Food Lion chain shops in Baltimore's market Low-price grocer plans local expansion

THE BALTIMORE SUN

When the latest area Food Lion appeared in February, tucked away in a freshly paved strip shopping center in Perry Hall, only a fluttering banner of flags announced the grocery store's arrival.

There were no marching bands in the parking lot, no media blitzes, no store-sponsored weddings or big-prize giveaways. Customers got a free loaf of bread on the way out.

After years of catering to rural communities on the Eastern Shore and on the fringes of more densely populated areas, Food Lion is changing course and creeping into Baltimore's suburbs. It's moving quietly and without fanfare.

But the presence of the $10.2 billion company -- employer of 80,000 people in 1,157 supermarkets in 11 states -- will be hard to ignore.

Food Lion, known for plain vanilla stores and an everyday low-price strategy, is the first national supermarket chain to expand into the Baltimore market in years. It comes at a time when even deeply entrenched chains are battling among themselves and with nongrocery competitors for consumer loyalty and dollars. The expansion is the most extensive from a nonunionized chain in a heavily unionized market -- and is being closely watched by food unions.

Food Lion executives refused to be interviewed, part of their policy of avoiding the media since ABC News' infamous "tainted meat" expose in 1992.

But the Salisbury, N.C.-based company, with three-quarters of its stores in Virginia, the Carolinas and Florida, is clearly in the midst of a major expansion. It has announced plans to use the proceeds from its September divestiture of 61 unprofitable stores in the Southwest to grow in its Southeast stronghold and the mid-Atlantic. The company plans to open 75 stores this year and remodel or expand another 133.

"Food Lion's strategy for 1998 is centered on growth," Tom E. Smith, president and chief executive officer, said in the company's annual report released last week. "Growth is important to leverage the dollars already invested in our business."

Food Lion has nine stores in the Baltimore area and another eight under construction or planned. That could grow over the next few years, sources say. A year ago, Food Lion -- which has a 1.2 million square-foot distribution center north of Hagerstown near Greencastle, Pa. -- operated just three area stores.

The company plans to cluster stores in middle- and working-class neighborhoods outside the Baltimore Beltway that have at least 20,000 residents in a two-mile radius.

"They will go to a particular area and come up with the weekly expenditure toward groceries, then do a study to see where the dollars are going and how they can steal them away," said a source connected to Food Lion, who asked not to be named. "Convenience is the No. 1 criteria for most shoppers today. If Food Lion plops in between me and two other food stores and has a price advantage, I'll probably go there."

At the same time, chains such as Giant Food Inc., Metro Food Markets and Safeway Inc. -- all unionized -- are also expanding. These chains also are enlarging and redesigning stores and offering features such as prepared meals, in-store banking and electronic coupons.

It's unclear how the grocery wars will play out -- or how Baltimore's suburban shoppers will warm to Food Lion's no-frills approach.

Its clean but stripped-down stores have well-lighted aisles and shelves peppered with red and yellow bonus-buy tags. But shoppers will find none of the pizazz of established competitors -- no prepared meals, gourmet truffles or cappuccino bars.

"They have a grocery-driven approach to the supermarket business," said Jeff Metzger, publisher of Food World, a Columbia-based trade journal. "Food Lion operates stores that are typically less square footage than the market norm. They have fewer items and offer lower retail prices. They're not nearly as heavily involved in health and beauty or perishables as other retailers. But their execution level is solid."

Giant spokesman Barry F. Scher wouldn't say how the region's largest supermarket chain might respond to Food Lion, saying only, "Giant will do whatever we have to do so we don't lose business."

"We have had Food Lion as a competitor in other markets for a number of years and have met them successfully," he said. "We look at Food Lion like we do any new, large chain."

Food Lion has had a tougher time competing against other strong, everyday low-price retailers, such as Giant Food Stores Inc. of Carlisle, Pa., which operates 15 Martin's Food Markets in Western Maryland and others in Pennsylvania. Sales at Food Lion stores in those areas have been disappointing, analysts said. But few question Food Lion's ability to capture some market share.

"Food Lion is a large enough company that if they want to keep prices low and keep pressure on [their competition], they can," said Kenneth Gassman, a retail analyst with Davenport & Co. "Anybody positioned as a low-pricer in the Baltimore market is going to feel the impact of Food Lion coming to town."

Typically, Food Lion attempts to undercut competitors' prices.

"Food Lion is able to come into a market like this and really price very competitively, and from Food Lion's standpoint, they can make good money," said Sally Wallick, a retail analyst for Legg Mason Wood Walker Inc. "I don't think Food Lion is for everyone, but Food Lion believes they have something a little bit different to offer."

Her comparisons on a sample of 40 grocery items, not including meat, poultry or produce, have shown prices can be as much as 20 percent less than at other chains.

Food Lion can keep costs low by relying on nonunion labor and scaling back full-service departments. Its operating costs were 16.6 percent of sales in 1996, compared with the average operating costs of 22 percent at a sample of 12 leading food retailers, Wallick said. Its net margins have been about 2.3 percent, higher than the average 1.7 percent of the sample group.

While the company offers hourly starting pay at rates comparable to other chains, Food Lion keeps a lid on overtime costs by making store department heads salaried and on pension and benefits costs by hiring part-time store staff. The company also gets cut rates from manufacturers for agreeing to carry a limited selection of brands.

Leaders of United Food and Commercial Workers have monitored the nonunion chain for years, complaining that the company pressures employees to be profit-driven at the expense of consumer safety. The union has not attempted to organize individual Food Lion stores, opting instead to file unfair labor practice complaints.

"We're watching what they're doing," said Bob Donnelly, organizing director for UFCW Local 27 in Towson, which represents 27,000 grocery workers. "Every local is being told, step back and watch and don't do anything yet."

Food Lion's formula may not have won fans among organized labor, but it has proven itself financially. The company reported its fourth consecutive year of higher earnings last year, with 1997 earnings, before a nonrecurring charge, rising to $223.7 million, or 48 cents a share, from $206 million, or 44 cents a share in 1996. Including a pretax charge of $87.1 million for store closings, net income was $172.3 million, or 37 cents a share.

Wallick rates Food Lion stock a "buy." She believes stock valuation -- an average $10.40 per share this year -- falls short of the company's potential for double-digit earnings growth this year and next. She bases that on the shutdown of the Southwest division last year, the solid performance of traditional Food Lion stores in a competitive environment and improving sales at Kash 'n' Karry, a 100-store chain Food Lion acquired in 1996.

"Food Lion is pretty well positioned to compete in a tough environment we have today," she said.

But she also warns that the company faces several unknowns. For one, Kash 'n' Karry has so far been a drag on earnings. And Food Lion could be vulnerable to competitors trying to gain or protect market share.

Founded in 1957 in Salisbury, N.C., Food Lion, which is controlled by Delhaize Freres et Cie "Le Lion" S.A. of Belgian, survived early difficulties to emerge as a Wall Street favorite in the 1980s.

"They truly could do no wrong," Gassman said. "Shares sold for a high valuation level. The company was growing by leaps and bounds, close to 20 percent annually. They were adding new stores rapidly."

The chain muscled its way into new territory, often shutting down the competition. In the Hampton Roads, Va.-market, Farm Fresh Inc., which once had a 40 percent market share, initially met Food Lion's low prices but eventually filed for bankruptcy. (The chain was recently bought by Richfood Holdings Inc., owner of Metro Food Markets.)

But then the tide turned. Negative publicity from the 1992 ABC broadcast sent the company's income crashing 98 percent the next year. (Food Lion later won a $5.5 million jury award in a lawsuit against ABC.) And the Southeast was becoming saturated with grocery stores.

Food Lion looked outside its traditional territory to the Southwest. But real estate experts say the company failed to understand the intensity of the competition.

"Their concept here was to get into the neighborhoods," said Edward F. Page, a principal with Boyd, Page Associates, a Houston-based real estate brokerage. "But they picked very curious real estate. They would go off the corner and face the wrong street or go four blocks away from the prime corner."

Food Lion slowed its Southwest expansion after the ABC story and closed 50 stores in 1994. Last year, the company pulled out of the region.

That hasn't been true elsewhere. By continuing to expand -- acquiring supermarket chains, building stores and upgrading older ones -- and developing a store model that looks less cluttered and includes delis, bakeries and floral departments, Food Lion managed to recover.

In Maryland, where Food Lion has 44 stores, it has become the top operator on the Eastern Shore, with 10 stores.

"Acme and Superfresh were bigger players, but they did little to enhance their properties," Metzger said. "Food Lion came in from scratch. Their prototype was larger, and they came in with lower prices and more locations."

In Baltimore, where established local chains offer larger stores with greater selection and real estate is pricier, Metzger said, "that's going to be harder to do, given the realities of the marketplace."

Pub Date: 5/10/98

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