1997 was nothing less than a landmark year for Fred Meyer, Inc.
Not only did Fred Meyer Stores deliver a record financial performance- but at the corporate level, we engineered three supermarket mergers that dramatically change both our industry and our future.

In a business where consolidation is an emerging trend and quality-in service, products, and operations-is key, Fred Meyer has become one of the leaders and, we believe, one of the best.

Today we're pleased to introduce you to the new Fred Meyer: four terrific food and retail chains, joining forces to create a $15 billion enterprise. More than 800 stores in 11 of the country's 15 fastest growing states. A vast distribution network, plus modern manufacturing facilities and management information systems. Experienced leaders who know their businesses and their customers. And 85,000 talented employees, living out a shared commitment to providing top-notch service and merchandise. With advantages like these, the new Fred Meyer is uniquely equipped to win and keep customers, growing along with our markets.

Growth at Fred Meyer Stores

Before we discuss the new companies that will be part of our future, let's look at the 1997 performance of Fred Meyer Stores-one year ago, the core of our business- today, just one example of how we can create value for shareholders. Sales for Fred Meyer Stores increased a record 13. 5 percent from the $3.7 billion reported in 1996, reaching $4.2 billion. Over the same period, income from operations grew 25.2 percent. Smith's Food & Drug Centers, a merger we completed in September 1997, added another $1.3 billion in net sales-generating a combined 47.2 percent increase in sales and a 86.2 percent increase in income from opera-tions, year-over-year, for Fred Meyer, Inc.

Fred Meyer Stores' comparable store sales increased 7. 4 percent in 1997, one of the top growth rates in the nation. Food sales grew 6.6 percent and nonfood increased 8.6 percent. During the final quarter of 1997, Fred Meyer Stores reported average supermarket sales of $450,000 per store per week, with a strong $400,000 store average per week for Smith's.

While we were growing top-line sales, we also con-tinued to grow our cash flow. EBITDA measured as a percentage of net sales grew to 7. 55 percent in 1997, compared to 6.70 percent in 1996. Improving our cash flow enables us to stay ahead of the competition by keeping our facilities modern and continuing to expand in our fast-growing markets.

The Rewards of Customer Focus

We grew by giving customers what they want across our broad product mix, from high-quality perishables to brand-name apparel. In just one example of our ability to make changes rapidly, we were among the first in our industry to shift the focus of our electronics departments from personal computers to faster-selling, higher-margin items like compact discs, videos, and software. We also added trend-setting departments and features to several of our stores. Bath boutiques, pet centers, nutrition centers, sushi bars, juice bars: innovations like these strengthen Fred Meyer's reputation for making shopping easy and fun.

Every day, new potential customers move to the Pacific Northwest.To serve that growth, in 1997 we built five new Fred Meyer stores, completed five major remodels, and added new specialty depart-ments to match local demand. We also expanded our jewelry operations, now fourth largest in the country, by acquiring Fox's Jewelers with 44 mall stores in the Midwest.

Leading Our Industry's Consolidation

We're particularly proud of our solid financial perfor-mance in a year when we were also working hard to create a more promising future for shareholders. We entered 1997 with one mission: to increase the value of an investment in Fred Meyer. Two impor-tant factors influenced our steps toward that goal. First, we wanted to position the company as a big-ger player in the supermarket category of retailing. Second, in an industry undergoing rapid consolida-tion, we knew we could either acquire, or be acquired.We chose to acquire.

We looked for merger partners who could expand our territory and broaden our grocery presence simultaneously. Today, in addition to Fred Meyer Stores, our business includes three of the best grocery chains in the West-companies whose quality stan-dards, values, and markets complement our own.

Smith's Food & Drug Centers: Western Pioneer

In September we completed our merger with Smith's Food & Drug Centers, with 156 stores in seven Western states and the number one or number two market share in cities that include Salt Lake City, Las Vegas, Phoenix and Albuquerque. In addition to new markets, Smith's brings us strategically located distribution and manufacturing facilities, increased buying power, a strong private-brand program, and a consumer research strategy that's ahead of its time.

The Smith's merger also brought us Smitty's. In 1997 we remodeled two Smitty's stores using successful concepts from Fred Meyer Stores. In addition to food, new Smitty's Marketplaces include garden centers, bath boutiques, nutrition centers, and other innovative nonfood departments. In 1998 we'll con-vert 12 more stores to the Marketplace concept, with four additional remodels slated for 1999. At an esti-mated cost of $4 million each, these remodels will give us a lead in offering one-stop convenience in Smith's markets in the Southwest.

Quality Food Centers: Tops in Seattle

The first of our two March 1998 mergers was with QFC, a leading supermarket chain in the Seattle area. QFC operates 89 premium supermarkets, the majority in Washington's Puget Sound area. The company's reputation for superior perishables- produce, meats and seafood, baked goods, and home meal replacement offerings-continues to win customers and keep them coming back.

QFC came to Fred Meyer with its own track record for expansion. Most recently, QFC had acquired Hughes Family Markets, a 56-unit chain serving Southern California. At the time of our merger, QFC was beginning to align the stores with QFC practices. In just one example of the benefits of the new Fred Meyer's scope, these stores will be operated by Ralphs, which has earned the number one market share in Southern California, the largest grocery market in the United States.

Ralphs Grocery Co.: Leader in a Growth Market

In March 1998 we also merged with Ralphs, which has succeeded in one of the country's most attrac-tive and demanding markets.With stores from Santa Barbara to San Diego, 264 Ralphs stores maintain the leading market share in the region by offering first-class products and service in an upscale setting. Through 80 Food 4 Less warehouse stores-on their own, number four in that market-Ralphs also serves price-conscious customers.

Quality is the key to Ralphs' success. Many products come from the company's own creameries, bakeries, and herd of grain-fed cattle. Home replacement meals prepared in the Ralphs commissary meet demand for gourmet foods without the fuss. And new full-service floral islands contribute to Ralphs reputation for innovation.

Bottom-line Benefits

Together, Fred Meyer Stores, QFC, Ralphs, and Smith's will share significant benefits. Geographically diverse, we will no longer depend on one region for our success. With $15 billion in combined buying power, each of our four chains will be able to merchan-dise more effectively.With modern manufacturing and distribution facilities in five states, we'll get products into our stores faster. By sharing Fred Meyer's and Ralphs' new technology platforms-that we are equipping for the year 2000 and beyond-all our companies will be able to operate, communicate, and administer their operations more efficiently.

In fact, by the end of the year 2000, we expect to save at least $150 million annually as a result of our consolidation. And, despite quadrupling the size of our corporation, we've been able to refinance all four companies' debt at very attractive levels, with low average borrowing costs around 7-percent. Our combined strong cash flow will enable us to pay down our debt aggressively as we go forward.

Cultivating What Works

Behind our new efficiencies lie some powerful shared values. All our companies are deeply committed to quality and customer service.They believe in treating employees well and in sharing their progress with the communities they serve. However, we'd like to stress that the key to our companies' continuing success lies in the distinctive ways they embrace this philosophy. And in that regard, we don't plan to change a thing.

Our goal now is to run these businesses as unique, independent enterprises-a strategy we practice successfully in our Fred Meyer multi-department stores. Behind the scenes, the companies of Fred Meyer, Inc. will share best practices, buying opportunities, oper-ating efficiencies, private brand development, and cost-saving capabilities. But on the front lines, where employees know their customers and where cus-tomers respect our strong store names, it will be business as usual, only better.

In the pages that follow, we introduce you to the five terrific food and retail chains that comprise the new Fred Meyer.You'll learn more about their values, their histories, their markets, and their competitive advantages.You'll also hear from the five chief exec-utives who have helped these businesses evolve and thrive-leaders whose experience and insight we'll leverage going forward. And as they'll tell you, they couldn't have done it without their teams of dedi-cated employees.

We'd like to say thank you to all the members of the new Fred Meyer team, from Alaska to Albuquerque, Washington State to Washington, D.C.Their commit-ment to taking care of customers is what keeps us a leader in our markets. Together we are well on the way to ensuring that Fred Meyer companies remain the best in the business.

Sincerely,

Robert G. Miller
President and Chief Executive Officer

April 15, 1998

 Ronald W. Burkle
Chairman of the Board