REVERSAL OF FORTUNE

ELLIOT ZWIEBACH

NEW ORLEANS -- Schwegmann's fortunes are turning upward.

Less than 10 months after Kohlberg & Co., the New York-based investment firm, acquired the 26-store chain from the Schwegmann family last Valentine's Day, earnings are back in the black and sales are beginning to rise, Mark S. Sellers, chairman, chief executive officer and chief financial officer for Schwegmann Giant Super Markets here, told SN.

"The basic turnaround mechanisms are all in place," he said, "and we're now ready to go after store volume, to increase our sales and market share."

The turnaround mechanisms include spinning off the company's grocery and frozen-food warehouses to Supervalu, Minneapolis; downsizing the corporate staff; re-establishing relationships with direct-store vendors; and restoring the stores' shelves to a much improved in-stock position. Sellers said Schwegmann's agenda to boost sales and market share includes the following:

Seeking to acquire additional units in outlying areas around the chain's base here, beginning with the possible acquisition of some former Delchamps stores along the Mississippi Gulf Coast.

Committing $14 million to store remodeling over a 2.5-year period.

Continuing an upgraded training program for employees at all levels. Expanding private label. The chain's plans for boosting volume do not include building any new stores, since land here is so expensive, Sellers said.

"The Schwegmann's franchise has the ability to make acquisitions going forward, and that's what we're looking at right now," he told SN. "There's not much available in the New Orleans area itself, but within Louisiana and contiguous states, there are some small- to medium-sized acquisition opportunities that we see."

One of those opportunities involves five former Delchamps stores in Mississippi that were sold to Supervalu when the Mobile, Ala.-based chain was sold to Jitney-Jungle Stores of America, Jackson, Miss. Sellers said a decision is imminent on whether or not Schwegmann's will buy some or all of those units to join its single store in Mississippi.

Asked whether Schwegmann's itself might be an acquisition candidate once its turnaround has been completed, Sellers was quite candid. "The company is not for sale," he told SN.

"However, there's always a possibility that we could be an acquisition candidate, and while no one has contacted us about that, if anyone does call, we would certainly listen."

A spokesman for Kohlberg told SN the company is "committed to building Schwegmann's. That's our first and overriding priority and our sole focus." Schwegmann's, a 128-year institution in the Crescent City, accounts for sales of slightly less than $400 million -- and $400 million is what the chain hopes to achieve by mid-February, Sellers said. "We're not looking for a huge jump in volume because we've taken on quite a bit, but by our one-year anniversary we hope to have single-digit increases in comparable-store sales," he told SN. He estimated the chain's market share at about 25.5% -- up slightly from 22% a year ago -- compared with 29.5% for Winn-Dixie and 14% to 15% each for Delchamps and A&P's Sav-A-Center.

Most of the Schwegmann's stores are 55,000 to 125,000 square feet, with two conventional-sized stores, called Canal Villere, of 35,000 to 40,000 square feet. Sellers said management believes the ideal size for Schwegmann's is about 80,000 square feet -- with about half the stores in that range -- "and we're doing some subleasing to a variety of businesses to reduce store size at some of the larger units.

"But we think the large size gives us an advantage because we can carry a larger variety and offer more one-stop shopping convenience than the competition can."

According to Sellers, Schwegmann's was historically a profitable operation, with a solid sales record, until mid-1995, when it paid $150 million to acquire 28 local stores from National Tea Co., the St. Louis-based division of Loblaw Cos., Toronto. It had hoped to add $500 million in sales from the acquisition -- until the Federal Trade Commission ruled that it had to divest 11 of the National stores and close seven other locations, leaving Schwegmann with a large debt and far short of its anticipated sales goals, he said.

The resulting drain on capital left Schwegmann's unable to pay all its bills, forcing vendors to impose credit limits that showed up as half-empty shelves during the last eight months of family ownership of the chain, Sellers said.

Kohlberg acquired the company last Valentine's Day for an undisclosed sum -- installing Sellers, a turnaround specialist, as chairman and CEO and reducing the debt to less than $100 million, he noted.

Asked what impact the sale of Schwegmann's to Kohlberg has had from a public relations standpoint, Sellers replied, "There was a lot of publicity when we took over, since it was the first management from outside the Schwegmann family since 1869, and a lot of people were asking what the 'New Yorkers' would do. But we think we've been able to offset some of those concerns."

To eliminate the out-of-stock problem, which had resulted in a sales drop of more than 10%, Sellers said, the new owners sold the chain's grocery and frozen-food warehouses to Supervalu and began to outsource distribution from the wholesaler. At the same time, the company set out to re-establish relationships with its direct-store-delivery vendors, he added.

To bring customers back into the stores, he said, Schwegmann's ran extremely hot prices in weekly mailers throughout the summer, then lowered prices on 4,000 items Oct. 1 -- a move Sellers said resulted in an immediate jump in sales and an even bigger jump in customer counts. The chain also upgraded the quality and variety of its produce offerings; started to promote the quality of its meat sections, "to get credit for the freshness we offer," Sellers said, and spent more than $1 million in the first half of the year fixing refrigerated cases "that should have been fixed long ago," he declared.

He said Schwegmann's reduced advertising during the first three months of Kohlberg's ownership while it got its in-stock position back in shape, "but we've made up for that reduction in the last four months with increased advertising."

With the new pricing program in place since early October, store remodeling moved up to the top of Schwegmann's to-do list, Sellers said, with Kohlberg making a $14 million commitment to upgrade the store base.

Of the chain's 26 stores, eight are former National Tea units, "which were in a little better shape than the existing Schwegmann's, some of which had not been remodeled for 20 years," Sellers said. Two of the stores have been completely remodeled so far, while the company has begun some remodeling at the other 24, Sellers said, including stripping the carpeting in the produce sections and putting down new tile, installing new lighting, adding aisle signs (which Schwegmann's did not previously have), installing new freezer cases and cleaning up, repainting and relighting the parking lots. According to Sellers, remodeling activity at most stores is 10% to 20% complete, with further remodeling on hold until after the holidays. The two stores where remodeling has been completed are each 90,000-square-foot units located in the heart of the city here, in areas where Schwegmann's competes with several Winn-Dixie stores, including a new Marketplace unit, plus several A&P Sav-A-Centers that are a couple of years old and a two-year-old unit of Delchamps.

Even before the stores had their grand reopenings in early November, Sellers said, "Sales were up a little bit -- in the high single-digit range, making up most of what they'd lost when we had an out-of-stock problem -- and customer counts were also up, probably a little more than sales."

The remodels, which were completed around Labor Day, took slightly longer than the company had anticipated, Sellers added, "because we tried not to disrupt business by doing a lot of the work at night."

At those two stores, Sellers said, the company took down the "Schwegmann Bros. Giant Super Market" sign and put up a larger sign that eliminates the word "Bros." and features a new logo with the store name in script and the description "Giant Super Market" in block letters.

He said the new logo will be up at all stores by the first of the year.

Inside the two remodeled stores, Schwegmann's remerchandised the shelves to integrate food and nonfood products; developed a new decor package; reset the shelves to accommodate additional merchandise; added bakery-delis and salad bars; moved the pharmacies from the back to the front of the stores; and installed new register systems, Sellers said.

"Historically, the stores have been rather sterile," he noted. "There was no signage -- not even aisle markers -- no banners and no labelling of departments. We've put in signs designating the deli, bakery and dairy using basic block lettering and hung banners and danglers from the ceiling calling attention to our new low prices and we've added aisle signs. "We blended the food and nonfood categories, which had been completely separate, to develop more logical adjacencies and to increase sales of higher-margin nonfood."

Sellers said the company added salad bars in the produce section, plus 24 feet for expanded produce varieties; it also added 80 feet of cold drinks (beer, juice, soda and water) in the grocery section, he said.

In addition, Schwegmann's took over operation of the bakeries, which had previously been leased out, "because we felt we could offer a better variety and make the sections fit in better with the rest of the store," he explained.

The pharmacies, which had always been in the back of the store, were moved to the front "to make them more visible to customers," Sellers said.

Schwegmann's is also replacing the ICL registers it had at some stores with NCR systems that were already installed at other stores and adding a new software package "to streamline the operation and be more efficient at the checkstand -- to move customers through more quickly and make our employees more productive," Sellers said.

He said he anticipates expanding private-label lines at Schwegmann's -- from the 500 stockkeeping units in place at the time of the acquisition to 800 to 1,200 SKUs sometime next year. "Right now we're still using the same supplier the previous owners used, but we will put private label out for bids next spring," he said.

Sellers said he expects improvements in store service levels to be one of the key elements that help Schwegmann's effect a successful turnaround. Accordingly, the chain has installed more intensified training programs, Sellers said.

For example, it has introduced orientation classes for all new employees, including managers, conducting two or three sessions a week to provide instruction on policies and procedures.

"Without that kind of orientation, it's not fair to the employees," Phil Seetin, vice president, corporate administration, told SN. "And nothing is more annoying to customers than employees who don't know the locations of certain products or how to run a register."

Seetin said Schwegmann has also introduced a refresher course for new hires four to six weeks later that concentrates on customer service, down to such basic procedures as how to answer the phone properly and the "10-foot" rule, which requires employees to greet any customers who come within 10 feet.

"And all store managers and assistant managers must complete a Dale Carnegie course tailored to the needs of a supermarket that stresses customer service from a total store perspective," he added.

Schwegmann's has also introduced a manager-on-duty program, which ensures that a manager is available at the front end at all hours a store is open, "which is particularly important now that we've expanded 10 stores to 24 hours and the rest to a 10 p.m. or midnight closing," Seetin said. According to Sellers, Schwegmann's has also introduced an aggressive bonus program for store management down to the department manager level, "to [reward] them based on individual store performance."

He said the company has also developed a program called "adopt a store," in which each member of management is assigned to a particular location, to help store management work out problems, assist with vendor issues and keep communications open between the store and the company.

Before joining Schwegmann's, Sellers was president of Kohlberg-owned Bay Area Foods, Danville, Calif., in 1995 and 1996, where he said he helped get the company turned around during his first year -- before the company decided to sell off its assets when it couldn't expand its retail operations (Petrini's, New Deal Markets and Cost Less).

During three years prior, Sellers was chief financial and administrative officer of Homeland Stores, Oklahoma City, where he said he helped reverse a declining situation.

Asked by SN whether he was at Schwegmann's on only a short-term basis -- to help steer it in the right direction before moving on -- Sellers replied, "We've pulled together a group of executives that have done a number of turnarounds in the past, and we are here for the long term."

Among that group of executives is Jim Pack, Schwegmann's president, who was previously chairman of Southwest Markets, Phoenix, another Kohlberg-owned company; Mark Pelletier, chief operating officer, who came to Schwegmann's with Sellers from Bay Area Foods; and Seetin, who came from Homeland.