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A SECOND CHANCE

EMBATTLED WINN-DIXIE EMERGES FROM BANKRUPTCY PROTECTION WITH A BRIGHTER OUTLOOK

By Rodger Brown

Winn-Dixie's new slogan — “Getting better all the time” — seems to violate a fundamental principle of marketing: Avoid drawing attention to your weaknesses.

But the venerable, Jacksonville, Fla.–based grocery chain that once operated some 1,000 stores in the Southeast had few options when it emerged from bankruptcy in November 2006. It had lost customers in droves, shut nearly half its stores and laid off tens of thousands of employees.

So when the time came for a relaunch, the best Winn-Dixie could do was this humble brand proposition that is as much an acknowledgment of its flubs as a modest promise for its future. “They can't say ‘We're great! We're the best store in town!” said Karen Short, senior vice president of equity research at New York City–based Friedman, Billings, Ramsey & Co. “They can't do that after what they've done to destroy their brand equity. Their approach has been: ‘We know we've been bad. We're getting better. We're “the beef people.” We've got good prices. Please come back and give us a chance.' That won't be their slogan forever, but right now, they don't have a choice.”

As recently as 2000, Winn-Dixie was No. 123 on the Fortune 500, with $14 billion in sales. It lagged behind Albertsons, Kroger and Safeway, but it was still ahead of Publix, its fellow Sunshine State grocery chain, which was No. 137. Last year, however, Lakeland, Fla.–based Publix leapt to 107. Winn-Dixie plummeted to 307. “Before they went into bankruptcy, they were having serious problems with sales,” said Jeff Hershey, a Royal Oak, Mich., real estate and feasibility consultant with a specialty in grocery retail. “Their service departments were never able to compare to Publix, so what they pushed was price.”

But when Wal-Mart began elbowing itself into the grocery business, Winn-Dixie could no longer compete on price. “Wal-Mart always undercut them,” said Hershey. “So they ended up dropping to second, third, even fourth in market share.” So getting better all the time is going to take some time, it seems. “Winn-Dixie's problems have been going on for some time, and I think they still have a very hard road ahead.”

Winn-Dixie traces its lineage back to 1925, when Carl and W.M. Davis moved from Idaho to Florida to open a grocery business.The chain remained family-run until the 1990s, when it got besieged by Wal-mart and Publix and hobbled by what one observer described as a “stale corporate culture.”

In 1999 new CEO Allen R. Rowland shook up Winn-Dixie's culture, cut costs, closed stores, laid off workers and changed ad agencies. But not even all this could slow the company's decline. Rowland stepped aside. “They hadn't done the basic blocking and tackling of the supermarket business,” Short said, explaining how a series of wrong moves culminated in bankruptcy. “They didn't have a logical, planned-out promotional process. It was just, ‘Let's give away the store!' ”

Customers were not impressed. “You won't keep a core customer by giving away the store,” Short said. “All you'll do is attract the cherry picker that is never going to come back. Why do you want to try and draw that customer?”

Besides, however low Winn-Dixie might try to go, as it were, Wal-Mart always seemed to go lower. “They made the decision to cut all services from their stores to compete head-to-head with Wal-Mart,” Short said. “That was the worst decision possible. You can't compete head-to-head with Wal-Mart on price. By doing that, they gave Publix the open door to take any customers that were remotely higher-end.”

Cutting the service departments — the bakeries, meat and seafood departments — made sense on one hand, says Hershey. “The biggest cost you can scale back on quickly is your labor cost, because that is a huge percentage,” he said. But “when you cut back on those, you're also cutting back on your highest-profit-margin departments.”

The cost-cutting tactics carried over into the real estate side, with similarly disastrous consequences, Short says. “As Wal-Mart started getting more aggressive in their markets, Winn-Dixie started going for subpar real estate that was much lower in cost, thinking that would help them offset other losses,” said Short. “The idea was that they would continue to generate the sales, but they realized the numbers weren't showing themselves.”

With the supermarket scene changing fast, Winn-Dixie brought in Peter Lynch as CEO in 2004. Lynch had been president and COO of Albertsons, which was then the No. 2 U.S. grocery chain and has been largely dismantled after its sale in 2006. At Albertsons Lynch oversaw a cost-cutting program similar to the one he was entrusted with at Winn-Dixie.

In 2005 Lynch took Winn-Dixie into Chapter 11 and led it out again in November 2006. The results of the restructuring surpassed expectations, with the company showing a profit for fiscal 2007 (ended June 27) of $300.6 million, on $7.2 billion in revenue, versus a loss of $361 million, on $7.1 billion in revenue, the year before. The restructuring went so well, in fact, that Steve Busey, chairman of the law firm that handled the bankruptcy, won the 2007 Turnaround of the Year Award from the Turnaround Management Association.

During a conference call in October to report the company's third consecutive quarter of positive results, Lynch was cautiously upbeat. “We are still in the very early stages of a multiyear turnaround, and we have a lot of work still left to do,” Lynch said.

The centerpiece of Lynch's long-term strategy is a program to remodel the 521 stores that remain in the chain. The company plans to invest $140 million in the remodeling. “Remodeling stores is not just about new paint and polished floors,” said Lynch. “We are now executing a multiyear initiative to completely revamp and modernize our stores.” The Winn-Dixie strategy involves two types of remodels: what the company calls “offensive” and “defensive.” The offensive remodels are those in markets where the company expects no new competition over the next year, and the defensive ones are those completed in areas where competitors are set to open. Of the 30 remodels Winn-Dixie has completed so far, the offensive remodels have shown a 15 percent increase in sales, Lynch says. Return on investment at the defensive projects is calculated as a measure of what the sales losses would have been without the remodeling.

“We have a pretty good database about when a specific competitor opens at a specific distance from one of our stores, so we have a pretty good idea from history about how that store will be affected,” Winn-Dixie CFO Bennett Nussbaum told analysts. “And the reason we do a defensive remodel is, we have a very good store that may be old and tired but is profitable, and we can get a very good return on our investment by doing that defensive remodel. … We've been able to keep several stores very profitable by doing that.”

Each remodeled store will fall into one of five formats: Affluent, Hispanic, Kosher, Resort and Urban. Within the Hispanic category, Winn-Dixie is going even further, with subniches like Cuban and Mexican.

Winn-Dixie's recovery program is happening just as discount clubs and supercenters are transforming grocery shopping itself. And in Florida, where Winn-Dixie operates two-thirds of its stores, hurricanes atop a collapsed housing market are surely no help. Hershey sees a stiff challenge ahead. “They would consider themselves very lucky to be number two,” he said.

But others insist that Winn-Dixie can still pull it off, and win that second-place slot or something close, simply by sticking to the basics of supermarket retailing. “They don't need to beat Publix and Wal-Mart,” said Short. “They just need to be able to get back some of the market share they lost.”