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Food Lion claws its way out of jungle

Tom Smith has replaced the collection of stuffed wild animals that once decorated his office with tasteful wildlife pictures.

"Frankly," explained the lanky, plain-spoken chairman of Food Lion Inc., "I've had enough other things to defend in the past two years" without having to argue his passion for big-game safari hunting.

Indeed, Food Lion _ once the nation's fastest-growing grocery chain _ has been engaged in its own version of jungle warfare the past two years.

A bungled growth plan caused casualties in the bottom line. The U.S. Department of Labor hit the company with a record $16.2-million settlement for unpaid overtime. And an ongoing feud with a food workers union led to a network TV news show alleging that some Food Lion butchers were repackaging old meat.

Food Lion's once-soaring stock has lost more than half its value since December 1991. The company last month moved to retrench by closing 88 unprofitable stores, including five of the 21 Food Lion stores in Tampa Bay. Worse, potential customers still harbor doubts about shopping there 15 months after the expose on ABC's Prime Time Live.

"I never saw the TV show," said Jeanne Hillis, a St. Petersburg title company clerk who has never been to a Food Lion. "But I've heard about the derogatory publicity about the freshness of their food. It's stuck in my mind. A friend was talking about it just last week."

Smith spent last year engineering a comeback strategy and assuring customers that Food Lion's food handling problems were grossly exaggerated.

Now many securities analysts think the company is poised to get back on track, even though none sees a replay of the 1980s, when a new Food Lion opened every four days.

"They're not back yet, but their fundamentals got better every quarter in 1993," said Brooks O'Neill, an analyst with Piper Jaffray Inc. "They were slammed hard but it wasn't a death blow. They were flapping around on their back. But Food Lion is absolutely going to come back."

Said Smith: "We took 1993 to double-check and rethink everything we do. Our new approach is long term. But our growth is going to improve in steps rather than big jumps."

Retrenching in Texas,

Florida after mistakes

For years Food Lion has been swimming against the grocery industry tide. It papered the Southeast with small, no-frills stores while competitors built sprawling operations stocked with twice as many goods, plus floral departments, gourmet food counters, sit-down restaurants, video rentals, liquor stores, photo shops and pharmacies.

Food Lion has struggled in Tampa Bay in particular. Since the company's arrival here five years ago, in fact, Florida has been its biggest problem market behind Texas, where it is closing half its stores only three years after opening them.

"They came into Tampa Bay with an aggressive plan but underestimated the difficulty of challenging the competition already here," said Ron Floto, chairman of Tampa-based Kash n' Karry Food Stores Inc., ticking off three other big national chains that attacked the market, then pulled out in the past decade.

After an initial burst of store openings, Food Lion's tiny market share in Tampa Bay has shrunk. Store growth peaked when the company shifted its building frenzy to Texas in 1991. The company's sprawling new regional distribution center in Plant City is serving 50 stores and operating at only two-thirds capacity, a slightly better than break-even proposition.

Food Lion also made a lot of real estate mistakes in Florida. One Palm Harbor store within a mile of another Food Lion closed only a year after opening. The other store closes next week.

"Strategically, it was a mistake to go into Florida with North Carolina developers" unfamiliar with Florida's tougher building restrictions, said Vince Watkins, a former vice president who helped orchestrate the 1988 move.

"It was already a tremendously overbuilt market. Then came the recession, which hit Florida real estate first. A lot of local (shopping center) developers gave us the cold shoulder because they could get a Winn-Dixie or Publix just as easily that offered them more sales volume and customer traffic. Plus the other grocers were willing to do more lucrative deals with developers while we were coming in from the start insisting on capping common area maintenance fees."

It was a strategy Food Lion would repeat in Texas with even more disastrous results. Unable to make deals with Texas shopping center builders, Food Lion built its own stores. Those are the ones now being shuttered and put up for sale.

Yet Food Lion still sees Florida and Texas as its biggest opportunities for growth now that the company has a foothold.

The company is likely to concentrate on spreading its 103-store presence in Florida farther south in the string of small central towns. And while it will close five unprofitable stores in Tampa Bay in the next two weeks, it will open its first store in suburban Miami _ a 200-mile drive from Plant City _ this year.

The rate of growth will be far more deliberate, however. The company plans to open as many as 50 stores a year _ almost a third of the pace of the past few years. Meanwhile, a remodeling effort will be doubled to about 60 or 70 stores a year so all of its 1,000 stores get a face lift every five years and a $1-million overhaul every 10 years.

Many changes follow

"Prime Time' report

Sales nose-dived 10 percent in the wake of the Prime Time Live report. Shortly thereafter, Smith took steps to assure customers that everything was okay.

Food Lion hired a consultant to review the company's contested food handling rules and review work scheduling standards.

Both got a clean bill of health. And its work standard benchmarks were judged to be about the same as those used by most other big grocers.

Food Lion also pledged (and now advertises) that it will not repackage or rework meat in its butcher shops _ a profit-protecting practice many grocers use in mixing yesterday's steaks into today's meat loaf.

Smith then turned to customer research. He found people want more than just low prices _ the hallmark of Food Lion's old strategy. They want high-quality food and a broader selection as well.

So all Florida stores will get deli-bakeries as they are remodeled. The produce and perishables selections have been broadened beyond the basics.

Employees traded in their old blue company polo shirts for uniforms that include a bright red tie and a teal apron. And Food Lion's ads are getting slicker, even though its $25-million annual advertising budget is far smaller than those of grocery chains of similar size.

"One way you can talk about quality is with better commercials," said Tom Crabtree, Food Lion's vice president for advertising.

Smith, who speaks in a clipped, North Carolina drawl, was retired as the company's TV pitchman except for an occasional appearance. Commercials that were once produced in-house to save money are now being done by the Atlanta office of Ogilvy & Mather.

Smith also learned that Food Lion's standard selection may be fine in the Carolinas, Georgia, Tennessee and Virginia, but that tastes in Florida or Texas are different. So merchandisers are trying to tailor the selection for different regions now.

Food Lion will cling to its everyday low price strategy. But it has become more promotional after a test last summer in 400 stores including Florida produced traffic and sales increases.

Company fights union,

ABC and ex-employees

Behind the sheen, however, Food Lion is proving it's no toothless feline.

The company is knee deep in active lawsuits with disgruntled former employees over pensions and unpaid overtime, some shareholders trying get back some of their shrunken investments, ABC, the producers and writers of the Prime Time Live report, and an old nemesis that figures in much of the above, the United Commercial and Food Workers Union.

Food Lion rejected the conventional standard public relations response to bad publicity, choosing instead to fight back. The reason: It blames most of its recent problems on the food workers union, which started the Department of Labor overtime investigation with a highly publicized study of its own, helped employees sue for back pay and put ABC in touch with 65 former Food Lion workers to help the network prepare its report.

PR will not make the union go away, Smith said.

"The PR people said we should have just said, "I'll fix it,' and gone on," he said. "But our customers and employees who knew that what our critics were calling us was wrong would have been let down. They would have had the right to think I didn't know what was really going on. And some of these critics are out to destroy us."

The union declared war on non-union Food Lion when it began opening stores in Washington, D.C., where most grocers have contracts with organized labor.

Why would a union go to bat for the employees of a non-union competitor?

"We want to maintain decent wages and work standards throughout the industry," said Greg Denier, a spokesman for the food workers union. "When a company like Food Lion gains a competitive advantage (over union grocers) it puts pressure on their competitors to violate the (Fair Labor Standards) law."

Food Lion, which employs more than 65,000 people, has maintained that the overtime violations were caused by a handful of overly zealous supervisors or ambitious employees who worked off the clock in violation of company policies.

The number of employees who have joined in the collective legal actions seeking damages for unpaid overtime has gone from 900 to about 500 as the 1992 case winds on. About 114 of the cases were filed by former Food Lion workers in Florida, a few of whom contend they are owed more than $50,000 in unpaid overtime. Twenty of the Florida claims were filed by salaried assistant store managers.

"In Tampa Bay, Food Lion proved to be a very chaotic work experience because the company was expanding so quickly," said the attorney for the Florida workers, John Davis. "It was pandemonium during these grand openings. But as soon as the opening day crowds left, they cut the staff. These people were under incredible pressure to produce."

Meanwhile, the company is trying a new approach to vindicating itself in the dispute over ABC's news coverage. It has reactivated a lawsuit against ABC under the 1970 Racketeer Influenced and Corrupt Organizations Act. It may be the first time that RICO _ created to fight organized crime but more recently to silence abortion clinic protesters _ has been used against the press.

Food Lion chose RICO rather than a libel lawsuit because it would be easier to prove. Libel law generally would require Food Lion to prove ABC was malicious in airing a report that also was untruthful. RICO basically defines racketeering as the practice of using a series of illegal acts to systematically gain a profit advantage.

Food Lion alleges ABC reporters broke several laws to get their hidden-camera story in order to profit with higher ratings for Prime Time Live. ABC reporters faked their identity to get Food Lion jobs. Then they used hidden cameras to film employees without telling them. All this occurred without consent on private property. And the six-minute report culled from 50 hours of surreptitious filming caused Food Lion to lose market share, the company alleges.

"The suit may be novel," said ABC attorney Devereux Chatillon. "But it's also meritless and outrageous."

Meanwhile, the union has continued its attacks. Last month it accused Food Lion of selling out-of-date baby formula, then handed the results of its investigation over to the U.S. Food and Drug Administration.

Food Lion said the findings would be the same if the union sorted through competitors' stores. It is offering free formula to customers who find out-of-date formula on the shelves. Besides, Smith said, there is no profit motive because manufacturers buy back outdated products at full price.

Food Lion has a suit pending to stop the union from interfering in its business.

"Obviously, we have not been intimidated by their suit," said union spokesman Denier.

FACT BOX

Based: Salisbury, N.C.

Origins: Small-town grocer started in 1957 by three former Winn-Dixie employees. Fought off bankruptcy for 10 years until they hit on pricing entire categories of groceries at lowest price in the market rather than copying other chains, which put on sale selected items most often in demand.

Store concept: Sticks to groceries in no-frill, 30,000-square-foot stores that carry about 18,000 items, less than half the stock of most big grocery stores today.

Ownership: About 30,000 American shareholders, but a majority of voting stock held by Delhaize Le Lion, a Belgian retailing giant.

Recent history: Was America's fastest growing supermarket chain until 1992, when a myriad of problems stunted company's growth at about 1,000 stores in 14 states. Now the eighth largest grocer in the United States, but its stock is worth only half what it was two years ago. Trying to get back on track after overly ambitious growth strategy, recession, ongoing feud with food workers union, network TV allegations of unsanitary meat processing and employee and shareholder lawsuits all hit in 1992.

Quote: "As tough as 1993 was for us we used the time to re-evaluate everything we're doing and put together a plan that positions us for the year 2000. But we're going to come a little bit at a time, not in the big jumps. " _ Tom Smith, chairman and CEO

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