Smart & Final 145th Anniversary

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Smart & Final is a peculiar operation, but in the very best sense of that word.

For one, there’s the name. Does it mean smart shopping?

Final deals? It’s actually the last names of Jim Smart and Hildane Final, who eventually bought the grocery company that had been founded in 1871 in Los Angeles by Herman Hellman, Jacob Haas and Bernard Cohn.

For another thing, the company is 145 years old—something very few companies are ever able to celebrate.

And then there’s the format: The company’s Extra! stores combine a club store and a grocery store under one (reasonably sized) roof. The stable of Extra! stores has grown significantly this year with the addition of 33 lease locations from a competitor. Smart & Final was able to take advantage of some of the available locations thanks to its move to become a publicly traded company in September 2014. It had the cash position to strike when the iron was hot, and many more residents of Central and Southern California now have a Smart & Final Extra! to shop in their neighborhood.

Inside, company executives talk about the past, present and future of this wonderfully peculiar company that is celebrating a milestone anniversary.

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Company Celebrates 145 Years of Superior Service, Growth and Success Smart & Final is a truly unique company, combining today’s state-of-the-art technologies and management practices with the historical perspective of one of the West’s pioneer companies.

The year was 1871, and Los Angeles was a small, dusty ranching town. Streets were unpaved, buildings were modestly wood or adobe, and the enclave’s 6,000 residents—many of Mexican and Indian descent—probably were outnumbered by local sheep and cattle. Los Angeles mainly produced hides, wool and tallow. Indeed, Los Angeles couldn’t begin to compare with its northern neighbor, bustling, cosmopolitan San Francisco.

But Los Angeles’ rural ambiance didn’t deter partners Herman Hellman, Jacob Haas and Bernard Cohn from launching a new grocery business. Housed in a two-story brick building on Los Angeles Street, Hellman, Haas Grocery Co. sold necessities including flour, brown sugar, salt, patent medicines, rope, sheepherding supplies, chewing Herman Hellman tobacco and gunpowder.

Packaged goods were unknown: Hellman, Haas’ food staples arrived in bulk and typically were sold by weight. There were prunes in huge casks, barrels of currants from Greece and rice for the town’s burgeoning Chinese population. So vital was the store that Hellman, Haas was one of seven names in the first Los Angeles phone directory.

Indeed, the entrepreneurs behind Hellman, Haas were a distinguished group. Herman Hellman later succeeded his brother, Isias, as head of the then-esteemed Farmers and Merchants Bank, which also was founded in 1871. Isias Hellman also was among the group of community leaders

who donated the land upon which the University of Southern California was built.

Meanwhile, Abraham Haas, Jacob Haas’ younger brother who had joined Hellman, Haas in 1873, launched the first flour milling and cold storage businesses in Los Angeles, along with several electricity and gas companies—the forerunners of current Southern California power companies.

Bernard Cohn later entered politics and briefly served as Mayor of Los Angeles.

By the turn of the century, Hellman, Haas had changed hands: The sole owners now were Abraham Haas and Jacob Baruch, who bought out Herman Hellman. The company name was changed to Haas, Baruch & Co. in 1889.

Meantime, Haas, Baruch introduced its private Iris label on canned tomatoes and launched a tradition of artistically designed labels to emphasize the cans’ high quality contents. By 1895, the grocer’s sales reached $2 million—a huge sum at the time.

By 1900, Haas, Baruch was the burgeoning city’s preeminent wholesale grocer. Over the next two decades, a chain of events—including construction of the L.A. Aqueduct, the discovery of oil in Long Beach and the opening of the Panama Canal—pushed the local population to nearly 1 million.

Abraham Haas left Southern California at this time and moved to San Francisco to found Haas Wholesale Grocers, which became the leading wholesaler in the Bay Area. His son Walter, who worked with his father in the food business, left to join a struggling clothing manufacturer, Levi Strauss.

Under his direction, the company flourished, and Walter

served as president for three decades, bringing Levi Strauss to international fame.

The Haas mansion in San Francisco, the original home of Abraham Haas, is now open to private tours as a San Francisco Historical Home.

At about this time, the Santa Ana Grocery Co., which was founded in 1912 and mainly supplied feed and grain to local H.D. Final at 17 years of age. farmers, was sold in 1914 to J.S. “Jim” Smart, a banker from Saginaw, Michigan, and partner H.D. “Hildane” Final, and the company name changed to Smart & Final Wholesale Grocers. The business relocated near the docks in San Pedro and immediately prospered. By 1919, sales surged to $10 million.

The first Smart & Final store.

The grocery industry was also changing. As retail grocers gained strength, many were negotiating discounts directly with manufacturers, avoiding wholesalers altogether.

Competition turned brutal: Of the city’s 16 wholesale grocers in 1920, only seven were left a decade later.

Smart & Final survived by offering better service and by pioneering the “cash-and-carry” concept in Los Angeles. Previously, grocery stores—even at wholesale— required a clerk to collect goods for the customer.

Smart & Final rightly figured the chain could reduce overhead by introducing self-service but still retain high-quality selection and service. Its novel cash-and-carry idea debuted in Long Beach in 1923.

Another innovation was locating stores near customers’ businesses, recognizing the importance of their time and sparing them the trek to a remote warehouse.

In 1953, Smart & Final merged with Haas, Baruch, with Smart &

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Company Celebrated IPO Anniversary, Underscored Project 100 in 2015 Smart & Final celebrated the one-year anniversary of its quality and convenience resonates powerfully with our busiinitial public offering of stock on Sept. 22, 2015, with CEO Dave ness and household consumers, and gives us an edge in a Hirz, members of senior management and board members competitive market.” ringing the opening The chain’s Extra! bell at the New York stores are signifiStock Exchange in cantly larger than its New York City. traditional warehouse Smart & Final is in stores and offer fresh the midst of Project produce, “the low 100—its accelerprices of a discount ated expansion plan grocer” and clubfocused on its Extra! size packs as well as and Cash & Carry thousands of items in format stores. Project smaller sizes.

100 calls for opening The Cash & Carry 100 new stores, stores are geared to investment in 100 foodservice customnew neighborhood ers such as restaurant projects and 100 owners, caterers and teams of new store event planners. employees.

At least 5,000 new “We have achieved Dave Hirz and company celebrate the anniversary of Smart & Final’s IPO a year employees will be strong financial earlier. hired to staff those growth during our first year as a public company, and have 100 new stores over the next four years. accelerated the expansion of our Extra! store format. Building In its first year as a public company, Smart & Final expanded upon our established Extra! and Cash & Carry footprint its private label, First Street, and organic private label, Sun throughout the western United States, we are now focused on Harvest; expanded its natural produce selection in its stores; executing our Project 100 plan, which includes opening over partnered with Instacart and Google Shopping for in-home 100 Extra! and Cash & Carry format stores in the next four and office delivery service; and rolled out a new logo emphayears,” said Hirz. “We believe our consistent focus on value, sizing the “&.”

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Final the surviving company. The company shifted its headquarters to Haas Baruch’s new warehouse in Vernon, California, which was quickly becoming the preferred distribution location for a number of wholesale and retail companies.

Shortly thereafter, in 1955, the company was acquired by a leading supermarket chain, Thriftimart, and grew to 83 units by 1984. That year, the company was acquired by Casino USA, an American subsidiary of a French retail company, and the Thriftimart stores were liquidated. The company’s resources shifted to focus on an aggressive Smart & Final store modernization and expansion program.

In 1993, Smart & Final made its first joint venture into another country with the opening of the first Mexico stores. Today, with more than a dozen stores operating in northern Mexico, those stores continue to prosper.

In the fall of 1994, the management of Smart & Final decided to expand its foodservice as well as store operations to the eastern U.S. and acquired the Henry Lee Co. in Miami, Florida.

In 1998, Smart & Final acquired the United Grocers Cash & Carry store chain based in the Pacific Northwest. With more than 45 stores in four states, the company’s West Coast operations now extended all the way from northern Mexico to the Canadian border.

In the fall of 1998, the company’s corporate offices as well as its main distribution center relocated to new, modernized facilities in the city of Commerce, California.

Smart & Final exited the Florida market in 2003 in order to focus all company resources on its core store operations in the West.

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Smart & Final was acquired by private equity firm Apollo Management in May 2007. Later that year, the company entered a new niche of food retailing when it purchased 27 Southern California Henry’s Farmers Market stores and eight Texas Sun Harvest stores.

Smart & Final subsequently sold the Henry’s and Sun Harvest stores to Sprouts in early 2011. It also began the next evolution of its Smart & Final stores. Seeing the opportunity to continue to focus on business customers, CEO George Golleher envisioned a Smart & Final that would provide a one-stop shopping destination for businesses and households alike. In 2008, that concept was brought to life when the first Smart & Final Extra! store opened in Fullerton, California.

Smart & Final was acquired by Ares Management, a private equity firm, in 2012.

In September 2014, Smart & Final stock began trading on the New York Stock Exchange. The management and private equity owners retained their stakes in the company; the IPO raised money for growth opportunities, such as the 33-store purchase from Haggen in late 2015.

As of 2015, net sales were $3.97 billion; adjusted EBITDA was $192.9 million; and net income was $38.3 million. The year ended with 221 Smart & Final stores and 55 Cash & Carry stores. Cash & Carry stores focus primarily on restaurants, caterers and other foodservice businesses like food trucks and coffeehouses. They are primarily located in Northern California, Oregon, Washington, Idaho and Nevada.

The Haggen lease acquisition The former Haggen leases purchased by Smart & Final are all located in Central and Southern California.

The addresses of the stores, which all will be Smart & Final Extra! locations before the end of May, are: 8200 El Camino Real, Atascadero 3830 W Verdugo Avenue, Burbank 955 Carlsbad Village Drive, Carlsbad 850 Linden Avenue, Carpinteria 4200 Chino Hills Parkway, Chino Hills 360 East H Street, Chula Vista 150 B Avenue, Coronado 3049 Coast Highway, Corona del Mar 240 S Diamond Bar Boulevard, Diamond Bar 13439 Camino Canada, El Cajon 2800 Fletcher Parkway, El Cajon 30252 Crown Valley Parkway, Laguna Niguel 3681 Avocado Avenue, La Mesa 2100 Newbury Road, Newbury Park 5038 W Avenue North, Palmdale 72675 Highway 111, Palm Desert 1191 E. Creston Road, Paso Robles 615 N. Pacific Coast Highway, Redondo Beach 1516 S Pacific Coast Highway, Redondo Beach 10633 Tierra Santa Boulevard, San Diego 2235 University Avenue, San Diego 10740 Westview Parkway, San Diego 1321 Johnson Avenue, San Luis Obispo 1636 W 25th Street, San Pedro 3943 State Street, Santa Barbara 9870 Magnolia Avenue, Santee 350 W San Ysidro Boulevard, San Ysidro 5135 Los Angeles Avenue, Simi Valley 21035 Hawthorne Boulevard, Torrance 21672 Plano Trabuco Road, Trabuco Canyon 7800 Telegraph Road, Ventura 5770 Lindero Canyon Road, Westlake Village 21500 Yorba Linda Boulevard, Yorba Linda

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President and CEO Dave Hirz:

Unique Model Gives Smart & Final Its Staying Power Dave Hirz became a six-year veteran of Smart & Final in April.

It has been a busy time since Hirz, president and CEO, joined the Commerce, California-based retailer back in 2010. At that time, the company’s Extra! format was only a couple of years old, having been developed by Hirz’s predecessor, George Golleher. The company spent time in 2009-10 tweaking the format and by 2012 was ready to roll it out to Dave Hirz a wider audience.

The concept has been so well received that today six in 10 of the company’s stores are Extra! stores, marked by a full selection of both club pack and grocery store (household) items as well as a broader range of perishables than before.

More than 30 new Extra! locations in Southern California will open in 2016, thanks to a major acquisition that closed late last year. Smart & Final staff has been all-hands-on-deck following the acquisition of the 33 Haggen lease locations, working long hours to quickly get the stores reset and hiring and training 2,000 new associates to support the growth.

Hirz started in the grocery business at age 16 and had spent his career in traditional grocery retail (Albertsons, Food 4 Less, Ralphs) prior to joining Smart & Final. With his background, he is well qualified to speak to the unique shopping option Smart & Final presents in the marketplace.

Bob Reeves, VP-West for The Shelby Report, spoke with Hirz at his offices on April 19. He offers some candid insights into Smart & Final’s business, which has proven its staying power over the past 145 years.

SR: A hundred and forty-five years is extraordinary.

We’re excited to dive into the history of the company and share with the grocery industry the reasons for your success. Give me your thoughts on how you viewed Smart & Final back when you were with Ralphs and you competed against them and how the company has evolved in the six years you’ve been in charge.

An emphasis on education

Smart & Final’s core value of growth refers not only to company growth but personal and professional growth as well.

Company chief Dave Hirz didn’t take his first college class until he was in his 30s. The fact that his employer at the time helped pay for his tuition and books “made a real impact on me and changed the trajectory of my career,” he says. “So I’m a really big believer in education—it’s something no one can take away from you.”

Every year, Smart & Final sends students to the USC Food Industry Management (FIM) Program; to the USC FIM Executive Program (twice a year); to the Portland State University’s Food Industry Management Certificate program; and to the Cornell University Food Executive Program, “which is something I was blessed to be able to attend back in the ’90s,” Hirz said, adding that Smart & Final is sending a student to the Cornell program this year.

In addition, Smart & Final has about 150 associates enrolled in the Western Association of Food Chains’ Retail Management Certificate Program. Those courses are offered through junior colleges as well as online. Smart & Final pays for their tuition and books up front, not as a reimbursement, since the company found the latter was preventing some students from taking that step.

“There’s no money out of pocket from our associates,” Hirz says. “Honestly, it causes them to run out of excuses to not attend school, and it’s been great. Cherie Phipps at WAFC has done an incredible job getting so many junior colleges on board in every state we operate in, including Oregon, Washington, Idaho, Nevada, California and Arizona. There are schools that are part of the program in every state. And there’s an online program that a lot of folks take advantage of, eliminating almost every excuse an associate could have to not attend.”

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Hirz: The first store started here in Los Angeles in 1871 selling sheep-herding supplies and gunpowder. We started out as a business that sold even back then to businesses and households. It certainly has evolved over 145 years to where we are today. Most people are surprised when they hear that there was a Jim Smart and a Hildane Final. Most people in our markets have no idea where that name came from, but it was the early founders, and it’s a part of our legacy that we’re really proud of.

When I was with Kroger for 11 years and president of Food 4 Less and Ralphs, I was familiar with Smart & Final but didn’t really see them as much of a competitor because I didn’t understand the format. When you walk into our stores, it’s different than a conventional grocery store, and people don’t quite get it. Neither did I. But before I made the decision to come over here, I went out and visited over 30 Smart & Final stores in different neighborhoods and tried to understand the model a little bit, and more importantly, what upside I thought Smart & Final had. I thought I knew the model pretty well and understood what the upside potential might be, but when I joined Smart & Final and really got to look under the covers, it was a lot different than I thought it was. It’s just a much different business.

The model is just really unique, and has evolved particularly over the last eight years as we began experimenting with this Extra! format. Today we have 245 Smart & Final stores, and 60 percent of them are Extra!s. For the first time, our older, what we call our legacy stores, are a minority of our stores.

So, Extra! really has grown over the last few years. It took a couple of years in 2009 and 2010 to figure out exactly what that model should look like and try to kind of perfect schematics, so we really didn’t start rolling it out until a couple of years after I got here. About 2012 we started really rolling them out—converting, expanding, opening new stores.

We’ve opened 45 stores in the last 12 months. We opened 20 last year and now there’s only a few of the Haggen stores left (to reopen).

Can you describe the Extra! format?

It’s really a unique shopping experience; there’s nothing else like it. About one-third of the store houses everything that a small business would need, whether it’s a food truck, a restaurant, office, club or organization. You can’t go to any kind of outdoor event, whether it’s a Little League game, a snack shack or a chili cook-off or a county fair and not see our private label product all over the place. It’s really a big part of what we do.

But then the other two-thirds of the business is all about household customers, and that’s where our growth has come from the last few years. Our business, club and organization part of the business has stayed really stable—has actually grown in dollar terms—but the penetration of household customers is what has really grown over the last six years and continues to grow.

It’s the only place that our business customers can come in and find everything they need for their small business and do all their household shopping at the same time. And for our household customers, we call it “two shops in one stop.” It’s the only place they can come in and do all their club store shopping and all their household shopping at the same time.

There’s no place else our household customers can do that.

Over the last four years, as the number of household customers has grown, we’ve listened to their feedback, and it has helped shape what our Extra! stores look like today. They were very clear about wanting more produce, and what’s the

The produce department in the Redondo Beach store. first thing you see when you walk into an Extra! store?—an inviting and brightly colored assortment of fresh, high quality produce. The great part is that our business customers have welcomed this change and have seen the benefit of it to their success as well.

Bulk foods also have evolved; they’re now in more than 80 of the Extra! stores.

Oven-roasted chicken wasn’t part of the early model, but that’s growing now.

With the Haggen purchase, we now have over 30 stores with hot bakeries, which is relatively new to the Extra! format.

We have 20 stores with sushi; a relatively new addition, but in the right neighborhoods, customers are really asking for a sushi chef shop in the store.

Cut fruit is an area that we weren’t sure it worked in our model, but it’s working really well. We have cut fruit now in over 20 stores, so it’s really evolved.

We have expanded meat operations.

It’s been a fun ride.

But club-size still is a really important part of the Smart & Final model. Club-size is still about a third of our sales. We carry almost twice the number of club-size items that the club stores carry. So, we have much more variety in club size than our customers will find in a club store, and obviously far more variety than a conventional store, which might carry 100 or 150 club-size items. We carry more than 2,700, so we have a variety in club items unlike anyone else.

That’s really interesting, the things you have been adding to your Extra! stores.

We always have to ask what makes sense in our format because we want to continue to be priced strong against the

It’s the only place that our business customers can come in and find everything they need for their small business and do all their household shopping at the same time. And for our household customers, we call it “two shops in one stop.” It’s the only place they can come in and do all their club store shopping and all their household shopping at the same time. There’s no place else our household customers can do that.

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competition. We are going to be priced 8 to 14 percent lower than our conventional competitors and priced competitive with mass and club stores. And the reason we can do that is that it’s a very low-cost format. We have a smaller store, lower rent, high productivity, no service departments, very efficient labor model and a high average sale per customer driven by two things—the club purchases of our household customers and the large purchases of our business customers.

All of that makes it a really low-cost model, so when we look at things like a hot bakery, the first question is does it fit in the model? We don’t want to mess up the model; we have to maintain this low-cost operation to be able to have the pricing we have.

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CEO Says Smart & Final Had ‘Exceptional’ 2015

Smart & Final’s results for the 13-week and 53-week periods ended Jan. 3 were positive.

Net income for the 13-week fourth quarter rose 7.4 percent to $10 million. Sales increased 18.9 percent to $997.6 million, including $73.3 million attributable to an extra week in this year’s fourth quarter. Comparable store sales increased 3.5 percent, including a 3.9 percent increase in transaction count and a 0.4 percent decline in average transaction size, which Smart & Final says was negatively impacted by deflation.

Net income for the year increased 15.5 percent to $38.3 million. Sales were up 12.4 percent to nearly $4 billion and comparable store sales rose 4.5 percent, including a 4.4 percent increase in transaction count and a 0.1 percent increase in transaction size.

“2015 was an exceptional year for Smart & Final Stores,” said David Hirz, president and CEO. “Our focus on execution positioned us to deliver strong top-line sales growth and record bottom-line financial performance. We completed our 2015 store development plan, which included expanding our Smart & Final Extra! store base by nearly 30 percent and adding two new Cash & Carry stores. Additionally, we continued the successful rollout of key merchandising initiatives, which helped contribute to our 26th year of positive comparable store sales over the past 27 years.

“We’ve set a new standard for growth at Smart & Final Stores and have made the necessary investments to support an accelerated pace of expansion in 2016,” added Hirz. “We plan to increase our Smart & Final banner store base by 15 percent this year, driven by the successful acquisition of 33 store leases and related assets in central and Southern California previously operated under the Haggen banner. In addition, we plan to open four to five new Cash & Carry stores in 2016.”

During fiscal 2015, the company opened 20 new Smart & Final Extra! stores and completed nine conversions of legacy Smart & Final stores to the Smart & Final Extra! format, including three store relocations. The company also opened two new Cash & Carry stores. As of Jan. 3, the company operated a total of 276 stores, including 127 Smart & Final Extra!, 94 legacy Smart & Final stores and 55 Cash & Carry stores.

“We look forward to building on our positive momentum in 2016,” Hirz said. “We have a strong team in place and the resources to execute our multi-year growth plan. As a result, we’re anticipating that 2016 will mark our 27th year of positive comparable store sales in the last 28 years.”

In the first quarter of 2016, the company expects to open 13 or 14 new Smart & Final Extra! stores and complete two relocations of legacy Smart & Final stores to the Extra! format.

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We started our first hot bakery a few years ago at a store in Orange County and played with it for a couple of years. We have added hot bakeries to a few stores—one in L.A. County, one in Orange County, into an existing Extra! store—to, again, see what that looks like.

Then, with the opportunity to acquire 33 Haggen stores, which almost all had hot bakeries, we dug deep to ask the question—do we want to open these stores with bakeries? The answer was clearly “yes,” because the customer really appreciates a hot bakery. Whether it’s thaw-andserve product or items you bake at store level, there’s a real halo effect of having a hot bakery in the store.

And, for us, it fits in the model since it’s not a service bakery. You don’t come up and somebody will get you the doughnut you’re looking for; it’s a self-serve hot bakery model. We bake fresh every day, and it works really well in the model. Out of the 33 Haggen stores that we are opening, 30 of them will have hot bakeries.

You have been opening those Haggen stores at a pace of about three a week, is that right?

Actually, next Wednesday (April 27), we open six stores. But we have been averaging three or four a week, yes.

We’ll open up one in Sacramento in early May; that’s one of the organic stores that is not The 33 Haggen stores were a unique opportunity. They were really great stores in really great Haggen-related. neighborhoods, and the acquisition has given us the opportunity to, over the last eight weeks We had a pipeline built for 2016; we were ready to open 22 stores without Haggen. So the or so, hire 2,000 new associates. It’s allowed us to hire and promote 33 new store managers, 33 new produce managers, meat managers. It’s created a lot of opportunity for associates. Our rest of the stores in the 2016 pipeline, we just pushed back into 2017 to allow us next year to start again with a 10 percent growth plan (Project 100, announced in 2015, that calls for more team is really excited about it.

But the 33 stores, we wanted to get open in a fairly brief period of time, so most of them will than 100 additional stores in four years).

So we’ll end the year this year with 254 stores, and we’ll open 25 new Smart & Final stores open over about an eight-week period. We will be done with the 33rd store the second week in 2017. of May. We bought these stores in bankruptcy court in December. All of them closed before the end Where do you see your biggest opportunities? of December, so we had the whole month of January and California only or outside California?

February to be under construction in these stores. We’ve …the (Haggen) acquisition has given us the There is still a lot of opportunity in California. California completely retrofitted these stores, and the average store is a very big state where today we operate a couple hundred opportunity to…hire 2,000 new associates. It’s we invested $1.8 million in improvements in the store. stores. One of our competitors operates as many as 600 We’ve upgraded everything in the store, from perishable allowed us to hire and promote 33 new store stores in this state, so there’s still an awful lot of oppordepartments to center store to the décor package, the managers, 33 new produce managers, meat tunities in the state of California. But we also have plans lighting. So when they opened, they’re complete, they’re outside of California. managers.

It’s really created a lot of opportunity done. There is no need to go back in and upgrade them.

Today we operate two banners, Smart & Final and Cash They have the final look and kind of the “latest and greatfor associates. Our team is really excited about it. & Carry, in three formats: Cash & Carry, Smart & Final est” of what Smart & Final Extra! has to offer. and Smart & Final Extra! We operate in six western states, I take it you did a good job on the negotiations for the Haggen stores. In other words, so our plans for the foreseeable future is to continue to grow both banners in those six western states (Arizona, California, Idaho, Nevada, Oregon and Washington). you got a good deal?

I didn’t personally, but the team did a very nice job.

We went in early. It was the middle of last year when we realized that the old operator was struggling and that these stores would probably become available. We took the list of all 83 stores in California—that’s what Haggen operated at the time—and went through the list and picked the 33 best locations for us based on fit with our existing stores, demographics; stores where we thought we could really be successful.

So we picked what we think are the best 33 stores. We got the team in an airplane, flew up, started at Paso Robles, the furthermost group of stores, and spent a couple of days just walking through every store with the team (the stores were still operating, Haggen had not yet announced its plans to sell). We went all the way down through Central Coast to Los Angeles and all the way down to the Mexican border. We looked at them to really understand the potential of the store and make sure that we thought it would be a great fit.

At that time, we talked about how we would, in some cases, subdivide those buildings. Ten of these stores are about 50,000 s.f., and we don’t want a store that large; it doesn’t work for our low-cost model. In cases like that, we subdivided roughly 20,000 s.f. We talked about how we would subdivide the stores, who potential co-tenants would be and how we would lay out the stores. We had all those initial discussions during that first visit.

We bid on 29 of them in a stalking horse bid. It got complicated; a couple of the stores we wanted were removed from our bid, but we later came back and picked them up in auction. So we ended up with the 33 stores.

How are you managing with the influx of new employees you’ve had recently?

That’s a great question. We started talking about a growth plan in 2012, well before the IPO. The entire team’s No. 1 concern was people because growth plans are actually pretty easy. We have an incredible construction department; our group VP of construction and real estate, Bob Lane, and his team are incredible. Every Smart & Final Extra! we opened last year was on time and on budget. Unbelievable. With the Haggen stores, the same thing. I don’t mean to say that part’s easy; they make it look easy because they’re incredible.

Finding real estate sites is relatively easy. In the markets where we operate, we have different opportunities in different states and different times, so filling a pipeline is not that difficult.

The most challenging part is the people. I tell you, Smart & Final has a really unique culture.

We have incredibly talented people working all throughout the company—in our stores, supply chain and corporate office. My senior leadership team is made up of some of the best leaders in the industry, and our store managers are just exceptional. They are some of the most hard-working and dedicated employees I have ever worked with. They have lived through the evolution, from a focus solely on business customers to a focus that balances business and household customers, and they have done an amazing job of guiding their teams through these changes and ensuring Smart & Final’s success.

The culture at store level, we built our core values five years ago, early on when I got here. I went out with my director of training and development and we held 16 meetings around the company with truck drivers, in the warehouse, at store level, with managers, with courtesy You mentioned you had opened 45 stores in the last 12 months, so obviously there is clerks, at the office here, in every distribution center. We went through an exercise, beginning some organic growth in the company as well. Can you tell me a little bit more about that? with more than 50 values and helping each group narrow that down to help determine what our team thought were the most important core values of Smart & Final. Out of the 50, our How did the Haggen acquisition affect that growth you already had in mind?

Great question. We took the company public in September 2014, and none of the private core values are teamwork, integrity, respect, growth and accountability.

But the No. 1 core value that resonated across every single meeting was teamwork. At store equity owners or our management team that owns part of the company, sold any of their level, it’s not like in the conventional world where if you’re a checker, you’re a checker and if ownership in the company. The whole reason for the IPO was to raise money. We used about you’re a produce clerk, you’re a produce clerk. At Smart & Final, everybody does everything. $115 million of the proceeds to reduce our debt on the balance sheet, and then we put about If they need help in produce, they go to produce; if they need help in the front end, they come $60 million onto our balance sheet. That $60 million along with our annual cash flow the up to the front end; they stock the center store. It’s unique company generates, we had calculated would allow us to in that everybody really works together well at store level; grow at 10 percent new stores every year.

Our core values are teamwork, integrity, respect, teamwork resonated as the No. 1 core value.

So in 2015, our first full year as a public company, we So the challenge is how do you grow from about 9,000 growth and accountability. started the year with 201 Smart & Final stores and we associates to about 11,000 associates in a three-month opened 20. That achieved our 10 percent growth rate goal, period and maintain that culture? Luckily, Barb Van Dine, so we ended 2015 with 221 stores. The goal then for 2016 our director of talent development, recognized early on that we needed a real plan to be able was to open 22 stores, another 10 percent growth based off this strategy from the IPO. We to integrate a couple thousand new associates and protect the culture. So there has been a lot came across the Haggen opportunity, which was an incredible, once-in-a-career opportunity, of work going on, starting with conversations in orientation, talking about the core values and so decided, for this year, on what ended up being 15 percent new stores. So, growing from 221, how the core values came to be, talking about the unique model that we operate. We have an we’ll end the year with 254.

Of the Haggen 33 stores, only 29 of these are actually net new Smart & Final Extra! stores; orientation video that the team worked on to give new associates on their first day an underthe other four are relocations. In those cases, where we opened the Haggen store as a Smart & standing of what the company is all about, to explain why we’re different, how we’re different, how important teamwork is, how important being involved in our communities is.

Final Extra!, we closed a nearby Smart & Final legacy store.

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I tell you, one unique aspect that’s true in all Smart & Finals and is now true in these new 33 You really can’t compare your operation to Aldi, but what are your thoughts about Aldi stores we’re opening is we are more involved in communities we serve than any competitor. coming into the marketplace?

That’s not bragging; we’re very involved from the day we open. We start out with contributions It won’t affect how we go to market, but we obviously study every competitor in the market, to local nonprofit organizations. particularly a new competitor coming to the market.

But the real involvement is because a third of our sales are to businesses, clubs and orgaI have a lot of respect for Aldi. I think they have a great format, they have a really good nizations. Unlike some of our competitors, all the local mousetrap. I was fortunate to have the opportunity to businesses are in our stores—the Little Leagues, the snack compete with them for about five years when I was at The So everybody kind of has the same goals in mind: shacks…if there’s a church picnic or church breakfast or Kroger Co. At the time, I was president of Food 4 Less, fundraiser, Smart & Final is involved because those folks back in early 2002 or so, and our CEO at the time asked it’s all about growing sales, creating a great come to Smart & Final to fill their needs for that event. me to open some stores in a new market area. We picked customer shopping experience, opening new It puts us in a unique position where our store managChicago, and our team opened 14 Food 4 Less stores in stores successfully. Everybody has the same set of ers know the names of the local business owners because Chicago, and in the Chicago market had the opportunity to goals that they’re tied to not just emotionally but they’re in their stores on a regular basis, multiple times a compete with Aldi. I had never heard of Aldi, didn’t know week. who they were, but we competed with them really aggresalso financially.

The 33 stores opening in a short period of time has been sively at Food 4 Less when I was in Chicago. I learned to a lot of work on the part of the team members, and they have a lot of respect for them. They’re good at what they are working so hard, everybody is working hard, six and seven days a week and long hours, but do, their private label product is good. We’ve cut it (the product) here over the last few months having fun, creating opportunities. several times, tested all their private label. Their pricing is strong, and they do a nice job. But for us, and again, any competitor that opens and sells food is a concern for us and we watch With you going public, are you able to offer your senior management shares of the them closely. But if I look at the Aldi model, they really have nothing in the store that our company, that kind of thing? business customers or clubs and organizations would want.

I cannot tell you how blessed I am. I have an incredible team, I really do. So at the time of the When Walmart came to Southern California between the middle of 2012 and the middle IPO, we offered shares of stock to all of our store managers, district managers, directors, VPs, of 2014, it opened 90 stores close to Smart & Final stores. And it was the same concerns back SVPs to make them part of the company’s success. Like most companies, we have a long-term then, but as I look at that model or the Aldi model, they really have nothing that that one-third incentive program that’s tied to equity, but we also have a bonus program that every single of my customers that are businesses, clubs and organizations would want, so that is helpful for associate in our office is on.

Smart & Final. The fact that a third of my volume almost is club-size product, and Aldi carries We’re very unique in that we have everybody in the building on the same annual bonus no club-size product, is helpful for Smart & Final. incentive program, as well as our store managers at store We pay attention to any competitor that opens, but our level, district managers, etc. So everybody kind of has the advantages are that we are priced so aggressively, competisame goals in mind: it’s all about growing sales, creating a tive with club and mass stores; we have an incredible fresh The penetration of household customers is what great customer shopping experience, opening new stores operation, more than 100 organic produce items; bulk has really grown over the last six years and successfully. Everybody has the same set of goals that foods, rotisserie chicken…There’s just so many components continues to grow, while our business customer they’re tied to not just emotionally but also financially. at Smart & Final Extra! stores that the customer would have The opportunity to take the company public in less reason to go to an Aldi or another competitor. penetration remains strong.

September 2014 was a great opportunity to give our assoThe Smart & Final model is very resilient. ciates an opportunity to own part of the company.

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SVP/CMO Eleanor Hong:

Marketing Plans Celebrate Brand’s Evolution Eleanor Hong’s early memories of Smart & Final revolve around her days of playing softball at Olive Park in her hometown of Burbank.

Back then, Smart & Final was mostly known for offering club-size products, so when it was her mom’s turn to provide snacks for the team, they would go to Smart & Final. But that was only a couple of times a year.

Fast-forward a few years and Hong has moved away from California, working for companies like Toys R Us and clothing/housewares retailer Kohl’s (in Wisconsin).

“When Smart & Final called, I had no idea that they had had this huge transformation in the last five, 10 years,” said Hong, who has Eleanor Hong been with the company for two-plus years. “I remembered the Smart & Final from my childhood, and when I came out here to meet with Dave and tour the stores and walk the stores, I was amazed at the change.”

Hong joined Smart & Final and today is SVP and chief marketing officer (CMO).

As a marketer, “I was excited by the opportunity to share the story,” Hong says. “What was amazing about the change is that it wasn’t a revolution; it was definitely a wonderful evolution of the brand because it didn’t lose the core heart and core essence and the heartbeat, which is the business customer. The household offerings were additive; they weren’t takeaways from our business customers.”

The oven-roasted chickens, bulk foods and organic items “are all things that our business customer wanted for their household anyway,” she says.

In May 2015, Hong oversaw the launch of a new branding campaign at Smart & Final that focuses on the ampersand—the “&” in its name—“to showcase its relationship with both its customers and the communities it serves,” the company said.

represents about 30 percent of the company’s total sales.

“A lot of restaurant owners and small business owners buy our private label products and it becomes, literally, part of their menu,” the video announcer says.

In February of this year, Smart & Final launched its private label charitable giving campaign, First Street First Percent. The first 1 percent of net profits from its First Street brand products sold in Smart & Final stores in California, Arizona and Nevada will be given to the Smart & Final Charitable Foundation to support local nonprofits.

Hong notes that she also works closely with the company’s human resources team to make sure internal communications help “bring our brand to life for our associates because they play an important role in communicating who we are and our values.”

Like other company executives, Hong says the teamwork aspect at Smart & Final is one of the most notable.

“When you come into a Smart & Final, you will regularly see people doing jobs across the board,” she says.

A Smart & Final board member recently observed to Hong that she wears a lot of hats at the company.

“I said, ‘well, we work in a wonderful organization where it’s not uncommon at a grand opening to see our CEO helping someone out with a cart to her car. It’s just kind of in our DNA in the way we approach our customers. At the end of a corporate quarterly update, you’ll see According to Hong, “We’re warehouse & grocery; business customer & household customer. every single person in the organization help stack chairs. These are little nuances but this is But we’re all about ‘Us & You,’ which is the community, and ‘Ourselves & Our Associates.’ And what keeps us small and nimble. Everyone rolls up their sleeves.” we’re about ‘Friend & Neighbor.’ There are a lot of things we lean into in terms of the ‘&’ in She says this attitude comes right from the top, from Dave Hirz. our name. From a branding campaign standpoint, we are really highlighting that and bringing Under Hirz’s leadership, she says, the company has a “willingness to try new things, do that to the forefront. things quickly, test and learn.

“This is how we deliver; this is our mantra; this is what our associates get behind,” she contin“We’re a 145-year-old company that behaves like a startup, which is unheard of,” Hong says. ues. “These are our values and what we stand behind in terms of how we deliver our mission, “We’re quick and nimble. You don’t see that in companies that are 145 years old.” and then our vision is to nourish communities, one neighborhood at a time. We wanted to She adds, “The greatest quality of our company is that we have a lot of long-term employees. make sure we stood for something that was aspirational, A lot of our managers are 10-, 15-, 20-, 25-, 30-year far-reaching.” veterans, and then you also have a lot of families. We She says nourishing communities is not just about food joke around—which family has the most employees Smart & Final is putting the finishing at Smart & Final. here? But we’re very proud of that.” touches on some videos that will be “It’s not just from a food level,” Hong says. “We’re one of the few companies that comes in and really helps small posted on its website to explain what sets businesses and really helps communities thrive and grow it apart from other retailers. in a way that others can’t.”

Another of the big &s at Smart & Final is Mr. Jim Smart and Mr. Hildane Final, so the campaign also emphasizes that the name comes from the founders, that it’s not a made-up name.

“A lot of people don’t know our name is from actual people,” Hong says. “They think it’s more like a value proposition, but it’s our founders.”

Hong oversees all of Smart & Final’s touchpoints with consumers, to include everything from traditional newspaper ads to billboard campaigns, television and radio, digital channels, and public relations and communications.

“My mission is to make sure as many people as possible hear our story,” she says.

The company is putting the finishing touches on some videos that will be posted on its website to explain what sets Smart & Final apart from other retailers.

Some of the points of differentiation from its competition, which includes not only traditional grocery stores but also club stores and restaurant supply stores, includes a smaller store size for both convenience and lower operating costs; warehouse shelving to also help keep costs low; club size products but without a membership fee as well as small sizes and in-between sizes; a selection of business case bulk items (such as enough apples to open an apple pie shop); meat primals for restaurants, and much more.

Smart & Final’s stores also offer produce from local farmers, including an extensive selection of organics, and meat departments that are twice the size of ones just five years ago.

Smart & Final had one of the first private label programs in the United States, and today it

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Group VP of Operations Sean Mahony:

Delivering Great Results Only Happens with Teamwork Sean Mahony is a 23-year veteran of Smart & Final, starting as a parttime night crew stocker in Long Beach while he was in high school. He continued working for the company while pursuing his degree at Long Beach State, eventually moving to a full-time store position. He became Sean Mahony a store manager and then moved into the corporate office for a temporary assignment in labor management and strategic planning. He then spent about six years in Northern California as a district manager; was a regional VP for about three years; was a group VP with an expanded territory through Los Angeles; and then ran the Southern Region. He is a 1999 graduate of the USC Food Industry Management Program and last summer attended the Cornell University Food Executive Program.

Today, in his fairly new position as group VP of operations, he oversees all of Smart & Final’s stores in California, Arizona and Nevada.

Because the 33-store Haggen acquisition is in Mahony’s area, his time in recent months has been focused on new hires, and some of the hiring needs are different than before the acquisition.

“When you think about the in-store bakeries we’re doing today and our cut fruit that we’re doing

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in-store today in several of our locations, we have to get our managers and department leads and the whole team to that level of operational excellence,” Mahony said. “That’s our focus right now, 100 percent.”

In markets like San Diego or the Central Coast, the number of Smart & Final stores has literally doubled. Thankfully, the labor pool in these areas has been rich.

“We were fortunate to get some great people from not only Haggen but other chains out there as well who were looking for employment,” Mahony says. “There’s been a lot of turmoil in the industry, so there have been so many great people that we have been able to hire that had the expertise we were looking for.”

The company has absorbed the pressure of reopening 30-plus stores over a four-month period thanks to teamwork, he says.

“It’s been pretty amazing,” Mahony says. “It really goes back to our core values at Smart & Final; one of the biggest core values that is spread across our entire organization, that has always been there, is teamwork. So you look at the time, the effort, the energy that everyone put into finding solutions, getting the job done and then delivering a great result, it’s just been amazing.”

Mahony says part of the challenge and the charm of working for Smart & Final is that “we continually reinvent ourselves—how do we do it better today than we did yesterday?”

Smart & Final’s corporate office in Commerce, California.

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SVP of Sales and Merchandising Mike Mortensen:

Management ‘Nucleus’ Helps Company Stay Nimble “Crazy work and crazy fun.”

That’s how SVP of Sales and Merchandising Mike Mortensen characterizes the early months of 2016 at Smart & Final as the Haggen acquisition has been digested.

“We’ve been working around the clock,” he said, with the store openings coming “every week—boom, boom, boom. We work long hours, but we have a team that is all going the same direction and trying to compete in this very Mike Mortensen competitive business.”

The 33 Haggen stores were all former Albertsons and Vons stores. The three that were opening the week Mortensen spoke with The Shelby Report were in Palmdale, Palm Desert and Laguna Nigel.

The Laguna Nigel store presented an opportunity for Smart & Final to see just how fast it could stock a store with perishables.

The store got approval to stock perishables just one day before the store would open to business customers (one day ahead of household customers).

“But all our ads were on the street (with perishables included), so we sent an army of people down there and got all the perishables stocked in one day,” Mortensen said. “It’s open this morning for business customers.

That’s the kind of hurdles this team has been jumping over.”

One of the keys to being able to make things happen quickly is the fact that “it’s a small nucleus that runs this company,” Mortensen says.

A senior management group that could include five, six or seven people at any given time “can get together and make a decision or not make a decision and move on that pretty darn quick,” Mortensen said.

They might get on a plane or get in the conference room, but either way,

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a decision is pretty quickly forthcoming.

“It’s not like you have to go back to a central office somewhere to get approval and three months later you get that approval,” he says. “We can make that approval pretty quickly, so that really helps us for any opportunities that might come our way or issues that arise. We make decisions while walking stores on the way our layouts are. It’s a small group that needs to say I’m in favor and we can roll it out.”

Mortensen will celebrate his sixth anniversary at Smart & Final this July and is marking his 44th year in the grocery business, so he has a wellrounded perspective of what makes Smart & Final unique.

One of those things, in addition to quick decision-making, is its cash position.

“We have a great free cash flow that allows us to do a lot,” he says, most recently the Haggen deal.

He also credits Ares Management, the company’s equity owner, with being “a great partner” that has continued to invest in Smart & Final’s growth.

“We’ve been able to make returns on those investments that are appetizing to our partner,” he says.

Mortensen started his career at a company called Randall’s in the Midwest and northward. Doc Randall had 29 stores that were serviced

by Supervalu. Mortensen moved west to California in 1978, working for Alpha Beta, which subsequently went through a number of mergers. The majority of his career was spent with Alpha Beta and Food 4 Less. He knew George Golleher and Dave Hirz from those positions, and they played a part in him coming to Smart & Final. He’s glad they did.

“This is a great little company, and I’ve been blessed to play a small role in it. It’s been a lot of fun; it’s been a lot of work.”

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Smart & Final both a pioneer and innovator in private label

The Iris brand was created sometime in the 1880s by Smart & Final’s predecessor companies, and it likely was the first private label line in the grocery industry, according to Dave Hirz, president and CEO, adding that private label is 30 percent of Smart & Final’s sales.

Smart & Final still uses the Iris name. As recently as the 1990s, most of the chain’s private label items were still under that legacy brand. Today, Iris is found only on select household items like paper products and health and beauty care items, but that label still has a special place in the Smart & Final family, according to Mike Mortensen, who oversees the private label program.

Private label is another area where Smart & Final can be nimble, he says.

“We can see something and say, ‘hey, we ought to have that,’ and we create it. Just like that. I don’t have to go get approval from somebody else; we make it happen,” Mortensen says.

The company has nine store brands: First Street, Iris, La Romanella, Ambiance, Montecito, Sun Harvest, Tradewinds, Simply Value and Cattleman’s Finest.

Hirz says that Smart & Final’s private labels are equal to or better than national brands—a standard he learned when he worked for Food 4 Less, which Kroger purchased while Hirz worked there. After Kroger came in, it tested all the private labels and had Hirz change 40 percent of the product formulas to bring them up to Kroger standards.

“My sales really improved,” Hirz says, proving the bottom line value of a good private label program.

First Street is Smart & Final’s cornerstone brand, Mortensen says, adding that nearly 80 percent of the company’s private label comes from that label.

Montecito is a Hispanic brand and La Romanella is Mediterranean fare like pasta and pasta sauces.

Both have a limited number of SKUs, Mortensen noted.

Ambiance is hot beverages like coffees and teas and the accompaniments for those.

“Simply Value is an entry-level item,” Mortensen explains. “Not maybe the quality of a First Street item but with a much better price point on it.”

The Tradewinds brand is for spices. Local restaurants often use these spices in their cooking.

There are three lines of natural/ organic products: Simply (natural products), Good for the Earth (nonfoods) and Sun Harvest. The latter brand came from Henry’s Farmers Market, which Smart & Final used to own; Smart & Final later purchased the rights to the brand from Sprouts.

“Last year we reintroduced Sun Harvest to the world and added 88 new items,” Mortensen said. “We’re in the process of adding a bunch more. Hopefully by the end of this year we’ll have close to 300 items on our shelves of Sun Harvest label.”

He said just two years ago Smart & Final had fewer than 100 natural and organic items across the store.

“Today, we have over 2,000 SKUs; in fact, probably closer to 3,000 SKUs of natural and organic items.”

Smart & Final also will add what it calls “Good & Well” product sets to another 22 stores this year, according to Mortensen.

To stay abreast of what its competitors are doing in their private label programs, each month Smart & Final does product cuttings from other stores, choosing a specific category to test, like canned tuna or pasta.

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EVP of Operations Scott Drew:

Teamwork Shines Through Every Task at Smart & Final Scott Drew joined Smart & Final six years ago, about two weeks before Dave Hirz came on board to lead the company. Drew had worked with both Hirz and Hirz’s predecessor, George Golleher, earlier in his career, which mostly was spent with Kroger divisions.

Drew joined Smart & Final to take on the task of opening SmartCo stores in Colorado. The valueScott Drew oriented grocery stores did not meet sales expectations, however, and were closed down in December 2010 after the first store opened in June that year in Denver.

The SVP of operations role was vacant at Smart & Final headquarters at that time, and Drew took on that role. In early 2016, he was promoted to EVP of operations, with responsibilities in the areas of store operations, construction and real estate.

“I’m having a ball in that role, learning a lot of new things and taking on new responsibilities. I’m involved in the real estate for Cash & Carry, our sister company, working with the construction team, real estate, human resources—just watching the team grow,” Drew said. “It’s a fun and energetic and

enthusiastic place to work, I’ll tell you.

“I am extremely fortunate that I have just an amazing team,” he continued. “One of our values is teamwork at Smart & Final, and it has really shone through in this project of growth (with Haggen). We have great people that can execute on a plan and deliver.”

Drew at SmartCo store #504 in Longmont, Colorado.

“We have a dedicated work force out there that really believes in our growth—our Project 100—and they’re delivering on that,” he said. “We may paint the vision, but it’s our associates that are making it happen.”

With the Haggen acquisition, making sure associates had Smart & Final’s core values instilled in them became a truly “monumental task.”

They need to know what the mission is, what needs to be accomplished and they must be held accountable for the results, Drew said, indicating that the new hires have displayed a willingness to adapt to their new culture.

“They have such a great attitude that they made my job easy,” Drew said.

Like Hirz, Drew gives a lot of credit to Bob Layne, Smart & Final’s group VP of construction and real estate, for how the Haggen project has been kept on schedule.

Layne and his team are “very buttoned up,” as Drew describes them. “They understand how the systems work out there—working with the counties and the different city officials to ensure that all the plans and projects come together in a timely manner. He prides himself in delivering on a schedule. When he puts a schedule together, you can count on that team to deliver.”

Drew also says his team of district managers “are just phenomenal. They are passionate about what they do, and they just get after it. There’s just great, incredible teamwork; it just really shines through. You throw anything in front of this group and it’s really inspiring to see it all come together.

“I love this company.”

Director of Nonfoods and Beverages Don Butterfield:

Right Assortment Keeps Business & Household Customers Happy Don Butterfield joined Smart & Final nine years ago, back when the company’s primary customer was still the business customer.

“When I first came, the majority of (regular) customers would only shop with us a couple of times a year, and it was mainly for parties,” says Butterfield, who is director of nonfoods and beverages. “We’ve really tried to change that tide and Don Butterfield get household customers to come in and shop with us every week.”

With the Extra! format, which Smart & Final began to open in 2008, a year or so after Butterfield arrived, “we’ve done a good job of accomplishing that,” he says.

More produce and more meat options are part of the Extra!

value equation.

“We’ve really focused on pushing the perishables departments to try to get more customers in our stores on a more frequent basis,” says Butterfield.

But, he emphasizes, “at the same time we wanted to keep our business customer happy.”

Smart & Final has been able to do that by keeping its business assortment intact and continuing to send out a business mailer every other week that “features pages of items that are strictly for the business customer,” Butterfield says.

The chain also has incorporated business and club items into its mailer that is mailed out every week. ““At the bottom of our mailer each week we’ve got three or four items that are really for business customers,” according to Butterfield, noting, “that’s something new; we didn’t start doing that until earlier this year.”

Butterfield worked for Ralphs for 25 years before joining

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When the Extra! stores began opening the following year, he moved over to the dairy/deli department, which included cheese. He kept responsibility for bakery, too.

“I managed that for a few years and then I became the category manager for beer, wine, spirits and soda,” Butterfield says. “Then, about a year ago, I was promoted to director of nonfoods and beverages.”

In the beverages category, which Butterfield manages, “we’ve done a ton with beer, wine and spirits.”

About two years ago, Smart & Final started adding craft single beers to its assortment and augmented its spirits selections.

“Most recently, we have developed and expanded our wine sections, where we brought in a couple of hundred different SKUs of wine direct from the wine companies, to really give some of our stores a great assortment of wine,” Butterfield says.

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Group VP of Sales & Merchandising Diana Godfrey:

Expanding Categories Add Excitement to Stores Diana Godfrey has the incredibly complex task of determining assortment for Smart & Final banner stores. And she’s responsible for pricing and data integrity, too.

Godfrey’s team includes: Will Miller, VP of produce, floral and bulk foods; Daryl Zgodzay, VP of meat, dairy, deli, cheese, bakery, thaw-andsell, commercial and the company’s new hot bakeries; Matt Reeve, VP Diana Godfrey of grocery and frozen food; and Don Butterfield, director of nonfoods and beverage. These executives communicate changes to their respective category managers.

And there has been a lot of change lately, a lot of additions, some of which are in all stores and some are in select stores.

These include: oven-roasted chicken, greeting cards, sushi (in former Haggens), olive bars and in-store bakeries.

In areas like the Central Coast and San Diego, Extra! stores expanded their wine selections with both luxury and DSD lines.

“We’ve also added craft beer and expanded that area,” Godfrey says. “We are trying to get a little more regional and local—product from maybe a San Diego brewery or a brewery up in Northern California—just to be a little bit more relevant to the consumers.”

In addition, “we’ve really expanded our natural and organics,” she says. “We have tons of bump-outs, lots of items we’ve added in those sections.”

The new items are mainly in the grocery department but a few frozen and deli items as well. Organic produce choices also have been expanded.

Bulk foods departments are a “staple” for Extra! stores now, Godfrey says, noting that all those banner stores that didn’t have them have now been retrofitted with them.

Floral departments have been expanded as well to help give instant impact for customers entering the stores.

“We’ve made it a part of the entrance when you come into

the store to help gain some sales in the floral department,” Godfrey says. “It creates a great ambience to walk and see floral or the great produce department, some of the great things on the bakery side that we’re doing. We just started to cut fruit in some of our stores. We had a pilot last year that was very successful, so we are going to expand more in the cut fruit.

“Gourmet cheese is another area where we expanded the assortment and we’ve also merchandised it differently in our stores with some round shelving within the deli case that really has brought attention to that area rather than just the traditional island,” Godfrey adds.

Asked what is the most exciting addition, Godfrey says probably the in-store bakery departments that were part of the Haggen lease locations that Smart & Final purchased.

“We’ve never had an in-store bakery to this level,” she says, although the company did test at least one bakery a decade or two ago at its North Hollywood store as part of a “big-box” test.

“For me, it’s pretty exciting seeing the bakery in full operation,” she says.

Only one of the Haggen stores, the San Ysidro store, does not have a bakery, and two existing Extra! stores in Tustin and Compton have been retrofitted with them.

Godfrey has spent her entire career in the Smart & Final organization, about 37 years. She started as a box girl at Thriftimart, which had acquired Smart & Final in the 1950s, in 1979. She moved over to the Smart & Final side of the business 1981 and has had a rich career there.

She worked in the stores before working in the corporate office.

“Back then we had bid sales where we sold to the county jails and direct delivery to those facilities that did some exporting,” Godfrey recalls. “Then I became a replenishment buyer and then became a category manager of a variety of different categories over the years.”

She has worked in grocery, nonfoods, perishables, procurement, private label, pricing/data integrity and merchandising.

“As we expanded the stores and got more heavily into

perishables, which continues the growth momentum at Smart & Final, and it became very complex, they brought over Mike Mortensen (who joined the company in 2010 from Food 4 Less), who had an extensive background in that area. So I now work for Mike and I do the category management and pricing.”

Mortensen was a contemporary of George Golleher, a former president of Food 4 Less who served as CEO of Smart & Final from May 2007 to December 2011. Golleher, according to Godfrey, had the vision for the Extra! concept.

“He and I had several conversations—he always wanted to be part of Smart & Final, is what he told me—and he had this vision that he could expand the business by being more relevant to the household consumer and keeping the uniqueness of Smart & Final.

“It really resonated, and then when Dave (Hirz) took over (in 2010), it really expanded with his leadership,” she says. “It’s been the vision of both of them and a lot of collaboration and a lot of work. But it’s also been a lot of fun times and changes.

High growth; lots of opportunities. I wouldn’t be here 37 years if it wasn’t something where I still thought I could contribute, and the company gave me lots of opportunities along the way.”

Boss/teacher combo a little intimidating

Diana Godfrey went through the Food Industry Management (FIM) Program the first year that it went to a 16-week program.

“Dr. Emmons, our CEO at the time, was one of my instructors, so it was a little nerve-wracking to have to answer questions in his communications class knowing your career could be on the line,” Godfrey says.

She also has attended the Food Industry Executive Program at USC as well as the Cornell University Food Executive Program. She was one of the first executives from Smart & Final to attend Cornell’s program.

VP of Grocery & Frozen Matt Reeve:

Don’t Give Shoppers a Reason to Go Anywhere Else Matt Reeve has been with Smart & Final for nearly 12 years, so he was around for the initial launch of the Extra! format.

There should have probably been no question about how well received the concept would be after that very first Extra! opened in Fullerton, California.

“There were lines wrapped all the way around the store,” he says.

Matt Reeve “There was a lot of customer excitement at store #425 right there in Fullerton. That’s one of those things I’ll remember my entire career.

“That was a really exciting time period, and I’ll tell you what, I still feel that excitement today when we open stores,” says Reeve.

When he joined Smart & Final in July 2004 after 15 years with Ralphs Grocery Co., he was category manager for dairy/ deli. He then became the director of perishables, which at the time included the meat, produce, dairy/deli categories.

He was director of the grocery category (grocery and frozen) before his most recent promotion to VP of grocery and frozen.

He has recently also taken on responsibility for making sure Smart & Final’s product assortment is as “relevant to consumers” as possible, according to Group VP of Sales and Merchandising Diana Godfrey.

“Whether it’s around beach stores or around mountain stores or around desert stores, he will be trying to get a little different assortment in there that is more relevant,” Godfrey says, noting that Reeve is focused on relevancy across Smart & Final’s entire category management organization.

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She acknowledges what a major challenge this presents for a concept like Smart & Final Extra!, which intentionally stays in a smaller footprint store and has a fairly static store layout.

“We don’t have big stores, so we don’t have a lot of opportunity to have a variety of different schematics and sets out there,” Godfrey says. “In traditional grocery stores and mass, you could bring in a lot of different neighborhood marketing opportunities and still carry everything else. We don’t have extra space to have that neighborhood marketing plus carry everything we currently carry. So he is managing the balance between space allocation and sales to become more relevant but still maintain the best of the best we already have out there.”

Reeve adds, “A year ago you couldn’t go into a Smart & Final and find a boogie board and a Frisbee, that’s for sure. But when a store is walking distance from a beach, those items are good for the stores and give those communities what they’re looking for.”

Reeve recalls the amount of work required to launch the brand-new Extra! concept, first devised by CEO George Golleher, back in 2008.

“There was an awful lot of work from a lot of folks here to really launch this new concept that is what it is today. Every year we’ve built on that and added pieces to it, but that core concept that we built in 2008 is really what’s still driving it today,” he says. “It’s fun to watch something that has been one of your ‘babies,’ one of your projects, something that a lot of us here have worked on for a long time, to watch it grow and mature and develop.”

Additional product offerings like oven-roasted chicken, hot bakery items, greeting cards, bulk foods, etc., “continue to help make us more and more relevant to the communities we

serve,” Reeve says. “If we can get them to not have a reason to shop somewhere else and keep shopping with Smart & Final for everyday purchases, that’s a big win, and that’s what we’re here to try to do.

“The evolution of Smart & Final has been really exciting and fun to be a part of, and I feel incredibly fortunate to be in a great organization.”

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Diverse backgrounds make for the best team

A number of Smart & Final executives have come to the company with a background in chain supermarkets, but others have come up through the Smart & Final organization exclusively. A couple of executives weighed in on what the various backgrounds create within Smart & Final.

Matt Reeve, VP of grocery and frozen, who spent 15 years at Ralphs before joining Smart & Final, put it this way: “I think Smart & Final has been, for a long time now, a really great melting pot of a lot of different companies, and for Smart & Final lifetime-career individuals. So I think it’s been a really good blend. Folks who have grown up through the foodservice part of Smart & Final helped make sure we’ve kept our eye on the ball on our foodservice and our business customers, which are still important and so uniquely different than any traditional grocery retailer. But we have folks from Vons…from The Kroger Co., including Ralphs and Food 4 Less…I think diversity helps a company be stronger, so having the varied background of everybody here plus the people that have come up all the way through Smart & Final and knowing the history of Smart & Final has made us a really resilient company with a lot of experience to really understand what the best pieces are to bring to the pie.”

Diana Godfrey, group VP of sales and merchandising, who has spent her 37-year career at Smart & Final, said the chain executives “helped us expand to where we are today, because internally we didn’t have the knowledge of retail. We had gotten rid of Thriftimart many years ago, and Smart & Final was really just focused on club organizations and businesses; if others could shop in that format, that was great. We took their knowledge of what does well at retail and blended that into what Smart & Final is and was and created a new Smart & Final. It has really been a great partnership between the experienced Smart & Final people teaching them about business and club, and the experienced retail people coming in and blending their knowledge and learning the business customer and club side of the business and ensuring that we still maintain that business focus while expanding the sales and needs for the household consumer.”

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