EDINA, Minn. -- Consumers in the Twin Cities are getting the best of two worlds under two roofs, now that Lunds and Byerly's have a common ownership.
It's been two years since Lund Food Holdings, an eight-store upscale operator here, acquired crosstown rival Byerly's, an 11-store upscale operator, also based here, for an estimated $90 million. And while the merged companies are operating as one in virtually all ways, they continue to maintain their separate identities at store level while attempting to offer customers the best of both operations.
"The individual names mean so much to the consumer base of each store group that we see significant opportunities in continuing to retain both names," Russell T. (Tres) Lund 3rd, chairman, president and chief executive officer of Lund Food Holdings, told SN.
"I grew up listening to customers at Lunds saying how much they loved our stores, and if I had grown up as the son of Don Byerly [founder of Byerly's], I probably would have heard the same thing from his customers.
"Historically, Lunds developed as a smaller, more urban, neighborhood store, while Byerly's grew as a larger, more suburban, more regional chain, and we're deeply committed to retaining both formats because each one represents something important to each group of consumers.
"If we were a corporation from another area who acquired the two upscale chains, I suppose we might have made the decision to operate under one umbrella, one name. But living in the community that has supported both stores, we understand what our customer base is looking for. So as we choose the real estate for additional stores, we'll let the location, the size and the demographics of the area determine which name we put on each one."
Looking ahead, Lund said the prospects for the merged company appear very promising:
Sales at the combined company have risen 6% overall in the last 18 months, with the Lunds stores showing bigger gains than the Byerly's because of the addition of leased departments.
The company is generating incremental annual savings of $4 million to $5 million from backstage integration and increased efficiencies -- benefits that can be maintained going forward.
One new store and two remodelings are scheduled this year and at least one new store will open next year, and the company also has its corporate eye peeled for acquisitions.
It is continuing to introduce signature items from each store group into the other.
It plans to introduce new programs at store level, including culinary specialists, as part of a Whole Health strategy.
Lunds, founded in 1939 by Tres Lund's grandfather, was an established fixture in the Twin Cities marketing area when Don Byerly opened his first store, with a similarly upscale format, in 1968. Byerly .... retired from his company in 1990; and sold it to Goldner, Hawn, Johnson & Morrison, a Minneapolis-based investment group. According to Lund, even the investors got caught up in the excitement of the grocery business.
"Financial investors usually challenge true grocers because they have a five- to seven-year window that drives their agendas, and the performance measures they look for are not usually longterm in focus. Decisions are usually geared toward creating cash flow to support their financial objectives, which sometimes means sacrificing longterm commitment to the stores.
"But in the case of Byerly's, the financial owners fell in love with the business too, and in the parting days they had their arms around the idea of caring and concern for the ongoing operation."
Industry estimates put Lund Holdings' volume at close to $450 million, with the Byerly's stores accounting for about two-thirds of volume. While Lund declined to pinpoint corporate sales, he said overall sales for the combined 19-store operation have risen 6% over the last 18 months, with sales up 3% at the Byerly's units and up 11% at the Lunds stores.
He said the Lunds stores have benefited from the addition, at five of the eight locations, of Byerly's leased vendor partnerships, including Leeann Chin Chinese Cuisine, Caribou Coffee and AFC Sushi, plus the addition of Byerly's very popular private-label soup line -- the only Byerly's brand available in the Lunds units.
Lund said he expects sales to continue to increase through further improvements in overall productivity and through the addition of new and remodeled stores.
According to Lund, increased productivity has been the company's primary focus since the merger in April 1997, with an eye toward creating efficiencies to pay down debt and to finance capital investments. That goal has been pretty much accomplished, he said, making it possible for Lund Holdings to lower its costs, strengthen its margins and improve store-level sales, Lund told SN.
He said backstage integration has enabled the merged company to enjoy incremental savings of $4 million to $5 million a year through more efficient use of production facilities, including a shift of production to whichever of the two former rivals' facilities did the best job with particular product lines.
Making such sweeping changes initially upset many longtime employees, Lund acknowledged. "By shifting operations from one facility to another, we were changing people's day-to-day activities, and our whole team had to understand why we were doing that. And while you can talk all you want about synergies, you have to provide people with concrete examples about what the savings mean.
"Based on the actual savings, we've been able to tell them the shifts have generated enough increased income to build one additional store per year once we pay down debt. Without debt, the incremental income will be committed to growing the business."
As Lund Holdings assessed its two bakery operations, it determined that the Lunds facility in New Hope, Minn., was more proficient at hand-crafted Danish and pastries than the Byerly's bakery in Rockford, Minn., which was more adept at bread production. Accordingly, the company transferred all pastry and doughnut production to New Hope and all bread and bagel production to Rockford last September.
"As a result, each bakery became more efficient, running a higher volume of what it did best, which lowered our ingredient costs, strengthened our margins and made us more efficient," Lund noted.
He said he expects further efficiencies when the company completes a 4,000-square-foot addition to the 35,000-square-foot Rockford facility later this year that will enable the plant to manufacture Artisan breads for the chain. (Artisan, formerly a Byerly's label, will replace Lunds' European Classic bread line.)
Looking at its central kitchens, the company determined that the Byerly's facility in Lake Mills, Iowa, was more proficient at producing that chain's popular frozen-soup line and would benefit from the addition of supplying products for the eight Lunds stores, while the Lunds central kitchen in New Hope was better equipped to prepare ready-to-heat refrigerated packaged foods for all 19 stores.
In produce, Lund Food Holdings has been able to increase its clout by buying full truckloads of packaged produce from the West Coast, with the result that delivery trucks don't have to make stops to drop off products from a full load to other customers along the way, Lund explained. "As a result of running straight truckloads to our stores, we can get merchandise three days fresher and at a lower cost, which means improved margins for us and better products for our customers," he said.
The company has also been able to lower its costs on fluid milk and eggs, Lund said. "Lunds and Byerly's each had different vendors for those items, and it was a tough decision to go with one supplier for each because it meant ending longstanding relationships. But we've been able to lower our costs, so it's been a worthwhile effort."
Lund said the incremental savings at the bakeries, kitchens, produce warehouse and dairy level have enabled the company to pay back 34% of its acquisition debt to the bank "significantly ahead of schedule." He declined to pinpoint how much debt the company has.
Besides reducing debt, Lund Food Holdings plans to invest some of the incremental funds in new stores and remodelings, Lund said.
"If Lunds and Byerly's were still operating as two separate companies, each could have moved forward building new stores, but together we can generate enough income to move more quickly," he said. "And because we can grow faster, our people have more job security and they can watch the company they love continue to operate successfully despite intense competition."
While Lunds stores have historically fallen in the range of 25,000 to 41,000 square feet, Byerly's stores range from 35,000 to 90,000 square feet. As the combined company opens new stores, the two banners will grow closer in size, with Lunds expanding to 45,000 square feet and Byerly's settling on a footprint of 55,000 to 60,000 square feet, Lund said.
"Lunds will go up to accommodate space for our vendor partners, along with scratch bakeries and liquor departments," he said. Although five of the eight Lunds stores have already allocated space for the company's vendor partners, "it's a very tight fit," he noted.
For Byerly's, the last new Byerly's that opened -- a 57,000-square-foot store in Eagan, Minn., in late 1996 -- will be the model for future stores, Lund said, including the company's first new post-merger store next October -- a 57,000-square-foot Byerly's in Maple Grove, Minn., 15 miles northwest of Minneapolis.
According to Lund, the Eagan Byerly's broke with the chain's tradition of splitting the grocery gondolas with a frozen foods section in the middle of the store, placing frozens instead in a perimeter location.
"We will carry the Eagan format forward by putting frozen foods on one side, but we will still split the grocery aisles -- with endcaps -- to give us more opportunities to display featured or promotional items," Lund said.
The layout of departments at Maple Grove will follow the Lunds format, however: whereas both chains usually position delicatessen and bakery as the first departments after customers enter, most Buyerly's stores have customers move on to meat and seafood, while Lunds has installed produce next in line at four of its eight stores. That's the layout design all new stores will follow, Lund said.
Following the opening at Maple Grove, the next new store is likely to open in October 2000, Lund said, though he's not sure where it will be or what name it will carry.
"What we face now is the need to reinvest in the Byerly's stores and remodel them to take them to the next level. Cap-ex was held back and remodeling was put off by the financial owners for seven years," he said.
The combined company just completed its first remodeling project at a Byerly's here, including the addition of two new vendor partners -- Baja Tortilla Grill and Green Mill Pizza, both local restaurant operations.
Coming up will be a remodeling of the Byerly's in St. Louis Park, Lund said. "That was the chain's flagship store in the 1980s, but we need to move it into the 2000s by rethinking the merchandise mix and the equipment and installing additional vendor partners," he explained.
The Lunds store in Wayzata, Minn., will be remodeled and expanded in October, adding 7,200 square feet to the 35,000-square-foot unit to accommodate an expansion of the store's deli and installation of a modified scratch bakery, Lund said.
He said the company also hopes to convert its Lunds store here to a Lunds Marketplace -- a densed-up format that includes higher shelving and narrower aisles, similar to the upgrade at the Lunds store in Minneapolis' Uptown district in 1996, which resulted in the store doubling its sales. Lund said the upgrade here has not yet been scheduled.
Lund Food Holdings is also looking for acquisition opportunities, he said. The company made a bid in January for a single-store operator, "but another retailer got it," Lund said.
The company had hoped to use that acquisition to replace an existing store in New Brighton, Minn., whose lease will be allowed to run out in July, Lund explained. "Our store is 25 years old, and it's operating on a break-even basis, and any increase in costs from a new lease would make operating it not viable," he said.
However, with no replacement store likely, Lund said the company will close the store when the lease runs out and transfer its 118 employees to the Maple Grove Byerly's set to open later this year, which will ultimately require 200 employees.
"But we have the capital available, and we will continue to look at acquisition opportunities," he said.
Lund Food Holdings has been a customer of Supervalu, Minneapolis, since the merger. In October, it took an option to make a limited liability investment in four Holiday Plus stores in Minneapolis that Supervalu acquired and converted to Cub Foods warehouse stores.
"Supervalu offered us the opportunity to invest, and we took it, although we compete directly with three of the stores," Lund explained. "The objective of our investment is to understand the warehouse format a bit more and to see our investment value improve.
"It's one more step that further integrates our alliance with Supervalu, although we have no plans to operate warehouse stores."
Lund said his company made the investment in a competitor's stores "for strategic reasons," though he declined to elaborate.
"It was a financial investment opportunity, just like others we've made in real estate and the oil and gas industry. It's an investment in another segment of the food industry, which is a natural thing for us."
On a merchandising level, the only Byerly's-label product in both store groups is Byerly's much-heralded frozen soup. The two operations also share a handful of other signature items, including Artisan bread; Gold Label ham, formerly a Lunds item that now carries either the Lunds or Byerly's name; and a line of dinner entrees in tray packs that originated at Lunds but is now merchandised at both stores under each store's name.
Both stores also use the name Chef's Market, formerly a Byerly's designation, for a section of their meat departments allocated to oven-ready meat items, Lund pointed out.
He said he is very excited about installing Whole Health, a program developed by the Washington-based Food Marketing Institute that encompasses natural-food products, organic produce, nutraceuticals and pharmaceuticals. "Whole Health will enable us to broaden our appeal to customers who shop at natural food stores," he said.
"The growing number of people who are aging and taking an interest in self-care, and the greater awareness of food and dietary supplements, is strongly aligned with the demographics of the Lunds and Byerly's customer, so it's a natural evolution for us to extend into the Whole Health area," Lund said. Lund Food Holdings has hired Bea James as Whole Health manager to direct the program -- to identify what products should be carried, how many stockkeeping units are needed and what employee and customer training programs should be introduced, Lund said.
A part of the company's greater emphasis on health and diet will be to combine Lunds' in-store dietitians and Byerly's store hostesses into the new position of culinary specialist, with responsibilities for party planning, recipe development, overseeing in-store cooking schools, ensuring new products are on display and helping customers find items.