Sweet Success

JON SPRINGER

Late last month in Crystal River, Fla., workers pried off and hauled away the final “K” from a Kash n' Karry store, spelling the end of a brand name that had been in Florida for some 45 years. In its place went the purple, teal and green of the Sweetbay banner, signaling the completion of a three-year transformation from stale to fresh.

Now the hard part begins.

While officials of parent company Delhaize are no doubt relieved to be free of ongoing store renovations — the chain did nearly 100 in less than three years, at considerable expense — their focus now shifts toward managing and growing the nascent united chain. That's a challenge that will put Sweetbay at several seeming cross-purposes, according to sources:

“Brand-building doesn't happen overnight, and demands hard work and regular adjustments to market realities,” Pierre-Olivier Beckers, Delhaize's president and chief executive officer, said of Sweetbay in a recent conference call. “We recognize certainly that there is yet much to do and accomplish in order to reach profitability.”

Named for a magnolia tree native to Florida, Sweetbay was introduced in 2004 to replace Kash n' Karry in southwest Florida. That chain, with roots dating to 1914 and known as Kash n' Karry since 1962, had been through multiple ownership regimes and a mid-1990s bankruptcy when it was acquired by Food Lion and its owner, Belgium-based Delhaize Group. Delhaize subsequently purchased the Hannaford Bros. chain in Maine, then repopulated Kash n' Karry's management with executive talent pulled from a deep bench at Hannaford. Among the southbound executives was Shelley Broader, who as president and chief operating officer of Kash n' Karry re-imagined it as a chain not about price or service, but “about ‘delicious,’” she told SN in a 2004 interview (Broader and other Sweetbay executives were not available for comment for this article).

The first Sweetbay store opened in a converted Kash n' Karry in Seminole, Fla., in November 2004. The store wowed observers with vivid displays and varieties of fresh produce and a brand that spoke to a passion for food. Gone were around 34 Kash n' Karry stores outside of the banner's Gulf Coast stronghold. Gone also was that chain's nondescript brand personality and its emphasis on price, a position rendered nearly irrelevant by the Florida expansion of Wal-Mart.

Initial results were so strong that Delhaize stepped up the conversion pace, completing 92 remodels in less than three years.

“If you look at where Kash n' Karry was, in order for that chain to survive, they had to do something dramatic,” Neil Stern, senior partner of McMillan Doolittle, Chicago, told SN. “I think they picked the best direction to turn. They picked a very compelling format, and where they've had the right location, they've done very well.”

Maintaining Momentum

While renovation and remerchandising have long been a part of the formula for food retailing success, rarely has the industry seen as dramatic a change as the transformation from Kash n' Karry to Sweetbay.

Its positioning was not chosen cavalierly. Officials studied consumer attitudes in Florida in developing a concept that emphasized fresh foods while providing information and advice to shoppers. In many ways, Sweetbay resembles a Florida-based Hannaford, which eschews a loyalty card in favor of everyday low prices and runs programs like “Guiding Stars,” which helps consumers make informed choices on healthy products. Guiding Stars has been extended to Sweetbay. Snowbirds and retirees from New England settling in Florida will also recognize Sweetbay's private label: Hannaford Bros.

Herb Sorensen, scientific director of the Shopper Insights program for TSN Sorensen, Portland, Ore., noted that his firm was engaged to study shopper behavior at stores as Sweetbay crafted a focus on merchandising for particular neighborhoods. “They're right on the cutting edge as far as putting a heavy focus on food and matching that with service appropriate to the neighborhoods they serve,” Sorensen told SN.

But there are signs that the change may have been too effective. While transformed stores have provided double-digit sales increases in their first year, sales have tended to plateau at the new level in their second and third years. The culprit? In part, a public perception that higher prices must accompany the revamped stores.

Officials have reported price-perception concerns with the new banner for around a year.

“Our pricing is very, very similar to Publix pricing in the marketplace. However, our price image is very weak, and it's something that we have to work on in the future,” Ron Hodge, the CEO of Hannaford, said in a conference call late last year. “We do know that our brand awareness is very strong. The acceptance of our positioning is high among all consumers in the marketplace. Our consumer images are very strong in product quality, variety, services and customer service itself. The weak point we have is clearly in price image.”

Most recently, officials launched what they called a major price initiative to improve price perception. The program includes everyday low prices promoted via a “locked-in low prices” symbol. This joins an earlier effort known as “savings on the spot” that targeted specific items and categories.

Officials point to poor price perception in the marketplace as a reason why sales have tended to stall at Sweetbay following explosive first-year growth. Hodge late last year acknowledged second-year performance was “a disappointment for us.”

Mark Husson, an analyst with HSBC Securities, New York, said the issue with pricing at Sweetbay is that it “looks expensive.”

“The stores are great,” he said. “The reason sales are not growing in the second year is that some people believe the stores are too expensive. They have to convince people they can offer good value, and drive sales while keeping the new upscale customers they've attracted, and re-attracting the old Kash n' Karry shoppers who may have been put off by the pricing.”

Stern noted that price perception at Sweetbay may actually be a case of consumers mistaking larger shopping baskets for higher prices.

“If you have a better store, with nicer products to sell, customers can walk out the door, look at their receipts and be shocked,” he said. “They notice they spent $90 when they might previously have spent $50. But the reason they spent $90 is because they bought a cake at the bakery they might not have, had the new store not offered better pastries. Maybe they bought prepared dinners they didn't buy before, because that department improved.”

A conversion to a single brand may also limit sustained appeal, Stern suggested, contrasting the Sweetbay conversion to that of sister chain Food Lion, which, in addition to adjusting offerings based on a variety of local demographic factors, has upscale (Bloom) and downmarket (Bottom Dollar) brands it is introducing in new markets. (Sweetbay officials said recently that the chain has begun to incorporate learnings from Food Lion with respect to neighborhood positioning).

He also noted that locations probably vary in appeal, with some better positioned for the Sweetbay banner than others. “They didn't get the opportunity to build these stores from scratch and put them exactly in the neighborhoods they wanted to put them in,” he said. “I think they ended up with some locations that are very good for the format but others that weren't as strong.”

Although Sweetbay has yet to grow sales as rapidly as it might like, observers agree the conversion has a proven market for the concept in Florida, where Publix tends to dominate market share and for many years went unchallenged in the supermarket service niche. Jacksonville-based competitor Winn-Dixie also appears to see room for better service in the conventional niche, using service and new merchandising to appeal to would-be Publix shoppers.

“I don't have a sense yet of how well Sweetbay can do, but I would say there is an opportunity for it,” one analyst, who asked not to be identified, told SN. “It seems that Publix in some cases has underinvested in its store base. The Sweetbays I have seen are newer and brighter than Publix. The feeling you get is that they're attacking that customer.”

“There are a mix of stores for Publix,” added Husson. “Some are very good and have good services, and others are tired and just showing up.”

Trouble in Paradise?

While the subprime mortgage crisis has at times wobbled global financial markets, observers say its local impact can be felt in places like Florida, where an extended residential building frenzy — a boom that's been a best friend to retailers in the Sunshine State for years — has slowed considerably over the last six months. Issues specific to Florida include condo markets in cities like Orlando and Miami ground to a halt by an overabundance of “flippers,” and slowdowns in the influx of new residents affected in part by an inability of would-be migrators to sell homes in the states where they currently reside.

According to David Marks, president of Orlando-based real estate firm Marketplace Advisors, land values are dropping and some homebuilders are turning their housing inventories back on the market. These factors can slow the growth of a retailer like Sweetbay, which for the first time will have to look beyond its own real estate portfolio for new stores.

“New concepts need growth, they need new sites with new populations,” Marks told SN. “With the slowdown in residential, the timing isn't good to come out and expand. It's going to be hard [for Sweetbay] to find sites that aren't already picked over by other groups.”

Marks said Publix owes its success in part to anticipating growth in Florida and “massaging” markets to reposition itself to benefit from growth over time. Publix, based in Lakeland, Fla., is by far the grocery store developers look to first in the market. “If you're a new grocer, how are you going to get that kind of foothold?” Marks asked.

John Crossman, president of Orlando-based developer Crossman & Co., is considerably more optimistic, saying that while housing has slowed, tourism is maintaining its strength, ensuring a strong economy. Crossman recently leased to Sweetbay a 50,000-square-foot space in The Villages, a massive new community under way north of Orlando. The development has four Publix locations already.

“Publix is awesome, No. 1 in Florida, and it's them, then Wal-Mart, way, way ahead of whoever's next,” Crossman said. “That said, you can't have a Publix on every corner. They're their own worst enemy that way. And so in situations where you've got a dense market and Publix on one side and room for a competitor, there are opportunities to come in.”

Observers also see a faster route to potential growth should Albertsons LLC pull off in Florida what it did in other markets like Northern California and sell. Sweetbay, analysts say, would provide a good fit for at least some of Albertsons' 93 Florida locations, which, according to Marks, typically reside in “Main and Main” locations with regional drawing power.

“If they had the opportunity to [buy Albertsons], I'd recommend they get it done,” said Crossman.

Though Albertsons LLC, Boise, Idaho, has made no announcement that the stores might be for sale, Husson estimates that Sweetbay — along with a resurgent Winn-Dixie — would be interested buyers.