Promotions Return at Winn-Dixie

JACKSONVILLE, Fla. — Winn-Dixie Stores here plans to become more promotional in an effort to drive sales and market share — a strategy that had previously backfired, but one the chain is now forced to pursue, analysts said.

The company is adopting its more aggressive position following disappointing results for its fourth fiscal quarter, when identical-store sales fell 5.2%, including a 4.2% decline in store traffic.

“We made the decision in the fourth quarter not to chase sales, and I think that hurt us a little bit,” said Peter Lynch, chairman and chief executive officer. “What we have done is take a strategic look at a few departments, and while we don't plan to over-promote, we think we can jump-start sales.”

He said the sales trends during the first eight weeks of the first quarter “have significantly improved, and we have additional sales initiatives we're implementing to build on the improvement so far.”

Some analysts said last week they view Winn-Dixie's decision to become more promotional as desperate and question its potential for long-term success.

“The new strategy is something management has resisted — in part because the chances for success are limited due to its understanding that Publix and Wal-Mart have much more financial wherewithal to sustain a higher promotional stance,” said Scott Mushkin, managing director, Jefferies & Co., New York. “This makes the ultimate success of the program highly unlikely.”

However, Winn-Dixie's sales performance in the fourth quarter “forced it to get aggressive on price and promotion to stem share losses,” he noted.

Price surveys in August showed Winn-Dixie had narrowed its price gap with Wal-Mart by 680 basis points since last October, Mushkin pointed out.

Andrew Wolf, managing director for BB&T Capital Markets, Richmond, Va., told SN he believes Winn-Dixie's decision to boost promotional activity is “pretty defensive, designed primarily to match what's out there.”

“With Wal-Mart doing heavy advertising on price rollbacks, with Sweetbay getting more price competitive, and with Publix getting more promotional, Winn-Dixie has to get more promotional to hold onto market share, so it makes sense for it to go after a consumer who otherwise would drive past a Winn-Dixie to shop at the store of a competitor who's promoting more,” Wolf said.

Meredith Adler, managing director for the New York office of Barclays Capital, London, said Winn-Dixie's efforts to stay out of the competitive fray has backfired.

“The company has indicated it is being thoughtful about its spending, with much effort to expand and do a better job communicating its Fuelperks program and a program to highlight produce,” she said. “It is also working very hard to make sure its weekly ads are put together in a way that will boost sales — for example, being mindful of last year's promotions to eliminate any week-to-week volatility and highlighting great deals on higher-ticket items at the end of the month to attract middle-income customers.”

Net income for the fourth quarter, which ended June 30 and had an extra week, rose 48.8% to $14 million. Sales increased 1.8% to $1.75 billion, and identical-store sales — on a comparable 12-week basis — fell 5.2%. Transaction counts fell 4.2% and average basket size declined 1%.

For the fiscal year — which also had an extra week — net income fell 27.4% to $28.9 million, reflecting a gain of $22.4 million in the prior year's second quarter due to resolution of insurance claims. Sales fell 1.6% to $7.3 billion, and ID sales — on a comparable 52-week basis — decreased 2.9% due to a 2.3% drop in transaction count and a 0.6% drop in basket size.

When Lynch was asked during a conference call with analysts why he believes the new round of promotional activity will succeed when a heavy promotional push in the fourth quarter of fiscal 2008 proved disastrous, Lynch said Winn-Dixie is taking a more strategic approach this time in specific departments.

“We had a much deeper investment in that [2008] quarter,” he explained. “We drove a lot of it through beverages, and despite a heavy spend, we didn't get the sales return we wanted. But that's not what we're going to do now.

“This time the spend will not be as heavy — it's much more strategic, and it's a totally different approach than we took last time. We learned from that experience how not to promote in a down market, and the strategic direction we're taking with promotions is totally different than before.”

He cited the Fuelperks incentive program and a new computer-generated ordering system designed to reduce out-of-stocks and lower store inventories, which will be rolled out chainwide by the end of Winn-Dixie's fiscal year in June.

While Lynch declined to pinpoint other initiatives for competitive reasons, he said the promotional activities are likely to result in a decline in gross margin of 30 basis points.

Another major source of optimism for management, Lynch said, is the positive consumer response to the company's new stores with expanded perishables — in Covington, La., which opened five months ago, and Margate, Fla., which opened two months ago, plus a remodeled store in Mobile, Ala.

He said sales at the Covington store are close to the industry average of $470 per square foot, “so the question is, how do we bridge the gap between the $300 [per square foot] that Winn-Dixie is running and get to the $470 the industry does? We think the key to success is these stores.”

Q4 RESULTS

* 2010 WAS A 53-WEEK YEAR WITH A 13-WEEK QUARTER, BUT COMPARISONS ARE ON A 52- AND 12-WEEK BASIS.