Winn-Dixie a Takeover Target?

Barbara Miracle | 6/1/2009

A Win-Winn Situation? For now, Winn-Dixie is trying to focus on putting its best face forward for customers and investors. [Photo: AP Photo/Oscar Sosa]

Winn-Dixie President and CEO Peter L. Lynch doesn’t want to talk about the speculation floating around financial websites that Kroger, Safeway or maybe SuperValu could acquire the Jacksonville retailer’s 520 stores in Florida, Georgia, Mississippi, Alabama and Louisiana. “My focus here at Winn-Dixie is making a better company,” he says.

Lynch, a 20-year veteran of the supermarket business and former president and COO of Idaho-based Albertsons, took the helm of Winn-Dixie in 2004, guiding it through a Chapter 11 bankruptcy filing in 2005 and its emergence in 2006. The company shed more than 500 stores and pulled out of five states and the Bahamas. Lynch is in the process of refocusing and remodeling every store.

Sales have been increasing, albeit slowly, while the company has focused on expanding its gross profit margin. For the first two quarters of its fiscal 2009 year, sales rose to $3.93 billion from $3.87 billion in the year-earlier period. Gross profit margin increased from 27% to 28%.

“I think that Winn-Dixie — and Sweetbay is another — have a challenge,” says Barton Weitz, professor and executive director of the Miller Center for Retailing Education and Research at the University of Florida College of Business. “I think the two big players are Wal-Mart super centers and Publix, which has a great reputation. It’s hard for a supermarket chain to fall somewhere between these two,” Weitz says.

National Beverage (No. 57) National Beverage, the Fort Lauderdale drink company, has neither Coca-Cola nor Pepsi in its stable, but its Shasta and Faygo brands resonate for those with niche tastes. The product line also includes LaCroix water and energy brands Rip It and PowerBlast.

The industry began shifting in the early 2000s, with the rise of Wal-Mart in the grocery market, the retiring of the Kash n’ Karry brand and other changes. The shift continued last year, as Publix bought 49 Florida Albertsons stores and has been converting them, at times putting two Publix stores across the street from each other. Lynch says that Winn-Dixie already has benefited from the Publix-Albertsons deal by attracting former Albertsons customers. Sweetbay Supermarkets closed seven of its hundred or so stores and plans to open three new Sweetbay stores this year. Earlier this year, Birmingham, Ala.-based Bruno’s Supermarkets, which operates stores in northwest Florida, filed for Chapter 11 bankruptcy protection.

To grow Winn-Dixie’s sales, Lynch is focusing on neighborhood marketing — designing and stocking the stores for five specific market niches: Hispanic, kosher, urban, affluent and resort. But Lynch says that there will be subcategories. For example, neighborhoods with a large number of young families might have an expanded selection of baby products. Says Lynch, “Every single store, we evaluate what their needs are.”

One of the biggest challenges in Winn-Dixie’s reinvention is its reputation. In a May Consumer Reports ranking of 59 supermarket chains, Winn-Dixie came in 55th, with Wal-Mart super centers ranked 56th. Publix ranked third nationwide. The University of Michigan-based American Customer Satisfaction Index gave Winn-Dixie a score of 73 out of a maximum of 100 for 2008, better than Wal-Mart’s 68 but lower than Publix’s 82.

Publix, with 711 Florida stores, has almost 42% of the total grocery sales volume in the state, while Wal-Mart super centers have 24%, according to fourth quarter 2008 numbers from the Shelby Report, an industry newspaper. Winn-Dixie’s market share stood at about 13.5%, putting it third in the state and far ahead of fourth-ranked Sweetbay, with 3%

Lynch hopes to make a new first impression by modernizing stores, adding wood floors and new displays in the produce area, bright lighting and track lights to highlight certain displays, fancier signs, smaller double-decker grocery carts in addition to the traditional-style carts and a health-and-beauty products area with curved salon-style shelving.

“My focus here at Winn-Dixie is making a better company.” — Peter L. Lynch, Winn-Dixie president and CEO

The chain is spending about $2 million per store, a total of $150 million on remodeling this year out of its total 2009 capital expenditures budget of $250 million. All stores will be completed by 2013.

The company is also redesigning the packaging of all 3,000 of its private-label products, which are more profitable and increasingly popular with value-conscious shoppers. Lynch added a high-end Winn & Lovett private-label brand and a line of Winn-Dixie organic products to the store’s traditional Winn-Dixie everyday and Thrifty Maid product lines.

UF’s Weitz wonders why a new grocery player such as Kroger or Safeway would wait until now to try to acquire Winn-Dixie when it could have done it during the bankruptcy. But the answer may lie in the world of arcane tax law. In a February earnings conference call with investors and analysts, the retailer’s senior vice president and CFO, Bennett Nussbaum, made a point of noting that Winn-Dixie’s tax benefits could be used by an acquirer now that a two-year waiting period since its bankruptcy settlement has expired. At stake is an operating loss carry forward for tax purposes, or net operating loss (NOL) of $550 million. “Before the two-year period expired, an acquirer could have lost all the NOLs,” says Nussbaum, adding, “but there is no more danger that we believe that it will be lost.”