Buttrey Food & Drug Stores Co.

601 6th Street S.W.
Great Falls, Montana 59404
U.S.A.
(406) 761-3401
Fax: (406) 761-3001

Public Company
Incorporated: 1990 as Buttrey Holding Corp.
Employees: 2,652
Sales: $382.1 million (1995)
Stock Exchanges: NASDAQ
SICs: 5411 Grocery Stores; 5912 Drug Stores &Proprietary Stores; 6719 Holding Companies, Not Elsewhere Classified

The largest operator of food and drug stores in Montana, Buttrey Food & Drug Stores Co. is a seasoned retailer with a century of experience in its home state. During the mid-1990s, Buttrey operated 40 retail stores, 32 of which were combination food and drug stores that offered grocery, dairy, frozen food, meat and produce departments, over-the-counter drugs, health and beauty aids, and general merchandise. In addition to its stores in Montana, Buttrey also operated stores in Wyoming, North Dakota, and Idaho. Merchandise for the company’s stores was delivered by a fleet of 28 tractors and 50 trailers, nearly all of which were refrigerated.

Early History

Established in 1896, Buttrey operated as an independent grocery store for 70 years until its acquisition by Melrose Park, Illinois-based Jewel Companies. Jewel’s 1966 acquisition of Buttrey initiated a 25-year period during which Buttrey operated under a corporate umbrella. Buttrey’s tenure as a subsidiary comprised two eras, the longest of which occurred under the Jewel umbrella. In 1984, the second era began when Salt Lake City-based American Stores Co. acquired the Buttrey chain. Historically, the Buttrey business had been a profitable one, but while under the stewardship of American Stores the chain’s financial health weakened as the communities it served suffered from their own financial difficulties. Positioned primarily in logging communities, Buttrey felt the downturn in the timber industry during the 1980s. By the late 1980s Buttrey regained profitability, but by that time American Stores was suffering from its own ills. American Stores’ attempt to resolve its financial difficulties significantly altered Buttrey’s future, marking a turning point in the supermarket chain’s history.

American Stores’ 1988 acquisition of Lucky Stores added a massive new supermarket chain in the company’s Southern California region where it already operated a chain of Alpha Beta supermarkets. But the acquisition eventually lead to the sacrifice of American Stores’ Buttrey division. The Lucky Stores acquisition saddled American Stores with nearly $3.4 billion dollars in debt. To ease the company’s debt load, American Stores’ management announced it would merge Lucky Stores and the Alpha Beta chain to realize the cost efficiencies of uniting its two Southern California retail chains. Buttrey, meanwhile, was operating in the wings, supported by its 44 stores and four home centers in Salt Lake City, Utah.

Buttrey was affected, however, when the U. S. Supreme Court entered the picture. In an April 30th, 1990, ruling the Supreme Court announced its decision to block the integration of American Stores’ Lucky Stores and Alpha Beta operations. Unable to reduce its debt otherwise, American Stores looked toward divestiture as a means to trim its debt and immediately the Buttrey division emerged as the prime candidate.

Buttrey’s 1990 Independence

In May 1990, American Stores announced, “While Buttrey’s sales and earnings have improved significantly, it is not yet performing at the levels desired by the company.” This proclamation occurred concurrently with the announcement that the company was putting the Buttrey chain up for sale. At the time, the Buttrey chain comprised 44 stores operating in a 1,400-mile swath across five states. There were 26 stores in the company’s home state of Montana, seven stores in eastern Washington, another seven stores in Wyoming, and two stores each in Idaho and North Dakota. These stores, which were generating roughly $475 million in sales at the time of the sale, were supported by two warehouses: one in Great Falls, a 285,000-square-foot facility that handled dry groceries, dairy, frozen food, meat, and deli items, and a second 235,000-square-foot facility located in Payson, Utah, that supplied general merchandise, drugs, health and beauty aids, and seasonal goods.

When the Buttrey chain was put on the block in May, industry observers listed two potential buyers: one of the chain’s chief rivals, Albertson’s, and an employee-led management group. By August, all conjecture about Buttrey’s future owner was put to rest when an employee-led management group and a merchant banking firm acquired the chain for $184 million. Headed by Edward C. Agnew, who had been president and chief executive officer of Buttrey since August 1987, the management group acquired Buttrey through a leveraged buyout (LBO) with the financial assistance of Los Angeles-based merchant banker Freeman Spogli & Co., a heavy investor in the U.S. supermarket industry. By October 1990, with the deal completed, Buttrey reverted to private ownership. Commenting on the LBO of Buttrey, Agnew noted to a reporter from Supermarket News, “This purchase is the right thing for our customers, the communities we serve, and, especially, our employees. The new ownership structure allows us maximum flexibility to run our business in both the short and long term.”

In the wake of the LBO that set it free to determine its own course, Buttrey searched for precisely what its future course would be. Initially, the company endeavored to increase its cash flow, and consequently re-evaluated all merchandise in its warehouse. By December 1990, Buttrey’s management had decided to expand through acquisition and boost sales by remodeling many of the chain’s stores. Noting as much, Agnew explained, “We made provisions in our capital structure to allow for prudent expansion as well as to complete our remodeling program.” Specifically, the company’s plans called for the remodeling of 14 stores during the ensuing three years and pursuit of acquisition opportunities that would strengthen its presence in markets where the chain already operated. Buttrey’s expansion program, which in 1990 was slated to begin in two or three years, was expected to develop on two fronts. In larger, more populous markets the company intended to establish 45,000 square-foot stores, while 30,000 square-foot stores were selected for smaller communities.

The first store the company had opened since 1985 opened in Cut Bank, Montana, in January 1990 and served as the inspiration for the smaller store concept that was expected to extend Buttrey’s presence into smaller markets. The extent of Buttrey’s post-LBO plans were curbed by a variety of factors, however. The onset of a national recession and increased competition from mass merchandisers and club store operators conspired to hobble Buttrey’s progress during the early 1990s. Although the company continued to remodel its chain of stores, sluggish sales and the debt incurred from the 1990 LBO precluded Buttrey from expanding either through internal means or through acquisition in any meaningful way during the early 1990s. To free itself from some of its financial pressures, the company sought the most expeditious path toward raising funds: converting to public ownership. In December 1991, Buttrey filed with the Securities and Exchange Commission for an initial public offering of 2.9 million shares at $17 per share.

The sale of stock was completed in February 1992 and exceeded expectations. Instead of entering the market at $17 per share, Buttrey’s stock debuted at $21 per share, enabling the company to substantially reduce its outstanding debt. Following the conversion to public ownership, Buttrey continued with its ambitious remodeling program, announcing in early 1992 that it would renovate 11 stores in the immediate future at a cost of $735,000 per store. While the company continued to post lackluster sales in the midst of anemic economic conditions and mounting competition, two management changes were effected. In February 1993, Agnew, who had been serving as president and chief executive officer, succeeded Peter J. Sodini as chairman and retained his chief executive officer title. Agnew’s promotion made room for Joseph H. Fernandez to move up Buttrey’s managerial ladder to president and chief operating officer. Fernandez had began his career in the food industry in 1976 with Buttrey’s former parent Jewel before being named executive vice president and chief operating officer of West Caldwell, New Jersey-based Kings Super Markets in 1991. By the end of 1993, Fernandez had assumed the chief executive position at Buttrey, putting in place the management team that would lead the company into the mid-1990s.

Mid-1990s Strategy

After several years of watching sales decline, Buttrey’s management attempted to ameliorate the chain’s lackluster performance in 1994. In July, the company agreed to sell all six of the stores in Washington to Seattle-based Associated Grocers for $19.2 million, stripping the company of 15 percent of its annual sales volume, or $64.3 million in sales. After shedding the six Washington stores, which the company said had been crimping profits, Buttrey recorded $382.1 million in sales for fiscal 1995, down from the $428.7 million collected in fiscal 1994, and down considerably from the $476 million the company generated when Freeman Spogli made its initial investment in 1990.

After nearly a half decade of allying itself financially with Buttrey, Freeman Spogli was ready to cut its ties to the supermarket chain in 1995. The merchant banker began looking for a buyer for the chain in early 1995 and in mid-April it appeared Buttrey and Freeman Spogli were going to go their separate ways. An acquisition proposal was received by Buttrey, but before industry analysts tired of speculating who the mystery purchaser was, the discussions with the potential buyer were terminated for undisclosed reasons. One month after discussions with Buttrey’s unnamed suitor were abandoned, Buttrey sold its Payson, Utah, non-food warehouse, and in June announced it would expand through acquisitions to increase sales. According to Fernandez, increasing the company’s sales volume was the number one priority in 1995.

Attempts to boost sales by adjusting prices, increasing the emphasis on selling perishable items, and redefining the company’s general merchandising strategy had largely failed, so Buttrey re-dedicated itself to pursuing acquisition opportunities. During the ensuing year, Buttrey achieved only modest gains on the acquisition front, purchasing one store in Cheyenne, Wyoming, from Bismarck, North Dakota-based Dan’s Supermarkets. In December 1995, however, encouraging news from Great Falls compensated for the lack of acquisitive activity. In Great Falls, a Buttrey store featuring a new concept the company called “Buttrey Big Fresh” opened on November 15th and recorded immediate success. The concept featured expanded selections of produce, meat, seafood, delicatessen, bakery, and floral goods, and the chain’s first food court. The “Buttrey Big Fresh” concept fueled hope that the company had at last found a recipe for higher sales.

Entering 1996, the success of the “Buttrey Big Fresh” and the “Food Court at Buttrey” concepts spurred confidence that the late 1990s would bring meaningful growth to the Montana chain. As the company mapped out its plans for the remainder of the decade, it announced its intentions to open a second in-store food court. Featuring Moose Brothers pizza, Chix fried and rotisserie chicken, Joey Pagoda’s Oriental Express, Cinnamon Street gourmet cinnamon rolls, and a coffee bar, Buttrey’s second food court was slated to open in March 1996.

After several anxious years of searching for a way to lift sales, the company’s management was excited by the success of the “Buttrey Big Fresh” and “Food Court at Buttrey” concepts. Continued success with the second food court pointed toward the establishment of additional food courts during the late 1990s and, perhaps, solid growth in the future. Considering the company’s dominant market position in Montana, any significant increase in the popularity of the Buttrey units would engender the boost in sales the company had long anticipated. Whether this would happen or not depended in large part on the marketing strength of its two new concepts, the long-term success of which remained to be determined in the late 1990s.