Delhaize’s New Way Forward – A Blueprint for Retailers?

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\"RRChanging markets and disruptive technologies have shaken many retailers to the core. Many are flailing about in all directions in hopes of chancing on a solution.

Barnes & Noble wanted to convert to a technology company, but couldn’t. JCPenney wanted to become a boutique mall, but couldn’t. Best Buy doesn’t know which way to turn.

So it goes for many retailers, including some in the food-retailing sector. Let’s take a look at one company in that industry – Delhaize. More than just about any retail company, it has tried out every conceivable model to reinvent and reinvigorate itself, but eventually decided to return to its core business. That move gave it two clear options for the future. Delhaize is an interesting case study in lessons that other retailers can learn from.

The Delhaize story starts early on with its founding in 1867 in Brussels, Belgium. The company, originally a wine merchant, segued into super-market operations and became Europe’s second largest food retailer, now with stores in seven countries. It also has a large store presence in the US that accounts for well over 60% of its worldwide revenue.

Delhaize arrived in America in 1974 when it acquired a minority interest in a small chain of supermarkets in North Carolina then known as Food Town. Two years later it took a majority position. Before too long, Delhaize’s capital infusion resulted in a rollout of Food Town supermarkets at a breakneck pace. That activity paused when it tried expanding into nearby states that already had other store groups called Food Town, “sparking litigation. So in 1982, Delhaize changed the Food Town banner to Food Lion. Delhaize is often known “as “Le Lion” and uses a lion logo “on its European stores, which was adopted by the Americanized Food Lion.

Food Lion’s Fast-Track Growth

Rollouts continued and Food Lion became America’s fastest-growing supermarket chain, and the most profitable. Through it all, Food Lion retained its strategic focus, which was to open small stores, many in rural towns or distant suburbs, and keeps prices ultra-low by offering close to nothing in the way of services or service departments. Plus product lines were limited.

Then everything changed. Walmart came along locating huge super-centers in the very type of towns favored by Food Lion. Even worse, Walmart became a food retailer and offered price points that Food Lion couldn’t match.

\"food-lion-storesjpg-64fc3a54061d6c1a\"Food Lion also suffered because of an ill-considered expansion plan, jumping from the Southeast into Texas, with a few stores in Oklahoma and Louisiana. Food Lion built a vast distribution center prior to opening even a single store, a capital investment that is almost never a good idea.

At about the same time, ABC “Prime-time Live” news aired a devastating critique of Food Lion’s sanitation practices, including hidden-camera views of workers soaking spoiled fish in bleach so it could be offered for sale. Food Lion, deeply resenting that ABC reporters obtained jobs at a Food Lion store to shoot footage, sued ABC. Costly litigation went on for years. After many appeals, Food Lion ended up with no damages at all, and it won in the larger ethical sense that news reporters no longer typically get footage through misrepresentation.

Food Lion’s venture in the Southwest failed at great cost and Food Lion retreated to the Southeast with nothing more than a badly damaged brand to show for it.

After several years of declining sales, Delhaize did what so many troubled companies do – it embarked on a period of acquisition and format experimentation. This is commonly done since, if nothing else, it imparts a sense of forward motion and, who knows, something might actually work.

Acquisition Time

Delhaize’s most noteworthy acquisition was the Hannaford supermarket chain in Maine, in 1999. Hannaford may have come to Food Lion’s attention since it had a few holdings in the Southeast. Many observers said that at $3.3 billion, Delhaize wildly overpaid for Hannaford. At the time, Hannaford had 152 stores and revenue of $3.3 billion, the buyout cost. Delhaize’s US sales at the time were $10.2 billion.

Later, Delhaize acquired a number of other smaller and lackluster chains in the Southeast including Kash n’ Karry, Harveys, Reid’s and Bottom Dollar Food. Delhaize amassed quite a fleet of stores of various types, numbering in excess of 1,500 by the end of 2000. Regrettably, none of them seemed to perform to expectations. So in 2004, Delhaize embarked on an interesting experiment; it rolled out a new chain in the Southeast called Bloom, which was the very antithesis of Food Lion. Bloom was upmarket, high service, with inviting décor, and new technology. Shoppers could place a deli order from the front of the store and learn about specials through an interactive online system.

Sady, Bloom wasn’t given much time to take root, even though more than 60 were opened. Soon every one was shuttered or converted to Food Lions. Meanwhile, several different strategies were tried in sequence to revitalize Food Lion, such as moving to more services and abandoning everyday low pricing in favor of promotional pricing. None of it seemed to make much difference. Hundreds of stores were closed over time.

As for its other banners, the Kash n’ Karry stores were converted to a new chain called Sweetbay. They were large, supercenter-like stores, all in Florida, which bumped up against the nearly invincible Publix chain.

Asset Sales

Now, Delhaize is selling its Sweetbay, Harveys and Reid’s banners to regional operator Bi-Lo/Winn Dixie. That leaves it with a simpler portfolio of stores: Food Lion and a few Bottom Dollar Food stores in the Southeast and Hannaford in the Northeast. Delhaize has two viable options: focus yet again on Food Lion in a bid to restart sales momentum, or sell part or all its holdings in the US and focus on European development.

The resurrection of Food Lion would be a long course to take. The brand has been repositioned so many times customers have little notion of what to think of the stores, and what they do think isn’t good. Delhaize’s best option might be to abandon the Food Lion brand altogether in favor of, say, its Bottom Dollar Food banner to facilitate a return to the low-price approach.

Many auguries suggest, however, that Delhaize may seek to exit the US. Chief among these portents is that longtime Delhaize chief executive Pierre-Olivier Beckers, 52, plans to step down before the end of the year. What makes this ominous is that Beckers’ family is directly related to one of the founders of Delhaize and is a major shareholder. They have had a hand in Delhaize management for generations.

Succeeding him will be non-family-member Frans Muller, 53, previously with Metro AG of Germany. Muller is considered to be a curious choice since his record at Metro was marked by declining sales and a demotion. This is also curious since Muller has no experience with American retailing, unlike Beckers who lived in the US for many years and directly ran US operations. To make matters worse, as those changes were in progress, Roland Smith, the chief executive of Delhaize’s operations in America with just a year on the job, abruptly resigned. So Delhaize now intends to have its US divisions report directly to Brussels. This probably isn’t a sustainable reporting structure.

Should a sale of Delhaize in America be in the offing, selling Hannaford should be an easy piece of work. Kroger, now in acquisition mode, would seem a likely buyer since it has no stores in the Northeast.

The stores in the Southeast might go to Bi-Lo/Winn Dixie since it has already bought Delhaize assets. More recently, it bought a batch of Piggly Wiggly supermarkets, and store overlap could be a problem.

A possible argument against selling is that despite everything, the US stores still represent a large percentage of Delhaize’s overall revenue.

So Delhaize has arrived at the defining moment with two ways forward; stay and shore it up, or leave and cut its losses. Neither choice is perfect, but there are a good many legacy retailers that would like to have such options. The company has now been simplified to the point that reasonable action can be taken. I think they should change the Food Lion name and tough it out. Growth in food retailing in Europe is far more elusive than it is here. However, in reality, I think they are fatigued of the US experience and will seek an exit.



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