Taking Stock

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Hodge To Retire As Delhaize America CEO; Smith Faces Big Task

I don’t think too many were shocked to hear that Delhaize America chief executive Ron Hodge will be stepping down from his post on October 15. Hodge has spent 33 years with the company (or its predecessors) and at age 64, the time seemed right to begin to enjoy his retirement.

Parent company The Delhaize Group named Roland Smith, former president and CEO of the Wendy’s/Arby’s group to replace Hodge and his task will be mighty challenging.

From his background as a corporate leader, Smith, 57, certainly has the pedigree. In addition to his stint at Wendy’s and Arby’s, Smith has been a CEO of Triarc Cos., American Golf Corp. and AMF Bowling World. He is also aWest Pointgraduate who spent seven years in the U.S. Army.

While Smith has spent a large portion of his career in the foodservice industry, this will be his first foray into the supermarket business (he did serve on the CPG side early in his career with Pepsi, Schering-Plough and P&G). And he will immediately inherit a most difficult situation that centers on DelhaizeAmerica’s largest property: Food Lion.

The good news: recent numbers indicate that in the approximately 435 Food Lion stores (representing about 40 percent of the Food Lion fleet) that have been “rebranded” from a price and service perspective, comp store sales increased about 3.3 percent. And after its second quarter ended on June 30, another 269 units were “rebranded” in the Charlotte-Greensboro, NC market, close to Food Lion’s headquarters in Salisbury. The bad news: Food Lion is still among the most vulnerable of all retailers to the flurry of new competition that’s entered its core markets (particularly Wal-Mart SuperCenter conversions, extreme value retailers and dollar stores) and now other pieces of parent organization Delhaize America are also being pressured.

While the “rebranding” of its core Food Lion banner should continue to modestly increase sales, the bigger question remains whether the chain is good enough to regain the luster of the once-powerful brand of the 1980s and 90s?

At this point, that the largest unit of Delhaize America has improved about 62 percent of its stores with markets such as Baltimore-Washington-Eastern Shore scheduled for “rebranding” early next year. So, again, will it be enough to create an image, other than convenience, that Food Lion is a destination shop for consumers?

A three percent comp sales gain is solid (comp store revenue decreased 6.7 percent in those Food Lion stores that have not been “rebranded”), but the once-discount chain was in such a rut that comparable store revenue has been lagging for the past three years. Once Food Lion’s “rebranded” stores cycle for a full year, we’ll be able to better judge if those investments are paying off on the top and bottom lines.

For now, on an overall basis, Delhaize America continues to produce some of the worst numbers in the supermarket sector. For the period ended June 30, overall U.S. sales decreased 3.1 percent to $4.7 billion and operating profits declined 24.5 percent to $157 million and comp store sales at its U.S. banners (Food Lion, Hannaford, Sweetbay, Harvey’s, Reid’s) dipped 0.6 percent.

Certainly, the investments made to improve Food Lion have adversely impacted DelhaizeAmerica’s earnings. But the bigBrusselsbased merchant is also fighting additional issues on other fronts. Its best banner, Hannaford, is fighting tough price competition, especially from Market Basket (Demoulas) and ShopRite, which have opened four new stores in Hannaford’s backyard (in the Albany, NY and Manchester, NH markets).

Its much touted Bottom Dollar discount banner is still not profitable and is, in our opinion, struggling with volume at many of its new stores in the Delaware Valley-Lehigh Valley and Pittsburgh-Youngstown markets.

In what is likely to be his last conference call, conducted after the earnings release on August 22, Hodge told analysts that the “rebranding” efforts at Food Lion should show positive overall sales results for the banner in about six months.

But Hodge, and soon Smith, will face other challenges, too. At Food Lion, many of its customers are in the demographic that remains the most challenged economically. Moreover, from a market analysis view, there isn’t a more competitive segment in the entire retail business with Wal-Mart, Aldi, Save-A-Lot, Family Dollar, Dollar General and Dollar Tree, all competing for the same customer.

And as Hodge inferred, the competition in the New England and Upstate New York markets is getting even more tenacious, and will continue to impact retailers with strong market shares such as Hannaford (and also Stop & Shop and Price Chopper).

I’ve visited many of the “rebranded” Food Lions units, and the company has done a nice job of making the shopping experience more pleasant (better mix, improved private label and cleaner perception) while lowering prices, too. Still, perishables remain below (supermarket) industry standards and the bulk of the fleet is comprised of smallish stores (under 35,000 square feet).

I recognize this project still needs more time to “bloom” (ouch), but my current impression of the “rebranding” initiative reminds me of the title of a song that the great Peggy Lee made famous: “Is That All There Is?”

Ron Hodge has had a wonderful career in this business, beginning with Hannaford Bros in Maine. We wish him the best in all his future endeavors. As for Roland Smith, it will be interesting to see how an industry outsider with strong leadership credentials pilots a company that’s enduring the most tumultuous period in its history that dates back to 1957.