CHATTANOOGA, Tenn. -- With the conversion last week of the final eight units of Red Food Stores to the Bi-Lo banner, Bi-Lo said it expects to become more aggressive in its efforts to recoup lost sales here. The chain expects sales to begin increasing before the end of the year, following the anticipated launch of a major promotional campaign and the rollout of an everyday-low-pricing policy, Jon R. Wilken, executive vice president of sales and merchandising at the Mauldin, S.C.-based chain, told SN. Sales at the former Red Food Stores here apparently began slipping prior to their acquisition last year by Bi-Lo's Dutch-based parent, Ahold. However, the erosion has accelerated, observers here said, because of negative reactions by local consumers to moves by Bi-Lo to change the stores' name and merchandising programs. With the conversion of all 52 Red Food Stores to the Bi-Lo name, executives at both Bi-Lo and Ahold expressed confidence that a turnaround is imminent:
Wilken said he anticipates a 10% sales jump by the end of the year, following chainwide introduction of everyday low prices and the launch of a major promotional campaign.
He also said he expects to eliminate out-of-stock problems now that the kinks have been worked out of the distribution system linking corporate warehouses here and in South Carolina.
Ahold said it expects ongoing cost savings to result from synergies between the two companies. Red Food was acquired by Ahold, Zaandam, the Netherlands, in April 1994. The chain became an operating division of Bi-Lo a month later, and the conversion to the Bi-Lo name and merchandising programs began in February. Of 55 stores acquired, the company said three have been closed. Local observers said at least seven more units are operating in the red and may be closed, which could make it harder to recapture declining sales. According to Wilken, the anticipated 10% sales jump will result from the promotional campaign the chain plans to launch shortly. While he declined to detail specific plans for the campaign, he said it will feature a combination of everyday low pricing and hot ad features. Wilken acknowledged that sales have declined since Bi-Lo took over the former Red Food stores -- a situation he attributed to efforts by Promodes, the chain's French-based former owner, to use promotional giveaways to inflate earnings by boosting sales during the years the chain was on the selling block. "Red Food knew it was going to be sold, so it introduced a $650,000 giveaway called Jackpot Bingo as part of an all-out effort to get sales up in the months prior to Ahold's takeover," Wilken said. "Following the acquisition, we did extensive consumer research in Tennessee and found Red Food got bad marks on its pricing over the prior two or three years, during which it went from being an everyday-low-price operator to a high-low operator. "We're still looking for sales improvements, but we're not disappointed with where we are now." Promodes officials could not be reached for comment.
According to Debra Levin, a securities analyst with Morgan Stanley, New York, Ahold management is very enthusiastic about the status of the former Red Food stores. "Although the stores are not yet contributing to earnings, management is particularly pleased with the synergies it's achieving from the acquisition, and it's looking for more synergies," Levin said. "And Ahold management said it's less likely to do another major acquisition for a while because the synergies will provide more profitability than had been anticipated." One market observer said Bi-Lo made a big mistake when it changed the name on the stores from Red Food to Bi-Lo within only a few months of the acquisition. "Bi-Lo paid $40 million in goodwill for the Red Food name," he said, "and switching to the Bi-Lo name so quickly was a huge mistake because people had shopped at Red Food all their lives and the name had such a strong local identity. "So Bi-Lo might have done better leaving the name on the stores for one or two years and letting the company run autonomously because people here were not familiar with the Bi-Lo name." According to Wilken, "Consumers don't like change, so we've been very careful about making changes in the Tennessee operation." One area where it has made changes, Wilken said -- much to the dismay of local consumers, the observer noted -- is in private-label, where Bi-Lo replaced 600 to 700 Red Food-label products with about 1,200 Bi-Lo private-label items. Wilken said the process of remerchandising the stores created problems at the distribution level, which in turn caused some disruptions at the store level. "We started resetting the stores in April, and in the process we converted our South Carolina distribution center to a slow-mover facility with cross-docking for 3,500 fast-moving items that we ship to and warehouse in the former Red Food distribution center in Chattanooga," Wilken explained. "During the changeover we have intentionally not done much advertising. We kept the program lukewarm because we've had some disruptions in the stores. "But in the process of adding and deleting items, we've probably increased the selection of dry groceries by 700 or 800 stockkeeping units, including a net gain in the selection of national brands as well as private labels."
According to the observer, one negative result of the name change and the subsequent introduction of Bi-Lo private-label products was that consumers began looking for other supermarket outlets.