April 1 2002 by Jonathan Burton
Inside the staff lounge of a recently opened Albertson’s supermarket in the San Francisco suburb of Hayward, Calif., CEO Larry Johnston is giving about three dozen employees of the grocery and drugstore giant a piece of his mind.
“We are in a turnaround,” he says pointedly. “We want leaders who think that change is an opportunity, not a threat. We want a culture that values the ideas of every associate. It’s the people closest to the customer who have the best ideas.”
He outlines the five “strategic imperatives” that have become the thrust of his young administration. Designed to boost sales, reduce expenses and improve operating margins, they include: aggressive cost and process control; maximized return on invested capital; customer-based approach to growth; company-wide focus on technology; and energized employees.
“An organization’s attitude determines its altitude,” Johnston tells the workers, invoking a favorite motivational maxim, one of many upbeat sayings he frequently quotes. “Don’t you feel better when you come to work every day and have leaders who are positive?” Murmurs of assent circle the room. Encouraged, he adds, “When we get up in the morning, we can either have a terrible day or a terrific day. Who decides?”
“We do,” echoes a chorus of voices.
“You’re going to hear a lot about this,” Johnston promises. “We’re going to teach positive thinking-how to have a good day not just at work but at home. And if you don’t have a leader who emulates these values,” he adds, sharpening his tone, “he or she won’t be your leader very long.”
People nod appreciatively. The store director beams. They’ve never met Johnston before, but they welcome his evangelistic and inclusive message. Clearly he had more on his agenda this day than cutting the huge blue-and-white frosted sheet cake that’s been baked to celebrate the store’s grand opening.
Johnston’s mission is to spread the message to all 225,000 employees-along with vendors and shareholders-that Albertson’s can become a dynamic meritocracy that rewards innovation and ideas. “There’s an infinite capacity to improve everything,” Johnston says. “Productivity is never ending.”
Neither, it seems, is Johnston. A driven yet easygoing 6′ 7″ bear of a man who has spent 170 days on the road since he started a year ago-and who never strays far from his Blackberry wireless email device-Johnston probably would have met every Albertson’s employee already if it were possible. As it is, he constantly whisks electronic missives to staff and customers-his email address is made public-singing praises and responding to problems.
One irate customer messaged Johnston about being rudely treated in an Albertson’s store and vowed never to return. Johnston sent a message to the store’s director with instructions to try to win back the business. Soon after, Johnston received another message from the angry shopper, this time expressing amazement that the store director had come to his house to apologize. “Our job,” says Johnston, “is the maintenance and acquisition of customers.”
Needed: Leader to unite rivals
Johnston, a corporate turnaround veteran, came to Albertson’s from General Electric in April 2001 with zero experience in the food industry and a mandate from Albertson’s board of directors to be a catalyst for change. The board’s unorthodox choice rankled more than a few insiders; since legendary grocer J.A. “Joe” Albertson opened his first store in 1939, Albertson’s had never even looked outside its Boise, Idaho, headquarters for a top leader.
But Albertson’s needed a cleanup. It had merged with American Stores in 1999 in a huge transaction that put more than 2,500 stores and 235,000 employees behind a single cash register. The combination of homegrown regional supermarkets including Albertson’s, Jewel Food Stores and Acme Markets, and drugstores Sav-on and Osco, generated revenues of about $36 billion across 36 states.
The merger also forced rivals set in their ways to get chummy with each other. No sale. This marriage of strong-willed equals quickly deteriorated into an “us versus them” culture clash that was demoralizing staff and miring progress. Albertson’s ended its fiscal year in February 2001 with revenues essentially flat over the previous two years, increasing administrative expenses, declining earnings per share and shrinking operating margins.
“We had a company that needed to be pulled together,” says Albertson’s director Gary Ames, who was instrumental in hiring Johnston. “The two cultures needed an outside third party to bridge them.”
Graduates of the Jack Welch School of Management are a kind of gold standard for Fortune 500 companies wanting a face-lift, such as The Home Depot’s Bob Nardelli, 3M’s James McNerney and Honeywell’s David Cote. “When you go get a GE executive, you know you get great financial, strategic and executive skills,” says Ames.
What Jack Welch taught Johnston
“They knew there would be a lot of tough calls that had to be made,” Johnston says of the Albertson’s directors. “There wouldn’t be any sacred cows. We would do whatever it took to increase shareholder value and move very quickly.”
Johnston, 53, had made several game-saving plays over a distinguished 29-year career at GE, where he steeped himself in Welch’s mantra to embrace change and best practices and to crush the bureaucracy that stifles a company’s development. Johnston honed his sales and management talent in GE’s appliances division, except for two years in Paris, where he headed GE Medical Systems’ operation in Europe, the Middle East and Africa. There, he showcased an ability to succeed where others had failed, turning a money-losing unit into a moneymaker after only one year. He did it by removing roadblocks while motivating employees to achieve-and exceed-goals.
He closed several unproductive factories in Western Europe and moved them to lower-cost regions including Mexico. He introduced the quality measurement system Six Sigma, and hired a motivational speaker from Texas to give European staff a course on the power of positive thinking. Johnston held Medical Systems sales meetings in Germany-the home base of chief rival Siemens-after which GE salespeople would call on local German hospitals. “That’s just fresh thinking,” says Welch. Today, Johnston notes, GE Medical Systems has passed Siemens and dominates its marketplace in Europe, the Middle East and Africa.
Impressed, Welch brought Johnston back to appliances in 1999, this time as president and CEO of the Louisville, Ky.-based group.
Welch still lauds Johnston’s European campaign. “We had all kinds of people-guys with better technology backgrounds, seemingly better rÃ©sumÃ©s,” Welch says. “Then Larry came and found the magic formula, giving them self-confidence, bringing the best out of them rather than having them keep their heads down, always losing. Larry proved beyond a doubt that he had the leadership characteristics to run any business.”
But can Johnston deliver manna to the grocery business? “There’s a huge amount of work to be done,” says Lehman Brothers analyst Meredith Adler, who in late February rated Albertson’s shares “market perform.” While Adler believes Johnston can streamline the organization, she points out that internal change alone doesn’t solve the company’s problems. Change takes time, and, she adds, “the industry’s quite competitive. Nobody’s sitting around waiting for Albertson’s to get its act together.”
Least of all Johnston. The squeaky wheel of change has begun to turn, starting with the CEO’s using his considerable communication skills to negotiate a truce between Albertson’s and American Stores loyalists. “What Larry says is €˜It’s neither culture-it’s the new culture.’ That’s doable,” asserts Peter Van Hoeden, a 23-year Albertson’s veteran who oversees the Midwest division. “Larry’s done a nice job of saying, €˜What’s good for our business? Don’t align yourself with where an idea came from. Align yourself with what’s best for the company.’”
Cutting administration, upping tech spending
Before Johnston had completed his first 90 days on the job, everyone knew what that meant. “There was too much bureaucracy,” he recalls, “too much management, too many assets that were destroying shareholder value.”
Albertson’s launched its five strategic imperatives and announced a broad restructuring that has included cutting up to 20 percent of administration and management above store-level, closing 165 underperforming stores, and consolidating operating divisions to 15 from 19. Johnston says he expects these and other steps to trim $250 million in costs by the end of the company’s fiscal 2003 second quarter in August. Much of these savings will be spent on technology-bringing greater efficiency to ordering, distribution and online shopping. Albertson’s has been testing an Internet-based home shopping service in Southern California and Seattle where online orders are filled and delivered for a nominal fee. Unlike failed dot-com grocer Webvan, which needed expensive warehouses and kitchens to fill orders, Albertson’s is leveraging existing stores and employees to provide customers with another convenience. Look for self-checkout aisles in stores, too.
Leverage is an important part of Johnston’s plan. Non-strategic assets are being sold, including 80 Osco drugstores in the Northeast that fetched $240 million-capital that can be used to remodel stores and open new locations in battleground markets such as California and Florida, which offer the potential for a higher return on investment. Even the number of directors has been downsized to 14 from 20. Says Johnston, “In the short term we may have to shrink a little bit to be more profitable.”
Employee “bullet trains” boost revenues
Running leaner would position Albertson’s nicely for the long term-and that is at once the goal and the obstacle in its fight for market share against formidable food and drug rivals like Safeway, Kroger and Walgreen’s. Fiscal 2002′s third-quarter sales of $9.4 billion rose 4.1 percent from $9 billion a year prior, while operating profit increased to $419 million from $384 million. Cash flow from operations totaled $442 million in the third quarter, ended Nov. 1, up 37 percent from $322 million a year earlier.
Though he welcomes the healthier balance sheet, Johnston concedes, “Many times it’s frustrating when things don’t move faster.” He’s assigned executives to small teams he calls “bullet trains” because they’re “fast and efficient.” Among their roles: drive savings and develop non-traditional, in-store revenues. Johnston also implemented Quick Market Intelligence-a best practice that GE gleaned from Wal-Mart-linking each of Albertson’s 15 operating divisions to headquarters every Tuesday morning. In the four-hour management jam session that ensues, best practices are swapped like trading cards.
“I know exactly what’s happening in the business and what a competitor is doing,” says Johnston. “More importantly, so do all the division presidents. We can pick up and transfer best practices much quicker without having to go through a bunch of layers.”
The result at Albertson’s, as with many large grocery retailers, has been to transform the neighborhood supermarket into a mini-mall. Albertson’s new look features Starbucks kiosks and Krispy Kreme donut displays, and services including a pharmacy, video rental, fresh flowers, photo developing and retail banking. Shelves are stocked with items that reflect the ethnic and eclectic tastes of an individual neighborhood, such as the catfish, collard greens and specialized hair care products sold in predominantly African-American communities. The company also operates more than 200 branded automobile fueling centers-a solid grower. Targeted for improvement are Albertson’s private-label items, which represent 17 percent of sales. Johnston says best-practice peers generate 25 percent of sales from private-label goods and the figure is growing.
New stock options for thousands of employees
When Johnston discovered early on that store managers’ compensation did not include options on Albertson’s stock, he saw a tremendous opportunity. “That shocked me,” Johnston admits. “If you were to ask me who is the most important person in the company, I would say the store director. Those people determine our success.” Within months, about 3,000 store directors’ and pharmacy managers’ salaries included stock options.
Lately Johnston has been tearing down other walls-this time literally. Chicago’s Jewel-Osco stores introduced an innovative idea to combine a supermarket with a drug store. The Chicago subsidiary removed the common wall between adjacent Jewel and Osco stores, marketing the space as two stores under one roof. “The return on invested capital and the margins in those stores are much higher than the industry average,” Johnston observes. Albertson’s is rolling out combined stores in Reno, Tucson and Omaha, with plans for other cities.
Many of Johnston’s directives seem to have come from GE’s operations manual-bottom-line initiatives intended to rally the troops, spend capital wisely, and grow market share and earnings. “The GE DNA grabs tight control over the financials and the financial metrics,” observes University of Michigan professor Noel Tichy, a GE alumnus who has known Johnston for many years. “But it ends up being a people game. How you run those stores is critical. You’ll see Larry put leadership development emphasis on both the store level and executive ranks.” Indeed, Johnston intends to instill Albertson’s executives with the kind of continuing education that he received at GE.
Leaving the Hayward store, Johnston settles into the back seat of a black SUV, which is soon crawling through San Francisco, where Albertson’s is challenging market leader Safeway. Behind schedule, he scraps a helicopter tour of potential Bay Area building sites for new Albertson’s stores. “Where’s next?” Johnston asks a colleague as the huge vehicle pulls away from a stoplight. You get the sense that he’s already thought of a few destinations.