MAPPING U.S. GROWTH

DAVID ORGEL

SALISBURY, N.C. -- Nearly 30 years after launching its business in the United States, Belgium-based Delhaize Group would be justified in taking time to celebrate its American anniversary.

The group's U.S. sales are estimated by SN to total $15.4 billion in the fiscal year ending Jan. 3. But if the global retailer's top executives decide to whoop it up and toast their U.S. operation, they won't break out champagne based on the size and potential scale of its holdings.

That's because executives of Delhaize Group, which is focusing on debt reduction don't see size as an end in itself. They plan to grow the American business without big acquisitions by pursuing tailored strategies for each of the four banners, which operate in highly competitive markets in the Eastern United States.

"Size is not the answer," said Pierre-Olivier Beckers, president and chief executive officer of Delhaize Group, parent company of Delhaize America, in an interview with SN. "Companies of our size who are regional leaders can develop sustainable competitive advantage. The key to long-term success is to strengthen who you are and what you do."

For a U.S. operation with banners as diverse as Food Lion, Hannaford Bros., Kash n' Karry and Harveys, Delhaize America's challenge is to differentiate each division according to market needs while benefiting from having all under one umbrella. That challenge has precipitated recent major enhancements at the various banners, including a crucial retooling of Food Lion's fresh-foods image.

POSITIVE TREND IN FINANCIAL RESULTS

Recent financial results indicate the strategy is gaining momentum. In the third quarter ended Sept. 30, "improving sales momentum at Food Lion and Kash n' Karry and continued strong sales at Hannaford" produced comparable-store sales growth of 1% for the U.S. operation, the company said. Operating profit for the American business grew by 15.6% to $176.4 million on the back of sales advances and strong margins.

Moreover, Delhaize Group revised upward its sales and earnings outlook for 2003, including a prediction that Delhaize America's comparable-store sales growth will be flat to slightly positive for the year rather than -1% to flat, as previously forecast.

The U.S. operation, which includes about 1,500 stores, represents 75% of the business of the parent, so the better financial picture contributed to improvements for the entire company. Organic sales of Delhaize Group rose 2.6%, vs. 2% in the year-ago quarter, and the operating margin advanced from 3.4% to 4.2% of sales. Delhaize Group operates in 11 countries on three continents. Total sales for the entire group last year were $19.6 billion. The strong quarterly report led some financial analysts to express positive views of the work undertaken at the U.S. banners.

Bryan Hunt, Charlotte, N.C.-based vice president, fixed-income research for Wachovia Securities, said, "Things are going well for Delhaize America, considering relative performance to others in the Mid-Atlantic and Southeast. Their comps are in line or better than their peer group."

Patrick Roquas, Netherlands-based food retail equity analyst for Kempen & Co., observed, "So far, it seems that after a couple of disappointing years, especially for Food Lion, Delhaize is succeeding in getting its house back in order. The short-term numbers look good, even though the comparisons help. Cost savings and sharpening of formats are helping."

FOCUS ON ENHANCEMENTS OF U.S. BANNERS

The "sharpening of formats" is most evident at Food Lion, the company that first attracted Delhaize Group to the United States. Back in 1974, Delhaize Group was known as Delhaize Le Lion and Food Lion as Food Town. That year, Delhaize Le Lion took a minority stake in Food Town, which would become a majority stake a few years later. For years, Food Lion thrived with its low-price, low-cost formula, but more recently, it was evident that change was needed.

"Over the past 15 months, we shifted to a much bigger focus on longer-term sales initiatives," Beckers explained. "Before that period, we hadn't significantly changed the formula that succeeded at Food Lion for so long. We always had strong customer perception on price, but not so much with perishables and service. So we're improving that now."

The most visible sign has been the overhaul of the 68 stores in the Raleigh, N.C., market area, including decor improvements, quality enhancements, and upgrading of fresh foods and service. Traffic patterns were retooled to emphasize perishables. Assortments were expanded in meats, cheeses, produce and other fresh-food categories. More emphasis was placed on organic and natural foods and wine displays. The company bet that concentrating so much energy in a single market would truly underline the company's intentions rather than diluting the efforts across its operating areas in 11 states.

Financial analyst Hunt said the changes in produce have been dramatic. "They no longer stock it only in the morning, but now stock two to three times a day, so the inventory control and presentations are better," he said. "So they have strong comps in produce. And the displays in deli and bakery are improved as well."

Analyst Roquas said the format enhancements have been positive for the company's financial picture, but that a typical Food Lion's relatively small footprint requires caution when adding more layers of fresh foods, pharmacies and other services. "You don't want to make Food Lion a Hannaford," he said. "And you also don't want to have Food Lion fall in between by losing price attractiveness and also not succeeding in fully improving services."

Beckers said the Raleigh program, launched in early October, "is still early, but in line with expectations. Customer reaction is extremely positive. They are coming back and taking a fresh look at Food Lion."

Food Lion intends to launch another market renewal by the second half of 2004, "and then with the learnings from the first two, we'll see some ramping up in 2005 and 2006 beyond just a single market a year," said Rick Anicetti, Food Lion president and CEO.

However, company executives are convinced that even this enhanced box won't sustain Food Lion's growth in all markets. They are toiling on a top-secret project called "concept renewal" that aims to create a new format altogether. It would benefit from association with the Food Lion name but also represent a point of departure. So far, the company is only giving hints of what this will involve.

"This is the next step in the renewal of Food Lion," Beckers said. "For the long term, we need another distinctive pillar to allow the Food Lion of tomorrow to be strong. We want to differentiate from the large-box supercenters and from the discounters out there in order to bring convenience to customers. The fact that we have 1,200 Food Lion stores means that locations are convenient, but we want to make the shopping experience itself more convenient. That includes product availability and solving the out-of-stock problem. We'll add front-end features that give us clear market leadership with convenience."

Food Lion is preparing pilots of this concept for 2004 in existing markets. The pilots will be based on remodels of existing units.

FESTIVAL STRATEGY FUELS NORTHEAST BUSINESS

In comparison with the overhaul at Food Lion, the retooling required at Hannaford is far less severe. The retailer, acquired by the group in 2000, was known for its focus on perishables, service, quality and high-average basket transactions. It developed a major differentiation strategy back in 1999, just as Wal-Mart was beginning to invade its markets.

"Hannaford took a deep strategic look at its business with consumer research," Beckers said. "They came out with the strategy of developing an even stronger differentiation in perishables, organics, meal solutions and other fresh-foods categories than they already had."

That was the birth of the retooled format internally dubbed the Festival format, and it led to sharp increases in sales growth and order sizes, Beckers said.

"That strategy was more than just a retail format," said Ron Hodge, president and CEO, Hannaford. "The bricks and mortar are part of the offering, but the strategy is bigger. It includes unparalleled produce and meat; good prices, but not necessarily the lowest in the market; and a shopping experience that sets us apart by recognizing and rewarding outstanding customer service, and enabling consumers to connect on an emotional level."

The Festival format increased produce space by 46% and meat by 44% compared to earlier formats. While all of Hannaford's 120 stores have now adopted the Festival strategy, only about nine are full-blown, ground-up Festival formats, Hodge said. The retailer is able to translate Festival's characteristics into stores ranging from 35,000 to 70,000 square feet.

Hannaford has also assumed responsibility for oversight of the Kash n' Karry banner, the Tampa, Fla.-based retailer acquired by Delhaize in 1996.

"That business was bought and sold a few times, and hadn't received consistent investment," Hodge said. "We've done a lot of work around product, distribution and supply chain, and brought in thousands of new items."

"We are continuing to develop the produce leadership of Kash 'n Karry, and making major improvements in meat," Beckers said. "We are putting a lot of effort into training and improvement and service overall. All of this results from a better understanding of what consumers expect in central Florida."

Leading this activity is Shelley Broader, who became Kash n' Karry's president and chief operating officer about six months ago. Broader, who reports to Hodge, had previously held a number of positions at Hannaford, and was instrumental in developing that chain's Festival strategy.

Broader said that when Hannaford began overseeing Kash n' Karry's product supply two years ago, customers noticed and appreciated the changes.

"Now we're at the next stage of our product redevelopment," she said. "We're now focusing on a quality shopping experience. We're concentrating on different specs and product recipes. We need to make sure the products are right for Florida."

STRATEGY SET FOR LATEST ACQUISITION

Florida is also the location for part of the Harveys chain, Delhaize America's fourth and newest banner. Harveys, which is based in Nashville, Ga., was acquired in October of this year.

"We are interested in Harveys because of their successful perception in rural areas of south Georgia and northern Florida," Beckers said.

Harveys is contiguous to -- but not overlapping with -- the regions served by Food Lion and Kash n' Karry.

"We may change a few Food Lion stores to Harveys in small towns," Beckers said.

But the present plan is to avoid tinkering with the success of Harveys. "Some of our competitors have changed formulas of acquired chains, and it didn't work," Beckers said. "For the moment, we want to work on back-room issues, buying and other things that will improve profitability thanks to Harveys being part of a larger group."

Food Lion will be responsible for supporting back-room operations. It recently named Glenn Dixon, a 10-year Food Lion veteran, to fill the newly created position of senior vice president of corporate development, overseeing the Harveys chain. Benny Ensley, Harveys' chief operating officer, reports to Dixon.

The Harveys acquisition is an example of the kind of fill-in deals that Delhaize is prepared to execute, given its goal of debt reduction.

"Our financial constraints mean we are totally focused on smaller-size fill-ins in existing markets, not in areas where we start from scratch," Beckers said. "That's totally in line with the Harveys deal where we strengthened our regional density. We can do that elsewhere in the Eastern U.S. or in other countries."

In the Eastern United States, Delhaize America's banners face stiff competition from conventional supermarkets and other formats. Didier Rabattu, managing director, Deutsche Banc, based in London, noted that in Food Lion's territory, Winn-Dixie has been cutting prices and margins, and Wal-Mart has grown quickly. "The cost of land is low, so it's easier for competitors to open stores, unlike in places like the Northeast," he said.

However, Beckers pointed to a slowdown of competitive openings in Food Lion territory, especially by Wal-Mart. "That's because there's already a good Wal-Mart penetration," he said. "Food Lion has been competing with them for about 10 years."

Already, about 60% of Food Lions compete with a Wal-Mart supercenter.

About 45% of Hannaford stores and 50% of Kash n' Karry units compete with a Wal-Mart supercenter.

"But competition will be there," Beckers stressed. "The key for Food Lion and Kash n' Karry will be to focus on what they do better than others. They need to excel at their own strategies."

Delhaize America continues to use price as a competitive tool, especially with Food Lion, Beckers said. "Food Lion invested in price throughout 2003, and we want to maintain that," he said. "But we also improved gross margin, thanks to sales mix. Operating margins improved because of effective cost management."

FINDING SYNERGIES ACROSS THE RETAIL BANNERS

Even as Delhaize America's banners pursue enhancement strategies, the company is growing synergies for the entire group, Beckers said. The Delhaize America holding company was created in 1999, and it became a full subsidiary of Delhaize Group following a share exchange in 2001. Synergies among Delhaize America banners have only come gradually because the parent company did not want to force too much change as acquisitions were being integrated.

"We needed to leave time after we brought the companies together," Beckers said. "We didn't want to force-feed synergies. That would have created resentment."

Beckers said the U.S. group is now accelerating synergies in the following areas:

Support functions, including insurance and legal.

Procurement of supplies and other items not directly sold to customers.

Multi-year contracts with IT vendors for the U.S. group as a whole.

Gradual alignment of IT. The first phase was creating bridges, while the second phase is a strategic roadmap for the next three to five years.

Extending to Food Lion and Kash n' Karry the inventory management system developed at Hannaford.

Food Lion's knowledge of small-store development will be useful for Hannaford's smaller footprints.

Good management exchange in the United States has become one of the greatest benefits of sharing among the American group.

The U.S. operation also takes part in synergies across the entire Delhaize Group. Delhaize Group's participation in the WorldWide Retail Exchange is increasingly benefiting the U.S. businesses now. The "concept renewal" at Food Lion will gain from the expertise of senior management of Delhaize Belgium. All of Delhaize Group's companies will benefit from a program to develop the next generation of point-of-sale systems now being piloted by Hannaford and Delhaize Belgium. Also, Hannaford's inventory management expertise will be leveraged by the Belgian retail business.

Now that synergies are in place and the U.S. banners have formulated differentiation strategies, the key is to make good on the promises, Beckers contended.

"Look at IBM under Lou Gerstner," he said. "He came in and said, 'We need to execute. We don't need more strategy."'

So at Delhaize America, the challenges ahead include executing in merchandising and associate relations.

"We want to direct human resources management so that we're the employer of choice in the markets," Beckers said. "We will work hard on associate training and development. We believe in moving from good to great in HR."

Beckers expressed confidence about tackling these and other challenges because of his company's long-term outlook.

"Delhaize is an old family-values company," he said. "We will always be focused on the long term, not on short-term expectations. That fits with our culture."