Big Time in Small Towns
Shopko will convert all of the Pamida stores into the new Shopko Hometown format.
By David Gill
The merger of Shopko and Pamida, which is expected to close in mid- to late February, will create a $3 billion retailer that will focus on serving smaller and rural communities, according to W. Paul Jones, Shopko's president and CEO.
In an interview with HFN, Jones said the idea for the merger came from the growth of dollar stores. "We did not see any growth in the big-box format," Jones said. "The growth of the dollar stores also signified to us that there were opportunities in underserved small markets."
Announced in early January, the deal will combine Shopko, with 149 stores in 13 states, with Pamida and its 193 stores in 17 states. Both chains have stores in the Midwest and Mountain regions. Shopko also has locations in the Pacific Northwest, while Pamida has stores in the North Central region.
When the deal is done, the Pamida stores will be converted to the Shopko Hometown format. Introduced in 2010, this format measures 35,000 square feet and features merchandise assortments similar to those found in a regular Shopko (which measures 80,000 square feet), and includes a pharmacy.
Jones will head the combined company after the merger is finished. John Harlow, president and CEO of Pamida, will stay on the executive team and lead the effort to integrate the two enterprises.
This is Shopko's and Pamida's second trip down the aisle. Shopko acquired Pamida in 1999 and operated the chain as a separate division. In 2005, Sun Capital Partners purchased Shopko, and shortly afterward completely separated the two chains.
The two chains began the process of rejoining forces in 2009, according to Jones. He said Shopko had purchased two Pamida stores close to Shopko's Green Bay, Wis., headquarters in that year with the idea of creating a smaller format geared to what he described as underserved communities.
The two stores, called Shopko Hometown, opened in the summer of 2010. Then Shopko bought five other Pamidas, did the same remodeling and opened those locations in August 2011. The company also built three other Shopko Hometowns from the ground up.
The reformatting of the Pamidas started an "aggressive discussion" toward merging, Jones said. "We saw an opportunity to combine the best of both companies," he said. "Pamida's strategy has always been to go after small markets, and we had a stronger merchandising infrastructure and some good private brands. Shopko Hometown has key national brands in all categories."
"In home, we have a strong fashion element in every category." Included in the home brand roster are Keurig brewers and K-Cups and Paula Deen cookware. In textiles, the store offers "a higher quality level in thread count and fabrication," he said. "There is more theater in the presentation as well." He added that home is "incredibly important" to Shopko Hometown's business, accounting for from 45 percent to 50 percent of all non-pharmacy sales.
Merging offered opportunities for expansion down the road. "We saw the opportunity for a $3 billion company to have the leverage and resources to expand," Harlow said in an interview with HFN. "We're very similar in the communities we serve, and it is a much better strategy to have two sets of minds creating ideas for growing one company, than to have two companies."
While the growth in dollar-store numbers provided a spur for the Shopko Hometown concept, Jones said emphatically that the new format "is NOT a dollar store. It has everything a dollar store has and more, including a pharmacy. We are a full mass general-merchandise store." He said the price points in Shopko Hometown range from opening price-point to moderate, and that the merchandise spotlights moderate midtier brands.
Both Jones and Harlow are taking a cautious view of the future for Shopko Hometown. "It's too early to talk about territorial expansion," Harlow said. "Job One for us is to lay the foundation for growth, in 2013 and beyond. We will look to grow profitably."
Jones did say the new format has the potential to be a national retailer, but "we need to focus first on converting the existing Pamidas," he said. "In the next five years, we'll focus on the markets where we are now to see where we can expand. There are still many underserved markets in these areas. This is a totally opportunistic effort."