ABINGDON, Va. -- K-VA-T Food Stores here is entering a new growth phase.
After expanding primarily through acquisitions for most of its history, the 86-unit Kentucky-Virginia-Tennessee-based chain is becoming more aggressive in internal growth, opening four new stores this year and targeting six more next year.
"Our focus is on building the company," Steven C. Smith, president and chief operating officer, told SN. "We're looking for expansion within our present markets because we see a lot of opportunities there to fill in holes to serve customers better and to provide additional opportunities for our associates.
"Everything we earn stays within the company, and we've kept our capital working for us."
Besides opening four stores, K-VA-T has used its capital in the past 12 months to acquire 18 stores -- 11 Piggly Wigglys in Virginia and seven Winn-Dixies in eastern Tennessee -- with one expansion completed and four more due next year, while keeping an eye out for additional acquisitions, Smith said.
K-VA-T would seem to be an ideal size in a fast-growing region of the country for a possible acquisition itself, but Smith said the company has no plans to sell in the foreseeable future.
"There have been some inquiries, but right now we're very happy and content as a family-owned, privately held regional operator.
"For the longer term, you can never say never, but right now we're still interested in growing the company," Smith said.
According to Smith, K-VA-T's long-range plans include the following:
Growing square footage by 6% to 8% a year, exclusive of acquisitions, by building new stores and expanding existing units.
Applying best practices from the recently acquired Winn-Dixie stores to improve its overall operation, including tests of service meat departments and natural food.
Continuing to evaluate its gasoline stations while seeking ways to tie-in its frequent-shopper program.
Continuing to expand its two-year-old pharmacy business.
K-VA-T is an abbreviation for the three states in which the company operates: Kentucky, Virginia and Tennessee. According to Smith, his father -- Jack C. Smith, the company's 74-year-old chairman and chief executive officer -- devised the K-VA-T moniker "mostly as a conversation starter. But Food City is the name we go by."
Despite the apparent geographic limitations of its corporate name, Smith said, K-VA-T is willing to look at potential acquisitions in whatever surrounding states they may arise.
"We're looking for good, controlled growth," Smith explained, "and while it's good to make acquisitions, we're looking to grow square footage 6% to 8% a year, and that can come either through building new stores or generating more sales within existing stores, possibly through expansions of 10,000 to 15,000 square feet per unit."
K-VA-T sales last year were $770 million, Smith said, adding he expects the company to hit $900 million this year. As for reaching the $1 billion mark, Smith told SN, "That depends on the number of stores we open and on same-store sales, but we'll have to pedal really fast to get to $1 billion in 2000."
Although K-VA-T is self-distributing, Smith said he acknowledges the buying edge larger chains have. "There's no doubt that size counts in procurement clout," he said, "but those advantages can be offset by quicker decision-making, local flavor and hands-on knowledge to make and implement decisions."
Helping to boost Food City's buying power, Smith added, is its four-year membership in the Topco group. "Topco has been an extremely positive tool for a company of our size because it enables us to co-mingle our volume to leverage a lot of buying opportunities with the Ukrop's, Giant Eagles, Meijer's and Haggens of the world, which is a big plus for us," Smith said.
Beyond buying power, "our challenge is to run the best stores in town," he said, "by combining price, quality, service and friendliness into a package of consumer value that we feel makes us more attractive than other chains in town."
Those other chains include Kroger Co. and Wal-Mart supercenters in Kentucky; Kroger, Food Lion, Ingles Markets and Wal-Mart in Virginia; and Kroger, Food Lion, Bi-Lo (an Ahold division) and Wal-Mart in Tennessee.
"The marketplace is more competitive now than ever before," Smith noted.
To meet all that competition, Food City is two years into a frequent-shopper program called Valucard "that allows us to know our customers and to try to keep the ones we have by pampering them while aggressively using advertising to drive new customers in," he explained.
"We're still learning how to deal with the data we get from the Valucards and how to do a better job of marketing to specific consumer groups. Obviously, as time goes by, we will become better able to deliver more customer-specific offers."
K-VA-T has been built on acquisitions.
Its predecessor company started life in 1955 as a Piggly Wiggly franchise headed by Jack Smith and three relatives. With three original stores and 12 acquired from other Piggly Wiggly operators, the elder Smith opted to give up the franchise in 1984 to give the company more freedom to grow and formed K-VA-T.
The new company's first acquisition came in 1984 when it acquired a 19-store chain in Greenville, Tenn., called Food City.
According to Steve Smith, "When we acquired it, the Food City banner had good name recognition and a good price image in Tennessee -- at a time Food Lion was beginning to move into the Virginia and Tennessee markets -- and we thought Food City was a good name to differentiate ourselves.
"And being a Virginia-Tennessee company going up against a North Carolina company like Food Lion kind of played into our favor with local consumers because we were better able to merchandise to their needs."
K-VA-T followed its acquisition of Food City by adding 43 units of White Stores, Knoxville, Tenn., in 1989; 11 Piggly Wigglys a year ago in Virginia; and the seven Winn-Dixie Stores units earlier this month in Tennessee.
One of the legacies of the Winn-Dixie deal, Smith said, will be the addition of service meat departments at selected Food City stores.
"We intend to keep the service meat departments at all six of the seven acquired Winn-Dixies that have them, and we plan to expand the departments to other stores where we have the space available and a clientele with more disposable income," Smith told SN.
He said he's not sure how many service meat departments will be added, although he contemplates adding the section adjacent to existing service seafood sections in at least two new stores.
(Apart from the Winn-Dixie acquisition, Smith said, Food City is considering putting in an Angus beef program at all stores, with a decision due by the end of the summer.)
After toying for several months with the idea of installing natural-food sections, Smith said, Food City is adding 68 to 84 linear feet of natural food this month at five of the seven former Winn-Dixies, featuring 1,400 to 1,500 stockkeeping units per store.
"We've been looking at our peers in other parts of the U.S. and we've seen that natural foods produce good sales per square foot and attract new customers, but we haven't had the space before now to test it," he said.
Food City plans to keep Winn-Dixie's melon bars and to incorporate them with the salad bars at its existing stores while simultaneously upgrading the salad bars at the former Winn-Dixies, Smith said.
He also said the company will retain Winn-Dixie's one-hour photo program at the four stores that currently have it but doesn't plan to expand it at this time. "We have no experience in this area, so we want to evaluate its performance at those stores and try it at one remodel as well," Smith explained.
Food City stores average 31,000 square feet, with a 10,000-square-foot unit in Rose Hills, Va., as its smallest unit and one of the just-acquired Winn-Dixies in Knoxville, Tenn., as the largest, at 57,000 square feet.
The company is building two prototypes -- 36,600 square feet and 42,600 square feet, depending on population density, Smith said. "In some markets size is determined by the geography of the area because we operate in several mountainous terrains in the coal fields of Kentucky and Virginia," he explained.
Food City operates 11 stores in Kentucky, and Smith said he sees good opportunities across the state for new-store growth, "with at least three or four towns in which we want to develop stores."
However, he said he sees little chance for growth by acquisition there, given the lack of multistore independent operators in the state.
Earlier this year K-VA-T built a 10,000-square-foot addition to a store in South Williamson, Ky., to bring it up to 50,000 square feet. "That was the second-oldest store in the company, and it's still one of our highest-volume units," Smith said.
The company expects to open a new 36,600-square-foot store in Louisa, Ky., next spring. In its home state of Virginia, Food City operates 21 stores, and Smith said he sees a lot of room for ground-up stores. Food City opened four Virginia stores earlier this year -- 42,600-square-foot units in Bluefield and St. Paul and 36,600-square-foot stores in Galax and Pulaski -- and it has a larger-prototype store under construction in Bristol, Va., that's due to open next spring.
Most of the Virginia Food Citys are in the Southwest part of the state, "but our plan is to continue to push east," Smith said. "The next three stores we open there will be more to the east, and we will continue to prospect for locations in that part of the state."
Food City operates 54 stores in Tennessee, including 41 in the Knoxville area of eastern Tennessee and 13 in the Tri-Cities region -- Johnson City, Tenn.; Kingsport, Tenn.; and Bristol, which straddles both Tennessee and Virginia -- on the Tennessee-Virginia border.
The company has three units under construction there -- in Strawberry Plains (36,600 square feet), Church Hill (36,600 square feet) and Sevierville (42,600 square feet) -- all slated to open next spring, plus four store expansions scheduled.
K-VA-T expects to begin work at the end of the month on a new unit in Gatlinburg, Tenn., that is scheduled to open next summer.
The Gatlinburg store, located in a resort area of the Smoky Mountains, will be a two-story location, with parking facilities at street level and the store one floor up.
"Gatlinburg is surrounded by a national park and a forest, and property is at a premium," Smith explained. "We were able to obtain a site of only 2.5 acres for a 45,000-square-foot store, so we had to go up.
"As a result we'll utilize the first floor for parking plus 18,000 square feet of leased shops, with the store above. And we'll merchandise that store in a unique way, taking more of a fresh approach because of the area's demographics."
The Gatlinburg store's merchandise mix will also include a greater emphasis on convenience items, including nonfood and health and beauty care, "because 70% to 80% of our customers will be people who are there for a month or less," Smith pointed out.
He said K-VA-T looked at double-decker stores operated by Loblaw in Canada and by Publix Super Markets and Winn-Dixie in Florida "to incorporate some of their best practices in our two-level store. And we found that the key to success is how you transport people and product up and down."
As a result, all deliveries will be made on the second floor using conveyor belts, and consumers will be able to move with their carts from the store to the parking level on people-movers, Smith said.
Food City got into the gasoline business last year and currently has 10 Gas 'N Go outlets, with another 10 installations planned in the next six to 10 months, Smith said.
Each outlet consists of six gas pumps, an 8- by 10-foot kiosk selling tobacco, candy, gum and automotive supplies and two soft-drink machines. According to Smith, the gas stations contribute an average of 10% to 15% to total store sales, "and up to 25% at one location," he added.
"And all are profitable, and we will continue to roll them out," he said.
Gas sales so far have tended to be incremental, Smith indicated. "We had hoped to find cross-merchandising opportunities, and we still may, once we get our frequent-shopper card integrated into the gas system. Until then, it will all be incremental business."
Smith said Food City hopes to tie its Valucards in with gas before the end of the year. "We thought we'd have done it by now because the gas pump manufacturers have been telling us for a year and a half that it would happen any day, but it hasn't happened yet."
Gas pumps are not successful at all store locations, Smith noted. "You can't depend solely on store traffic for your business -- you need proximity to a busy highway with good ingress and egress," he said.
"It's like finding good store locations. You can have a good store surrounded by a lot of rooftops, but you don't need to be located on a major thoroughfare. With gas stations, you do."
Another new venture for Food City has been the pharmacy business, which it entered two years ago "for competitive reasons and to satisfy customer demand," Smith said.
Food City is expanding pharmacy installations as it builds and remodels stores, Smith said, and currently operates 17 pharmacies. The departments not only add incremental sales "but also help HBC sales immensely, with solid double-digit growth in over-the-counter items."
The pharmacies were originally operated with the help of PRS, a third-party adviser based in Latrobe, Pa. However, in April, Food City hired Caynor Smith (no relation), formerly with Kmart, to oversee its pharmacy operations.
A big part of Food City's reputation over the years, Smith said, has been built on its nine-year sponsorship of the NASCAR 500 every April and the NASCAR 250 every August in Bristol, Tenn.
"The key to NASCAR is how you take the sponsorship and convert it to community involvement," Smith explained. "At Food City we set up fund-raisers with drivers signing autographs, and that helps differentiate us from other supermarket operators."
Demonstrating the popularity of the two National Association for Stock Car Auto Racing events, Smith pointed out, is the fact that next spring's race, with a capacity of 140,000 spectators, is already sold out.
K-VA-T has been self-distributing since early 1998, when it bought out the last of its partners in Mid-Mountain Foods here, a cooperative formed by K-VA-T and three other operators in 1975. It bought out two of the partners years ago and bought out the third partner, the 11-store Kennedy's Piggly Wiggly group, based in Coeburn, Va., last year.
The distribution complex includes 900,000 square feet of warehouse space for dry groceries and perishables, plus a spring-water manufacturing business -- Misty Mountain Springs -- that K-VA-T acquired in 1996.
Of its 86 stores, all but two operate under the Food City name -- a 12,000-square-foot store in Tennessee and a 10,000-square-foot store in Virginia "that are too small for the Food City banner but that both make money," Smith said. Both use the name Super $.