THE FAMILY WAY 2004-11-29 (2)

GREG GATTUSO

Family-operated supermarkets can be a viable force -- if they can make it to the next generation.

The road to growth is fraught with uncertainties and challenges. But if family concerns are armed with the right combination, including a vision, financial stability and a strong management team, they can take advantage of market opportunities.

"Historically, we are facing tough odds as far as death goes," said Stew Leonard Jr., who is president and chief executive officer of the 35-year-old Stew Leonard's, Norwalk, Conn. "Family businesses do not perpetuate themselves well over generations." With three stores generating revenue of about $300 million a year, Leonard believes he can beat those odds.

More than 70% of family-owned businesses do not survive through the second generation, and 87% do not make it through the third, according to an estimate from National Grocers Association, Arlington, Va.

The recent sales of Minyard Food Stores, Coppell, Texas, and Victory Supermarkets, Leominster, Mass., illustrate how difficult it is these days to keep family-run businesses going and growing.

In Minyard's case, it was fierce competition from Wal-Mart Stores and other big food chains. Plus, there were the personal reasons that led Liz Minyard and her sister Gretchen -- both took over the chain in 1988 when their father died -- to sell.

At the time of the announced sale, Liz Minyard, who is also chairwoman of Food Marketing Institute, Washington, told SN, "There's always a sort of bittersweet feeling in this sort of transaction. The family has owned this business for 72 years."

Arthur P. DiGeronimo, president and CEO of the 81-year-old Victory Supermarkets, said the timing was right to sell the 20-unit chain to Delhaize America, Salisbury, N.C. The decision also was spurred by the slow-to-rebound economy.

"Ultimately, you have to respect family companies making family decisions that are best for the family," said Tom Zaucha, NGA's president and CEO. Yet the success of the business after the family has decided to sell depends on sustaining the business's culture, he said.

"Whether or not the procuring entity is able to sustain and build upon that culture, to me is an open question [referring to Minyard's], and to me that's what will determine whether it is ultimately a good decision or a bad decision," Zaucha said.

In an effort to assimilate the new company and generate greater efficiencies of scale, the acquirer risks losing the special regional touches that attracted customers in the first place.

"Often, they're unable to sustain what made it great," said Richard S. Bragaw, a longtime food industry observer based in Palatine, Ill.

Kings Super Markets, the upscale 27-store chain based in Parsippany, N.J., was acquired by U.K. clothier Marks & Spencer in 1988. After several years of underwhelming performance, Kings was put on the block, but Marks & Spencer failed to sell the chain when financing fell through on separate occasions for two nearby suitors: New York City-based Gristedes Foods and D'Agostino Supermarkets, Larchmont, N.Y.

Meanwhile, Safeway, Pleasanton, Calif., has struggled to retain customers after it acquired regional favorites Genuardi's Family Markets, Norristown, Pa., in 2001 and Dominick's Finer Foods, Oak Brook, Ill., in 1998.

"Is Genuardi's a better company after it was acquired by Safeway?" Zaucha asked. "Dominick's, in Chicago, is not the same company that it once was. Randall's in Texas is not the company that it once was. In Washington, you could say the Giant that was run by Izzy Cohen and Joe Danzanski is not the same as the Giant run by Ahold."

Avoiding Death

In addition to heated competition from such deep-pocketed public entities as Safeway, Kroger and Wal-Mart, today's independent operators must contend with changing tax laws and develop a strategic business plan that will keep their company on a growth track for generations to come.

Mike Needler, president and CEO of Fresh Encounter, Findlay, Ohio, who began his company with the purchase of CWC Cos. in 1995, believes a succession plan is important for survival. "We have a program to develop our top management team and it is working very well. We have put together a cohesive team that understands our company's vision," he said.

Another important issue for independents is making the transition from an entrepreneur's drive to professional management," said Bragaw.

"One of the companies that did a good job is Wegmans," Bragaw said. "It started with Robert Wegman. His son Danny is a different breed of manager, who has made a good transition from small, family-run business to a larger, professionally run operation." Indeed, Chairman Robert Wegman and his son, President Danny Wegman, have seen sales for the Rochester, N.Y.-based, 65-store chain grow 9.3% last year to an estimated $3.3 billion.

But guidance from the founding family is only part of the story.

"I don't think it has to do with the Wegman family. It has to do with the employees," said Jason D. Whitmer, food industry analyst at FTN Midwest Research, Cleveland. "They have made Wegmans a big family atmosphere, and that makes a big difference.

"[The employees] are quick to respond to competitive pressure, and they add more value," Whitmer said. "They also have localized experience. And, customers know the name on the outside of the store is the guy who started the business. It has a neighborhood feel."

Steve Smith, who became president and CEO, K-VA-T Food Stores, Abingdon, Va., four years ago and has worked in the family business for 25 years, has made the transition to professional management. Most of K-VA-T's top executives are non-family professional management. These executives have either come up through the ranks or are from outside the company. "We've got a good group of executive vice presidents and senior vice presidents who certainly aren't family members who really contribute to the professional management of our company. I think it's really crucial to have outside management in the company, even for smaller companies. It just helps in the leadership of the company," Smith said.

While the majority of K-VA-T is family controlled, it is an ESOP (employee stock ownership plan), and 16% of the company is owned by employees. "That's something we're very proud of. We think if they have ownership in it, they take better care of it," said Smith.

Zaucha noted that independents have the ability to be flexible, an important strength especially "in an era when companies are doing everything they can to control costs and make stockholders happy. These companies are investing in new creativity and new technology to better serve the customer.

"Private companies have an inherent level of flexibility in responding to consumers that public companies are incapable of," Zaucha said. "Being private means being accountable to your customer and to your owners, not to outside interests. You can respond to change more rapidly. You have a great opportunity to spin off stores and develop different formats."

"We can experiment with ideas and if they flop in three to six months, we lick our wounds and move on," Leonard said. "We don't have a short-term time frame for making decisions and that's a competitive weapon."

Bob Piccinini, chairman and CEO of the $2.5 billion Save Mart Supermarkets, Modesto, Calif., said, "We can historically do the short-term stuff that is hurtful, but long term it pays some dividends. The public companies typically can't do that unless they happen to be in a period where everything is wonderful. At the moment, when everybody is struggling with share price and earnings, it's a perfect opportunity for us." He said this is the time to "lock in locations for the future."

Zaucha noted that family-operated companies tend to have more patience than stockholders when it comes to turning a profit.

"Some operators will pull out of a market not because they aren't making money, but because they aren't making enough money," Zaucha said. "Independent operators are not tied to return on investment as much as servicing the community and being neighbors servicing neighbors."

"Fresh Encounter is going into towns [in Ohio] where larger stores left, and they're being welcomed as heroes," Zaucha added. "Similarly, in Los Angeles, Hispanic and Asian specialty stores are showing the possibility of diversity."

The challenge, said observers, is for the second-, third- or fourth-generation retailer to take over the business, long after the founder has retired or died.

That scenario is questionable for Piccinini's Save Mart. He is doubtful that his company will remain under family control. "My children are either not old enough nor do they have the desire to be in the business," he said. "My suspicion is that I am going to have to figure out a different avenue other than keeping it in the family."

On the other hand, Leonard and Needler see their ventures passed onto the next generation. "We intend to continue to grow our business. It is my hope that we will be able to continue as a family-owned, community-focused business well beyond my time," said Needler.

"We look at our business as an heirloom," said Leonard. What we are hoping to do is continue to keep it safe, shine it up and keep making it beautiful and hand it on to other generations."

NO GUARANTEES

Even when a family retains ownership of the company, there are no guarantees that the family culture will live on. Sam Walton's widow and children currently own approximately 39% of Wal-Mart stock, but their legacy has not stopped the company from becoming one of the country's top targets for lawsuits alleging everything from sexual discrimination to non-payment of overtime.

In Florida, the family of founder William Davis owns 36% of Winn-Dixie Stores, but the company struggled in fiscal 2004, posting a net loss of $50.8 million as new management was brought in to continue a strategic restructuring plan that includes exiting more than 150 underperforming and non-core stores. In October, Chairman A. Dano Davis retired from the company's board after 35 years to make room for H. Jay Skelton, president and CEO of DDI Inc., a Jacksonville, Fla.-based holding company owned by the Davis family.

"I'm not sure if the Davis family was more involved they could have avoided those problems," said Whitmer. "Change has to be for the better. Consumers will pick up on that fact."

There are no hard and fast rules about maintaining the founder's vision, according to Craig E. Aronoff, consultant and co-founder of The Family Business Consulting Group, Marietta, Ga.

"Companies have died maintaining the founder's vision," he said. "Especially if the founder was selling buggy whips. What the successive generations need to do is reinterpret the founder's vision, and adapt it to current competitive situations."

Yet even if the independent retail industry manages to stay afloat in the present, it must take action to stay on the growth track in the future, Zaucha said. The answer lies in specialized education, as well as legislation.

One of NGA's "10 Keys to Retail Success" is recruiting and retaining the next level of managers and owner-operators, Zaucha said. However, a recent NGA survey found most respondents had not written a strategic plan for carrying the business into the future.

Motivated by that research, NGA established an institute to help families deal with critical business issues. So far, about 300 families have graduated from the institute. For the third year, NGA will partner with PepsiCo and Cornell University to offer a week-long "graduate course" for new leaders and managers looking to take over the family business.

The issue is not merely running the family business, Zaucha said. "It's about a company's culture. Building a dynamic management team; embracing technology in a cost-efficient, profitable way; and integrating with manufacturer suppliers and personal leadership skills."

"I don't think you have to be a member of the family to be a successful manager," Zaucha added. "It's whether or not you can maintain the culture of the business. There are a lot of great COOs and CEOs that manage businesses that aren't part of the family."

Another major obstacle is the federal estate tax. According to NGA, many family-owned businesses are forced to sell out in order to meet their tax liability when the owner dies. Under President Bush's 2001 tax plan, the federal estate tax is currently being phased out and will be repealed for the year beginning Jan. 1, 2010. After that, however, the old estate tax law will take effect on Jan. 1, 2011, unless Congress and the president amend it or repeal it permanently. NGA and other associations, including FMI, have placed the issue at the top of their lobbying efforts for years.

"It's really tough to do enough estate planning to prevent real financial obstacles for family-owned businesses," Smith said, "and that's one of the reasons we've got to continue as an industry -- both NGA and FMI have to push for the permanent death-tax repeal, so family-owned businesses can give other family members the ability to continue on in that business."

"We are for the total repeal of the estate tax," Zaucha said. "When you talk about inequity, a penalty tax, it's the scourge of the family business. There's no rhyme or reason for it.

"If you can't plan for the future, because you have to recapitalize your business to take care of a tax liability, that's a serious issue.".

In the meantime, observers say, family-run supermarkets can cling to their intangible assets: pride, legacy and community support, while continuing to cater to niches left open by their supersized competitors. "The 'family feel' is our advantage," said Needler.

And, with consolidation slowing considerably over the past few years, small, family-owned chains are in a unique position to fight back, said Whitmer.

"Those who want to stick it out, can stay in business until the last penny drops."

PASSING IT ON

Craig E. Aronoff, consultant and co-founder of The Family Business Consulting Group, Marietta, Ga., said there are three key factors to think about in a generational transition:

The family must have a united vision for the direction of the company. "They should feel comfortable working together, and have shared goals and values."

The company must have a strategic organization and financing to compete successfully.

The company must have or develop the leadership to move forward.

According to Aronoff, succession can happen suddenly, due to an illness or accident, and the current leaders and managers must have a plan in place for such an emergency. However, he suggests a timetable of two to five years.

Generally, he said, planning can begin when the retailer is 50 or 55. At that point, the successors are usually in their late teens to late 20s, an age which allows them to get a good education, some practical business experience outside the family company, and specialized training offered by a trade group or industry association.

"It's not the age of the founder, that's the most important," Aronoff said. "It's the maturity of the next generation that's going to be involved in the process."

Inevitably, misunderstandings occur in family situations, Aronoff said. "Misunderstandings are the norm," he said. "Usually, stock or ownership is passed down without any preparation, and the potential for conflict is quite high.

"Policies must be developed, and minimum expectations should be established. You should not employ someone because he is family. You should employ someone because he can contribute to the business and add value to the business."

The candidate should also have outside experience and want to take over for the right motives. "Otherwise, you're going to have trouble as a business and as a family," he said.

"You should not give someone a job with the family company because it is his last resort," he said. "If your son is not a good employee for someone else, he is not going to be a good employee for you."

But, with leadership being a crucial component of succession, the business may call for consultants, outside management or a board of directors, Aronoff said.

"The marketplace is an increasingly competitive environment. You need to have the best people running it. You need to have objective people who are all committed to building a great business."