MAKING FOOD LION ROAR

MARK HAMSTRA

SALISBURY, N.C. -- Delhaize is taking steps to strengthen one of the Southeast's stalwart supermarket brands.

In an interview with SN, Pierre-Olivier Beckers, president and chief executive officer, Delhaize Group, Brussels, Belgium, explained how the company is taking a multi-pronged approach to reviving Food Lion. The chain's sales have been lagging amid a general industry downturn, but Beckers, who was named CEO of Delhaize America here in August, said he hopes to leverage Food Lion's reputation as a convenient shopping destination and infuse it with some marketing and merchandising know-how borrowed from its successful sister chain, Hannaford Bros., Scarborough, Maine.

Among the most visible efforts to enhance Food Lion's appeal to consumers are the company's design innovations, which include a new rounded prototype that the company is planning to roll out more aggressively next year and a smaller prototype that could be used to expand in towns that cannot support a full-sized supermarket. SN recently toured some of the new prototype stores with executives to see how the company is seeking to leverage the brand's core strengths and develop new ones.

Beckers attributed Food Lion's recent sluggish sales to the weak economic environment.

"Unemployment is at an all-time high, and that affects consumer spending, and this is happening in a very over-stored Southeast," he said.

"Therefore, our same-store sales outlook continues to be very challenging, even though it continues to be very positive and strong."

Delhaize America's sales last year of $14.9 billion accounted for 79% of the company's total revenues. Comparable-store sales in the U.S. rose 1.4%. Cash flow from operations was $1.3 billion in the U.S., or $87.7% of Delhaize's total.

Although U.S. comparable-store sales are expected to be positive this year, the company said they are expected to grow by less than 1%. Delhaize recently lowered its earnings projections for 2002, based on the weak U.S. performance.

The company's stock, at about $18 last week, has lost two-thirds of its value in the past year, including a drop of nearly 50% since its late-September profit forecast revision.

Food Lion comprises by far the largest component of Delhaize's U.S. business with 1,225 stores in 11 states in the Southeast and Mid-Atlantic. Hannaford, with 114 stores, and Kash n' Karry, Tampa, Fla., with 138 stores, make up the remainder of Delhaize's retail operations in the United States.

Price will continue to be a core element of Food Lion's positioning, Beckers told SN.

"We will continue to be known for our low prices and will maintain that low-price image," he said. "But next to that, also in the short term, we want to continue building our fresh-food image."

Beckers said demand for fresh foods has shifted in the past few years in the Southeast. Consumers, especially outside the large cites, traditionally were interested in a limited range of produce that was competitively priced. In recent years, however, Beckers said demand has shifted toward more variety and higher quality as consumers gained interest in health and nutrition.

The company is experimenting with some ideas to boost fresh-food sales, including moving produce closer to the front door in some stores. It also is seeking to borrow some ideas for merchandising fresh foods from Hannaford.

The Hannaford Connection

Although Hannaford has a decidedly different operating model, Beckers said he sees abundant opportunities for the transfer of knowledge from the New England-based operator to Food Lion.

Transforming Food Lion into a Hannaford-type concept "is clearly not what our customers want in the Southeast," he said, but the company has been shifting some veteran Hannaford executives into operations posts at Food Lion in an effort to share some of their expertise.

In August 2000, the company named Hannaford Bros. veteran Rick Anicetti chief operating officer at Food Lion, and elevated him to president and CEO this year.

"That had been in the making at Food Lion for two years," said Beckers. "We felt comfortable with him. He had a lot of human skills, he was a real team player, and at the same time he brings a lot of operations experience with him."

Earlier this year, the company had shifted its Kash n' Karry operations to be under the control of Ron Hodge, Hannaford's CEO, giving the company "two strong leaders managing our operations in the U.S.," Beckers said.

In conjunction with Anicetti's promotion, Delhaize removed Bill McCanless, formerly CEO of the U.S. division, out of an operations role to become vice chairman of Delhaize America. Beckers said McCanless "is a very strong guy" and was "the right person in the right place" for the company's integration of Hannaford and Food Lion, but his lack of operations experience made Anicetti the better choice at this point. With Beckers taking over as CEO of Delhaize America, Anicetti and Hodge report directly to him, rather than through McCanless.

"For me, with 75% of our operations in the U.S., it is very important that I focus much of my energy and time on this part of the operations," Beckers said. "It was really the next logical step for Delhaize in terms of streamlining the organization."

In addition, earlier this year Food Lion split its operations into two regions, with a Hannaford veteran, Cindy Schlaepfer, taking the helm of the Southern division as senior vice president of retail operations. She oversees three of the company's geographic divisions -- Southern, Western and Central -- while 13-year Food Lion veteran Elwyn Murray took over the Northern and Atlantic divisions.

The move marked the expansion of Food Lion's operations from four divisions to five, part of an overall effort to bring a more localized focus to the chain's operations. The localized effort also includes the division of Food Lion into 12 price zones, where merchandising and marketing will be more customized to target the consumers in those areas, mirroring a strategy employed at Hannaford. Four of those price zones -- Columbia, S.C.; Richmond, Va.; Norfolk, Va.; and Raleigh, N.C. -- have adopted the localized approach "with very good results," Beckers said.

Although the recent executive changes came at a time when Food Lion's performance was weakening, Beckers said the transition to the new management structure "was well-planned" and "very clearly not the result of short-term pressure we have in the field."

Beckers also draws upon the company's experience overseas to "constantly review our fundamental store format," he said. "We've had a team working for some time on this. In fact, we have included our team from Belgium, as we feel we can bring a lateral view of what retailing is today."

Perhaps the most significant element in Delhaize's plan for Food Lion is a renewed focus on convenience.

"We have more than 1,200 sites and, therefore, you have a Food Lion near your home in just about every area," he said. "But we also want to become the convenient retailer in the store and develop our front-end service and self-service convenience elements in the store, from the deli to other areas where we can make the shopping experience more convenient."

Food Lion competes with a range of traditional supermarket banners in its various markets, from Publix and Kroger in Georgia to Bi-Lo and Harris Teeter in the Carolinas, while at the same time it is increasingly faced with head-to-head competition against the behemoth from Bentonville, Ark. Analysts often point to Food Lion as an example of a brand that is poorly positioned against Wal-Mart, saying the Food Lion's emphasis on low price places it squarely in a face-to-face showdown for the exact same customers that Wal-Mart attracts.

Beckers downplayed the impact of Wal-Mart, saying that Food Lion's convenience and service levels allow it to compete effectively.

"I know there's this feeling out there that Wal-Mart is this 800-pound gorilla that takes market share away from all retailers and that retailers are not taking market share away from Wal-Mart, but we experience every time we open a new store next to Wal-Mart that we are taking sales away from that competitor," he said.

Going in the Round

At the forefront of Food Lion's effort to differentiate itself through convenience is the chain's new "round" prototype design, which debuted last year in Concord, N.C. In a recent interview with SN at that store, Kyle Mitchell, vice president, construction and engineering, said sales have been so strong at the prototype that the company is planning to build at least 20 new stores next year featuring the design and will remodel another 20 to incorporate it.

"We've had a couple of different rounds of customer feedback, and it appears that we've hit the target," he said.

Although the new design costs about 10% more to build than typical stores, the prototype stores are offsetting that with increased sales, Mitchell said. Both the Concord store and another in Rock Hill, S.C., are exceeding the company's sales projections, he said, while a third prototype, in Martinsville, Va., is meeting expectations.

The first remodeled store featuring the design opened last month here. Although that store was expanded to include a pharmacy, Food Lion is still on the fence about whether or not to expand beyond the chain's current 20-store pharmacy deployment.

The new design -- known internally as the "Concord prototype" -- features a bright blue and yellow color scheme, with product illustrations encircling the store's interior walls. The aisles are curved to allow customers to see products on the shelves all the way down the aisles.

"We wanted to increase customers' interest in the store and help them see products they might not have seen in the past," said Mitchell. "The bending of the aisles is a part of that."

With the new design, although the product assortment has remained the same, customer focus groups have been giving the company more credit for offering variety, Mitchell told SN. He said the perception seems to come both from greater product visibility in the curved aisles and from the wall illustrations.

"We weren't getting credit for the variety of product that we offered [with previous store formats]," he said.

The new design also emphasizes the brand's core attributes of price and convenience, Mitchell explained. Cement floors and the exposed ceiling give the design a warehouse look that connotes low prices, and the curved design makes it easier to shop, he explained.

The semicircular layout of the checkout lanes, which funnel customers from a wide area to a focal point in front of the service desk, has been a big hit with customers, he said. In addition to easing congestion in the lines, it also allows the employees at the service desk to observe the activity at the checkout lanes easily.

To emphasize the chain's newfound focus on fresh offerings, the produce department has been shifted to the front right of the store, although that positioning might not be incorporated in all future stores featuring the round design.

One design element of the prototype that will change is the front left area of the store, which housed books, magazines and bread in the prototype but will instead be home to beer and wine in newer stores.

Another design innovation Food Lion has been testing is a smaller, 28,000-square-foot prototype that can be built in markets that are too small to support the chain's traditional 38,000- and 34,000-square-foot stores.

The company began experimenting with the smaller stores last year and now operates four of them.

Bill Kepley, director, real estate, said Food Lion hopes to use the new prototype to expand in fast-growing areas that are underserved.

"We're trying to find those places where people will cheer, and say, 'Oh, great! We finally got a supermarket!"' he said. "We're looking for places where people now have to drive a great distance to shop."

Kepley said Food Lion is the only large chain to have such a small prototype.

The smaller stores, he said, have fewer facings than the chain's 34,000-square-foot supermarkets, fewer checkout lanes and smaller back rooms, although the merchandise assortment is consistent with that of the larger stores.

The four prototype small-format stores also feature some of the design elements of the company's round prototypes, including the exposed ceilings and the decor package, although they do not have curved aisles.

"We're still very much in the test stages," he said.