A COMPATIBLE COMBINATION

ELLIOT ZWIEBACH

MINNEAPOLIS -- Lunds here is consolidating its hold on upscale consumers in the Twin Cities in the wake of its acquisition last month of crosstown rival Byerly's.

After competing with Byerly's for nearly 30 years, Lunds anticipates the two retailers can find greater success operating as a single entity, Russell T. Lund 3rd, chairman, president and chief executive officer of the 19-store chain, told SN.

"Bringing the two companies together made a lot of sense, and we see some really significant upside potential to consolidating the upscale niche, especially considering that the customers at both chains are so compatible and our corporate values are so similar," Lund said.

"Looking at both companies, it's clear that both were successful in their own right. But we believe we can be more successful together. That's what both companies will be striving for at all levels."

Lunds is not rushing into anything, however, preferring to integrate the two companies gradually between now and the end of 1998. "Our objective is not to do anything that will disrupt customers," he said.

The company has no agenda for integrating store-level activities, he added. "Job 1 for the next 18 months will be bringing the two companies together, with the focus on creating backstage efficiencies," Lund said.

Accordingly, both Lunds and Byerly's will retain their separate identities as part of a holding company that will oversee the two operations, Lund said.

"Although both companies are focused on quality, service and selection, and although there is some customer crossover, we think it would be a mistake right now to change either banner because Byerly's customers love Byerly's for what Byerly's is, and Lunds' customers love Lunds for what Lunds is," he explained.

"Certainly we could change one name or the other and leave everything else as it is, but to customers, changing the name would change something very significant about the stores.

"So we will concentrate on changing things behind the scenes -- things that are invisible to customers -- to make both operations more successful."

According to Lund, the changes that will evolve over the next 12 to 18 months include the following:

Leveraging both companies to create better products and services.

Seeking ways to utilize more efficiently the separate bakery and central kitchen facilities operated by each chain.

Looking at best practices of both companies "to create exceptional practices."

Combining accounting, store development/real estate and human resources.

Lunds, founded in 1939 by Russell Lund's grandfather, was an established fixture in the Twin Cities when Byerly's opened its first store with a similar upscale format in 1968. Lund said he fondly recalls a letter his grandfather received from Russ Byerly and his son Don when they started their company 29 years ago, informing him they would try to copy Lunds' long-standing commitment to quality.

"That's why it's a real pleasure today to have Don Byerly serving on our advisory council and helping us through this transition period," Lund told SN.

Over the years, Lunds grew into a chain of eight stores with a volume estimated at about $100 million, while Byerly's grew to 11 stores in Minnesota and two in Chicago with annual sales approaching $350 million.

When Don Byerly sold the chain to an investment group based here -- Goldner Hawn Johnson & Morrison -- in 1990, "we knew the investors had the objective of reselling the company within a five- to seven-year horizon, and that the move away from Byerly family ownership represented a potential opportunity for us," Lund said.

When it came time to negotiate a deal, Lund said he told Goldner Hawn Johnson & Morrison his company did not want to operate stores in Chicago and insisted that to close the deal, Byerly's would have to sell those two units separately (which it did, to Dominick's Finer Foods, Northlake, Ill.).

Once the two Chicago stores were out of the picture, Lunds closed the deal for an undisclosed sum.

"There's always been so much respect between the two companies as competitors," Lund said, "and we've always tried to emulate each other -- going back to the letter Russ Byerly wrote to my grandfather -- and now we have a rare opportunity to move forward together."

Of the 19 stores, 18 are within a radius of about 40 miles of each other -- the exception being a Byerly's in St. Cloud, Minn., located about 100 miles north of the Twin Cities. Although Lund declined to comment on the stores' combined volume, observers estimate it at about $350 million.

The stores have very little overlap, Lund pointed out, and where they do compete directly, "the areas are so dense in population that we don't contemplate the need to close any stores," he said. The two companies were operating units of distinctly different sizes, with Lunds stores ranging from 25,000 to 41,000 square feet and Byerly's from 50,000 to 90,000 square feet. Asked which banner the company will use on new store locations, Lund replied, "The manner in which we expand will be based on the trading area, the size store we can put in and the proximity to either an existing Lunds or Byerly's." He said the company has its eye on four distinct communities that can accommodate either a Lunds or Byerly's, but he declined to pinpoint those locations for competitive reasons. Both chains had remodeling plans in place at the time of the merger, Lund noted, and the combined companies' store development and real estate people are engaged in putting together a remodeling schedule for the 19 stores, with any new-store construction on hold until sometime in 1999, after the integration has been completed, Lund said. He said the company has not yet decided whether to cross merchandise signature items that carry the name of one operation or the other at both chains. "We intend to conduct focus groups with customers from each chain, and some crossover shoppers as well, to determine their preferences and expectations," Lund said. "Anything we do will be customer-driven. "So we're not sure yet if the Lunds or Byerly's name will appear in both stores. I've gone back and forth on that issue in my own mind because both stores have strong customer identifications. But we haven't spoken with enough customers yet to make that determination." Asked if the two chains would grow more alike through remodeling and new stores, Lund replied, "If you look at the newest Byerly's and Lunds units, they were starting to look more alike, though there were still some differences. "For example, for years Byerly's always had its frozen-food department at the center of the store -- but in 1996, it opened its first store with the section on the perimeter, where Lunds has always had it. "But both companies were evolving in a similar direction, and both will continue to evolve, and it's likely they will begin to look more alike. How alike, though, has yet to be determined." He added that new or existing units are unlikely to expand or shrink to a common size in the foreseeable future. According to Lund, both companies had capital budgets for information systems, "but with the consolidation of Byerly's offices into ours, we'll require only one system for accounting and purchasing." Lunds has historically been a very centralized company, while Byerly's has always been very decentralized in terms of store manager autonomy, Lund pointed out. "But over the last few years, Lunds has been giving store managers more authority and Byerly's has been coordinating more purchasing centrally, so the two companies have gotten more alike," he said. "Through the integration process, we expect to have some elements of centralization and decentralization -- and we'll probably end up with some kind of hybrid approach. "We have executive teams in place that are focusing on getting familiar with both operations to leverage the differences, so we can achieve improved performance. But we realize there's no right or wrong way to go and that both companies have been successful doing things the way they have." Lund said the company does not contemplate any physical changes at store level, although he does anticipate some improvements in the kinds of products and services both chains offer. "Right now we're meeting with two of Byerly's vendor partners -- Leeann Chin Chinese Cuisine and Caribou coffee -- as w Cities in the wake of its acquisition last month of crosstown rival Byerly's.

After competing with Byerly's for nearly 30 years, Lunds anticipates the two retailers can find greater success operating as a single entity, Russell T. Lund 3rd, chairman, president and chief executive officer of the 19-store chain, told SN.

"Bringing the two companies together made a lot of sense, and we see some really significant upside potential to consolidating the upscale niche, especially considering that the customers at both chains are so compatible and our corporate values are so similar," Lund said.

"Looking at both companies, it's clear that both were successful in their own right. But we believe we can be more successful together: That's what both companies will be striving for at all levels."

Lunds is not rushing into anything, however, preferring to integrate the two companies gradually between now and the end of 1998. "Our objective is not to do anything that will distrupt customers," he said.

The company has no agends for integrating store-level activities, he added. "Job 1 for the next 18 months will be bringing the two companies together, with the focus on creating backstage effciencies," Lund said.

Accordingly, both Lunds and Byerly's will retain their separate identities as part of a holding company that will oversee the two operations, Lund said.

"Although both companies are focused on quality, service and selection, and although there is some customer crossover, we think it would be a mistake right now to change either banner because Byerly's customers lover Byerly's for what Byerly's is, and Lunds' customers love Lunds for what Lunds is," he explained.

"Certainly we could change one name or the other and leave everything elese as it is, but to customers, changing the name would change something very significant about stores.

"So we will concentrate on changing things behind the scenes - things that are invisible to customers -- to make both operations more successful."

According to Lund, the changes that will evolve over the next 12 to 18 months include the following:

Leveraging both companies to create better products and services.

Seeking ways to utilize more efficiently the separate bakery and central kitchen facilities operated by each chain.

Looking at best practices of both companies "to create exceptional practices."

Combining accounting, store development/real estate and human resources.

Lunds, founded in 1939 by Russell Lund's grandfather, was an established fixture in the Twin Ciities when Byerly's opened its first store with a similar upscale format in 1968.

Lund said he fondly recalls a letter his grandfater received from Russ Byerly and his son Don when they started their company 29 years ago, informing him they would try to copy Lunds' long-standing commitment to quality.

"That's why it's real pleasure today to have Don Byerly serving on our advisory council and helping us through this transition period," Lund told SN.

Over the years, Lunds grew into a chain of eight stores with a volume estimated at about $100 million, while Byerly's grew to 11 stores in Minnesota and two in Chicago with annual sales approaching $350 million.

When Don Byerly sold the chain to an investment group based here --Goldner Hawn Johnson & Morrison -- in 1990, "we knew the investors had the objective of reselling the company within a five- to seven-year horizon, and that the move away from Byerly family ownership represented a potential opportunity for us," Lund said.

When it came time to negotiate a deal, Lund said he told Goldner Hawn Johnson & Morrison his company did not want to operate stores in Chicago and insisted that to close the deal, Byerly's would have to sell those two units separately (which it did, to Dominick's Finer Foods, Northlake, Ill.)

Once the two Chicago stores were out of the picture, Lunds closed the deal for an undisclosed sum.

"There's always been so much respect between the two companies as competitors," Lund said, "and we've always tried to emulate each other -- going back to the letter Russ Byerly wrote to my grandfather -- and now we have a rare opportunity to move forward together."

Of the 19 stores, 18 are within a radius of about 40 miles of each other -- the exception being a Byerly's in St. Cloud, Minn., located about 100 miles north of the Twin Cities. Although Lund declined to comment on the store's combined volume, observers estimate it at about $350 million.

The stores have very little overlap, Lund pointed out, and where they do compete directly, "the areas are so dense in population that we don't contemplate the need to close any stores," he said.

The two companies were operating units of distinctly different sizes, with Lunds stores ranging from 25,000 to 41,000 square feet and Byerly's from 50,000 to 90,000 square feet.

Asked which banner the company will use on new store locations, Lund replied, "The manner in which we expand will be based on the trading area, the size store we can put in and the proximity to either an existing Lunds or Byerly's."

He said the company has its eye on four distinct communities that can accomodate either a Lunds or Byerly's, but he declined to pinpoint those locations for competitive reasons.

Both chains had remodeling plans in place at the time of the merger, Lund noted, and the combined companies' store development and real estate people are engaged in putting together a remodeling schedule for the 19 stores, with any new-store construction on hold until sometime in 1999, after the integration has been completed, Lund said.

He said the company has not yet decided whether to cross merchandise signature items that carry the name of one operation or the other at both chains.

"We intend to conduct focus groups with customers from each chain, and some crossover shoppers as well, to determine their preferences and expectations," Lund said. "Anything we do will be customer-driven.

"So we're not sure yet if the Lunds or Byerly's name will appear in both stores. I've gone back and forth on that issue in my own mind because both stores have strong customer identifications. But we haven't spoken with enough customers yet to make that determination."

Asked if the two chains would grow more alike, though there were still some differences.

"For example, for years Byerly's always had its frozen-food department at the center of the store -- but in 1996, it opened its first store with the section on the perimeter, where Lunds has always had it.

"But both companies were evolving in a similar direction, and both will continue to evolve, and its's likely they will begin to look more alike. How alkie, though, has yet to be determined."

He added that new or existing units are unlikely to expand or shrink to a common size in the foreseeable future.

According to lund, both companies had capital budgets for information systems, "but with the consolidation on Byerly's offices into ours, we'll require only one system for accounting and purchasing."

Lunds has historically been a very centrazlized company, while Byerly's has always been very decentralized in terms of store manager autonomy, Lund pointed out. "But over the last few years, Lunds has been giving store managers more authority and Byerly's has been coordinating more purchasing centrally, so the two companies have gotten more alike," he said.

"Through the integration process, we expect to have some elements of centralization and decentralization -- and we'll probably end up with some kind of hybrid approach.

"We have executive teams in place that are focusing on getting familiar with both operations to leverage the differences, so we can achieve improved performance.

But we realize there's no right or wrong way to go and that both companies have been successful doing things the way they have."

Lund said the company does not contemplate any physical changes at store level, although he does anticipate some improvements in the kinds of products and services both chains offer.

"Right now we're meeting with two of Byerly's vendor partners -- Leeann Chin Chinese Cuisine and Caribou coffee -- as we

contemplate how we might be able to utilize those departments at the Lunds stores," he said.

However, the question of whether to expand branches of First Bank or AFC, a sushi bar operator, to the Lunds stores is not being addressed immediately, he added.

Another effort that's under way is a determination of how best to utilize existing production facilities, including a Lunds bakery and central kitchen in New Hope, Minn.; a Byerly's bakery in Rockford, Minn.; and a Byerly's central kitchen in Lake Mills, Iowa.

"We will continue to operate all four facilities," Lund said, "though how we use each one has yet to be determined."

Those determinations will be made by teams of employees from each facility, he said. "While an executive team will decide what to merge and the financial implications of each move, the employee teams will decide what changes to implement to improve the operations of each plant," Lund explained.

"Each facility has different production capabilities, and each produces similar, but different, lines. The employee teams will determine how we can integrate and improve the overall operations of each one to maximize the productivity of each."

For example, Lund said he expects production of soup -- a signature frozen line for Byerly's that comes from the Lake Mills facility -- to be shifted from Lunds' New Hope plant and consolidated at Lake Mills "because that seems most cost effective.

"On the other hand, one of the main advantages of the Lunds central kitchen has been its ability to prepare refrigerated food for quick distribution to the stores, so we will shift production of those items to the New Hope facility for the Byerly's stores.

"But we think the 'Lunds Tonight' program, which assembles takeout meals that serve six people, should be consolidated into the Byerly's facility."

The kitchen and bakery teams are expected to complete their plans for combining the facilities by the end of July, Lund said.

In terms of distribution, Lunds is in the process of converting to Supervalu here for all 19 stores.

Lunds had been using Fairway Foods here as its wholesaler prior to the merger, while Byerly's was using Supervalu. The company decided to switch completely to Supervalu, "because we felt it was in the best interests of both organizations as they come together to combine their purchasing strength through one wholesaler, and Supervalu was our clear choice," Lund explained.

Asked about reports that Lunds, had talked with Quality Food Centers, Bellevue, Wash., about a possible merger prior to Lunds' purchase of Byerly's, Lund told SN, "I've had an acquaintance with Dan Kourkoumelis, [QFC president and chief operating officer], since 1989, and we've looked at each other's operations to benchmark our performance.

"But Lunds is not for sale. Our purpose in acquiring Byerly's was to bring two operations together in a private business that's a major part of our family holdings, and to continue as a private business.

"At this point, we have no plans to sell the company. We're bringing the businesses together for the long term, with the long-term purpose of operating in the Twin Cities."