Quality Food Centers -- Success Is In The Basket

If your box boy seems especially capable and interested in your comments next time you're shopping at QFC, he just might be Dan Kourkoumelis.

Kourkoumelis, the boyish-looking 41-year-old president and chief operating officer of Quality Food Centers, often is in the trenches keeping in touch with clerks and customers.

So are other top QFC officials; it's considered part of their job.

At most grocery chains, that kind of hands-on management has pretty much gone the way of the glass milk bottle. But at the Bellevue-based QFC, it's just another tactic to keep profits rolling in - a job at which QFC has been spectacularly successful.

With only 32 stores in King and Snohomish counties, QFC is hardly bigger than a bread crumb compared with industry giants such as Safeway, with more than 1,100 stores nationwide.

No matter. At a time when most other grocery chains are battling discounters and membership warehouses and watching sales sink, QFC has been sailing along, adding and expanding stores and reporting record profits.

Some on Wall Street are taking notice.

"They are the top performing (grocery chain), bar none," says Gary Giblen a Paine Webber retail analyst in New York. In the Seattle area, "You probably take it for granted, because it's a local chain," he says. "But QFC has the best numbers on virtually any benchmark in the whole supermarket industry."

For example, while industry net- profit margins hover around 1 percent to 1.5 percent, QFC's was 5.23 percent in 1991, according to Value Line Investment Survey. And while the industry's margins are expected to rise to an average 2.2 percent in the next three to five years, Value Line expects QFC's to rise to 8.4 percent.

Another benchmark is turnover. Groceries fly out of QFC stores, Value Line's figures show, with the company turning its stock nearly 30 times a year. That's extremely efficient use of shelf space compared with the industry average of slightly more than 12 turns a year.

Still another is sales at stores open more than a year. At QFC, such sales were up 3.1 percent during the first half of the year. Nationwide, same-store sales were flat.

"They just do a good job in a lot of aspects of retailing," says retail analyst John Rogers of Ragen MacKenzie.

QFC's roots are in King County, where it has all but three of its stores. Founded here 38 years ago, it is the largest independent supermarket chain in the Puget Sound area. About $1 out of every $5 spent on groceries in King County is spent at a QFC, but that's still less than the proportion spent at Safeway, the regional leader.

Nonetheless, QFC's market share has been growing steadily.

So have its profits. The company made $20.6 million last year, up from $15.9 million in 1990 and $12.8 million in 1989. In part, the rise reflects QFC's aggressive policy of adding and remodeling stores, a tried-and-true method of boosting sales.

So far this year, QFC has reported record profits - $5 million in the first quarter, up 21 percent compared with the same quarter last year, and $5.8 million in the second quarter, up 24 percent from the same period a year ago.

Clearly, this area's economic health relative to the rest of the nation has helped QFC skirt the problems plaguing other grocers. But that happenstance of geography only partly accounts for its success; management decision-making plays a more crucial role.

One decision QFC's management made years ago was to lead the industry in computerizing its stores. Back in 1979, QFC was the second or third grocery chain in the nation to install scanners at check stands, Kourkoumelis says. And, he adds, the company has continued to upgrade its system, adding such state-of-the-art features as Direct Store Delivery, a software program that eliminates paperwork and allows employees to record grocery deliveries more precisely.

Also state-of-the-art: QFC's cash registers, which actually are highly refined personal computers that provide detailed information about shoppers' habits and customer flows, an aid to purchasing and worker scheduling.

Someday, the chain may use the information gleaned from its system to send targeted mailings to customers who request them. Then, for example, a shopper who buys dog food could receive mailings offering specials on pet products.

Though analysts may tout QFC's performance, company officials maintain a low profile. They decline most on-the-record interviews and requests for their photos.

Equally low profile are company headquarters above the Bellevue Village store. The entrance is around the back of the store, past workers hoisting groceries and hosing down floors and to one side of a yawning dumpster the size of a single-wide mobile home.

Clearly, flashy offices aren't QFC's style. Anyway, they might seem out of place in the grocery industry right now, which is reeling as shoppers, made cautious by the recession, buy cheaper brands or do without.

Grocers weren't expecting to feel the economic slump.

"In the past, the industry has always been considered to be recession-proof," says Priscilla Donoegan, assistant managing editor of Progressive Grocer magazine. But "that has not been the case this time," thanks to a lack of inflation in the price of food.

In fact, these days the price of some food, notably perishables, actually is going down. The phenomenon, known as food price deflation, is partly a result of more efficient production, partly because of sluggish demand. Although that may be good news for consumers, it's bad news for grocers, who count on inflation to let them pass along rising costs by adding them to the price of, say, a pound of pork chops or bag of potato chips.

"If your grocery ticket used to be $50 and, because of food price deflation, it's $48, (the grocer is) trying to cover an operating cost structure with lower revenues," says Eliot Laurence , an analyst with Wessels Arnold and Henderson, a Minneapolis brokerage.

Despite shoppers' penny-pinching ways, discounters don't seem to have made inroads on QFC's market.

One reason is that the top priority for most people who shop at QFC is not saving a few cents at the cash register. The average shopper, industry sources say, is a middle-class buyer more interested in QFC's service and its somewhat upscale mix of groceries and specialty departments. These let the shopper pick up petit fours at the bakery, gladiolas in the floral department, corned beef or pasta salads at the deli, fresh salmon or swordfish in the seafood department.

In addition, a few stores also offer Asian Cuisine take-out food, such as sweet-and-sour pork. A few more feature the company's own Quality Quick Cuisine - fresh, unfrozen foods such as pork fajitas or chicken Dijon.

Labor costs are higher than in other departments, but the departments have proven profitable.

Other new QFC services include a home-delivery program, QFC Express, which takes orders by phone or fax, and floral delivery.

Still, whether it's a remodel or a new service, all growth is carefully weighed, company officials say.

"We're not going to grow just for the sake of growth," Kourkoumelis likes to tell investors and others. "We're going to grow for long-term profitability."

QFC is a comfortable size for a grocery chain, industry sources say. Eventually, it may want to handle its own distribution when volume justifies it, but that's not in the cards right now.

For the time being, it's large enough to carry some clout with its supplier, West Coast Grocery, allowing it favorable prices on products. It's also big enough to purchase some items directly from manufacturers, but not to offer many of its own branded products - on which grocers have higher profit margins.

In the future, QFC will concentrate on expanding into Snohomish and Pierce counties, though it also plans to fill in gaps in King County. This year, it plans to add stores in Mukilteo, Midway and Fairwood (Renton). And, if all goes according to plan, customers may see Kourkoumelis bagging groceries in Pierce County when the West Federal Way store opens there later this year.

All told, the expansions will boost total floor space by 26 percent this year. The company has no plans to add stores in Seattle, but it has been remodeling and expanding in the city. Already, QFC's market share is high in Seattle, where it's estimated to be neck-and-neck with Safeway.

Still, there are some city neighborhoods where QFC is noticeably absent. There are no stores in Southeast Seattle or the Central District, for example, areas with predominantly minority populations.

That situation has led some detractors to label QFC "Quality Food for Caucasians."

QFC officials deny that the racial composition of a neighborhood has anything to do with store locations. They say they would like a store in southeast Seattle but haven't been able to find a suitable site.

That's vigorously questioned by another grocer in that area who says he's never even heard rumors of QFC's expressing interest in properties there. But a real estate agent who has scouted locations for the company said QFC was interested in putting a store on Beacon Hill and made an offer for an empty store there. The offer was rejected, because the owners didn't want to sell.

When it comes to employment, QFC has acquired a reputation as a relatively enlightened employer. Recently, it settled its union contract covering most of its 2,400 workers before the contract expired. And in an industry that employs many part-timers, QFC probably has more full-time employees, and, thus, more labor stability. QFC also offers employees a stock purchase plan in which more than half participate.

Perhaps relations are harmonious because labor stability has paid off for QFC, on its debt-free balance sheet. Back in 1989, the chain settled with its union, United Food and Commercial Workers, and, thus, managed to avoid a 12-week strike that hit most supermarkets in the county. As a result, sales for the year were up 38 percent, when a gain of 22 percent was expected.

Work-force stability also no doubt benefits from the emphasis the company put on long-term employment. Its store managers - all men - have an average tenure of 18 years with the company.

Company officers tend to stay a long time once they start getting QFC paychecks. That includes Kourkoumelis, the president who still bags groceries and who started with QFC as a box boy in 1967. ----------------------------

QUALITY FOOD CENTERS

-- Headquarters: Bellevue -- Business: Grocery -- President: Dan Kourkoumelis (no CEO) -- Fiscal 1991 sales: $395 million -- Fiscal 1991 profits: $20.6 million -- Current stock price: $35.50 -- Employees: 2,400