FRESH BRANDS CAUGHT BETWEEN WAL-MART AND ROUNDY'S

Christina Veiders

SHEBOYGAN, Wis. -- Fresh Brands here faces a very familiar dilemma -- how to compete against the supercenters operated by Wal-Mart Stores, Bentonville, Ark.

As a retailer, Fresh Brands operates 21 corporately owned stores under the Piggly Wiggly and Dick's Supermarkets banners and one convenience store. It also is a wholesaler to small-town independents and a franchisor of 79 Piggly Wiggly stores located throughout Wisconsin, northern Illinois and Iowa.

Over the last year, Fresh Brands has seen its sales impacted and profits squeezed by Wal-Mart supercenters on one side and an aggressive stance by Milwaukee-based Roundy's with its Pick 'n Save stores on the other.

The company has also experienced a flurry of executive changes with Louis Stinebaugh named president and chief operating officer last year, replacing Elwood Winn, who had been chief executive officer before leaving the company in 2003 under board pressure.

Stinebaugh said at the time of taking his Fresh Brands post, "We'll continue to put focus on the programs that enable us to withstand competition whose primary focus is price." His office did not respond to a request for comment on this story.

David Livingston, managing partner, DJL Research, Pewaukee, Wis., said Roundy's is also feeling the pressure from Wal-Mart, and since it can't compete with Wal-Mart it has decided to take market share away from a weaker competitor -- Fresh Brands.

"Roundy's has been specifically targeting some of Fresh Brands' highest-volume [Wisconsin] stores for new and replacement Pick 'n Save stores -- Kenosha, Monroe, Saukville, Oak Creek, Hales Corners, Delafield, Oconomowoc, Fond du Lac and Appleton, to name a few," said Livingston. "All of these new stores have, or will have, a significant impact on the Fresh Brands Piggly Wiggly stores."

Wal-Mart is planning on two new supercenters in Fresh Brands' hometown of Sheboygan, Livingston noted. In January, Fresh Brands announced it would close one of its corporate stores in Sheboygan next month due to poor performance.

"Several more Wal-Mart supercenters are planned, many of them in small communities where Fresh Brands has held a significant market share. Many of these have been announced just in the past few weeks, meaning the next two years will be more of the same," said Livingston.

Neil Stern, senior partner, McMillan-Doolittle, Chicago, said Fresh Brands is facing the same obstacle as many others in the industry. "They have to determine how to compete against Wal-Mart long term," he said.

Stern believes Fresh Brands can improve its operations and gain a better competitive advantage by concentrating on the basics. "Their options are to focus in on what is core to their business and run it very well. There are other options, including divesting its units. But the first option is to do what they are doing but do it now better," he said.

Livingston said Fresh Brands has become more price competitive. Late last year, the company rolled out a new marketing campaign that included what it called a new "value proposition" that lowered prices on thousands of items. The campaign followed a strategy to achieve cost reductions at stores and through Fresh Brands' distribution centers.

Last year, the company closed five corporate stores and sold one. Livingston said the company will continue to close underperforming stores where there is no chance for recovery.

He said Fresh Brands has done a good job in getting its independents up to date with new stores, remodels and expansions. "As a wholesaler, they do an excellent job with independents in the small, one-store-town markets. These make up about half of the store base, said Livingston.

He suggested Fresh Brands look into adding fuel and pharmacies to these stores. "Pharmacies have been one of the fastest-growing departments in conventional supermarkets over the past few years, and Fresh Brands has not taken advantage of that.

"There are also several more Roundy's, Supervalu and Nash Finch independents in small, one-store towns that would probably be better off being a Piggly Wiggly. Fresh Brands needs to keep going after these accounts. But all of these changes will probably be just window dressing in order to attract a white knight to buy the company," said Livingston.

Fresh Brands was scheduled to report its fourth-quarter and year-end earnings late last week. Observers were expecting more of the same sluggish performance.

"They might show a bright quarter or two in the future," said Livingston, "but overall, the trend will be much of the same."

"Given the industry trends, I think you can expect pretty tough times ahead," Stern said. "There isn't much out there that suggests anything different. Very few retailers around the country are putting up good numbers."