April 23, 2014

What's Eating Winn-Dixie?

John Finotti | 3/1/1999
Andy Raka, a stocky, reserved man in his early 50s, is a weekend warrior in the pricey pastime of vintage sports car racing. At tracks like Daytona International Speedway, Roebling in Savannah, Ga., and Watkins Glen in New York, he races his collection of vintage Porsches and Aston Martins against other well-gloved participants, tooling around the courses at speeds of up to 200 mph. A weekend outing can cost as much as $30,000 for mechanics, transportation and lodging.

But Raka isn't your average well-to-do weekend speedster. Raka is actually the racing pseudonym sometimes used by A. Dano Davis, chief executive and chairman of Winn-Dixie Stores Inc., Florida's biggest publicly traded company and biggest employer. Winn-Dixie's leader, a cautious driver, wins his share of races, but tends to finish in the middle of the pack. That works just fine as a hobby; Davis' problem is that the grocery giant he runs in his day job has also been a middling, cautious performer instead of an industry leader.

Indeed, Winn-Dixie's costly campaign to replace its older, smaller stores with larger, modern "Marketplace" stores offering everything from bakeries to pharmacies and film processing hasn't generated the earnings that executives had hoped. Over the past year, Winn-Dixie has released a string of disappointing quarterly reports: Profits sank 69% for the quarter ended Sept. 27. The company's $52.3 million in earnings (35 cents a share) in the most recent quarter, ended Jan. 6, fell about 7% from the same period last year. Those numbers hit analysts' expectations, but didn't impress them: "It was the third consecutive disappointing quarter," says Debra Levin, a retail analyst at Morgan Stanley in New York City.

Last year, the Jacksonville-based company did not raise its monthly dividend for the first time in 54 consecutive years. For the six-month period ended Jan. 6, Winn-Dixie's earnings-per-share of 45 cents actually fell short of the company's dividend payments of 51 cents a share. Moody's and the other major U.S. corporate rating firm, Standard & Poor's, have both lowered their short-term credit ratings on Winn-Dixie, citing the company's weaker earnings and intense competition in the grocery industry. Meanwhile, rumors swirl of a possible merger.

Some of Winn-Dixie's woes stem from stiff competition in a hotly competitive grocery industry that's undergoing major consolidation. But those same market conditions haven't slowed Winn-Dixie's big in-state rival: Lakeland-based Publix Super Markets Inc. continues to outperform Winn-Dixie at every turn. Publix stores generate nearly twice the per-store sales as Winn-Dixie's, and with fewer than half as many stores, Publix generated nearly 85% of Winn-Dixie's total sales (see chart, page 55).

No one questions Winn-Dixie's viability. The company's structural framework is sound, and Florida is one of the fastest-growing markets in the nation. Winn-Dixie now has bigger, more modern stores in good locations. The company has no long-term debt because it leases its stores, and its workforce is non-union. So what's the problem?

The old-fashioned corporate culture that served Winn-Dixie well as it grew may be working against the mature company that now has size but lacks agility. Senior company managers were slow to get on the big-store bandwagon that has defined grocery retailing in the 1990s. Then, after deciding to spend nearly $2 billion over the past five years to build bigger stores and add a slew of services, they have managed the transition poorly. Marketing and profitably operating the larger and more complex stores continues to vex Winn-Dixie, now a heavyweight that plods rather than sprints. "Clearly, the earning power of the company has not been a reflection of the asset base it has built up over the years," says Charles D. Hyman, whose Jacksonville money management firm owns shares of Winn-Dixie stock.

Roots

Andrew Dano Davis grew up in Jacksonville in the tall shadow cast by his late, legendary father, J.E. Davis, one of the four Davis brothers who founded the company. The other brothers were A.D. (Artemus Darious), M. Austin and Tine W. The Davises started the company in 1925 and went public in 1940. The Winn-Dixie name derives from Winn & Lovett Grocery Co. of Jacksonville, which the Davises bought in 1939, and Dixie Home Stores, a Greenville, S.C., chain acquired in 1955. Mergers and acquisitions have extended Winn-Dixie's reach across the South to Texas and most recently (1995) into Ohio.

J.E. Davis, the second-born, became the dominant brother and a Florida business icon. In the 1950s, J.E. teamed up with former Florida Gov. Claude Kirk and Ash Verlander, a Georgia insurance regulator, to form American Heritage Life Insurance, a company in which the Davis family still holds about a 40% stake. The wily J.E. made sure Winn-Dixie suppliers signed up for American Heritage's group insurance programs. In later life, J.E. convinced the acclaimed Mayo Clinic in Rochester, Minn., to open its first satellite facility in Jacksonville on land donated by the Davises. An astute investor, he also made sure that control of Winn-Dixie remained firmly in Davis hands: The family still owns 40% of the 148 million outstanding shares of Winn-Dixie common stock. The balance of the shares are mostly owned by Winn-Dixie employees, retirees and individual investors; there are no large institutional shareholders. The company still pays dividends monthly, a strategy started by J.E. Davis to encourage small shareholders to shop in the company's stores.

The Davises, skeptical of business school grads they considered overeducated, have always promoted from within the company and rewarded employees with a profit-sharing plan. In fact, despite its public ownership, Winn-Dixie is run in many respects like a private company and reflects Dano Davis' personal reticence. Top executives rarely speak to the media. Dano Davis turned down requests for an interview for this article. The company even refused to release corporate biographies for either Davis or James Kufeldt, Winn-Dixie's president.

Unlike most large publicly held companies, Winn-Dixie doesn't hold regular quarterly conference calls for stock analysts. As a result, Winn-Dixie doesn't have a big following among Wall Street investors or analysts, a fact that doesn't appear to bother the company in the least.

Like most of Winn-Dixie's top managers, Dano Davis worked his way up the company ladder, beginning as a bagboy for a Winn-Dixie while still a teenage student at Jacksonville's The Bolles School. As a freshman at Stetson University in DeLand, he spent as much time tooling around campus in his convertible GTO as he did studying. After his first year, much to the chagrin of his father, Davis dropped out of college and took a job as a meat cutter at a Winn-Dixie in Daytona Beach. He returned to Stetson a year later, graduating in 1967, the same year Stetson University's $500,000 Davis Hall, a gift of the four Davis brothers, was dedicated. Dano Davis served as a member of Stetson University's Board of Trustees from 1984 until April 1998. His wife, Mary Lou Varnedoe Davis, is a 1966 Stetson alumna.

At the moment, Dano Davis is the only Davis still involved in Winn-Dixie operations. Cousins T. Wayne Jr. and Robert D. left management several years ago, but still serve on the company's board. Dano Davis took over the president's office in 1982, when then-president Bert Thomas died at 64 of a stroke, and also was named principal executive officer (J.E. Davis didn't like the use of "chief"). He added the title of chairman in 1988, and Kufeldt took over as president.

Under attackJ.E.'s son got his first big challenge in 1987, when earnings fell from $192 million the previous year to about $112.3 million, a 41% tumble. Winn-Dixie had been caught flatfooted. While other regional and national chains had begun the shift to larger-store formats, Winn-Dixie hesitated and nimbler, low-price chains like Food Lion made inroads into its markets. Six years after Food Lion invaded Winn-Dixie's Florida turf in 1987, the North Carolina chain had gobbled up a 21.6% share of the grocery business in Jacksonville, Winn-Dixie's own backyard.

At first slow to react, Winn-Dixie finally took the Food Lion threat seriously. Winn-Dixie chucked its weekly specials in favor of everyday low prices. The company also improved its purchasing power by buying on a company-wide basis instead of by division. In its biggest break from the company's penny-pinching past, Dano Davis began closing smaller, drab stores and replacing them with the bigger "Marketplace" stores.

Historically, Winn-Dixie stores had functioned like convenience grocery stores, which sold meat, produce, groceries and little else. The new Marketplace stores are nearly twice as big and, in addition to basic food groups, sell everything from prescription drugs and fresh flowers to prepared dinners and fresh baked goods. In the past five years, Winn-Dixie has either replaced or enlarged 70% of its existing stores. "We're committed to this change," says Winn-Dixie spokesman Mickey Clerc. "People want everything in one place, and we think we're dead-on with our strategy."

Indeed, early results were impressive. Sales jumped 6.4% in 1995 and another 9.9% in 1996. Another significant sign: By 1998, Winn-Dixie had regained some of its lost market share in the Jacksonville area, as Food Lion's portion of the market slipped to 11.4%. But the strategy has been expensive: Last year Winn-Dixie could no longer fund its improvements and pay its monthly cash dividend to shareholders out of its cash from operations. Along with forgoing an increase in its dividend, Winn-Dixie also has had to borrow money to continue its expansion plans -- and cover its $151 million in annual dividend payments.

In addition, apart from some early success in reversing the loss of market share to Food Lion, Winn-Dixie hasn't executed its strategy particularly well. Despite spending vast sums to advertise its new concept, the company hasn't been able to draw more shoppers into its stores; same store sales were flat last year. Winn-Dixie is learning that there's a huge difference between running a 25,000-square-foot supermarket and a 50,000-square-foot superstore. The larger stores require anywhere from 150 to 250 workers vs. 60 to 70 workers needed to run the older, smaller stores. The varied services offered at the bigger stores mean managers and workers require more training -- something the company is focusing on this year, "Five years ago, the problem at Winn-Dixie was their stores," says Jack Russo, an analyst at A.G. Edwards in St. Louis. "They corrected it with money for new stores. Now it is a question of dealing with what's inside the four walls. It's an execution issue. Physically, Winn Dixie's new stores are the same as Publix's. Publix just does a better job at execution."

Competition

Winn-Dixie officials say it's just a matter of time before the chain begins reaping greater profits from its Marketplace strategy. But time isn't a commodity in oversupply: Publix isn't the only supermarket chasing Winn-Dixie, as a consolidating grocery industry spawns a shelf full of behemoths. In August, Boise, Idaho-based Albertson's Inc., which operates stores in Florida, agreed to acquire bigger but weaker competitor American Stores Co. for about $8.4 billion in stock. That deal will create the nation's largest supermarket company, with more than 2,470 stores in 37 states, with big concentrations in the Midwest, California and Texas. Together, their sales will total about $36 billion.

The Kroger Co. followed the Albertson's deal with its own blockbuster purchase of Fred Meyer Inc. for $7.36 billion. Earlier, Dutch-owned Ahold USA had announced its plans to buy Giant Food Inc. Also last year, Safeway Inc., of Pleasanton, Calif., bought Vons Cos. Even Kmart is looking to elbow its way into the supermarket business. In late October, Kmart Corp.'s chief executive said the giant discounter has been looking for a merger partner in the supermarket sector.

The competitor most feared by the supermarket chains, however, may be Wal-Mart Stores Inc. The giant discount retailer has quickly become one of the nation's top grocery companies, and its low-cost distribution system makes it a formidable player. Wal-Mart's system funnels groceries into more than 500 supercenters -- Wal-Mart's mega-stores that sell groceries along with general merchandise -- and the company has moved rapidly into the top tier of grocery retailers. Bentonville, Ark.-based Wal-Mart also is experimenting with a smaller "neighborhood" grocery store format that it could use to further encroach on traditional supermarket chains. "They're all scared to death of Wal-Mart," says Erik Gordon, director of the Center for Retailing at the University of Florida, which receives some funding from Wal-Mart. Gordon predicts that Wal-Mart will be the nation's biggest seller of groceries within several years.

Analysts expect further consolidation in the $426 billion-a-year grocery industry, as big players vie for more stores to strengthen their buying power with grocery suppliers. One persistent rumor in Jacksonville and in Internet chat rooms involves a possible acquisition of Winn-Dixie by Wal-Mart. The rumor is enlivened by the fact that Wal-Mart founder, the late Sam Walton, served on the board of Winn-Dixie in the 1980s. (Legend has it that in 1986 after Walton said to J.E. Davis that Wal-Mart planned to sell groceries, J.E. asked him to resign from the board.) Analysts who follow the retail industry say a merger between Wal-Mart and Winn-Dixie seems highly unlikely because Wal-Mart has always expanded through internal growth. "Wal-Mart doesn't need to buy anybody," Gordon says. Possibly because of the Walton connection, Winn-Dixie has taken unusual pains to say it isn't so, breaking corporate tradition to officially deny the takeover rumors. "We generally don't comment on rumors," Winn-Dixie spokesman Clerc says. "But this one was so pervasive we felt we had to deny it."

What now?Aside from authorizing the denial of the Wal-Mart rumor, Davis is mum on the company's strategy. In contrast with Winn-Dixie's low public profile, Davis is relatively visible in civic life, prompting some to wonder if his passion for the grocery business is taking a back seat to his philanthropic activities and love for automobiles. He's a partner in Brumos Motor Cars Inc., a Porsche and Mercedes dealership in Jacksonville. And, besides driving in vintage car races, Davis has been a key organizer of the widely popular Concours d'Elegance car show at the Ritz-Carlton Hotel at Amelia Island. That event, as with many Davis activities, involves philanthropy, raising money for the Northeast Hospice center.

Davis also supports the Boy Scouts and serves on the board of the Jacksonville Zoo. He has traveled to Africa several times to learn more about animals. Davis and his family have been extraordinarily generous in Jacksonville and Florida, and he gives of his personal time. Last year the Davis family donated $20 million to Jacksonville University, a private liberal arts college in Jacksonville where Davis is a trustee. Winn-Dixie also has built stores in low-income inner-city areas where other supermarket chains have been reluctant to venture.

For the moment, management at Winn-Dixie seems content to focus on working out the kinks in executing its Marketplace strategy. Clerc says Winn-Dixie is not seeking any acquisitions and is content to grow internally. But "we've always tried to keep an open mind. If an opportunity presents itself, we'd look at it."

Something, however, may have to give: If Winn-Dixie cuts back on new- store spending, sales could suffer. But it can't afford to keep spending $350 million a year in capital improvements and paying out $150 million in annual dividends unless it can boost profits. A takeover is likewise problematic: Given the ownership of the company's stock, the Davis family would have to approve any possible merger or sale, and it's unclear where they stand on the issue. Ironically, Dano Davis can take some comfort -- and cover -- from the speculation surrounding the industry and his company. In early February Winn-Dixie shares were trading in the mid-40s, or at about 40 times this year's forecasted earnings, thanks to some takeover-talk premium. By comparison, the Standard & Poor's index of seven supermarket stocks, including Winn-Dixie, was trading at a price-earnings multiple of about 36. "In a consolidating industry, the market certainly places a value on any company that has a strong franchise position in Florida," says Hyman, the Jacksonville money manager.

Still, if Winn-Dixie is intent on emerging as a superbly profitable supermarket in the coming years, it may have to change. That may involve some new mid- and upper-level management. It almost certainly will involve beefing up levels of service in the larger stores to attract more shoppers. "They've got a lot of issues to address," says Brian L. Bugbee, an analyst at Value Line in New York. "They have a high dividend payout. They're less efficient than other competitors. And there's a lot of competition in the Southeast."

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