2110 Executive Drive
Food Lion, Inc. is the seventh-largest supermarket chain in the United States. The company operates more than 1,070 stores in 14 states, primarily in the Southeast but also extending to the mid-Atlantic region as far north as Pennsylvania and to the Southwest as far as Texas. Food Lion enjoyed rapid growth averaging 20 percent per year from the late 1960s through the 1980s based on its low-price, high-volume strategy. The chain sells many items at cost or even below cost to lure customers through its doors. By cutting its overhead dramatically, Food Lion has been able to offer "everyday low prices" to consumers and still manage to reap some of the highest profits in the supermarket industry. Starting in 1992, however, growth slowed dramatically and profits fell as the company had to deal with some negative media coverage, labor conflicts, and stiff competition in some of the new markets it had targeted for growth.
In December 1957 Ralph W. Ketner, Brown Ketner, and Wilson Smith opened a Food Town supermarket in Salisbury, North Carolina. The three men had worked together in the grocery business for some time at a small chain that was owned by the Ketners' father but had recently been sold to Winn-Dixie. Dissatisfied with their new employer, the Ketners and Smith set out to open their own chain of supermarkets. By calling on everyone they knew in Salisbury for a small investment, the trio slowly raised enough capital to begin operations. Although growth was sluggish for the first ten years or so, those early investors made out very well in the long run. After numerous stock splits, an initial investment of 100 shares, originally valued at $1,000, was worth more than $16 million by the end of 1987.
During Food Town's first decade, the company tried every kind of gimmick available to entice customers into its stores. Contests, free pancake breakfasts, trading stamps, beauty pageants, and other promotions captured shoppers' attention, but not their sustained business. By 1967, after a full decade of operations, Food Town had only seven stores, and earned less than $6 million that year.
In 1967 Ralph Ketner formulated the strategy that would launch Food Town's dramatic rise in the retail food industry. Ketner, the story goes, locked himself up in a Charlotte, North Carolina, motel room with six months worth of invoices and an adding machine. When he emerged three days later, he had determined that prices could be slashed on 3,000 items, and, if sales volume increased by 50 percent, the company would still show a profit. Gambling that the reduced-price strategy would adequately expand its repeat-customer base, Food Town implemented his plan. Ketner later remarked, "One thing about taking a gamble: when you're already broke you can't do much damage." Soon the company adopted an unusual new slogan: "LFPINC," which stood for "Lowest Food Prices In North Carolina," and shifted its advertising emphasis from print to television. Ketner's gamble was a winner; increased volume soon more than made up for the price reductions.
The 1970s were a period of tremendous growth for the company. By 1971, sales were nearly $37 million. Although it occasionally snapped up a particularly appealing acquisition, Food Town preferred to build its chain from within. The company tended to construct more smaller stores rather than fewer larger ones in order to provide greater convenience. In 1974 the second-largest Belgian supermarket chain, Delhaize Freres & Cie, "Le Lion," purchased a majority of Food Town's shares. Delhaize "Le Lion" signed an agreement to vote with Chairman Ralph Ketner for ten years on all policy issues. The company's growth accelerated dramatically in the late 1970s and the 1980s. Food Town opened stores in Virginia in 1978 and in Georgia in 1981. In 1977 the chain operated 55 stores; by 1987, it ran 475.
In 1982, Food Town was sued by the owner of several supermarkets in Virginia which operated under the name Foodtown. The court restricted the use of Food Town's name in certain markets due to the similarity. As a result of this action and in anticipation of similar problems with another group of stores in Tennessee, the chain decided to change its name. The new name, Food Lion, was selected partly because the Belgian chain Delhaize had a lion logo, but also because the chain could save money in changing the signs on its stores: only two new letters, an "L" and an "I," needed to be purchased since the "O" and the "N" could be shifted over. This type of frugality was characteristic of the chain. In 1983, Food Lion carried its new banner into Tennessee as sales surpassed the $1 billion mark.
In the summer of 1984, the National Association for the Advancement of Colored People (NAACP) organized a boycott of Food Lion stores because the chain had declined to sign a "fair share" agreement. The agreement called for raising the number of African Americans in management, increasing minority employment, and pledging to do business with minority-owned vendors and construction firms. The NAACP moved its annual board meeting from New York to Charlotte, North Carolina, to attract attention to its protest. The boycott ended in September when Food Lion signed an agreement with the NAACP to increase minority opportunities with the company.
Food Lion branched into Maryland in 1984. Early the following year, the company acquired Giant Food Markets Inc. of Kingport, Tennessee. It soon sold the 22 Jiffy Convenience Stores that came with the Giant deal, sticking to what it did best--the conventional supermarket trade.
In January 1986, Tom Smith became CEO of Food Lion, replacing Ralph Ketner, who remained chairman. Smith, who had once worked as a bagger for a Food Town store, returned to the company in 1971 as a buyer and became president and chief operating officer in 1980. Smith steered Food Lion on the same course as Ketner had, stressing low prices and efficient service. The company topped the $2 billion sales mark at the end of Smith's first year as CEO.
By the late 1980s, Food Lion had become the dominant force in the regions in which it did business. Stunning earnings and market share encouraged the chain's further expansion. In 1987 Food Lion prepared to extend its territory into Florida. Food Lion saw Florida's increasing population and the relatively high prices of chains already in the area, such as Winn-Dixie and Publix, as an excellent opportunity for expansion. The chain planned to double its number of outlets by first tapping Florida's shoppers, then possibly moving westward through Alabama, Mississippi, and Louisiana. After nine months of market-softening advertising proclaiming "when we save, you save," three Food Lion stores opened in Jacksonville, Florida. The response was phenomenal; security guards had to be hired to help people form orderly lines at cash registers. By the end of the year, Food Lion had plans for 20 more stores and a distribution center of 1,000,000 square-feet to be built in nearby Green Cove Springs. That facility positioned Food Lion for eventual entry into other Florida markets such as Tallahassee, Tampa, and Melbourne.
Since Ralph Ketner formulated Food Lion's everyday low-price strategy in 1967, the company stressed doing "1,000 things 1% better," an attitude that was responsible for Food Lion's operating expenses of only 13 percent of sales, compared to a 19 percent average in the industry. Food Lion cut costs in a variety of inventive ways: recycling banana boxes to ship cosmetics and health products and using exhaust from freezer motors to help heat the store in the winter, for example. Food Lion also used aggressive inventory strategies, ordering enormous quantities of products in order to save through volume buying.
By the end of the 1980s, Food Lion was the fastest-growing and one of the most profitable supermarket chains in the country. In 1990 alone, Food Lion opened 20 more stores, while sales hit $5.6 billion (beating Smith's goal of $5 billion set five years earlier). Earnings of $172.6 million for the year equated to a 3.1 percent margin, besting the industry average of one percent. Smith set a new goal of reaching $14 billion in sales by 1995. He also became chairman of Food Lion in 1990, replacing Ketner who remained on the board of directors.
To keep the company growing, Smith broke with tradition by targeting a state noncontiguous to the ones Food Lion already operated in: Texas. That market appeared vulnerable to a low-price operator since food prices there averaged 15 percent higher than Food Lion's. By the fall of 1991, Food Lion had opened 41 stores in the Dallas-Fort Worth area. Sales for 1991 increased 14.3 percent to $6.4 billion, and the firm's margin remained steady and healthy at 3.2 percent.
The following year, however, Food Lion faced several challenges. In November, toward the end of a year in which Food Lion opened 131 new stores and expanded to Oklahoma and Louisiana, ABC's PrimeTime Live news magazine television show aired a story claiming that Food Lion stores had knowingly sold spoiled meat, fish, and poultry to its customers. The report included hidden-camera videotape appearing to show Food Lion employees masking the spoiled states of the products by rewrapping products whose sell-by dates had passed. Through the power of television, the effect of this negative publicity was immediate and significant. Chainwide same-store sales plunged 9.5 percent in November.
Particularly hard hit were stores in the states into which Food Lion had only recently expanded: Florida, Texas, Oklahoma, and Louisiana. Compounding Food Lion's difficulties were its less than robust sales in these new markets, especially Texas. Some analysts contended that Food Lion had misread the Texas grocery market. In any case, 1992 ended with a disappointing sales increase of 12.5 percent and a decreased margin of 2.5 percent. The full brunt of the PrimeTime story was felt in 1993 when sales increased only 5.7 percent and the firm barely broke even, posting net income of only $3.9 million due in large part to a $170.5 million charge incurred in order to close 88 stores, about 50 of them in the poorly performing Texas and Oklahoma markets. Ketner announced early in 1993 that he would not seek reelection to the Food Lion board, citing his frustration with constantly being outvoted on key board matters. Ketner had reportedly opposed some of Smith's expansion plans.
Food Lion sued ABC for fraud and racketeering, claiming that ABC had concocted the story. Smith also fought back on several other fronts. He moved to quickly boost customer confidence in the quality of Food Lion products by offering money-back guarantees. Moreover, the number of planned new stores was scaled back in favor of the expansion and remodeling of existing stores. This was seen as particularly important in markets such as Dallas-Fort Worth, where customers who might be attracted by low prices were turned off by the smaller size, smaller selection, and no frills of most Food Lion stores. Many of the remodeled stores featured the addition of a deli/bakery. In 1994, 65 stores were remodeled, with the number of renovations increasing to 121 in 1995. By contrast, Food Lion opened only 47 new stores in 1995.
Finally, Smith moved to address an ongoing conflict with the United Food and Commercial Workers Union (UFCW), which had been attempting to organize Food Lion for years. The UFCW had brought to the attention of the U.S. Department of Labor claims that Food Lion had violated child-labor laws and had forced some of its workers to work extra hours without receiving overtime pay. Rather than continuing to fight, Food Lion agreed to a $16.2 million settlement in 1993. Two years later, however, the matter had not been completely resolved since as many as a thousand Food Lion employees opted out of the 1993 settlement in order to pursue independent claims. Food Lion began to settle these suits in 1995 (without any admission of wrongdoing), adding hundreds of thousands if not millions of dollars to the amount it agreed to pay in 1993.
During 1995--a year in which sales growth continued to slow (a 3.5 percent increase to $8.21 billion, well below Smith's $14 billion goal of five years earlier) and the company's margin fell further to 2.1 percent--Food Lion's lawyers and public relations staff remained busy. New reports from the consumer watchdog group Consumers United with Employees (CUE) claimed that Food Lion had a "chronic problem" with selling out-of-date infant formula and over-the-counter drugs. Food Lion maintained that CUE was biased because of its connections to labor unions and cited an inspection by the U.S. Food and Drug Administration of 63 Food Lion stores which resulted in an overall "excellent" rating. Food Lion even conducted its own investigation of some of its competitors' stores to show that they too were selling a certain percentage of out-of-date items, thus implying that Food Lion was being unfairly singled out for an industry-wide problem. The firm did, however, agree to refund CUE for 1,088 cans of outdated infant formula CUE had purchased from Food Lion stores. In mid-1995 it also filed a $100 million lawsuit against the UFCW, former employees, and others alleging a conspiracy to destroy the company through the continuing attacks.
The company also remained embroiled in a lawsuit against ABC, alleging fraud, trespassing, and breach of fiduciary duty in the way that ABC had conducted its investigation and in its use of hidden cameras. The company was seeking $100 million from ABC in damages, profits made by ABC from the PrimeTime broadcast, and attorneys' fees.
While the outcomes of its various lawsuits were sure to have a profound impact on Food Lion, some analysts suggested that regaining its niche in the market was perhaps more crucial to Food Lion's future, as, during this time, low-price competitors such as Albertson's and Winn-Dixie appeared to be gaining ground on Food Lion. Nevertheless, as it moved toward the 21st century, Food Lion management remained optimistic. According to one company publication, Food Lion looked forward "with confidence to a future of continued innovation, continued growth, continued price leadership, and continued service to its customers and communities."