DEEP SOUTH

JON SPRINGER

Southern Family Markets is vanishing almost as suddenly as it appeared.

Pieced together less than two years ago from fragments of the Bi-Lo and Bruno's chains after they passed from Ahold to a private equity firm, Southern Family was to have provided its owner, C&S Wholesale Grocers, with a retail base to supplement and integrate with the Bi-Lo wholesale account it picked up in a prior, related deal.

The chain, however, has been rapidly shrinking. What began as 104 stores spun off from Bi-Lo/Bruno's, plus at least seven Winn-Dixie stores picked up as the result of that chain's bankruptcy, Southern Family outlets now number about 57 after waves of closures and store sales. The remaining outlets, according to observers, in most cases haven't successfully addressed the volume, market-share and competitive issues that landed them on the selling block in the first place. For many stores, sources said, the situation has gotten worse.

Moreover, they said, the chain has done little to establish an identity amid increasingly difficult competition in Southern markets where Wal-Mart is a dominant brand.

Whether the brisk pace of openings and closings at Southern Family indicate a brilliant design, a deal gone wrong, or something in between puzzles some observers. C&S isn't saying: Officials did not respond to several interview requests from SN for this article.

Distribution Driven

Southern Family Markets traces its beginnings to the final act of a long-term recovery strategy spanning two owners and several years at Bi-Lo. The Columbia, S.C.-based retailer and its Birmingham, Ala.-based sister chain Bruno's were put on the auction block by former owner Ahold in 2004.

Ahold at that time was reeling from an accounting scandal and a subsequent need to reduce debt — factors that had slowed the flow of capital toward its Southern U.S. banners to a trickle, Bi-Lo officials said. The increasing need for attention at Bi-Lo sparked its officers to engineer a deal that landed the stores with Texas buyout firm Lone Star Funds, and shortly afterward, its three distribution centers and all replenishment functions with C&S.

Finally last May, in what Bi-Lo called “the last phase of its long-term growth strategy,” it shed 116 stores, paring the chain to a lean 310-store operation consisting only of stores in markets where Bi-Lo was or could be the No. 1 or No. 2 grocer.

In the same announcement, Bi-Lo said that 104 of those 116 third-in-market-or-worse stores would be sold and reopened under a new banner called Southern Family Markets, an affiliate of C&S.

C&S made no secrets that the dealings with Bi-Lo were distribution driven, saying that the acquisition of warehouses and the Bi-Lo account would open up new opportunities in the Southern states for C&S. By taking on Bi-Lo's troubled stores, C&S assured it would do business with at least one healthy customer. The question remained whether the sick assets it acquired would soon infect C&S.

“C&S were looking for distribution — that was their main objective,” Neil Stern, senior partner at McMillan-Doolittle, Chicago, told SN. “The stores they bought they could operate under their own banner, or they could parcel them out for other independent operators.”

Observers at the time were skeptical. One source, who asked not to be identified, predicted C&S was in for trouble when it acquired the stores. “If you have 100 stores and 50 of them are losers, you're going to be a loser,” the source told SN last year.

“To lose between 45% and 50% of the store base is really shocking,” Burt P. Flickinger III, managing director of Strategic Resource Group, New York, told SN. “It seems to fly in the face of the whole objective of buying those stores to keep the wholesale business. If they lose half a store base, what kind of size and scale can you have for the balance?”

Troubled Assets

C&S closed on the acquired Bi-Lo and Bruno's stores in a series of transactions over 11 months, the company said. A purchase price was not announced. According to sources, each acquired store was set up as its own limited liability company, which could facilitate the sale of the stores one at a time if necessary.

Mark Gross, the former C&S senior vice president who at the time of the deal was named president of Southern Family Markets, told SN that a retail presence offered C&S “another way for us to interact with the manufacturing community.”

And in a speech last year, Ron Wright, co-president and chief operating officer, C&S, described the chain as “an educational tool” that would help C&S learn to deal with independent retail customers — a nascent strength at C&S, which traditionally made its money outsourcing logistics to large chains.

“Support of our independents is a competency we need to come up to speed on very quickly,” Wright said during a Grocery Manufacturers Association conference in June 2005, shortly after the deal to buy the stores was announced.

C&S spent much of summer 2005 rebranding the acquired assets — which operated variously under the Bi-Lo, Bruno's, Food World, Food Fair or Foodmax names — with the Southern Family Markets banner. Certain stores in Georgia were rebranded as Piggly Wiggly, which C&S acquired the right to use there as the result of its Fleming acquisition a few years earlier. Shoppers noticed signs changing as early as September a year ago and conversions continued until this spring.

Frank Curci, a former Bi-Lo executive who since ran Ahold's Tops stores in New York, was named chief operating officer of Southern Family. Curci in a press release announcing the reopenings said the stores would be “family focused” offering quality foods at competitive prices and would continue to offer a discount card, as its predecessor had.

Observers told SN they noticed little change, and little to support the new banner. Southern Family, for example, does not operate a website. “It was like they just changed the name of the store one day and assumed everyone would shop there,” said Britt Beamer, chairman of America's Research Group, a consumer behavior firm based in Charleston, S.C.

While a smooth transition has its benefits, the assets acquired by C&S, particularly in the Bruno's division, cried out for change, Stern said. If C&S has encountered difficulty running the former Bruno's stores, it wouldn't be alone in that regard, he added.

“The Bruno's piece alone hasn't worked for any number of people who've run it, going all the way back to KKR,” said Stern, referring to the private equity firm that purchased Bruno's in 1995, only to surrender it to creditors in a 1998 bankruptcy filing. “It's been difficult for anyone to figure out. Under no circumstances was anybody going to buy them and operate them as business as usual, because business as usual was a loss.”

A reorganized Bruno's in the late 1990s achieved something of a renaissance, only to stumble again after Ahold, which purchased it in 2001, encountered its own troubles in 2003, and Wal-Mart Stores continued to gain market share and influence in the South, spelling disaster for any number of retailers.

“The fact that Wal-Mart is dominant in the South isn't just a problem for C&S — it's been a problem for a lot of operators in the South including the private equity guys who've owned chains,” Flickinger said.

Beamer recalled visiting a Southern Family Markets store near his vacation home in Clayton, Ga., this summer and being struck by what he called the store's “lack of identity.”

“You have to give the consumers a reason to exist today, especially when you're in the eye of the tiger with Wal-Mart supercenters all around you,” Beamer told SN. “Southern Family Markets had no identity. It looked to me like a neighborhood grocery store that was going to go out of business.”

Closures and Sales

The Clayton store visited by Beamer in fact closed on Aug. 12 of this year, the same day 12 other stores in Alabama and Georgia shuttered their doors. That announcement was followed in September by word that Southern Family was backing out of North Carolina completely, closing nine stores and selling eight others.

The closing announcements were made by a new chief operating officer, Bill White, who took over for Curci in June. White told the Birmingham News in September that the chain gave the stores several months to “grow the business and change [sales] trends.” However, he said, the company determined the closing outlets had “no long-term potential.”

Accompanying the closings was a reduction of 66 staff members at Southern Family's Birmingham headquarters, the newspaper added. That left the retailer with approximately 75 head office employees. The smaller staff would require less office space, White added, so the retailer was looking into selling its headquarters building and leasing the necessary space back.

North Carolina stores slated for sale went to a variety of competitors including Harris Teeter, Food Lion and Fresh Market. David Diaz, a member of New York City's Key Food cooperative, purchased and reopened two former Southern Family stores (including a Winn-Dixie Southern Family acquired after the Bi-Lo deal). Key Food may have also purchased a third location.

Key Food's outlets will be supplied by C&S. Jerry Cesaro, senior vice president of Key Food, told SN there was little ailing the purchased locations that a sharp focus on the local market couldn't fix.

“Cooperative members have a better focus on the neighborhood than the chains — chains are too cookie-cutter,” Cesaro said. “So we'll focus on the products that are best for the neighborhood and not necessarily what's best for a 100-store chain.”

Food Lion purchased locations in Greensboro and Mocksville, reopening the former on Sept. 20 and beginning an extensive remodeling in Mocksville. No date has been announced for that store's reopening.

Many other closed stores went unsold. A newspaper article this month detailed a petition effort by residents of Eden, N.C., to entice Lowes Foods to take over a former Southern Family site there. Lowes refused, according to the report in the Eden Daily News.

Rumors of additional sales trail Southern Family in places like Tennessee. On an Internet message board discussion, participants identifying themselves as employees of Southern Family said store staffs and shoppers in Tennessee, formerly loyal to Bi-Lo, were on edge fearing a sale or closure could come at any time.

“We are tired of all the secrecy and the wait-and-see games,” one message read in part. “You can't go a day without customers asking you, ‘What is going on?’ or ‘When are you closing?’”

According to Plan?

There's an argument to be made the Southern Family operation is going more or less as planned. Flush with new capital and free of market laggards dragging down its results, Bi-Lo is aggressively expanding behind large modern stores, providing C&S with additional distribution sales.

C&S in the press release announcing its purchase of the former Bi-Lo/Bruno's stores said it intended to operate “the majority” of the acquired stores. If that remains true it would indicate store closures are at or near an end.

The new COO, White, has a good reputation as an operator. As president of Supervalu's Shoppers Food and Pharmacy division, he helped reposition that chain as a full-service price operator in the Washington-Baltimore region. Curci, by contrast, was more of a financial executive, according to Flickinger.

“Bill White is a superb operator, and getting him was a real coup for C&S, but he's inheriting a lot of problems,” Flickinger said. “Frank Curci was more of a financial guy, with less experience at marketing and merchandising.”

Although Flickinger said he believes C&S' “reach may have exceeded its grasp,” in the Bi-Lo deal, “if they invest more money they can achieve a retail renaissance.”

Grand Union, the Northeast-based retail chain C&S acquired out of bankruptcy court in 2000, faced a similar wind-down. C&S acquired 185 stores, then sold numerous units to competitors, let leases lapse on others, and retained a small core of stores today known as GU Family Markets. That chain today has 36 stores in New York, Vermont, Massachusetts, Connecticut and Pennsylvania and “does reasonably well,” according to Flickinger.

Southern Family stores remaining open have recently phased out the bonus card program for a wall-of-values approach called Power Buys, employees say. Whether that approach can be successful at the stores remains to be seen, but it indicates new strategies are at work.

The majority of its remaining stores have union employees anxious over their futures, according to Elaise Fox, president of United Food and Commercial Workers Local 1657, Birmingham. Local 1657 represents workers at around 29 stores in Alabama who are working on an extension of a contract that was to have expired in September 2004. A plan to extend terms to a future owner in the event of a sale is one of the major issues in ongoing renewal negotiations, Fox told SN.

“Southern Family Markets has given us the indication that some or all of the stores may be for sale, so successorship is important for our members,” Fox told SN. “Employees are getting anxious. They work for a chain that has been sold three times already.”

Southern Family History

February 2004: Ahold announces it would sell its Bi-Lo and Bruno's chains in an attempt to reduce debt. Bi-Lo at the time operates about 287 stores in North Carolina, South Carolina, Georgia and Tennessee; Bruno's operates 168 stores under the Bruno's, Food Fair, Food World and Foodmax names in Alabama, Florida, Georgia and Mississippi.

December 2004: Ahold agrees to sell Bi-Lo and Bruno's to Bi-Lo Holdings, an affiliate of Dallas-based private investor Lone Star Funds, for $560 million — a figure at the low end of analyst estimates. The price could increase to $660 million pending Ahold's ability to meet certain targets related to disposition of inventories and assets.

January 2005: Bi-Lo transfers ownership of its three warehouses and all replenishment functions to C&S Wholesale Grocers. Financial terms are not disclosed. Also, Bi-Lo announces it would combine back-office operations of the chains at its Mauldin, S.C., headquarters.

February 2005: Jacksonville, Fla.-based retailer Winn-Dixie Stores, with stores throughout the South, declares Chapter 11 bankruptcy.

March 2005: Bi-Lo announces it will close 29 stores, nine under the Bi-Lo banner and 20 in the Bruno's division.

May 2005: Bi-Lo announces it would sell 104 Bi-Lo and Bruno's stores to Southern Family Markets, an affiliate of C&S, in Georgia, North Carolina, Tennessee, Alabama, Florida and Mississippi. Financial terms are not disclosed.

June, 2005: Winn-Dixie announces plans to close or sell 327 stores, completely exiting Virginia, North Carolina, South Carolina and Tennessee, and parts of Georgia, Alabama, Mississippi and Louisiana.

September 2005: Southern Family Markets acquires seven former Winn-Dixie stores in bankruptcy actions; Southern Family Markets signs begin appearing on storefronts at former Bi-Lo and Bruno's stores throughout the South, and officials say openings will continue through early 2006; in Georgia, 12 former Foodmax stores are rebranded with the Piggly Wiggly banner by C&S.

June 2006: Bill White is named chief operating officer of Southern Family, replacing Frank Curci. Southern Family chain includes 99 stores.

July 2006: Southern Family announces it would close 13 stores in three states on Aug. 12. Southern Family chain now down to 75 stores.

August 2006: Southern Family announces it would exit North Carolina completely, closing 17 stores. Eight of the stores are sold to new operators. Southern Family chain now totals 58 stores.

September 2006: Southern Family cuts 66 headquarters jobs, reflecting store sales and closures, according to reports. Chain includes 57 stores.