AN AMERICAN TALE WITH EUROPEAN ROOTS

DAVID ORGEL

SALISBURY, N.C. -- Delhaize Group's launch into America almost 30 years ago was born out of desperation.

After years of fast growth in its home base of Belgium, Delhaize -- then known as Delhaize Le Lion -- hit an expansion roadblock. Belgium and other European countries enacted laws that severely limited expansion for large food retail chains. Delhaize Le Lion, whose origins date back to 1867, was forced to consider growth in other markets for the first time.

The United States became a prime candidate, and the moves that followed would lay the groundwork for a U.S. operation that is expected to reach sales of $15.4 billion in the year ending Jan. 3, according to SN estimates. The U.S. business, with banners including Food Lion, Hannaford, Kash n' Karry and Harveys, represents about 75% of the parent company's overall business.

Delhaize was attracted to the United States by strong growth potential and the absence of legislation that hindered expansion. However, the company's decision to build an American business was also influenced by world events.

"A number of people in our organization had relationships in the U.S. that began in the 1950s during the Marshall Plan for rebuilding Europe after the war," said Pierre-Olivier Beckers, president and CEO of the company now known as Delhaize Group, in an interview with SN. "Also, in the 1970s there was still fear of what was happening on the Eastern side of Europe. It was still very much the Cold War, and even though it may seem a little strange in hindsight, the board of Delhaize was really afraid of the U.S.S.R. making some moves at some point. So, they wanted to diversify assets in a more secure place, and the U.S. became the choice."

Delhaize hired a consultant to find a growing food retailer in the United States for an acquisition, and Salisbury, N.C.-based Food Town Stores was identified. Food Town was a retailer known for low prices, low costs and the use of forward buying to achieve price advantages. In October 1974, Delhaize Le Lion became one of the first European retailers to enter the U.S. grocery industry when it signed an agreement with Ralph Ketner, Food Town's top executive, to acquire 34.5% of Food Town's shares.

"Food Town only had about 20 stores, but it was growing fairly rapidly," Beckers said. "The retailer's formula had been solid."

Ketner and his partners were interested in the arrangement with Delhaize because of the capital infusion that would enable rapid growth. But there was another incentive.

"They were looking for an acquirer that wouldn't just seize control and run it their way," Beckers said. "They felt they had a good concept offering the lowest prices with a no-frills format. They gained confidence we would let them run the show." That confidence was well-founded. Delhaize Le Lion became known for a relatively hands-off approach with the managements of its acquired retail companies. It also became known in the United States as an acquirer with a long-term view, Beckers said.

TAKING A LONG-TERM VIEW

"The long-term view was in our genes," he said. "That helped make Food Lion what it is today. All the cash was reinvested in the business for many years. We didn't seek short-term gains. As a family business, we also used a human approach by respecting companies we own and allowing them to do what they feel is right."

Food Town pushed forward with rapid expansion in the late 1970s by entering South Carolina and Virginia. In 1976, Delhaize Le Lion became the majority owner in Food Town with a 52% share.

One of the biggest highlights in Food Lion history was the explosive growth in the 1980s, Beckers stressed. Food Lion grew from 106 stores in 1980 to 881 units in 1991, according to an official history published in 2003 by Delhaize Group. The company expanded to states including Georgia, Tennessee, Maryland, Florida, Delaware, Kentucky, West Virginia, Pennsylvania and Texas. "The retailer's price advantage and incredible real-estate expertise allowed it to grow by 60 to up to 120 stores a year," he said. "That focus on organic growth was what Food Lion did incredibly well."

Net earnings grew from $3.8 million in 1975 to $172.6 million in 1990, and the share price advanced quickly along with the wealth of investors.

Food Town became Food Lion in 1982 to avoid legal disputes with other chains in its markets that operated under the Food Town banner.

The Food Lion venture increased Delhaize's confidence about its retailing know-how and led the parent company into other ventures, some of which did not prove successful. In 1979, Delhaize acquired Alterman Foods, a chain of 93 supermarkets in Georgia and Alabama. By 1981, Alterman was posting losses. Delhaize tried a number of strategies to stem the losses, including the creation of a new format under the Cub Foods banner franchised from wholesaler Supervalu. However, the restructurings did not work, and Delhaize eventually shed these businesses through closures and sales.

"A mistake was to buy 100% of Alterman right off the bat," Beckers said. "It was not what we had done successfully with Food Town. Also, we probably hadn't studied enough how the center of Atlanta was beginning to move about 20 miles north."

The good times at Food Lion came to an abrupt end on Nov. 5, 1992. ABC's "Prime Time Live" aired an expose alleging unsafe food-handling practices and off-the-clock work by employees. The television report was extremely damaging to the chain even though undercover journalists used false pretenses to get hired by the retailer. Food Lion denied the allegations and fought back through public relations and legal measures against ABC. The chain blamed a labor union for influencing the creation of the report. Legal actions between Food Lion and ABC would drag on for years. The impact was devastating on all aspects of the business. The company's equity value plummeted and comparable-store sales fell by 2.6% in the following year. Stores in the new markets of Texas, Oklahoma and Louisiana suffered the most. The company would eventually close those locations as the 1990s progressed.

BACKING FOOD LION IN DIFFICULT TIMES

Food Lion's business survived the episode, and rebounded within a couple of years. Beckers pointed to the parent company's backing as an integral factor in the chain's survival.

"We stuck with the management and the company," he said. "It's strange to say I see it as a highlight of Food Lion's history, but I point to the way we recovered from the "Prime Time Live" and union attacks. Obviously, we suffered a lot at the time. But the way the company pulled itself together with support from Delhaize was remarkable. In the mid-'90s when things were back under control, people told me they never thought Food Lion would be in existence after the magnitude of the attacks. So, that's why this was a highlight for me."

Food Lion moved forward with new changes. It created a new organizational model that supported local management, and developed larger store prototypes that enabled the chain to enhance fresh-foods departments. It also developed a customer loyalty card.

In 1996, Food Lion acquired Kash n' Karry, a Florida chain, after determining that it needed a new vehicle in Florida. "We realized that while northern Florida was very much like the Southeast states that Food Lion understood, the rest of Florida was very different. So, maybe the best answer was to grow not with Food Lion but with a more locally adapted concept. That's how the Kash n' Karry opportunity came about." In 1999, the holding company Delhaize America was formed.

Meanwhile, the Delhaize Le Lion holding company was converted to a group between 1999 and 2002, and was renamed Delhaize Group in 2002.

FORAY INTO THE NORTHEAST

One of the most important deals in the company's history took place in 1999 when agreement was reached to acquire Hannaford, which operated 152 food-and-drug combination stores in the Northeastern United States. Delhaize paid a high premium for the company, whose roots reached back to the late 1800s and was known for its upscale merchandising and quality perishables.

Hannaford would quickly become an integral part of the American group, and provide solutions for some key Food Lion challenges. "When Food Lion failed in Texas, we came out with the realization that it was not going to be easy to take that company into every state across the U.S.," Beckers recalled. "Hannaford brought new growth opportunities, and it brought a very different go-to-market strategy into the picture. We began to realize that Food Lion needed to develop a fresh-foods expertise, and building it from within would be difficult because of the chain's low-price culture. So, we could see that Hannaford was going to be a great source of expertise to Food Lion, and it delivered exactly on those promises."

Hannaford also benefited from Food Lion's expertise with volume purchasing and with developing real estate for small-store formats. In fact, Hannaford is now furthering its growth opportunities by opening smaller formats of around 38,000 square feet with help from Food Lion's experience.

Hannaford and Food Lion have learned from each other on the technology front. Both were always considered strong technology practitioners, but they each took different approaches. "Food Lion was centralized, so its IT development focused on centralized processes," Beckers said. "Hannaford had a smaller operation and the conviction that each market was different, so it built technology and IT around decentralization, PC-based, and the ability of each store to adapt itself through technology for what it needed."

Bringing Hannaford and Food Lion together in the same organization meant that new opportunities existed to leverage the technology of each, Beckers said.

The Delhaize Group has also fostered global synergies among its chains, always avoiding too rigid a structure.

"We have a bias against formal structures," Beckers said. "We don't want large support offices, either globally or regionally in America. We are convinced we can create synergies and best practices while keeping the priorities on the companies themselves."

An example is in the practice of procurement. Delhaize focuses procurement at the local level, but also maintains point persons by region who help coordinate among the chains.

"But the real nitty-gritty work of procurement is being done by local teams coming together ad hoc or on special projects. We take the same approach for most other functions in our company."

EUROPE AND AMERICA LEARN FROM EACH OTHER

Describing in more detail how Europe and the United States benefit from each other, Beckers said non-U.S. operations "benefit from the planning and discipline that U.S. companies bring to business, including testing, surveying and qualitative knowledge." U.S. operations, on the other hand, gain from "the true passion for food and customer relations that we brought from Europe."

U.S. companies also stand to learn from Europe in segments of the business including private label, home-meal replacement and development of organic foods in conventional supermarkets, Beckers said. "In the home-meal category, Delhaize Belgium owns a 62% market share among supermarkets. That's phenomenal."

The company's strategy of making investments around the world is geared to a payoff in the long term rather than the short term, Beckers said.

"We only have 35 stores each in Thailand or Indonesia," he said. "We don't need those countries today, but one day we will. Just like we made a decision to come to the U.S. and invest in a company with about 20 stores, if we can repeat that kind of Food Lion growth in one of our other countries in the future, whether it's Thailand or Indonesia or Romania, for example, that would enable us to find new sources for growth."

One of the most notable things about Delhaize Group is its gradual and methodical development of synergies. However, Beckers said that the financial community is often more impressed with companies that make bold moves, change managements, and launch new strategies.

"I know that Delhaize Group is often seen as conservative and prudent because it's less visible in announcing, for example, a huge IT center for the whole world. Well, that would be very impressive, but do you need it? Can't you develop the right IT synergies without relocating 200 people to a new office in a place where they don't want to live when the technology should allow you to do what you need to do from the banners? That's exactly what we're developing now. So, there's a more evolutionary rather than revolutionary approach in the Delhaize culture, which is one of the strengths of the company today."

DELHAIZE GROUP'S GROWTH IN AMERICA

In 1974, Delhaize Le Lion, a business whose roots reach back to 1867, began researching opportunities outside its Belgian marketplace to overcome expansion roadblocks. The company's search led to the United States and to Food Town Stores, which would later be renamed Food Lion. Following is a timeline of Delhaize Group's history in the United States.

1974: Delhaize Le Lion acquires minority ownership in Food Town Stores.

1976: Delhaize Le Lion increases its stake in Food Town to become majority owner.

1979: Delhaize Le Lion reaches agreement to acquire 93-unit Alterman Foods in Georgia and Alabama.

1981: Alterman Foods renamed Food Giant.

1982: Food Town becomes Food Lion.

1985: Tom Smith succeeds Ralph Ketner as Food Lion chief executive officer; Food Giant opened stores under the Cub Foods banner, which was franchised from Supervalu.

1986: Delhaize Le Lion sells its Food Giant stores to Supervalu; Cub division transferred to a newly founded company called "Super Discount Markets," owned 80% by Delhaize and 20% by Supervalu.

1991: Food Lion operates 881 stores in 12 states following booming growth in the 1980s.

1992: ABC's "Prime Time Live" program reports on alleged problems with Food Lion's sanitation practices, a development that would jolt the chain's business and prompt years of lawsuits.

1993: Food Lion's comparable-store sales fall 2.6% in year after ABC report.

1994: Food Lion closes 84 stores in Texas, Florida and Oklahoma.

1995: Food Lion introduces the MVP loyalty card (Most Valuable Partnership Customer Program).

1996: Food Lion acquires Florida-based Kash n' Karry for $121.6M.

1997: Food Lion closes its Roanoke, Texas, distribution center and the remaining 61 stores that were supplied from there.

1999: Bill McCanless succeeds Tom Smith as Food Lion CEO; Food Lion reaches agreement to acquire Hannaford, which becomes effective in 2000; Delhaize America holding company created.

2001: Delhaize America becomes a full subsidiary of parent company following a share exchange; Super Discount Markets closed after losses in several consecutive years; Pierre-Olivier Beckers becomes CEO of Delhaize America; Rick Anicetti becomes Food Lion CEO; Ron Hodge becomes Hannaford CEO.

2002: Parent company corporate name now Delhaize Group.

2003: Shelley Broader becomes Kash n' Karry president and CEO; acquisition of J.H. Harvey Co.