The first question Lawrence R. Johnston asked when a headhunter got in touch with him three years ago about running Albertsons Inc. (ABS) was: "What's Albertsons?" But it didn't take long for Johnston, then the chief executive of GE Appliances (GE) and often on the receiving end of such feelers, to realize that Albertsons, the nation's second-largest grocery chain, was the opportunity he had been waiting for. His assignments at General Electric Co. (GE), especially resuscitating its ailing European medical services business in the late 1990s, had been so challenging that every other job he considered felt as if he would be taking early retirement. Not so at Albertsons. "This one intrigued me because it was very close to customers. It was big. It was complex. And it was broken," he says.
It certainly was. The folksy, family-owned grocery chain that Joe Albertson started in Boise, Idaho, in 1939 had become a $35 billion dysfunctional mess. The company had botched the integration of its 1999 merger with American Stores Co. "It was clear we didn't know who we were," recalls Paul I. Corddry, a board member since 1987. And while executives were preoccupied with union battles and lawsuits, Wal-Mart Stores (WMT), Target (TGT), and other discount retailers were eating Albertsons' lunch.
"LARRY CAN LEAD"
Johnston, 56, had been a lifer at GE. He joined in 1972 right after graduating from Stetson University in Florida with a degree in business, distinguished himself early on with his salesmanship, took on a series of increasingly high-profile assignments for two decades, and came within reach of Jack Welch's job. That was mostly because of his record at the medical services division. Welch dispatched him to Paris in 1997 to fix the business, which was losing $100 million a year, or dump it.
In less than three years, the division was making a $100 million operating profit. According to Welch, Johnston succeeded because he quickly realized his chief task was reenergizing the employees. "This was a cynical group of French and German engineers," Welch recalls. "But he engaged them incredibly." Every month Johnston traveled to a different European city, conducting sales meetings in the mornings and taking his team to visit hospitals in the afternoons. And at nights he studied French. "Larry can lead people over the hill," Welch says. "He put us on the map in Europe."
So it's safe to say that Johnston came to Albertsons in April, 2001, with an idea or two about how to tackle the company's problems. First, natch, was to make it operate more efficiently. Johnston is cutting about $1 billion in costs while spending another billion to upgrade technology -- from the supply and distribution system to self-checkout stands. He closed 500 unprofitable stores. And he has introduced a new managerial and financial discipline, including Six Sigma, to the 230,000 employees.
But he also knows that Albertsons -- or any retailer, for that matter -- can't take on Wal-Mart with greater efficiency and lower prices alone. So Johnston has decided that Albertsons will have to make grocery shopping something it not always is: quick and easy. If all goes as planned, in 18 months shoppers in all 2,500 stores will use handheld scanners that are connected to a company data base and a global-positioning-satellite system. The devices will read product labels and keep a running tab; they can direct customers to the shortest path to their groceries and alert them to special offers based on past purchases or that a prescription is ready. At the exit, the scanner charges the total to a credit card. No checkout line. No waiting. "The new technology not only allows us to be more efficient, but it also allows us to connect better with customers at the most intimate levels." And this, Johnston hopes, will help Albertsons finally boost sales.
Because it isn't happening any other way. So far, Johnston is squeezing profit out of the grocer but not through sales growth. The 18% rise in third-quarter earnings was due mostly to lower costs. Same-store sales growth stayed flat, at 0.3%. "Albertsons sales momentum remains very uninspiring," says Goldman Sachs & Co. (GS) analyst John Heinbockel. Meanwhile, Wal-Mart could well generate up to $162 billion annually in "supermarket-type" sales in three years, according to retail consultant Retail Forward Inc. That's more than the combined revenues of the top three national grocers: Kroger (KR), Albertsons, and Safeway (SWY).
WAR WITH THE WORKERS
Johnston is also dealing with the lingering aftereffects of last year's four-month strike in Southern California, which cost the company $1.2 billion in lost sales and immeasurable ill will among employees. "You can't differentiate yourself from Wal-Mart through high-quality service at the same time you go to war with your workforce demanding they give up their benefits," says Patrick J. O'Neill, executive vice-president of the United Food & Commercial Workers union.
You might think that Johnston, who likes to talk about motivating employees, would have some regrets about the strike. But it doesn't appear so. "[The strike] was very costly, but [the settlement] was one of the best investments our company ever made," he says. He believes his tough stand allowed him to reach labor agreements elsewhere more readily. That, and direct communication with the employees. When a union in Chicago was sitting on a new contract, Johnston decided to explain the terms in a video he sent to every worker's home. The contract was approved by the next deadline.
Johnston is continuing the charm offensive with weekly e-mails to all employees, monthly live broadcasts, and regular visits to stores. And he is introducing a seminar on positive thinking. That's not something Joe Albertson might have put much stock in, but then he probably never imagined that Wal-Mart would one day be selling milk and eggs.
By Stanley Holmes in Boise, Idaho