Tinkering with business organizations in ways that cut spending or redeploy it into areas away from core activities has its limits, like everything else. That's among the lessons to be found in recent events at Eagle Food Centers, Megafoods, Kash n' Karry and, no doubt, many other companies.
The situation at Eagle, the 102-store chain in Milan, Ill., is outlined in some detail in this week's front-page news feature written by reporter Elliot Zwiebach.
It turns out that Eagle, a company that has gone through several ownership permutations in recent years, embarked on a big cost-cutting venture at about the time it was facing intensifying competition.
The cost cutting ended up undermining the core business, allowing both top and bottom lines to decline unacceptably. So, in an effort to reverse the effects of a four-year-long sales decline, Eagle recalled a retired executive earlier this year and equipped him with a mandate to return the chain to viability through a renewed commitment to fundamentals.
Now, look for Eagle to beef up advertising, add hours in customer service areas, improve employee training and the like.
"Our biggest challenge is to reinvest a little bit more than we [previously] have in the basics," said Pat Petitti, president and chief executive officer. He's the executive who returned after a two-year retirement.
Meanwhile, the saga of Megafoods Stores, Mesa, Ariz., points out problems inherent in deploying capital away from the basics of the business, in this case toward rapid expansion. Megafoods was founded in 1987 and grew slowly. That changed about a year ago when it put on a couple of acquisition-driven growth spurts, and became a multi-regional chain of 71 stores.
As reported earlier, Megafoods filed for Chapter 11 this month, apparently in connection with a cash-flow problem, a problem that probably started in earnest late last year when it bought 15 stores from Kroger Co. in San Antonio. In that market, Megafoods' troubles grew when tough competition declined to permit it to build the low-price image it needed for success. Compounding Megafoods' problems were its odd relations with supplier Fleming Cos. -- or is it the reverse? In either case, illustrating how quickly a situation can deteriorate, Robert E. Stauth, Fleming's chairman, president and chief executive officer, issued a letter to shareholders dated Aug. 5 specifying that "during the [second] quarter we signed a five-year, noncancelable supply agreement with Megafoods, one of the largest customers of our Phoenix division. The agreement solidifies our relationship and enhances our credit position with Megafoods in Arizona, California and Nevada."
Then, just a week thereafter, on Aug. 12, Fleming temporarily halted deliveries to some Megafoods' stores in a dispute concerning funds, then temporarily halted deliveries to all Megafoods' stores on Aug. 17, the day of the Chapter 11 filing.
Megafoods claims Fleming is the dark force that caused its contretemps and that forthcoming litigation promises to "hold Fleming and Mr. Stauth accountable for the harm they have done to this company," to quote Dean Miller, Megafoods' chairman, president and chief executive officer.
As for Kash n' Karry, the 100-store chain based in Tampa, Fla., says it's considering a prepackaged Chapter 11 as part of a long-sought debt-restructuring device, as reported earlier.
Kash n' Karry, a company that was once a unit of Lucky, as was Eagle, ran into troubles when increased competition undermined its capital structure. In an effort to find an answer, it set aside store remodeling and forward-buying programs for a time. Both moves did little but to compound the company's difficulties by making it less competitive in terms of facilities and prices. Through it all, it seems that the lesson these experiences is trying to tell us is that undercapitalized companies are especially vulnerable to a competitive poke in the nose. And, these same companies -- driven by short-term necessity -- are in severe danger of taking counterproductive actions that exacerbate their own problems.