SALISBURY, N.C. -- Food Lion here is sharpening its claws for battle. Despite a glut of competitive gladiators in its Southeastern den, Food Lion clearly intends to be a survivor when the carnage clears.
"The Southeast is a growth area, and it's typically been that way, and we've had to learn to live with that," Tom Smith, chairman, president and chief executive officer, said at a recent
industry forum.
Despite growth by a number of competitors in its core territory -- Publix Super Markets, Winn-Dixie Stores, Harris Teeter, Hannaford Bros. and Wal-Mart Supercenters -- Food Lion had its best year ever in 1996, Smith pointed out.
"Last year was a banner year for us, with record sales and earnings and same-store sales increases of 5.7%," he said.
Although noting that 1996 will be a tough act to follow, Smith said he anticipates sales will hit $10 billion this year -- an 11% jump from last year's $9 billion -- and same-store sales will grow by approximately 3% to 4%. He said he anticipates ongoing sales growth of 12% to 15% a year for the foreseeable future.
He also said the combination of pricing, convenience and product mix that Food Lion offers will enable it to get more sales out of existing stores. Smith said he bases his optimism on the following factors:
The acquisition last December of Kash n' Karry Food Stores, Tampa, Fla., with its $1 billion sales base and the prospects for making it a more efficient operation.
Neighborhood convenience offered by the chain's new prototype of 34,000 to 38,000 square feet.
Improved performance through greater utilization of vendor input.
Increased private-label sales, with more aggressive moves to tie private label to the chain's successful MVP loyalty-card program.
Efforts to tailor advertising and overall pricing to individual units.
Left behind are Food Lion's tribulations with ABC-TV's "PrimeTime Live," which presented a negative report in 1992 on the chain's alleged perishables-handling practices -- a hidden-camera report that devastated the company with the investment community and hurt sales.
Food Lion filed suit against the network, questioning the undercover methods used to gather information (though not the content of the assertions), and won the case late last year -- although ABC has disclosed plans to appeal the $5.5 million decision.
SN's parent, Fairchild Publications, is a unit of the ABC segment of Walt Disney Co.
Since absorbing the impact of the ABC report, Food Lion has managed to reinvent itself while staying faithful to its low-cost roots.
It's done by listening to customers and making some adjustments in its traditional approach, Smith said. "We are still the low-price leader in our operating areas, and we are maintaining our edge by keeping operating costs low," Smith said.
"But we're also offering more than that by adding products and services that customers tell us they want," including more deli/bakery departments, more 24-hour locations and debit and credit programs.
Gary Giblen, a securities analyst with Smith Barney, New York, said circumstances have prompted Food Lion to find ways to become more competitive in service and quality while holding on to its low-price image. "Winn-Dixie and other competitors have been able to narrow the price gap, so Food Lion has had less of a clear edge in that area, and it's had to offer more in service and quality to compete," he pointed out.
Aiding Food Lion in its quest to keep operating costs down and maintain low pricing has been its fervor for category management, "which helps promote more effective marketing techniques, so we don't waste money carrying or promoting non-effective items. "In addition, through assortment planning, it helps us set the shelves on a market-specific basis so we can work more closely with vendors to utilize promotional dollars more effectively, and through zone pricing, we can still be the lowest-priced chain in an area while retaining the flexibility to adjust prices up or down, depending on how competitive an area is," he said.
Smith said Food Lion plans to ask vendors to cooperate with the chain to help reduce its logistics costs. "We're as far along as we can go with manufacturers in that area. Now we're asking all manufacturers to benchmark our performances against the competition so we can improve."
Although Food Lion stores average just over 29,000 square feet, Smith said the chain's current prototype of 34,000 to 38,000 square feet is geared more to providing the kind of convenience that customers are telling the chain they want.
"Customers tell us they don't like larger stores," Smith said. "But at 34,000 to 38,000 square feet, we can carry a wide range of groceries in a store that's easy and convenient to shop." He said ongoing research indicates "that customers consider convenience second in importance only to price, and that's a requirement we're able to fill. Our store size is conducive to convenience because we make it easy for customers to get in and out.
"The No. 1 thing customers tell us about convenience is they like stores that are close to home. Given our prototype and our low break-even points, we can deliver that kind of convenience" -- built around the slogan "Food Lion and Fast."
Jonathan Ziegler, a securities analyst with the San Francisco office of Salomon Bros., New York, said convenient size is a major plus for consumers confronted by a growing number of supercenters.
"One of Food Lion's major advantages is its store size, compared with the huge box stores of 150,000 square feet or more that the supercenters build," he said.
Besides the prototype stores, Food Lion also has six experimental stores of 45,000 square feet in larger markets that feature "destination departments" in several categories, including expanded health and beauty aid sections; larger pet departments, and more extensive beverage sections.
Smith said Food Lion uses the larger stores "to see what works and what doesn't work, and the current chain prototype is a direct reflection of those experimental stores."
The company plans to build five more expanded stores this year and to enlarge nine existing stores to the larger format.
Food Lion intends to continue its aggressive store expansion program, Smith said, with 55 to 60 new units planned for this year -- approximately the same number as in 1996 -- plus 100 remodeled units, compared with 124 last year. Smith said Food Lion will also be on the lookout for acquisitions.
"Food Lion management is very opportunistic about acquisitions," Ziegler told SN, noting that Food Lion's potential expansions in Maryland, Washington, D.C., and Pennsylvania could be accelerated by acquisitions.
Giblen said Food Lion is likely to pursue two types of acquisitions: smaller local chains "that it can fold into the markets in which it already operates," such as Food Fair, a nine-unit chain in Winston-Salem, N.C., that it acquired early in 1996; and regional chains like Kash n' Karry.
Food Lion acquired Kash n' Karry late in 1996; the 100 stores accounted for sales last year of $1.02 billion.
Food Lion began promoting "the new Kash n' Karry" in February with ads indicating it had reduced thousands of prices. The company is expected to continue to make further adjustments in Kash n' Karry's pricing, although the chain will continue as a high-low operator rather than convert to the everyday low pricing that characterizes the rest of the Food Lion operation.
Food Lion has made a commitment to invest $150 million in Kash n' Karry over the next four years, including an anticipated $50 million outlay this year.
The biggest gains at Kash n' Karry should come in backstage operations, Smith said -- "in ways that will not be obvious to consumers" -- as Food Lion attempts to reduce costs wherever possible.
Debra Levin, an analyst with Morgan Stanley, New York, said she expects Food Lion to realize "substantial savings in distribution, buying, systems and administration [at Kash n' Karry], as well as benefits from Food Lion's financial strength.
In contrast to previous acquisitions, Food Lion plans to retain the Kash n' Karry name on the Florida stores "because it's a very strong, well-respected name, with a strong brand equity, but limited financial resources," Smith said.
While somewhat vocal on its Florida plans, Food Lion is reluctant to tip its hand on its plans for its Southwest division, which operates 61 units in Texas, Oklahoma and Louisiana -- down from a high of 83 stores in 1993.
Smith declined to indicate how those stores figure in Food Lion's long-range plans. The company has said previously it will either expand the operation or divest it completely, but it has not set any timetable for making that decision.
Food Lion is extremely bullish on the subject of private label, having seen the category evolve from 12% two years ago to 16% at the end of last year. "I once thought that 15% was as high as we could go, but we should hit 18% this year, with no cap at all on long-range growth," Smith said.
"Our goal is to strike a certain balance of private label to national brands."
However, he said he's not sure what the ideal ratio should be.
To boost private-label sales, the chain has been using the slogan "Our Best Quality, Your Best Value" since 1995.
Smith said Food Lion's plans for private label this year include linking it with two of its major promotional vehicles: sponsorship of sporting events and its MVP loyalty card.
