HOMELAND'S SIBLINGS

OKLAHOMA CITY -- And then there was one -- Homeland Stores.

of Safeway that were sold to division executives and financial investors in 1987 and 1988 following the 1986 leveraged buyout of Safeway by Kohlberg Kravis Roberts & Co., New York.

The other three -- AppleTree Markets in Houston, Food Barn in Kansas City and Harvest Foods in Little Rock, Ark. -- have all been liquidated and sold by their former owners.

Each spinoff accounted for annual sales of $300 million to $500 million but operated with older stores, a union workforce, its own distribution center and a corporate overhead structure that proved to be no longer viable.

According to one industry observer, "Companies of that sort, without a distinctive niche and a larger store base for buying more efficiently or spreading out the overhead, were more vulnerable to competition and more prone to failure."

Industry observers told SN at the time the four divisions were on Safeway's "C" list, operations it wanted to divest the most. "Safeway was desperate to raise cash, but these were not distress sales," one said.

"Safeway got good prices, high enough to satisfy KKR and reasonable enough that it had no trouble finding eager purchasers."

However, the spinoffs ran into problems, many of which resulted from Safeway's corporate culture, observers said. "The type of people running a corporate division tend to be good executors rather than more creative types. They are not necessarily the right people to run a lean, mean, regional operation because they may have been too tied to Safeway's methods of operating.

"The former Safeway people had never been given the freedom to design their own systems because that had all been directed by the corporate office. So the first thing Food Barn, AppleTree and Homeland did was buy huge IBM mainframes that were very expensive to maintain.

"And when it came to designing stores, they didn't know what features to include because that had all been determined for them in the past by Safeway."

Among other negative factors the spinoffs had in common, observers said, were outdated physical plants due to a lack of financial investment by Safeway, plus high union wage rates.

While Harvest's investors advanced funds for a 12-store acquisition and Homeland's investors supplied money for store upgrades, the owners of AppleTree and Food Barn opted to pay down debt before making heavy capital commitments to their operations.

The unions at three of the spinoffs made some concessions to the new ownerships, but Food Barn underwent a 12-week clerks' strike in 1991 that left it devastated and prompted its original owners to step down.

Looking at the four operations on a chain-by-chain basis:

AppleTree Markets, sold by Safeway in June 1988 for $175.6 million to members of management and Duncan Cook & Co., a Houston-based investment group.

The company debuted under the AppleTree name in the fall of 1988 with 94 stores -- and limited in-store service, a high union pay scale and a high-price image carried over from the prior ownership. The company was also operating a distribution center, a milk plant and a bread plant that created a drag on profits.

The chain filed for Chapter 11 bankruptcy protection early in 1992, with plans to downsize to 50 stores by eliminating operations in smaller communities and emphasizing neighborhood convenience. However, it ultimately opted to sell off all its stores to a variety of competitors and was gone by the end of 1992.

Food Barn, sold by Safeway in January 1988 for $143 million to members of management and Morgan Lewis Githens & Ahn, New York.

Starting with 66 stores in Kansas and Missouri, Food Barn operated with a warehouse format, which had been in vogue when original owner Safeway converted the stores to that format a few years earlier but that had fallen out of favor as the Kansas City market went upscale.

An influx of new competition into the market and aggressive growth by established operators also hurt Food Barn.

The chain was also frustrated by its union status in a non-union region and never quite recovered from a 12-week retail clerk strike in 1991. When the union declined to accept wage and benefit concessions in 1993, Food Barn filed for Chapter 11 bankruptcy protection.

In February 1994 Food Barn sold its remaining 38 stores to Associated Wholesale Grocers, Kansas City, Kan., which subsequently spun them off to a host of independents -- who converted them to non-union operations.

Harvest Foods, sold by Safeway in April 1988 for $65 million to members of the division's management and Acadia Partners, New York.

The new owners retained the Safeway name on the 51 stores for a year and a half, then introduced the Harvest banner in late 1989. At about the same time it acquired 12 local stores, which made sense competitively, if not financially -- opting to assimilate the acquired stores at the same time it was trying to deal with its buyout debt.

Within a year Harvest had stopped paying interest on the debt, preferring instead to use cash flow to pay its bills.

The chain also uncovered allegedly questionable financial dealings by its top executive, who was succeeded in September 1991 by Harry Janson, who introduced a more aggressive marketing stance for Harvest in the hope of generating sufficient cash flow to reduce the debt.

Harvest went through a prearranged Chapter 11 restructuring in 1994 and emerged with a $20 million capital infusion earmarked for store expansion.

However, after acquiring a local wholesale company in January 1995 and attempting to integrate its own warehouse with the wholesaler's, Harvest ran into systems problems that resulted in a liquidity crunch and subsequent inventory problems at store level, and once it began losing customers, it found it difficult getting them back.

Harvest shut down its wholesale operations in mid-1995, when it filed its second Chapter 11 petition, which resulted in the sale of the chain.

Homeland Stores, sold by Safeway in June 1987 for $165 million to management and Clayton & Dubilier, New York-based investors.

Unlike the other three LBOs, Homeland's new owners invested capital in the company at the outset -- $50 million in the first two years -- which enabled the chain to upgrade half of its 105 stores and strengthen its sales position despite the recession.

However, high fixed costs prompted Homeland to sell its distribution center and 29 stores to Associated Wholesale Grocers in 1995 and prompted a prearranged Chapter 11 reorganization a year later -- a development from which the company is now recovering.