By Jeff Keeling
To say Food City made a splash last month when it announced its intention to acquire 29 BI-LO supermarkets in the Chattanooga market would be an understatement. The purchase, expected to close this fall (terms are undisclosed), increases the Abingdon, Va.-based company’s store count by nearly a third, from 93 to 122. “Food City has gotten its game pretty sharp,” Progressive Grocer Content Editor Meg Major told The Business Journal July 30, a week after the deal’s announcement. “I think the fact that Food City has made this move (shows) really, really strong underpinnings for what’s going right there.”
The July 23 announcement listed 21 Tennessee stores and eight in Georgia, totaling 1.2 million square feet and employing 2,000 people. Most are former Red Food stores, a company for which current Food City COO Jesse Lewis previously worked and which was purchased by BI-LO’s then-parent company in 1994.
Food City CEO Steve Smith said his company – which is part employee-owned – planned to retain BI-LO workers, honor their years of service, and invest about $40 million in upgrading the BI-LO stores.
Progressive Grocer’s Major said while, “Food City wasn’t necessarily on my radar for that to happen,” the deal didn’t surprise her. The supermarket business, she said, “has been in a very pronounced period of M&A activity. You can look at any part of the country and see some sort of ripple effect from some deal that’s going down.”
Major pointed to three primary reasons for the flurry of activity: saturation, non-traditional competition, and cheap money. First, the industry is “mature,” Major said. Most markets have no shortage of retail outlets, which limits the opportunity for organic growth. Another factor is the ubiquitous availability of at least some grocery-type items in retailers not traditionally associated with food, from drugstores and closeout retailers to dollar stores.
Combine that with the Costcos and Sam’s Clubs of the world and Walmart and Target grocery operations, and the market gets pretty saturated, Major said. “Given that everybody’s coming after that food dollar, traditional grocery retailers have been under fire.”
Finally, Major said, “it’s still a very advantageous lending climate, so companies are able to borrow money at still historically low rates.”
Major said BI-LO has been paring its store count, including additional divestitures with other retail companies within the past year, to focus on building brand equity in its core markets. Still, she said, “the bigger part of the story focuses on Food City, simply because Food City’s kind of stuck to its knitting through the years, and I really think has built a great reputation.”
Considering the investment planned, including the millions to rehab stores Major said aren’t in bad shape to begin with, Food City is certain to be looking to increase the new stores’ competitiveness in their markets. “You really wouldn’t make an acquisition of that size to have a business as usual game plan,” she said. “I think it would certainly be to envision a better experience and other signature departments that Food City has long stood for. So there’s definitely an opportunity to raise the bar for the stores it’s acquiring.”
The key, Major said, will be integrating employees into the Food City model, along with procedures, infrastructure, distribution, and the typical things that come with rebranding a store. Shoppers can also find renovations off-putting when they’re used to a certain layout, but, Major said, “I kind of think Food City’s got the chops to handle it as well as anybody could.”
Smith said the former Red Food stores have seen numerous owners since first being sold more than 20 years ago. “They’ve almost been like a foster child that’s bounced from family to family, and now they’re going to get a permanent home,” Smith said.
That home should allow Food City to continue executing its strategic growth plan, Smith said. Currently, its southernmost store is in Vonore, southwest of Knoxville. The northernmost BI-LO being acquired is in Cleveland, just northeast of Chattanooga.
“It gives us a lot of opportunity to grow (between those points) and on up the Sequatchie Valley,” Smith said. “There’s a lot of county seat towns up there that need good grocery stores. I think there’s room for us to build at least 10 or 12 supermarkets in the not-too-distant future.” Smith said there could also be independent stores willing to sell in that corridor.
Smith sounded bullish on the opportunity for revenue growth in the 29 stores being acquired. “It’s another major metropolitan area of Tennessee, with good growth – they’ve got the Volkswagen plant and other associated industries that are coming in because of that.”
The growth will ripple into the Tri-Cities, Smith added. Distribution for the newly acquired stores will move to Food City’s distribution center at Exit 22 of Interstate 81 near Abingdon, creating new trucking and warehouse jobs. The corporate office in Abingdon also will be adding new jobs in accounting and other areas to support the growth. “This is going to create between 60 and 90 jobs at our distribution center,” Smith said.
For her part, Major said Food City is seen in the industry as an exemplar among regional grocery chains.
“It really is a very engaged leadership team and dedicated group of people that know the grocery business and are dedicated to not just the profit aspect of things, which everybody knows in the business of food retailing is a challenge,” Major said. “Food City really has kind of just stuck to their game plan and really hung tight through a very rough economy. Lots of things have happened in the past 10 years such that you could say the food business has undergone more changes in the past decade than in the five preceding it.”