TAMPA, Fla. -- Kash n' Karry Food Stores here is "a diamond in the rough," according to Ronald E. Johnson, the chain's new chairman, president and chief executive officer.
And the chain, which operates 99 supermarkets, is now ready to polish its act following its emergence from a Chapter 11 restructuring late last December, Johnson told SN in an interview.
The operator is up against aggressive competitors who have far outpaced Kash n' Karry in new unit openings. But Kash n' Karry is now gearing for an expansion and merchandising push, and Johnson maintains the prospects are encouraging.
"Every rock I look under, I see a great opportunity," Johnson said. This chief executive has been "turning over rocks" to see what hidden assets he can find since moving here in mid-January from Farm Fresh, Norfolk, Va., where he had been senior executive vice president.
"There are huge opportunities here to make improvements at all levels of this operation and increase gross margins by 4%." According to Johnson, those opportunities include the following: · Undertaking a major remodeling program that will see 16 stores upgraded in the next 18 months. · Expanding perishables and seasonal nonfood selections immediately, prior to developing a prototype that will set the pattern for long-term expansion. · Seeking to develop a series of unique food and nonfood items that offer strategic values to Kash n' Karry customers. · Becoming more aggressive with vendors in securing deals. · Continuing to seek ways to lower operating costs. Kash n' Karry operates 33 liquor stores in addition to its supermarkets, with operations focused along Florida's west coast and in the central part of the state. The concentration of stores is in the Tampa-Clearwater-St. Petersburg area. Sales are running about $1.1 billion, while same-store sales fell to a five-year low of negative 0.8% for the year ended June 30, 1994. Cash flow, which had held steady through the early 1990s, fell 22.6% last year to $42.6 million.
According to industry observers, the company faces intense competition from four major supermarket operators with greater financial resources: Publix, Winn-Dixie, Albertson's and Food Lion. During the past five years those four chains have opened a total of 116 new stores, compared with 16 for Kash n' Karry. The chain filed its prepackaged Chapter 11 plan of reorganization with the U.S. Bankruptcy Court for the District of Delaware in November. The approved plan reduces the debt burden of $350 million by about one-third and lowers annual interest expense by more than one-third, or about $12 million.
In the course of the reorganization, Ronald J. Floto resigned as chairman and chief executive officer and was replaced on a temporary basis by Tony Petrillo, a turnaround specialist who helped the company reduce operating expenses before stepping aside in favor of Johnson. Johnson has reorganized the chain's top management team, bringing in executives from outside the company as senior vice presidents for perishables and nonperishables marketing, as well as vice presidents for meat and general merchandise. The chain's financial problems were rooted in a poor capital structure, analysts said.
Gary Giblen, managing director of Smith Barney, New York, said Kash n' Karry watched its price image disintegrate as the cash crunch of the past few years eroded its ability to make forward buys. "Kash n' Karry is a good company that had a bad capital structure resulting from its 1988 leveraged buyout, and it couldn't do much of anything," Giblen said.
"It got stuck in the middle, without a clear position, but its saving grace was its great store locations." He said Kash n' Karry has retained a good customer franchise despite its financial ups and downs, "and now that it's gotten rid of most of its debt, it has more breathing room to operate. And the part of Florida in which it operates is such a high-growth area that Kash n' Karry should benefit." Bob Lupo, a high-yield securities analyst with PaineWebber, New York, told SN he expects Kash n' Karry's turnaround efforts to succeed. "Management is certainly committed to strengthening the operation, and Ron Johnson gets high marks from the trade as an excellent merchandiser. With the merchandising strategy the chain plans and its remodeling capabilities, combined with a stable market, it should be successful," Lupo said.
Kash n' Karry controls a market share of 21.3% -- behind Publix's 31.5% and Winn-Dixie's 29.1% but ahead of Food Lion's 11.2% and Albertson's 6.9%. The company's postrestructuring strategy -- which includes improving procurement techniques, upgrading perishables, adding more customer service and reducing inventory levels -- is expected to generate at least $12 million more of cash flow annually to improve Kash n' Karry's profit levels, observers said. Johnson told SN he believes Kash n' Karry can raise its overall gross margin of 20.5% by about 4% in the short term -- picking up 2% from remodeling stores and upgrading its perishables operation, and adding a minimum of 2% more from increased forward buys and direct-store-delivery buy-ins.
Central to the company's long-term objectives is the 16-store remodeling effort, which will cost about $300,000 to $500,000 per unit. Johnson also said he expects Kash n' Karry to do at least 20 mini-remodels at a cost of $20,000 to $25,000 per store that will include interior and exterior painting, new signs, new decor packages and updated planograms. Kash n' Karry has already completed a series of mini-remodels at seven of its nine stores in Fort Myers, "which had a very positive impact, with sales moving from negative comparisons to plus 10%," Johnson said. According to Lupo, Kash n' Karry was "being swamped" in Fort Myers by Publix. "And while it will require a major commitment by Kash n' Karry to really repair that part of its operation, the fresh-paint remodels there showed quite dramatic immediate sales increases of 20% to 25%." Johnson said the majority of the chain's stores are in "fairly good shape." Although they have not been remodeled for years, neither have the competition's stores, he pointed out. He said he expects Kash n' Karry to continue to focus on remodels over the next several years, with one to three new stores per year. "And given the sales base we have today, if we can grow sales and improve our expense controls to generate cash, then we will be able to get more aggressive on expansion." Kash n' Karry will begin the remodeling program before the new prototype is ready. It plans to complete four remodels before the summer, plus two new stores slated to open at the end of the summer in Englewood and Columbus Park, in the Tampa area, Johnson said. All will be transitional units that will simply encompass remerchandising changes within the existing store design to improve adjacencies and tie-in opportunities, he pointed out. The company had to begin moving on those stores quickly "because Winn-Dixie and Publix are building new stores across from ours, and we didn't want to surrender any of our potential by waiting too long." Most of the remodels scheduled to open in mid- to late summer and through the balance of Kash n' Karry's fiscal year that ends in June 1996 will represent the new prototype direction for the chain.
The store's new prototype is expected to be similar to the successful format Johnson helped develop at Farm Fresh that contributed to a gross margin improvement of 2.5%, Johnson said. "At Farm Fresh the first store we remodeled was gutted and reopened in seven weeks, with gross margins rising 2% and sales up $100,000 a week, and it paid for itself in six months," he recalled. "That's the potential impact of a remodel at the right location, and it's certainly central for us to have sound financial paybacks on our efforts." The chain will not make conclusive decisions about a prototype until after May 1, when it sees the results of a research study being conducted by Dakota Worldwide, Minneapolis.
Nevertheless, some aspects of the prototype's direction are known. It will feature more perishables and more in-and-out seasonal merchandise on the nonfood side, Johnson said. "We want to move toward a food court, with a power alley featuring a salad bar, soup bar and a variety of prepared foods, plus enhanced and upgraded varieties in bakery-deli, service meat and service seafood." On the nonfood side, Johnson said, he wants to see a stronger emphasis on seasonal merchandise and in-and-out continuities. "Right now we have enough footage for in-line merchandising of general merchandise and health and beauty care. But we're not capable of carrying large GM assortments. "So we plan to eliminate some in-line merchandise and do more floor displays of seasonal items because of their high impulse appeal." The new Kash n' Karry format will also include more staple items on grocery endcaps, Johnson said -- a mix that could add 0.5% to gross margins. "The 30 endcaps in each store are not merchandised for impulse or profitability right now. They've been positioned for whatever vendors have been promoting rather than items that will create excitement for consumers. So we're looking for more impact items and basic staples with mass appeal, the kinds of items consumers use every day and every week rather than once a month." Since remerchandising endcaps doesn't require any refixturing, Johnson said he expects all endcaps to reflect the company's new approach by mid-May. Besides reformatting perishables and nonfood and remerchandising endcaps, Johnson is hoping to develop a unique niche for the chain to strengthen its consumer franchise. "What we have to do is figure out what we can offer consumers that the competition can't take away from us. We have to find what we are best at and then stake a claim to our value,"Johnson said. One area of value, he said, is Kash n' Karry's exclusive on Certified Angus beef. "We've carried it chainwide for about a year, but we've never talked about it and we've never marketed it," Johnson said. "However, if we can market it properly, then it doesn't matter what Publix or Winn-Dixie or anyone else does at that price point because consumers will have to come to Kash n' Karry to get Angus beef." Johnson said he isn't sure what other "strategic values" the chain may be able to develop to differentiate itself from the competition. "We need 100 things like Angus beef to create strategic value for our customers that the competition doesn't offer. Right now all we have is Angus beef, so we have to create the rest and build on that." While all the chain's efforts are meant to stay competitive, the chain isn't targeting any competitors in particular. "We will find ourselves a position where we fit in. We can't possibly take away the quality image Publix has or Winn-Dixie's everyday-low-price identity, but we can establish our own image and position ourselves somewhere in between." Another major effort is the attempt to reduce costs, and Johnson said he sees a wide variety of opportunities. "Look at labor scheduling. Right now we basically give the stores the number of hours we need to schedule help, but we don't help them schedule or provide work methods that need to be emphasized or tell them what standard of service should be included. "We've backloaded the process by using wage percentage as the driving force. So it creates a huge opportunity for us to improve customer service by scheduling help properly, providing better training and improving productivity to make the best presentation. "In advertising we've spent too much time and effort over the years emphasizing feel-good stuff like nature-friendly and community service, both of which are good support items but they should not be the main emphasis. The primary focus has to be the basics -- customer service, product quality and freshness and proper pricing." As a means of cutting its energy costs, the chain recently relamped all its stores at a cost of $1.5 million, "but the payback in reduced costs will be one year," Johnson said. He told SN he sees additional cost-saving opportunities in reducing product shrink, controlling bad checks and improving store maintenance.