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Oct 13, 2023

THE LION’S HUNGRY

When Ralph W. Ketner and two co-workers quit their jobs with Winn-Dixie Stores

When Ralph W. Ketner and two co-workers quit their jobs with Winn-Dixie Stores 30 years ago to open their own grocery store, they had more ambition than cash.

Undaunted, they went through the Salisbury telephone book looking for people who would invest in their venture at $10 a share.

They found 125 takers, and shortly Food Town grocery store was open for business.

Because of numerous stock splits since 1957, one share of Food Town stock, later renamed Food Lion, has grown into 12,960 shares today. An original investment of $1,000 would be worth $14 million.

"Food Lion went from a dying corporation to one of the country's fastest-growing supermarket chains almost overnight," said analyst Kenneth M. Gassman of Wheat, First Securities.

Over at least the past 10 years, Food Lion's sales and earnings have been growing at an annual rate of 25 percent to 30 percent, Gassman said. The number of new Food Lion stores has increased 22 percent to 26 percent annually during that same 10-year period.

The 571-store supermarket chain grossed $3.8 billion in sales last year. Company executives expect sales to increase by at least $1 billion in 1989, and to top $5 billion next year with 1,000 stores.

Food Lion has made big gains in the industry. In 1985, it ranked fifth in market shares in Tidewater. Last year it moved into second place behind Hampton Roads grocery giant, Farm Fresh. But it is a distant second.

Farm Fresh commanded 38.7 percent of the grocery market last year, while Food Lion got 18.9 percent, according to Food World magazine's most recent annual survey.

Sales haven't always soared for Food Lion. During the first decade, Ketner's stores closed as fast as he and his partners worked to expand the company. By 1967, 16 Food Town stores had opened in North Carolina, and nine had closed again.

They tried everything from serving breakfast in the store parking lots to giving away cars. As soon as a competitor would come up with a better gimmick, the customers would be gone.

Finally, Ketner discovered the secret that would keep people consistently shopping at Food Lion:

Cash.

By offering lower prices than its competitors, Food Lion started keeping its customers.

The 100-hour weeks that Ketner worked during the lean years paid off. He and his partners are no longer actively involved in the day-to-day operations, although Ketner still comes into the corporate office in Salisbury almost every day.

Tom E. Smith, whom Ketner recruited away from Del Monte Inc. in 1970, has replaced Ketner as chief executive officer.

The company's philosophy didn't change with the transition of management. Food Lion is still dedicated to low prices and tight cost controls, with a heavy focus on people and performance.

"I keep one thing in mind with every decision I make for Food Lion," Smith said. "My rule of thumb is that if my mom would be comfortable shopping in our grocery stores, then everybody else probably would be, too."

In 1974, a foreign grocery store chain was attracted to the growing food chain. Delhaise Le Lion, which operates about 100 stores in Belgium, bought about 52 percent of Food Lion's voting stock.

The two corporations have what is known as a "stockholder relationship," Smith said. Delhaize executives sit on Food Lion's board of directors, but they are not involved in management decisions.

"They were looking to increase their assets, and Belgium law restricted further growth within its borders," Smith said. "A big part of the deal was that Delhaise would always vote in agreement with Food Lion. It's been a profitable relationship for both companies."

Maintaining a high profit margin is Smith's greatest challenge, he said. Over the years, he has gotten very inventive at finding ways to cut costs.

The company saves about $2 million a year by recyclng its cardboard waste. It uses banana crates as bins for cosmetics instead of expensive display racks. Food Lion makes about $1 million annually by selling ground-up bones and fat for fertilizer.

Smith stars in most of the company's TV commercials, keeping advertising costs down.

Most of the grocery chain's stores are based on one design to save on architect's fees.

The stores are small by industry standards, ranging in size from 25,000 to 29,000 square feet. The small, no frills markets cost about $650,000 each to construct.

By comparison, Farm Fresh Supermarkets Inc.'s average store size is 45,000 to 60,000 square feet and costs about $1 million to build.

Smith said Food Lion can get away with smaller stores because it can stockpile its groceries in warehouses located within 200 miles of every store.

"If a store runs low on certain items, they can call for a delivery and the new merchandise can be in the store within a few hours," Smith said.

Also, Food Lion sticks to basic groceries. It carries a smaller selection than some of its competitors.

Customers won't find many extras like video stores or florists.

"I’m not knocking what other grocery chains do, but we’d rather stick to selling groceries," Smith said. "It just didn't seem necesssary to add all those extras to bring in customers.

"All grocery stores have their own gimmicks to keep their share of the market. Our gimmick is selling groceries cheaper than anybody else."

Analyst Gassman said the strategy has worked. "The company has been giving all of its competitors a run for their money ever since its low-price strategy began (in 1967). It's quickly becoming the consistent market winner."

Not only is the low-priced chain beginning to take the lion's share of the market, it has been ultimately responsible for lowering grocery prices in most of the regions where it operates, analysts report.

"It's really satisfying to watch grocery prices fall in an area after we move in," Smith said. "When we went into Jacksonville, Fla., last year, it was nearly a two-billion-dollar market. Within a year, shoppers were paying fifty million dollars less for their groceries. If you’ve got anything at all inside of you, you’ve got to feel good about contributing to savings of that magnitude."

Locally, prices began dropping shortly after Food Lion moved in, Gassman said.

"The Tidewater market, which is controlled by Farm Fresh, was high compared to other areas in Virginia," he said. "When Food Lion opened up in Virginia Beach, the other stores started playing with their prices. We started to see the overall market decreasing."

Grocery prices are 15 percent lower in the 10 states where Food Lion has stores, according to Food World magazine.

For the average family, that means a savings of about $400 a year on their groceries.

Michael E. Julian, president and CEO of Farm Fresh said that Food Lion may be getting too much credit for lowering prices in Tidewater.

"The biggest impact on local grocery prices was when we merged with Giant Open Air Markets in ’86," Julian said. "The merger increased our buying clout. We were able to save by buying in larger quantities, and we passed that savings on to consumers.

"Comparing a limited-selection store like Food Lion with a store of our size us is like comparing apples and oranges."

To help keep costs down and productivity high, Food Lion offers employee incentives, Smith said.

In the warehouse, the workers who fill store orders are paid on a productivity incentive program. The system allows a base salary with income increasing as a worker's productivity increases.

The workers who load the trucks also get bonuses for productivity. Workers sometimes make a contest out of who can stock a truck fastest. Visitors to the warehouses must be alert to stay clear of speeding forklifts and motorized dollies.

Food Lion's lower prices and cost-cutting techniques have not come at the expense of its nearly 22,000 employees. In a recent survey of America's best 500 corporations to work for, Food Lion ranked 73rd based on wages, benefits, working conditions and career opportunities.

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