HANNAFORD'S SOUTHERN PUSH

MARK TOSH

SCARBOROUGH, Maine -- Hannaford Bros. here has weathered both a storm of new competitors in its market and a soft New England economy over the past several years.

Now the chain wants to test its mettle in a new market: the rapidly growing Interstate-85 corridor between Charlotte, N.C., and Richmond, Va., the market it entered on the wings of July's acquisition of Wilson's Supermarkets, Wilmington, N.C.

But growing in the Southeast won't be all that easy.

That's because a number of expansion-minded supermarket chains -- as well as growth-oriented local operators -- already have the Carolinas and Virginia on their minds.

Competitors such as Harris Teeter, a 139-store chain based in Charlotte, N.C., and Ukrop's Super Markets, the market-share leader in its hometown of Richmond, Va., are not likely to surrender turf to a newcomer without a fight. Other industry heavyweights, namely Publix Super Markets of Lakeland, Fla., also are reported to be eyeing the booming area between Charlotte and Raleigh-Durham, N.C.

Now, for Hannaford, the challenge is to successfully transfer its New England know-how to this new Southeast market.

Hugh Farrington, president and chief executive officer of Hannaford, said at the time of the Wilson's acquisition that the retailer represents "a great opportunity." The $120 million purchase gives Hannaford a solid base upon which it can build its business. By year-end Wilson's will operate 23 stores, most of which are located near its Wilmington headquarters, but two also are in South Carolina. As part of Hannaford's overall 1995 $125 million expansion plan, Wilson's is expected to open six new stores, the same number of units Hannaford plans to add in its core Northeast market area. "We are learning from Wilson's and looking for opportunities to add value to the Wilson's organization," Farrington told employees in a recent company newsletter.

Farrington said the acquisition is "prudent" and should, over the long term, increase shareholder value. He declined to be interviewed for this article.

As expected, Hannaford has moved quickly to expand the Wilson's operation.

Wilson's, which should exceed sales volume of $200 million this year, already has secured new-store locations in Richmond and Charlotte. New stores could open on the sites as early as late 1995, Hannaford executives have said. Two other Wilson's units are expected to open in the Raleigh, N.C., suburbs early next year.

In New England, Hannaford has demonstrated its operational skills in skirmishes with traditional food retailers, including Shaw's Supermarkets, East Bridgewater, Mass., and has matched prices with new competitors such as membership-warehouse clubs and Wal-Mart discount stores.

New competitors, primarily Wal-Mart Stores, Bentonville, Ark., have added an estimated 5 million square feet of new-store space in Hannaford's New England operating area in 1992 and 1993. By comparison, Hannaford operated about 4 million square feet of space in New England at the end of 1993.

But despite New England's soft economy and the influx of new competitors, Hannaford's track record has been among the best in the industry over the past few years, according to securities analysts who follow the company. The chain reported sales of about $2.1 billion in 1993.

Hannaford's strategic plan looks simple: reduce operating expenses and pass on the savings to the consumer in the form of lower price points. The result has been 14 consecutive years, (and likely 15 years including 1994) of increased net earnings for the chain, which operates 95 stores in upstate New York and New England.

Among its operational achievements, Hannaford has:

· Lowered selling, general and administrative expenses every year since 1991. SGA expenses totaled about 19% of sales through 39 weeks of fiscal 1994, compared with 20% in 1991.

· Increased retail square footage in its core New England market by 11.6%, 7.7% and an estimated 10%, in spite of the tough economic conditions in 1992 through 1994 period.

· Raised its net margin to 2.8% of sales in 1993, far above the industry average of about 1% of sales.

In fact, Ed Comeau, a securities analyst at Lehman Bros., New York, said he believes Hannaford's execution as a company -- from category management to labor scheduling and shelf management -- is among the best in the industry.

"Hannaford is a very well-managed company," he said. "It has ratcheted down expenses every quarter for the last year and a half or two years; and it is well up the curve in terms of utilizing technology and wringing efficiencies out of the operation."

But like every good operator, Hannaford needs room to grow -- and it is now close to saturating its New England market, according to observers. The chain had been studying expansion opportunities for at least two years.

Wilson's, with a loyal customer base and a profitable operation, proved to be an attractive candidate. To help assure the success of the acquisition, Hannaford has retained Larry and Michael Wilson, sons of the founder, to help manage the operation.

The existing Wilson's stores average about 35,000 square feet and, in terms of merchandising philosophy, fall somewhere between price-oriented Food Lion, Salisbury, N.C., and the upper-end Harris Teeter chain.

New Wilson's stores are likely to be in the 46,000-to 52,000-square-foot range, with more space for upscale, specialty departments modeled on Hannaford's Shop 'n Save format, observers said.

If that's the case, Hannaford must carve for itself a place among the competition in the high end of the market in both Richmond and Charlotte. Some local Southeast observers, noting that Giant Food of Landover, Md., tried unsuccessfully to enter the Richmond market years ago, wonder how Wilson's expects to fit in.

"I don't know Hannaford stores other than by reputation, but from what I understand [of the stores] I find it hard to understand how they will differentiate themselves from what we already have here in Richmond and what already is in place in Charlotte," H.B. Thomson 3rd, a securities analyst at Wheat First Butcher Singer, Richmond, said.

The competition in Richmond includes Ukrop's and the Grocery Store format operated by Farm Fresh, Norfork, Va., at the upscale end of the spectrum and Food Lion at the price-impact end. Super Fresh stores and Farmer Jack (a banner that is new to the East Coast) operated by A&P, Montvale, N.J., also are among the competitive lineup.

"I don't quite see where Hannaford clearly fits in a different sort of niche with that lineup of competitors here in Richmond," Thomson said. "And to some extent I think the same thing can be said for the Charlotte area where Harris Teeter plays the role of the Ukrop's here."

The key to Hannaford achieving success in the Southeast, according to other observers, is to improve the profitability of the existing Wilson's operation by transporting Hannaford's operational expertise, especially the use of technology, to the Carolinas.

Although some financial analysts on Wall Street have lowered the rating on Hannaford's stock from "buy" to "hold" after it disclosed plans to enter Charlotte and Richmond, Comeau of Lehman Bros. said he believes Hannaford can benefit from the Wilson's expansion.

"Hannaford brings two very good things to the table," he said, citing Hannaford's operational skills and its clout as a $2 billion retailer. The analytical tools that go into making a supermarket more efficient and profitable are transportable across retailing sectors and across regions of the country, Comeau said.

"The ability to analyze shelf space and the ability to manage categories effectively and profitably is transferable anywhere you go," he said. "Hannaford does it superbly; Wilson's doesn't do it at all."

Comeau raised his rating on Hannaford stock to a buy in January and has maintained that recommendation throughout 1994.

Debra Levin, a securities analyst at Morgan Stanley, said she believes Hannaford will be able to improve Wilson's profitability by implementing its "superior systems" for accounting, shelf management and debit/credit card capability. She also rates Hannaford stock as a "buy."

Additionally, Levin said she expects Hannaford to improve Wilson's private-label program and to take advantage of new backhaul opportunities from the Southeast, where indigenous products such as chicken are less expensive.

"The Wilson's acquisition appears to be progressing smoothly and Hannaford expects to reap the benefits of improved operations once its own systems are fully implemented," Levin said. "Hannaford is also looking to implement centralized buying of certain merchandise categories, such as greeting cards."

Another factor that bodes well for Hannaford, according to Comeau, is the dearth of superstores in the Carolina market. "There hasn't been a proliferation of large superstores in the marketplace," he said. "If you were to go to Dallas or Phoenix, there is nothing but superstores everywhere you go. You don't have anything like that in North Carolina."

Instead, North Carolina is characterized by a plethora of small stores generating sales of between $100,000 and $150,000 per week, Comeau said. "Even if you take Food Lion away from the equation, there are tons of little conventional stores."

An increase in higher-income jobs and the growth of suburban communities in the region is expected to create greater demand for one-stop shopping. The superstore, which gives additional space to specialty departments and nonfood merchandise, is considered a "good fit" in this

demographic environment.

However, some doubts have arisen on Wall Street about Hannaford's ability to maintain its historical levels of success with the Wilson's chain.

Mark Husson, a securities analyst at J.P. Morgan, New York, said he has some concerns about the planned Wilson's expansion next year. "I am sure in the long term, it's going to go well, but there's huge amount of personnel that need shifting down from Portland [Maine] to manage the stores and to manage the process of opening the stores," he said. "The Wilson's business, as it stands, isn't big enough to work through all the logistics, systems and marketing issues that will come with such a huge store-opening program."

Husson recently reduced his rating on Hannaford stock from "buy" to "hold." He said Wilson's aggressive store-opening program will require "a tremendous effort."

Additionally, Husson said he believes the markets where Wilson's either operates stores or plans to expand already have formidable defenders. "Winn-Dixie is being aggressive and Kroger is pushing into some of these markets," he said. "Strong local operators, like Ukrop's in Richmond and Publix, are" expanding in the Southeast, too. Publix has stores in South Carolina and could expand north into North Carolina, "if not this year or next year, then the year after," Husson said.

Another strong competitor, Harris Teeter, opened a 60,000-square-foot supermarket in Charlotte that is among the "best food-retail stores in the entire United States," Husson said. Hannaford expects to open a Wilson's store less than 2 miles away, he added.