Shopping Bag locations immediately. In 1969 Vons was bought out by the Household Finance Corporation, later Household International, which added the chain to its Household Merchandising division.

Dynamic Growth in the 1970s and Early 1980s

The expansion of Vons Stores into the San Diego area during the 1970s corresponded with a period of dynamic growth when the chain widened operations to include wholesale marketing to other retailers and fast-food chains. In the mid-1970s, Vons opened a series of mid-sized units called Value Centers, which sold food and drugs in one location. This "combo" concept would develop into Pavilions Stores in 1987. In the early 1980s, Vons expanded north into the Fresno area. In the same period, the company began to stress the importance of combining coupon promotions with in-store product demonstrations as a means of persuading more conservative customers to try new foods. Vons was among the first stores to operate its product promotion department as a profit center funded by fees from participating companies.

Vons scored a tremendous coup in 1984 when the company was designated the official supermarket of the Los Angeles Olympics. Under a deal worked out with the Olympic Committee, the chain agreed to provide food for more than 12,000 athletes, coaches, and trainers in the Olympic Village. Food worth $8 million was provided to the committee at cost for preparation by an independent foodservice organization. The balance, worth $2 million, was donated by the company. In return, Vons was guaranteed a number of exclusive merchandising and advertising opportunities. Store decor was changed to highlight the Olympic theme, and the Olympic logo was placed on a number of perishable items that were considered to have particular nutritional value.

Vons Regained Independence in 1986

In January 1986 top management in the Household Merchandising branch of Household International negotiated a $757 million leveraged buyout of their division. The deal, which was the largest retail buyout in the United States at the time, was masterminded by Roger E. Stangeland, who went on to become chairperson of the newly independent Vons Companies. Stangeland had been an executive at Household International since 1961, and had been responsible for Vons Stores since 1982. While the buyout successfully separated Vons from Household International, it also burdened the company with an unacceptable level of debt. Stangeland announced that reducing the debt-to-equity ratio would be a priority over the next few years. In the meantime, he added the ten-store Pantry chain to the Vons portfolio. He also charged William S. Davila, the company's president, with developing an expanded "combination store" concept. Started in 1986, the year of the leveraged buyout, the Pavilions subchain would number 28 stores by 1991.

At 75,000 square feet, the first Pavilions store was the company's largest to date. A combination store, Pavilions offered huge food and nonfood sections. Different departments were identified with banners and decked with white awnings which created the effect of tented "pavilions." Joe Raymond, a merchandising executive with Pavilions, described the concept as "breaking away from the pack." Important features included the plain white decor, designed to focus customer attention on the items on display. The store carried a greater selection of produce than comparable stores, and shoppers were invited to sample new products at a permanently staffed demonstration booth. In order to emphasize the freshness of the perishable goods, all food preparation was done in full view of the shopping public. At the same time, the nonfood area stressed value for money, with a large variety of health and beauty aids offered at discounts of up to 30 percent on average retail prices, and a professionally staffed pharmacy selling prescription drugs at discounts of up to 50 percent. In some areas, Pavilions competed directly with adjacent Vons stores, a situation that traditional marketing strategists would tend to avoid. Vons executives remained unruffled, however, articulating their belief that if Pavilions did not go head-to-head with the older stores, a competitor certainly would.

In December 1986, Vons announced that a $700 million deal had been struck with Allied Supermarkets, Inc., a publicly listed Detroit retail and wholesale food marketer. The goal of the merger was to take Vons public while controlling the company's debt load. Roger Stangeland became chair and CEO of Vons, and William S. Davila was named president and COO. Since Vons had no ambitions to expand to the Midwest, Allied's Detroit assets were sold to members of the existing management. The merger achieved its goal; Vons went public on the New York Stock Exchange in early 1987.

Constantly in search of new merchandising techniques, Vons executives turned their attention to the ethnic composition of their customers in 1987. They observed that by 1990 an estimated 40 percent of southern California's population would be of Hispanic origin. In January 1987 the company opened its first Tianguis superstore in Montebello, California, designed to cater to the specific needs of Hispanic customers, especially first-generation immigrants. Tianguis, meaning marketplace in Aztec, denotes the place where the community met to shop and to socialize; commenting on the choice of name, CEO Stangeland said in August 1986 that Vons hoped to "position our stores as an important center in the community" and to "differentiate ourselves strongly from the competition." By 1991 the company was operating nine Tianguis stores throughout southern California and had plans to open two to three stores per year.

Tianguis differed from its predecessors in many ways. All advertising and store signs were bilingual, as were the stores' employees, hired from the local community. The produce section was greatly expanded to include a wide variety of Mexican herbs, fruits, and vegetables, while some product categories were eliminated completely. As in the Pavilions stores, meat preparation was done in front of customers. The grocery section included an extensive selection of Mexican imports, sharing shelf space with their U.S. counterparts. Distribution of imports was guaranteed through the early establishment of a subsidiary called Central de Abastos Internacional in 1986. To enhance the social aspect of the stores, aisles were widened to allow patrons to stop and chat. Diaper-changing rooms were installed at the back of each store since, in Vons President Davila's words, "shopping tends to be a family event for Hispanics." The introduction of the Tianguis stores was widely discussed in the industry. Vons had demonstrated once again its strength in adapting to the changing needs of the market before its competitors.

Purchased Safeway's Southern California Stores in 1988

On August 29, 1988, Vons took over 172 of Safeway's southern California operations, paying $297 million in cash and giving up 11.67 million shares of Vons common stock, leading to Safeway holding a more than one-third stake in Vons. As a result of this transaction, the number of stores under Vons control doubled, but the company's debt load also soared. In spite of its highly leveraged position, the company immediately embarked on an ambitious remodeling of the former Safeway stores, spending an average of $1.3 million on each location. Together with more efficient inventory control and labor scheduling, the remodeling was intended to increase per-store profitability, money that in turn would be used to pay off debt. A number of in-store innovations were also implemented, including an electronic coupon program and other cost-saving technology. The strategy worked. By November 1990, sales per square foot at the former Safeway stores had risen to $615 from an average of $447 at the time of the buyout. The industry average at the time was $550. Meanwhile, corporate finances also improved. Vons went from a $25 million loss in 1989 to a $50 million profit in 1990 and a $65 million profit in 1991. By 1991, the company's debt-to-total capitalization ratio had dropped to 60 percent. The company's financial position was also strengthened by a successful equity issue in 1991.

In January 1992 Vons acquired family-owned Williams Brothers Markets for $48 million in cash and a liability of $10 million on Williams Brothers' outstanding mortgages. The transaction was financed using Vons' existing revolving loan. Located in central California, the 18 Williams Brothers stores were well-known for their customer service and successful niche in marketing to local communities. As such, they integrated well with other stores in the Vons portfolio, while allowing Vons to expand further north.

During the course of the riots in Los Angeles in May 1992, several Vons stores were looted and burned. The cost of restoring the damaged properties, however, was largely covered by insurance. In the aftermath of the riots, attention was focused on the dearth of quality supermarkets in south central Los Angeles. Vons Companies announced that the chain would commit $100 million to developing markets in neglected areas over the next few years. Then in January 1993, an outbreak of food poisoning in Washington state that claimed the lives of three children was traced to hamburgers purchased at the Jack in the Box fast-food chain, which had purchased the meat tainted with the deadly E. coli bacteria from Foodmaker, parent company of Jack in the Box. Vons, as the meat processor for Foodmaker, was involved in the early stages of the investigation. After being commended by health authorities for its clean processing facility, Vons aided health authorities by tracing the source of the contaminated beef to one Foodmaker beef supplier. The incident had wide-ranging implications for United States Department of Agriculture inspection procedures, which were deemed inadequate.

In the early 1990s, Vons renewed a commitment to technological progress by announcing a dramatic increase in its Information Systems (IS) budget. IS initiatives were piloted in a number of metropolitan locations and included electronic shelf tags, which would be updated automatically when the checkout scanner price was changed. This system was intended to enhance customer service and decrease labor costs. The early 1990s also brought two new store formats: the warehouse-club-style Expo, a format abandoned in 1995; and Super Combo stores, which included banking services, catering facilities, a dry cleaner, photo processing, a pharmacy, as well as an expanded grocery section. Later in the decade the Super Combo format essentially was melded into the Vons and Pavilions formats, many of which included the added services and sections that were becoming increasingly common in grocery stores.

Overall, the early 1990s were difficult years for Vons not only because of the severe southern California recession but also as a result of a number of other factors: the heavy debt-load that was taken on to acquire the Safeway stores; the cost of acquiring William Brothers, remodeling 59 stores in 1993 alone, opening 12 new stores in 1993, and opening a new headquarters; the temporary closing of 45 stores due to damage from the 1994 Northridge earthquake; and the loss of some customers as a result of the Jack-in-the-Box food poisoning outbreak. Same-store sales fell two percent in 1992 and another nine percent in 1993. In response, Vons instituted a restructuring program in the third quarter of 1993, taking a $57 million charge for a cost-cutting program that involved a workforce reduction of about 15 percent, salary freezes, and other initiatives. Simultaneously, the company launched the Vons Value program, which began in January 1994 and featured 18,000 price reductions.

Continuing its recovery efforts, Vons spent $175 million in 1995 to open ten new stores and remodel 65 existing stores. The company also closed down a number of unprofitable stores and consolidated three distribution centers into two, while laying plans for a three-year, 15-unit expansion of the Pavilions subchain. Same-store sales fell 2.4 percent in 1994 and increased 3.5 percent in 1995, signaling a company on the rebound--having also been aided by the strengthening of the southern California economy.

Acquired by Safeway in April 1997

In 1996 Vons added 12 new stores to its chain, eight of them replacements for older units that were closed down and four of them bought from Smith's Food & Drug. Late in the year&mdash the company was laying plans to open 12 to 15 stores in 1997, six of them Pavilions, including the first San Diego stores for that format--Safeway offered to purchase the 65 percent of Vons it did not already own. The deal was completed in April 1997, with Safeway paying about $2.5 billion to complete the purchase, including $565 million in debt. Vons thereby became a wholly owned subsidiary of Safeway, but its 320 stores continued to operate under the Vons and Pavilions names. Shortly after completion of the deal, Safeway eliminated 240 administrative positions at Vons, representing 37 percent of the 650 Vons headquarters staff.

In February 1998 Vons contributed, along with several meatpackers and other companies, to a $58.5 million payment to Foodmaker to settle a lawsuit Foodmaker had filed in 1993 in connection with the Jack-in-the-Box food poisoning outbreak. In December 1998 Vons bought eight stores from the Ralphs chain and subsequently remodeled them and reopened them under the Vons banner. By January 1999 there were a total of 324 Vons and Pavilions stores. This number was likely to increase at a more rapid rate than in the past as Vons could now take advantage of the deeper pockets of its parent, which was the second largest grocery chain in North America, trailing only The Kroger Company.