Bi-Lo Files Chapter 11 Bankruptcy 2009-03-30

JON SPRINGER

GREENVILLE, S.C. — Beset by falling sales and reluctant lenders, Bi-Lo LLC filed for protection under Chapter 11 of the U.S. Bankruptcy Code last week.

The petition comes only weeks after Bi-Lo's former sister chain, Bruno's Supermarkets, filed its own Chapter 11 petition. Both chains are owned by Lone Star Holdings, a Dallas-based private equity firm, which acquired them together from Ahold in 2005.

Bi-Lo, which operates 215 stores in four Southern states, named a new chief executive officer, Michael Byars, last month. Byars in a statement last week said the bankruptcy was precipitated by the unwillingness of some lenders to negotiate terms for an extension of a loan set to mature last week. Bi-Lo said the lenders would likely commence collection and foreclosure actions after the company defaulted on the $260 million loan.

“In a normal credit environment we would have expected to refinance the maturing term loan on reasonable terms in the ordinary course of business,” Byars said. “Unfortunately, the current credit environment is very challenging.”

But a tight credit market appears to be only one of Bi-Lo's problems. The company in court papers acknowledged that sales and earnings have fallen precipitously since 2006, with projected EBITDA this year of $52 million — less than half the $116 million the chain generated in 2006. Observers said Bi-Lo is losing share in a number of markets with stores that need capital investments, and has been outpositioned by both discounters and service-focused chains.

A similar combination of old stores, declining market share and a lack of sharp market positioning drove Winn-Dixie from many of the same Southern markets during its bankruptcy proceedings in 2006.

“I can't say that it's the credit market's fault,” Bryan Hunt, an analyst at Wachovia Securities, Charlotte, N.C., told SN last week. “You've got deteriorating sales and deteriorating profitability, and that's a function of competitive pressures, and also assets that have not had a lot of money spent on them.”

Bi-Lo acknowledged that “mounting competition and general economic instability” contributed to declining sales, and that obligations to pay rent on 35 dark stores and an empty warehouse were adversely affecting finances. However, the company “believes it has excellent chances for a successful reorganization,” and that the “vast majority” of its stores are desirable operations, according to court filings.

Its optimism is based in part on a program of merchandising and promotions begun at stores in November by interim CEO Randall Onstead. Byars in a recent interview with SN pledged to continue that “back to its roots” program, which he said focuses on quality products and strong customer service.

Bi-Lo has a strong presence in some markets in South Carolina, including Spartanburg and Florence, where, according to Tucson, Ariz.-based Metro Market Studies, it holds the No. 1 market share. But increasing competition — both on the high end, where concepts like Harris Teeter and Food Lion's Bloom are seeing success, and on the lower end, from Wal-Mart, Aldi and Food Lion — is squeezing out Bi-Lo, sources said.

“There are markets where Bi-Lo can get good density, and then there are markets like Charlotte, which is a good example of where Bi-Lo has weak density,” Hunt said. “There is Food Lion here segmenting the market with Bloom and Bottom Dollar; you've got Wal-Mart, Harris Teeter — which is the leading player — and Lowes Foods. Aldi is expanding their store base in Charlotte, while Trader Joe's and SuperTarget moved in last year.

“With the multitude of concepts and fresh capital investment in Charlotte, there is little room for mediocrity.”

Bi-Lo identified supplier C&S Wholesale Grocers as its largest creditor. C&S, based in Keene, N.H., is owed $16.7 million. Bi-Lo said it renegotiated parts of its deal with C&S prior to filing Chapter 11 to facilitate the reorganization.

The company said its lenders required “onerous and oppressive terms that would severely cripple its business” in negotiations to extend the $260 million term loan that was due last week.

Bi-Lo said it has secured a $100 million bankruptcy loan from GE Capital so that it can pay suppliers and employees.