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    MARKETPLACE SURVIVAL: Reconstruction

    Can 80-year-old Winn-Dixie be saved from itself? Industry watchers offer opinions.

    By Bob Gatty

    Right now a dark cloud hovers over what for many years was a proud and successful supermarket chain, known for the quality of both its products and its services, as well as for a deep involvement in the Southern communities that it served.

    What happened? Everyone knows that Winn-Dixie slid into Chapter 11 bankruptcy protection earlier this year and is currently struggling mightily to survive. But that's the end result of years of decline, of opportunities missed and crucial decisions badly made. Winn-Dixie's fall from prominence, to the point where its demise is possible -- even, in some industry observers' views, imminent -- holds lessons for many other supermarket operators.

    Over time, Winn-Dixie's rich heritage seemed to have been forgotten as the company slipped in serving its customers, fell behind the times in merchandising and marketing trends, and allowed relationships with many vendors to be poisoned by its hunger for slotting fees and other trade money. Good will, built up through years of community outreach such as charitable contributions and sponsorships of local athletic events, dissipated rapidly.

    Winn-Dixie was bleeding. The bankruptcy followed devastating losses of $399.7 million for the quarter ending Jan. 12, a performance almost five times worse than the net loss of $79.5 million it had suffered in the same period last year. Sales from continuing operations for the period were $3.1 billion, down 4.7 percent from the same quarter in 2004.

    New footprint

    The new president and c.e.o., former Albertsons turnaround expert Peter Lynch, in charge since December, is determined to restore a "relationship of trust" with suppliers, associates, and customers as he seeks to bring his troubled company back to prosperity.

    At presstime Lynch told Progressive Grocer that he planned to have a new footprint for the company completed by mid-April, to present to the committee of creditors established under terms of the bankruptcy, then to the bank, and finally to the bankruptcy court for approval. He declined to offer further details, except to say that the company would be smaller, with fewer employees, but better run and stronger.

    The chain's continued operation was been made possible by an $800 million loan obtained from Wachovia Corp. to pay other bank debt, bankruptcy costs, and operating expenses, including suppliers and employees. But it owes suppliers an estimated $250 million to $350 million for goods and services obtained prior to the bankruptcy, which was finalized in February. The suppliers must stand in line for their money -- although experts say the bankruptcy filing offers a better chance that they'll be paid. The company listed assets of $2.2 billion.

    Winn-Dixie has also been kicked off the New York Stock Exchange, where its shares had sold for more than $48 (fueled by takeover speculation) in 1998, but as of March 29 they had fallen to 86 cents on the "pink sheet" over-the-counter market.

    The paring of assets has been relentless. The company has closed, sold, or subleased 156 stores, and closed distribution centers in Louisville, Ky.; Raleigh, N.C.; and Sarasota, Fla.

    (Winn-Dixie operates conventional supermarkets, upscale Marketplace stores, and the low-price warehouse store format SaveRite, which it introduced two years ago to the Georgia market.)

    At presstime in early April, more store closings, as well as layoffs of some of its 79,000 employees, were expected to be proposed in coming weeks. At that time, the chain was operating units throughout Florida, Georgia, North and South Carolina, Alabama, Mississippi, Louisiana, Tennessee, Virginia, and the Bahamas. The three Virginia stores were being sold at presstime, and the company has said it would be out of the state completely by June 1.

    Winn-Dixie previously jettisoned its Dixie Packers manufacturing facility; shuttered its Miami, Fla. dairy and Greenville, S.C. ice cream plant; and transferred production to other facilities. It has sold its Crackin' Good Bakers and Crackin' Good Snacks manufacturing facilities, based in Valdosta, Ga. By the end of April the company was expected to exit its Montgomery Pizza manufacturing facility. In addition, Winn-Dixie has begun marketing for sale its Chek Beverage, Deep South Condiments, and Astor Products manufacturing assets.

    Believers and doubters

    "There's a lot of low-hanging fruit," says new c.e.o. Lynch of opportunities Winn-Dixie has to recover sales and stature. He has been sizing up the challenge, which is formidable, and has concluded that "there's a huge opportunity for Winn-Dixie if we just get up to industry standards and best practices."

    Lynch acknowledges that the company has lagged badly in nearly every important area, from customer service to vendor relations. "We're now driving very hard to get there," he says, then sounds an optimistic note: "There's room for Winn-Dixie in this marketplace."

    The company's fourth president in six years, Lynch has asked vendors and associates for their help in the recovery effort, and has promised customers that Winn-Dixie's stores will be dramatically improved. He has already taken concrete steps to make solid improvements on all fronts.

    At the chain's Ponte Vedra Beach Marketplace unit in Florida, which Lynch showed off in March to reporters, an inviting produce department, a gift center, and a large wine selection all lend the store a halo of quality and excitement that's missing from most of the company's other outlets. Lynch intends to upgrade those stores, department by department, over the next year, first by revamping a model store in each region, and then rolling out the improvements to the other units in the market.

    According to Lynch, bakery, deli, and meat departments will be upgraded first. Other infrastructure improvements, however, will take longer.

    "Customers need to feel good when they enter your store," says Lynch, commenting on the selling floor upgrades. "You have to create a feeling of trust with the customer. When there are quality, quantity, and a consistent level of service day after day, then your customers will come back. We have to create an environment of trust with our customers, our trading partners, and our associates. If we do that, we'll be successful in the future."

    The c.e.o. has promised to establish a new customer service department headed by a v.p. of customer service, who will report directly to Lynch. A team of customer service specialists will be deployed to cover clusters of stores.

    Lynch adds that he's putting in place sales incentives and merchandising initiatives in an effort to improve the shopping experience for customers and help improve sales performance and morale. For example, he challenged Winn-Dixie florists and managers to boost Valentine's Day sales, resulting in a 39 percent increase over last year's comparable sales, and nearly a 9 percent increase for the week.

    Open communication

    Within just a few days of the bankruptcy filing, Lynch held a "town meeting" with more than 1,400 store, produce, and market managers in attendance, where he discussed his management style, which is focused on communication, trust, teamwork, and leadership, urging his managers to adopt those principles, as well. Lynch was forthright with his associates, telling them that more stores will have to close and that there will be fewer employees.

    "I can tell you that he's very committed to communicating frequently and candidly with our associates," says Kathy Lussier, senior director of communications at Winn-Dixie. As a result, she says, many associates have sent e-mails to Lynch and to her, expressing gratitude for Lynch's policy of keeping them in the loop and "telling it like it is."

    "This is a very stressful time for our associates," notes Lussier, "and [Lynch] realizes that having accurate information in a timely manner helps to ease their anxiety so they can focus on what's most important right now -- driving sales and turning around the company."

    Lynch is confident that he can make it work.

    "My immediate focus is on quickly and cost-effectively improving sales across the entire chain," the top executive said when the bankruptcy filing was announced in February. "I believe improving the execution of merchandising and sales-focused initiatives, reinvigorating our associates, and restoring a sales-driven culture across the organization can achieve sales growth quickly without significant capital expenditure. We are therefore improving perishables offerings and other product merchandising, as well as implementing store sales competitions and other initiatives to get our associates excited about driving sales. These tactics have proven successful in my previous turnaround experience, and I believe they can work at Winn-Dixie."

    An unclear future

    He has the full support of the company's board. "We are very committed to management, to Peter Lynch. We have all the confidence in the world in Peter's leadership and ability," chairman H. Jay Skelton, who is also president of D.D.I., Inc., the investment company of the Davis family, who founded Winn-Dixie and holds 36 percent of its common stock, told the Florida Times-Union in February.

    But outside the Winn-Dixie organization, there are skeptics, among them industry analysts, consultants, vendors, and others with a vested interest in the company's success.

    "I really don't think it's feasible," says Wall Street analyst Gary Giblen, director of research at CL King & Associates, who has been following the supermarket industry for many years. "I think it will be broken up and sold off. [Lynch] will give it a shot, but it won't last."

    Says one longtime major supplier to Winn-Dixie, who asked not to be identified, "We need to give Lynch the benefit of the doubt. But I think Winn-Dixie is already out of business. They just don't know it."

    Patrick G. Berman, director of retail brokerage at Cushman & Wakefield in Tampa, Fla., gives the company "a better-than-average chance to survive." He also suggests, however, that the company "may be the third wheel [in the real estate market], and it may be one too many. It depends on how they come out of bankruptcy." Berman says there is now virtually no market for shopping centers anchored by Winn-Dixie stores, while those anchored by Florida market leader Publix Super Markets sell at a premium.

    "No one's selling Winn-Dixie right now," says Berman. "It's just too difficult. How do you borrow the money? It's just too risky."

    Berman noted that under the terms of the bankruptcy agreement, Winn-Dixie has been able to "reject" $60 million in lease expenses it was previously paying for stores that have closed. "It was costing them $5 million a month, month after month, for empty stores," he says. "Now they're off the hook."

    Others posit that, as Lynch's strategy suggests, the chain could be transformed to a leaner, more viable operation that could find a new place in the market. "If the business holds itself together, Winn-Dixie could shrink down to a more profitable platform by selling or closing stores in various markets that are unprofitable," predicts Evan I. Mann, a commercial bond analyst with Gimme Credit in New York. "That's the direction they're going to head in. But if sales erode further and competitors really pounce on them, there won't be a Winn-Dixie anymore."

    In a Feb. 23 report to clients, Mann predicted,"[T]o emerge from bankruptcy, Winn-Dixie will have to shrink down significantly to a core group of stores that can operate profitably and generate sufficient cash flow to reinvest in remaining competitive. We believe there is a 50 percent likelihood Winn-Dixie winds up liquidating within the next two years."

    Lynch is patient with such skepticism. "Just give me time," he says. "In a couple of years it will be a smaller company than it is today, but a very well-run company focused on very good customer service, very good perishables, and a company that people want to do business with."

    Charting the fall

    How did Winn-Dixie stray so far from that model, and is it too far from it to find its way back? Throughout the industry, people have been shaking their heads; although there have been warning signs for some time, it's still been hard for some to accept that a company with the history and reputation of Winn-Dixie could have fallen so deeply.

    Or is it? Securities analyst Giblen predicted bankruptcy for Winn-Dixie three years ago. "People thought I was out of my mind, but it happened pretty much the way I expected," he says. "Sales were slipping, there's no barrier to new competition in Florida, and they kept on flip-flopping in their strategy. Every 18 months or so, they changed. They were low-price, then it was produce, then it was focus on Hispanics, and then having good meat. You can't do that. You have to come up with a plan and execute it consistently."

    Pressed by competition, especially from Wal-Mart and Publix, Winn-Dixie couldn't seem to figure out where it fit in. In an effort to compete head-on with Wal-Mart, two years ago the company turned most of its Georgia units, as well as some Florida supermarkets, into SaveRite low-price warehouse operations. "Big mistake," says Mann. "They can never be the low-cost producer and compete with Wal-Mart." Says one source in a position to know, some of those stores ended up being run by 20-year-old former stock boys with no management training or experience.

    "They played right into Wal-Mart's hands," says Berman. "You can't fight Wal-Mart head-to-head on pricing. That's what killed them."

    Last May, former c.e.o. Frank Lazaran told reporters and analysts that the company could still hold its own, positioned between its two competitors. "We believe there's a defined space we can compete in very effectively," he said.

    Six months after Lazaran said there was room to operate, he was gone, and Lynch, known for turning around Albertsons' ailing Acme brand, was in. An initial inspection of some 50 units made it clear to Lynch that the company had a number of "sterile, unappealing stores" that were missing many sales opportunities. The company was suffering from low employee morale, as well as questionable merchandising practices, and needed to regain a lost customer base. Tellingly, however, Lynch says that his company's problems should not be blamed on Wal-Mart: "They're self-inflicted."

    Even as Winn-Dixie grew to more than 1,030 stores across the Southeast, the forces driving competition -- the advances of technology and productivity, marketing and merchandising innovations, and creativity -- seemed to pass it by.

    One former employee says that when he joined the company after working several years for a more progressive supermarket chain, "It was like going back in time 20 years." They were so backwards it was amazing. There was no training department; the technology was a joke. Loss prevention was Barney Fife sitting behind a desk wanting to pull the trigger on everybody suspected of stealing or shoplifting."

    Healing vendor relations

    In late March Winn-Dixie hired its first new executive (after Lynch) since the Chapter 11 reorganization kicked in: Thomas Robbins, s.v.p. of merchandising. Robbins was formerly an e.v.p. of sales and marketing for Price Chopper and has held executive positions at the Great A&P Tea Co., Thriftway Food & Drug, and the Kroger Co., where he launched his career in 1967. He succeeds s.v.p. Dick Judd, who now focuses solely on supply chain management.

    Whether Winn-Dixie can be turned around by Lynch's team and its new sales-driven management approach depends in large measure on how much support the company gets from its suppliers, many of whom in the meantime must wade through the bankruptcy process in hopes of collecting what they're owed. For now, they're being asked to continue to provide products and services under normal terms, so the company can keep its stores open.

    In a letter to vendors Judd, then s.v.p. for supply chain and merchandising, noted that the bankruptcy resulted when the second-quarter financials and reduced liquidity reported set off a chain reaction that included tightening of trade credit from some vendors.

    "Unfortunately, our filing means that any payments owed by Winn-Dixie to a vendor for goods or services provided prior to the filing cannot be paid at this time," explained Judd. "These amounts are 'pre-petition' claims, and vendors seeking payment for such claims must do so through the Chapter 11 process. If you have such a claim, we sincerely regret the impact of our filing on you as a valued business partner. We hope you will recognize that our ability to pay you in full, under normal payment terms, for all goods and services provided after the bankruptcy filing means that our relationship going forward will be mutually beneficial."

    Trouble is, there's some degree of ill will festering among vendors, which Lynch and his team will have to counter with convincing evidence that a revamped Winn-Dixie will treat suppliers more fairly. Lynch has taken aggressive steps already to deal with that lingering negative reputation.

    House of cards

    Many vendors are willing to talk about the rocky relationships they've had with Winn-Dixie, but not for attribution, as they don't yet want to jeopardize any improvements in their dealings with the chain, should Lynch's reforms take hold. Vendors will say the trouble started when, instead of figuring out how to attract and keep more customers and sell them more product as the best way to generate more sales and make more money, Winn-Dixie became obsessed with getting every nickel out of suppliers through such tactics as demanding high slotting fees, imposing onerous credit terms, and claiming rampant unauthorized deductions.

    One manufacturing source recalls, "You'd take Wal-Mart a new product and they'd say, 'That's great. When can we get it? How much? And what are you going to do to support it?' When we'd take it to Winn-Dixie, they'd say, 'You know the deal: It's $82,000 an SKU.' They pushed vendors away."

    Of that approach to retailing, one veteran consultant, experienced with both manufacturers and retailers, remarks, "You can't build your business by squeezing your suppliers harder. You discourage suppliers from partnering on new initiatives. Why would you want to work with a company that's going to keep hitting you over the head?"

    The consultant cites a history of Winn-Dixie taking unauthorized deductions for a myriad of reasons, causing repeated hassles and headaches for suppliers. Over time, the consultant says, Winn-Dixie seemed to increasingly rely on the financial benefits of such tactics. "It was a house of cards built upon the shaky foundation of reliance on deductions and allowances from suppliers, and abusing payment terms. At the same time, same-store sales were declining. So that was the wind that blew that house of cards away."

    One major supplier reports now, however, that there seems to be a change in the approach being taken by Winn-Dixie's new management team. "We've been told that things are going to be different," he says. "We should give Peter the benefit of the doubt. If they reduce their slotting fees and change their return policies, things could improve. Manufacturers want to work with retailers they like, and help them grow their business, because then everybody benefits."

    Moving forward

    Lynch says he won't let the past harmful practices sabotage his vision for Winn-Dixie's future. "That may have been the practice in the past. That's not the way that [I do] business with vendors. Our vendors are very important to me. They're our lifeline. We need to work together if we're going to succeed."

    It would appear that many vendors, elements of skepticism aside, aren't prepared to write off Winn-Dixie just yet. In March Lynch held the first of what he says will become regular quarterly meetings with vendors. Five hundred of them showed up. "I talked candidly with them, and then we had a Q&A session and I answered every single question. After that, it took an hour to get out of the room."

    Lynch also says that every Tuesday morning he holds individual, top-to-top meetings with key vendors. The first meetings were with Procter & Gamble, PepsiCo, and Kraft. "We can learn a lot from our vendors, and we need to take advantage of their expertise and knowledge if we're going to succeed in this turn-around," he notes.

    Ultimately, Lynch's faith in the future of Winn-Dixie is tied to a belief that the Southeast market still has room for an improved Winn-Dixie. "The world is just not going to end up with Wal-Mart and Publix," he adds. "There's room for a good retailer that runs a good operation. In the past, Winn-Dixie didn't run the type of stores that it should have and it wasn't focused on its customers. We're going through the tunnel right now, but I see the light at the other end."

    By Bob Gatty
    • About Bob Gatty Bob Gatty is a Washington, D.C.-based freelancer who specializes in covering the food and convenience industries.

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