Good morning, ladies and gentlemen. We have a lot of friends in this room — and colleagues. I hope today, as we assemble as leaders in business and government, that [we all] share the optimism of those of us who believe in Michigan. And that may be kind of a strong statement right now because people interested … in investing in and operating retail real estate in the one state in the union most bruised by today’s economy can be in short supply sometimes, but I hope not in this room. And I say that, even as the coming challenges of 2009 in our automotive industry could make 2008 look like a relatively healthy year.
We’ve all seen the numbers — from unemployment to population decline. It’s a rather daunting time to live in Michigan and talk about commercial real estate and business development. But I can speak for us; we’re not moving to Texas. And 75 years after my grandfather opened his first grocery store up in Greenville, Michigan is still our home.
This is our 75th anniversary year, and it’s taken a lot of luck and a lot of effort to reach that milestone. If I reflect on some of the specific things that it’s taken, they would have to include innovation, and that certainly brought them to where we are today. Our willingness to adapt has just been critical. My grandfather, who was a novice, small-town merchant in the Great Depression, had to figure out how to meet or beat the prices of the mighty A&P. In fact, in that first store in Greenville, he had to be willing to go self-service and borrow [capital] to expand to become a supermarket. And almost 30 years after that, he and my dad had to be willing to venture into the discounting of general merchandise, which was a business about which they knew next to nothing. And if they’d cut a business plan for it — that first big Thrifty Acres store — it would’ve made no sense at all.
But we’ve been willing to take the plunge many times, from opening 24 hours to developing our own brands to giving away free antibiotics. And, of course, we’ve failed more than a few times. There are probably not many people in this room who remember we once ran a fast-food restaurant in front of our Alpine Avenue store (in Grand Rapids) called Thrifty’s Kitchen. Or our discount drugstores called Spaar. And then there was SourceClub, which you may remember, which we thought would be the next big thing in retailing. But we weren’t smart enough to make it work; we were too little, too late and got out before it jeopardized the company …
Along with innovation, or, to put it another way, that willingness to fail, I thank my dad and grandfather for building a corporate culture committed to a high standard of integrity. Earl, it was gracious of you to mention that. It certainly doesn’t mean we never make mistakes, goodness knows, but it means that, as a team, we operate — and I speak for Mike and Julie here, and for others of you who work with us — we operate with the assumption that we’re going to do the right thing. And it means we’ll be good neighbors and generous corporate citizens in the communities we serve. That means we’ll value and respect our team members. There are threads from our past that are woven together pretty tightly today, and I’m reminded of them and the stories behind them in a terrific new biography called Fred Meijer: A Life in Stories that will be coming off the press in about two weeks. And speaking of Fred, his efforts to plan for the future, to make our company sustainable, have been and will continue to be crucial.
When we talk about who we are today, and we hope we can count on many of you as valued customers, we define ourselves to ourselves by saying, “Meijer provides fresh food and merchandise to families in the Midwest. We distinguish ourselves from other retailers by the quality and assortment of our food, the breadth of our general merchandise, and the low prices we charge.”
Compared to our national competitors and on the general merchandise [side], chiefly who we have are Wal-Mart and Target and Kohl’s and Penney’s and Lowe’s and Home Depot — you can go down the list of all those “big boxes”; alas, we can’t distinguish ourselves by geographic diversity. We are home here and our business and what profits we make depends on here. But in 2009, we hope we can also distinguish ourselves by adding talent, rather than announcing layoffs. And by opening stores rather than closing them. In a normal course of events, we grocers can be the profit margins. … And these, of course, are not normal times, and we are very grateful — and I really mean that — to be in the business of selling food. Our food sales have been solid, even as the general merchandise side of our stores has lagged, along with our counterparts’ in the rest of the retail world.
In 2009, we know that maintaining either sales or profits — I don’t know that I can say both — either sales or profits will be tough. And we’re ready to work on the former by sacrificing some of the latter. Overall, we’ve held our own, although at the start of 2008, we certainly had hoped to do better than [what] we ended up with. But we’re reasonably satisfied. And it feels kind of odd today that we’re “reasonably satisfied” with mediocre results. But we find ourselves serving the region we all live in with a declining population with residents who have fewer dollars to spend. So sometimes “success,” in a contracting market, has to be measured in market share. And overall, we’ve been showing some gains there.
We’ve also been excited over the last year to see our internal scores for “friendliness” improve. We recognize that if we’re going to keep your business once you come in the store for other things, we’ve got to not be another impersonal “big box.” We’ve got to be a friendly place to shop. We’ve seen our logistics and distribution team work along with our operations team to get the cleanest back rooms that we’ve ever had; that means we’re doing a better job of controlling inventory. And we all know how important that becomes when revenue growth is harder to come by. You look at every facet of your execution. We’re doing a better job of having the right products on the sales floor, rather than the wrong ones buried in back. And we’re seeing some heartening sales growth in Chicago.
In Chicago, we are very small fish in a very big pond. We have 11 stores, which would obviously be a lot in Grand Rapids, but there, if you want to have any kind of economies of scale, of advertising, of recognition in the market, we’re pretty small. But Chicagoland is the only major metropolitan area in our market in which we can look forward to significant population growth. Suddenly, that starts to loom very large in our future.
We opened nine new stores in 2008, which is really one of our biggest years ever for new stores. But that’s a little bit deceptive because we also closed four stores. So the new stores that we opened in Columbus (Ohio) and Dayton, Ohio, and down in Battle Creek (Mich.) were actually replacements.
Years ago, we had investment bankers come through every once in a while hoping that you’re going to sell out or [take on an] acquisition and they’ll be there for the business. I remember an investment banker asking us what our store-closing strategy was, and we said, ‘We don’t have one.’ But as we grow, that’s no longer a sensible response. So we’re looking at opportunities, as we did last year, to replace older stores at less-desirable locations with newer stores in that market.
One of the adjustments we’ll see in 2009 and beyond is in our ability to do more modest remodels. For too long, we seemed to be stuck — a little bit — in a pattern where we either did nothing with a store and let it fall out of date, or we spent millions of dollars on very costly remodels. And sometimes we got paralyzed trying to make that choice. And we’re learning to be more flexible in what we can do that suits an individual store [or] individual market without breaking our budget, but allowing us to serve that customer better.
And speaking of flexibility, one of our big changes this past year was the opening of a somewhat smaller version of our supercenters. I get that they’ve called that a new format because it’s still a supercenter, but these are stores with about 156,000 square feet, rather than the 190,000 or 200,000-plus that most of us are familiar with. We had smaller stores in the past, of course, but what we intended to do was reduce the food and general merchandise — reduce all the departments proportionally so that we were stripping too much out of our core food offerings. And we know this time around that this new format, or this new version of our stores — we still have a lot of tweaking to do. Our goal is to be more thoughtful about our general merchandise assortment, but [to] not compromise our position as the leading supermarket in town.
This year, we’ve slowed down our openings schedule slightly, although if you add out the replacements as far as next year, it’s fairly similar to last year. We’ll be opening five new stores, three of which will be that smaller size. One of those is just up the road in Cedar Springs (Mich.), to which we’re returning after nearly 40 years. Cedar Springs was actually store No. 2 in our company. That was fine when we [had] it to a 20,000-square-foot supermarket. It wasn’t a place for a 200,000-square-foot supercenter. Now we’re coming back, and we’ve seen growth in northern Kent County, and we’re coming back with a 156,000-square-foot store.
Another [store] is way up the road in Gaylord, (Mich.), which will become our northernmost store. And the third is in James Dean’s hometown of Marion, Indiana. In the cases of Gaylord and Marion, we’re seeing a scenario that, a few years ago, we would not have been able to imagine. And that’s going head-to-head with Wal-Mart in what are, for each of us, single-store towns. In other words, there’s not a larger universe of competitors to take a lot of business from. There are other people in the market, but it’s chiefly [just] the two of us. … Also this year, we’ll be adding more traditional big stores in Hartland, Mich.; and Delaware, Ohio. I also mentioned remodels. We’ll be doing eight of the rather major variety this year, of which seven are in Michigan. From Gull Road in Kalamazoo and Three Rivers in southwest Michigan to Auburn Hills, Ann Arbor, Fraser, Westland, and Belleville in southeast Michigan. Three of those remodels will be what we call our “flagship design.” For those of you who are familiar with our store on 28th Street at Cascade (in Grand Rapids), it will look like that, where we really tried to raise the bar with our assortment and quality of food, from bakery to beer to wine and cheese and deli. We think it improves our shopping experience significantly, and we’re looking forward to having more of those flagship stores.
We’ll also, in 2009, complete the addition of a bakery and new breads for our Middlebury, Indiana, central kitchen, and [we] hope to break ground for a big addition to our grocery-distribution center in Newport (Mich.), between Detroit and Monroe. Last year, in our Tipp City, Ohio, distribution facility — we really have three distribution facilities — Newport …; Lansing, which is our largest complex; and then Tipp City, Ohio, north of Dayton.
In Tipp City, we took some of the fulfillment work for our startup e-commerce sales in-house so that we’re shipping from that distribution center to all 50 states. Closer to home, we also added MDOT (Michigan Department of Transportation) commuter park-and-ride sections to the parking lots of eight of our Michigan stores. This is a smaller thing in the scope of our business, but I think it’s a really terrific public/private partnership. And I give so much credit to the people who thought about that and thought it up. For so many years, we’ve seen these commuter parking lots alongside the expressway exits around Michigan. And the state, obviously, spent a lot of money to obtain or retain that property, and then to maintain it. And then there were security issues where people’s cars were being broken into and that sort of thing. So the state saves money by not having to purchase and maintain that property. Our commuters are encouraged to save gas by making … their parking situation better. We hope to benefit, as people may stop in our store at the beginning or the end of their work day. Our parking lots are paved and lighted anyway, [but] sadly, not filled to the maximum all the time, particularly during the day, during the week. And so space was available, and all the real-estate folks in this room appreciate we better be convenient to major highways. So that’s been a really neat partnership, and we’ve got a list of 30 more such sites to come in 2009, as I mentioned, [which] is our 75th anniversary year. We’re fortunate to celebrate it as a private company. I give my dad (Fred Meijer) a lot of credit for that. He did three big things, I think — no one of which could’ve determined that we would reach 75 years and still be private and still be growing because they were all essential.
Certainly he helped guide us into a format — the supercenter, which continues to serve and please customers when others have faltered. He also — and I always tease him about this because he turned 89 a couple of months ago — he started many years ago to talk about what would happen when he died. Now that’s kind of a morbid topic, especially for my brothers and me [as adolescents], but it meant that he was planning ahead to help keep the company private, to do the things he needed to do in terms of estate-planning, to allow us to aspire to our 100th anniversary in just a short quarter of a century.
Finally he recognized that just because your name is on the building, that is no indicator of any special competence. And that meant that from the time my brothers and I were growing up, he trusted and respected others and encouraged non-family members to assume leadership roles in the company. There was no way we could’ve grown otherwise. So we find ourselves passing another milestone, and I think my grandparents, who came from the land of windmills, would be pleased to learn that this year, we’ll be installing our first wind turbines — first on the roof at our office in Walker (Mich.) and then at our Grand Haven and Norton Shores stores (in western Michigan).
I realize the title of this talk is “2009 and Beyond,” and “beyond,” in this economic climate, is rather hazier than usual. Our response to such uncertainty, though, is still to grow, to make new investments, but cautiously, keeping our [construction scheduling] and retaining our ability to drive prices lower, as we recognize how important savings are to our customers. And while our 2010 construction schedule is still fluid, we are committed to new stores in Michigan, along with another round of major remodeling projects. We are optimists about that, and we look forward to that.
We’re excited about refining and revamping our hardlines and softlines businesses, the side of the store that’s hit hardest in this economy. Our pharmacies have won new-prescription customers, in part, through our major investments in offering free antibiotics and prenatal vitamins. We look forward to expanding the grocery-express online ordering content that we’re now testing in our Knapp’s Corner store in Grand Rapids. I mentioned our central kitchen in Indiana. The new bakery operation there, we expect — we’re just beginning — as we anticipate further opportunities in prepared foods and manufacturing. Doing more of our own manufacturing can sometimes reduce our costs, but perhaps more significantly, allow us to improve our quality and develop more unique items.
We see a future in which our own brand products will only grow. We’ve also, as many of you know, vastly expanded our assortment of organic products, although I would have to say a renewed customer emphasis on savings may cause that trend to slow just a little. We are just beginning to do a better job serving local tastes and better understanding ethnic food preferences, and we know about the concern over carbon footprints, or “food miles,” as people sometimes say in our industry, will only grow in coming years. And so will regulation and so will concern over food safety.
We also know that right now, great values, great prices trump everything, with niche marketers like Whole Foods and Fresh Market in retreat. We face more formidable competition of a traditional nature. Kroger’s acquisition of Farmer Jack in Detroit replaces a struggling grocery competitor with the nation’s largest supermarket chain, and we know that will be tougher competition. And Wal-Mart’s continuing build-out of supercenters, particularly in southeast Michigan, which is our largest market, is a daunting prospect. Our friends at Spartan are resurgent, and the membership clubs, particularly Costco, appeal to our customers for those very important “stock-up” trips. In fact, we want to be the better choice for stocking up on commodities. And then you have people like Aldi, who sneak up on grocers who fail to recognize the power of price.
Reaching our customers with news of our sales and prices becomes trickier. (Reporter) Chris Knape and (photographer) Lori Cool (of The Grand Rapids Press) and I were just talking a moment ago … as traditional print media — newspapers — struggle … As an old newspaper guy myself, that’s a sad sea change — one that requires us to talk to our customers in new ways. We can’t count on all of us paying attention to a weekly circular. And, in fact, we were just thinking about how The Grand Rapids Press will soon be the largest daily newspaper in Michigan, as the Detroit papers cease to be daily newspapers.
The future holds as much uncertainty for us as at any time in our 75-year history. Or at least since 1962, when my dad and grandfather leaped into that supercenter business. So we face the unknown with a couple of crucial certainties: By staying private, we will retain the flexibility and long-term outlook we need to [grow] and by entrusting the leadership of Meijer, who I think is really the most talented team we’ve ever assembled, we’ll respond to what comes next from a position of strength.
I look forward to taking your questions, but I’d like to close by saying I know I speak my dad, my mom, and my brothers when I say that those characteristics are enough to make an uncertain future very bright indeed. Thank you.