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Winn-Dixie reinvents, again

Caught somewhere between Publix's flair and Wal-Mart's prices, the Jacksonville chain falls back on a strategy that has failed before.

By MARK ALBRIGHT
Published February 27, 2005

Winn-Dixie marketers expected by now to be basking in the warm fuzzies of a feel-good film that carries its name. The supermarket even designed a Because of Winn-Dixie plush toy version of the namesake character, a smiling stray dog found at the supermarket.

Instead, customers are paying $9.99 for what could become a final memento of an 80-year-old supermarket chain that might vanish because of Wal-Mart.

The Jacksonville chain filed for Chapter 11 bankruptcy last week after an unrelenting, decadelong market share decline. The company's new top executive hopes to use the court to shrink Winn-Dixie for a third time in what promises to be a painful restructuring. But a chorus of industry experts wonders if the bankruptcy only delays the inevitable.

"After 14 years of trying, they still don't have a store format that works," said Burt Flickinger III, president of Strategic Resource Group, a New York firm that has sized up the company for prospective buyers. "They have lost their reason for being."

Three months into the job, Peter Lynch, Winn-Dixie's fourth chief executive in six years, steered the company into Chapter 11 to ease supplier fears of a collapse. Court protection will give him the clout to close what some estimate will be 15 percent or more of the company's 920 stores and emerge a smaller company, again.

More important, the filing buys Lynch time to find out whether his most-recent predecessor's strategy of $1-million store remodelings, some merchandising tricks, customer service training and some new items in perishables departments will turn things around.

Sound familiar?

It's essentially the same prescription offered up by his three predecessors, who closed more than 320 stores and pulled Winn-Dixie out of four states.

"We need to look at the whole company to determine what we need to bring in more customers, satisfy our associates and become more competitive with the bigger players," said the Albertsons Inc. alumnus. "Our weakest link is customer service. We have to give our store managers more decisionmaking power. We just need to stay positive and get creative."

Winn-Dixie's plight is nowhere more evident than it has been in the Tampa Bay area. In the past decade, Wal-Mart's share of the local food retailing market soared from nothing to second place, with 16.5 percent of the market. Winn-Dixie slumped almost in half, from a solid third with more than 20 percent to 11.2 percent and a fight for fourth place with Albertsons.

The chain has plenty of company. The only big supermarket chain besides Wal-Mart to gain market share in the past decade is Publix, which has parlayed a store-building frenzy and its proven formula to increase its share to 35.4 percent, up from 34.4 percent in 1995.

Statewide, Wal-Mart blew past Winn-Dixie last year into second place, even though Wal-Mart has only begun building new supercenters in major Atlantic Coast markets from Miami to Jacksonville (where Winn-Dixie is still a strong second).

In South Florida, Publix controls more than half the market and continues to grow faster than the population.

Winn-Dixie's struggle is shared by grocery chains all over the country. That's because Wal-Mart's successful march into Florida's food retailing business is largely driven by price. And traditional grocery store chains cannot compete with Wal-Mart on price without changing the way they do business.

Supermarkets work on a thin 1.5 percent profit margin for selling goods. But they also profit from the way they buy products from suppliers. They charge suppliers for shelf space and advertising support, and insist on other kinds of promotional money. A few years ago, Albertsons brought in $1-billion in profit selling groceries, and another $1-billion from suppliers.

Wal-Mart does it differently. It simply asks suppliers to sell them groceries at the cheapest price, and then never eases the pressure to keep lowering it.

Meantime, Wal-Mart has learned how to keep labor costs low and use technology to be far more efficient. Wal-Mart's overhead to sell $1 in merchandise was 17 cents in 2003. The supermarket industry average was 23 cents. Winn-Dixie was 27 cents.

A variety of pricing surveys of up to 1,500 items have found Wal-Mart is about 15 percent cheaper than supermarket prices.

"They cannot go toe-to-toe with Wal-Mart on price," said Sandy Skrovan, who studies the discount chain for Retail Forward, a Columbus, Ohio, consulting firm. "All supermarkets have the same handicap. Winn-Dixie's situation is worse because they were principally a price-driven supermarket."

Americans choose grocery stores for three reasons: Price, the quality of the food or the store's distance from where the customers live.

As a result of Wal-Mart's push, supermarkets all over the country are trying to reinvent themselves as flashier, fresher-looking alternatives with more tempting products that carry higher profit margins. It's a romancing-the-food and customer-service formula more like Publix and such chains as Wegman's in upstate New York or Ukrop's in Virginia.

The old line among Tampa Bay area grocers has always been "You cannot out-Publix Publix," because it's a lot harder than it appears.

"The traditional supermarkets stuck in the middle between Publix and Wal-Mart have a limited future because it's gotten very crowded in that space," said Skrovan.

A variety of chains are even giving up years of brand equity by changing their names in experimental chains. Food Lion has started a small chain called Bloom in Charlotte, N.C. Marsh Supermarkets in Indiana has developed Arthur's Fresh Markets. Kroger Co., the nation's largest traditional supermarket chains, has opened Fresh Fair in California and some Detroit suburbs.

In the Tampa Bay area, Kash n' Karry Food Stores is changing the name of its entire chain to Sweetbay Supermarket over the next two years. The chain has opened four new Sweetbays and converted eight others in Fort Myers so far.

"The Sweetbay store performance has exceeded our expectations," said Shelly Broader, president of the Tampa-based chain.

These new stores are typically smaller, neighborhood stores so shoppers can get in and out quickly. The selection is heavily weighted in favor of service departments, such as produce, bakery and deli, and meats and foods that don't require a lot of preparation at home. The displays are meant to be tantalizing celebrations of food. Clerks are supposed to impress with their food knowledge and friendliness.

A few experiments are at the other extreme: low-priced alternatives spurred mainly by the growth of such no-frills, limited assortment chains as Save-a-Lot and the spread of dollar stores. Albertsons recently expanded its Super Saver chain, and Winn-Dixie has some SaveRite stores. Those are recycled grocery stores, usually in lower-income neighborhoods. Prices are low because the selection is the bare minimum and the brands are store labels. Service is minimal. Customers bag their own groceries.

Winn-Dixie's Lynch, however, is counting heavily on a year-old prototype of Winn-Dixie's traditional supermarket that was unveiled in 92 stores in Miami-Dade, Broward and Monroe counties. The stores have expanded selections in the perishables departments, olive bars and better lighting. Most employees are outfitted in new, cleaner-looking uniforms of white shirts and khaki pants. The bakery and deli workers are suited up in chef coats and hats.

The new stores feature the sorts of smarter merchandising Lynch wants to spread chainwide. For Valentine's Day, for instance, the company staged competitions among floral departments. Some decorated the checkout as Lover's Lane and put chocolates and flowers within easy reach. Others put floral displays at the front door as a reminder. A few even set up kiosks in nearby malls. As a result, floral sales soared 39 percent on Valentine's Day and 9 percent for the week.

Lynch said the remodeled South Florida stores are performing better than the rest of the chain, but declined to say by how much. He plans to remodel stores next in the Montgomery, Ala., market.

The bankruptcy has already improved Winn-Dixie's bottom line. The chain stands to save $60-million a year in rent that it has been paying on half of the 156 stores that were closed last year but have not been sold. Lynch said there will be more cost cutting outlined in a month or two.

The Winn-Dixie board is impressed enough to already hand Lynch a $1.5-million bonus on top of his $900,000 salary.

But what happens next depends on Lynch proving to the investment community that he has reversed Winn-Dixie's 15-year slide.

"This is like the Kmart bankruptcy," said Neil Z. Stern, a principal with McMillan/Doolittle, a Chicago retail consultant. "The Chapter 11 allows them to get rid of bad stores and bad leases. But it doesn't give them a long-term solution."

Observers expect the company to pull out of many of the 36 markets in eight states where it operates, and restructure its debt before emerging from Chapter 11 as a smaller company. Some markets may be auctioned off. Many stores will be abandoned.

But getting a private equity firm or one of the bigger chains such as Kroger, Safeway or Albertsons to buy even the reshaped Florida core of Winn-Dixie after the bankruptcy remains a stretch.

"I've talked to all the prospective buyers," said Flickinger. "Nobody will touch Winn-Dixie until it's fixed."

Added Stern: "The bigger chains have problems of their own. Being stuck in a market between Wal-Mart and Publix is not an easy battle to step into."

Because of Winn-Dixie is a heart-rending story about how an orphaned dog found at a small-town Winn-Dixie helps a young girl deal with being abandoned by her mother. It has sad parts.

But it does have a happy ending.

Mark Albright can be reached at albright@sptimes.com or 727 893-8252.

Publix "celebrates food' in clean-looking stores that get regular updates. Customer service is emphasized and store brands rival nationals in quality. Big, flashy deli-bakeries are flush with food to go. It works on a profit margin well-above the industry average.

Supermarkets inside its huge supercenters compete on price, plain and simple. They stick with mainstream foods and brands and offer no-frills deli-bakeries, but no on-site butchers. Experts say the produce is as good as any supermarket.

[Last modified March 4, 2005, 08:42:44]