Companies in Transition More Vulnerable in Downturn

Major business transformations are never easy, but they can be made even more complicated by the uncertainties of the economy.

What seem like solid, well-grounded plans put in place during boom times can suddenly become pie-in-the-sky dreams when the resources to carry them out begin to dry up.

In the “Executives to Watch” feature beginning on Page 14, SN profiles five industry leaders who face significant challenges in 2008. The companies they work for are all reshaping their strategies to some degree, either through mer-gers, new formats or turnaround efforts.

The five executives — Richard Dreiling of Dollar General, Steve Junqueiro of Save Mart, Rebecca Philbert of A&P, Laura Sen of BJ's Wholesale and Jack Sinclair of Wal-Mart — are overseeing these types of corporate changes just as the economy appears to be teetering on the brink of a recession, or perhaps is already in the midst of one. In addition, rising costs for food and fuel have put more pressure on consumers, and no one seems to be sure how long the economic malaise will last or whether it will spread.

Last week, another company that is undergoing a transformation, Winn-Dixie Stores, saw its stock downgraded because of fears that the slowdown will impact the chain's core customers.

In a report, analyst Karen Short of Friedman, Billings, Ramsey & Co., lowered her rating on the Jacksonville, Fla.-based chain, saying the stock was fairly valued at current levels, rather than being undervalued. She based her downgrade in part on a recent survey conducted by BIGresearch that indicated Winn-Dixie's shoppers were especially likely to reduce spending on groceries as a result of the economy.

“The Winn-Dixie customer has an average annual income of $53,477, and given the overlap with Wal-Mart, we think may be more likely to trade down within the store, or trade away to lower-cost alternatives such as Wal-Mart,” Short wrote.

Consumers in Florida, where the bulk of Winn-Dixie's stores operate, have been especially hard-hit by the slump in the housing market, a factor Delhaize Group has also cited in reference to its Sweetbay chain here. According to the BIGresearch study, 34% of Winn-Dixie's customers — more than those of any other chain in the survey — anticipate spending less on groceries to cope with the problems in the housing market.

Short added that she does not feel that Winn-Dixie's turnaround is in jeopardy, but said investors are likely to react negatively to a slowdown in sales gains, putting more pressure on the stock price.

Likewise, there is no indication that the economy has compromised the strategies of any of the five executives profiled in this week's feature, but it should force them to reassess those plans. If the plans were drawn up based on heady sales projections during an economic upswing, perhaps the firms should take a step back and think about how their strategies can best weather periods of weaker consumer spending.

Food retailing should be largely recession-proof, but companies whose strategies are in flux may be especially vulnerable, chiefly because those competitors whose positioning is more firmly grounded have one less thing to worry about.