THE VIRGINIAN-PILOT
Copyright (c) 1995, Landmark Communications, Inc.
DATE: Monday, October 16, 1995 TAG: 9510140219
SECTION: BUSINESS WEEKLY PAGE: 12 EDITION: FINAL
TYPE: Cover Story
SOURCE: BY STEPHANIE STOUGHTON, BUSINESS WEEKLY
DATELINE: NORFOLK LENGTH: Long : 192 lines
Can Farm Fresh Inc. ever dig its way from underneath a multimillion dollar mountain of debt?
Some people in the supermarket industry don't think the Norfolk-based supermarket chain has a chance, even with pit bulls like Michael E. Julian and Keith Alessi at the helm. After all, Farm Fresh has long since passed the buying mania in the '80s, when many troubled grocers were purchased. And Farm Fresh isn't considered healthy enough to go public, especially with new competitors bulldozing their way into Hampton Roads.
But don't count Farm Fresh out.
The grocery chain may have turned a corner. In the last several quarters, Farm Fresh has continued to trim losses, boost sales and increase cash flow. While the company's future is still unclear, proving the naysayers wrong would certainly bring smiles to the executives' lips.
``In the seven-and-a-half years I've been here, we've been written off about 200 to 300 times by certain folks,'' said Alessi, vice chairman of Farm Fresh. ``When Food Lion came in, everyone counted us out. When Sam's Club and other clubs came in, everyone counted us out.
``Guess what? We're still here.''
Julian and Alessi really have nothing to lose. If they fail, it was expected. If they win, the local supermarket kings will be able to laugh in the industry's face. Some competitors have shrugged off Farm Fresh. But that, one rival said, could be foolish.
Farm Fresh's early tests
Farm Fresh faltered in 1983, when the company moved into two new territories: Richmond and North Carolina. About three years later, Farm Fresh merged with Open Air Markets to snag a bigger piece of the Hampton Roads market and to absorb some of the local competition.
Both moves weren't working out. The stores in the expansion weren't performing well, and executives with the two merged companies were bickering.
That's when Julian came in. In the summer of 1987, longtime president Eugene Walters was forced out by shareholders and Julian was lured from Richfood Inc., a Richmond-based wholesale food distributor.
``I was pretty excited because I saw some great opportunities to help fix what was a very difficult and unsuccessful merger,'' Julian said. ``My goal was to take a schizophrenic part of the company created by the merger and make it into a well-run supermarket company.''
But he didn't like what he found.
Farm Fresh was in much worse shape than he had thought. The North Carolina and Richmond stores were bombing, and the company's convenience stores didn't fit in well. At the time, it had seven different warehouses.
``It was like someone had put together a supermarket company with seven different pieces,'' Julian said. ``It really was a mess. It was going to be difficult - as a public company - to fix what needed to be fixed.''
Meanwhile, Farm Fresh began to draw interest from the investment banking community.
Two organizations submitted bids for Farm Fresh: Citicorp Venture Capital Ltd. and an investor group led by Alex Grass, chairman of the Rite Aid drugstore chain. Grass' offer was 50 cents a share less than Citicorp's.
In September 1988, stock owners approved the sale of the company to a leveraged buyout group financed by Citicorp. Farm Fresh was sold to a new privately held company, FF Holdings Corp., for $181 million.
Leverage and debt go hand in hand. In a leveraged buyout, a group of investors uses mostly borrowed funds to buy a company. The company's assets serve as collateral.
Julian and the other Farm Fresh executives were required to buy $1 million in stock in the new company. In addition, they had to lend the company $1.2 million in the form of high-yield, junior debentures. The chain's long slump
Farm Fresh wasn't the only grocer that underwent a leveraged buyout in the '80s. But it is one of the few that remain in the same troubled situation. Some of the smaller chains went bankrupt. Others, like Kroger and Safeway, have long since been recapitalized. They have returned to the stock market and are now publicly traded.
Farm Fresh, now loaded with $330 million in debt, isn't exactly being wooed by investors or prospective buyers. The chain hasn't shown a profit since the late '80s and its sales and cash flow, until recently, haven't been high enough to draw any suitors at all.
``I actually had someone suggest we file Chapter 11 - screw the bond holders and the banks and then start all over again,'' Julian said. ``I told him I'd only do it if it was a last resort to protect the 8,500 people who work at Farm Fresh. Then I'd consider it.
``People lent us money on good faith.''
Farm Fresh officials said the company clearly needs to be refinanced. Going public again is probably not an option, but the company might be able to find a new equity source, they said.
The competition lines up
Farm Fresh's slumping financial performance has drawn the attention of competitors. Privately, rivals have indicated they viewed the region as having no retailers with knockout potential. They saw market leader Farm Fresh as a weakling with a limited amount of money to build and renovate stores.
The two newcomers to this region are bigger and well-financed. The first is Harris Teeter, an upscale chain from Matthews, N.C., that has picked out sites in Virginia Beach, Chesapeake and Newport News. This grocer, which had sales of $1.6 billion in fiscal 1994, carries more gourmet and luxury items.
But Hannaford Bros. Co. of Scarborough, Maine, is likely the one that will most concern Julian. .
``Hannaford is more of an in-your-face competitor,'' said Jeffrey Metzger, publisher of the industry publication Food World. ``Harris Teeter has taken the tack that if they only open a couple of stores in a year, that's fine.''
Hannaford recently bought 10 of Farm Fresh's Richmond-area properties. Eventually, Hannaford wants to operate as many as 15 stores stretching from Hampton Roads to Richmond - maybe more.
``The market is changing dramatically,'' Julian said. ``Every time you turn around, there's someone else moving in.''
But as his rivals began to build, something strange happened. Farm Fresh began to perk up. So far this year, the 57-store chain has continued to cut losses, increase sales and boost cash flow.
Losses declined to $8.4 million in the first nine months of 1995, compared to a loss of $15.3 million in the year-earlier period. Sales rose 5 percent to $638.8 million in the nine-month period ended Sept. 9, while same-store sales increased 2.8 percent. During the period, cash flow jumped 20 percent to $32.6 million.
Standard & Poor's, a credit rating service, revised its outlook on Farm Fresh and holding company FF Holdings in July to stable from negative. The agency said Farm Fresh had managed to increase its sales and pare losses in an increasingly competitive environment.
Alessi said the company's improvements in 1995 seem more dramatic because last year's figures were down. Even so, he doesn't think Farm Fresh's higher sales and slimmer losses should be a shock to anyone in the industry.
``I don't think it should surprise anyone if they've seen what we've been doing over the last several years,'' Alessi said. ``In the last 7 1/2 years, we've never concentrated on the next quarter. We've had a long-term view . . . We would never have been able to do that as a public company.''
The improvements came from several areas, including the Rack & Sack warehouse division, which finally began kicking in after a slow start. Farm Fresh's Gold Card discount program also drove sales up.
Industry analysts say while they respect Julian and Alessi as supermarket operators, they think the company has a way to go. The current trends at Farm Fresh - more cash flow, higher sales - must continue, they say.
``If anyone can make that situation work out, they can,'' said Michael Kirkpatrick, a supermarket analyst with Mendham Capital Group of Roseland, N.J. ``But they have a very difficult road ahead of them with the competition coming in. With the debt they have, it will be very difficult for them to fight off threats.'' Behind the Scenes
Julian grew up in the grocery business, starting at a New York chain at age 16 and working his way up through the company. He later became a food consultant and was assigned to Richfood. The distributor's board hired him in 1986 as an executive vice president.
The 45-year-old Farm Fresh chief executive has a reputation as being both savvy during negotiations and sometimes bearish.
Behind the scenes is Alessi, 40, who followed Julian from Richfood to Farm Fresh in 1988. At both Richfood and Farm Fresh, Alessi served as chief financial officer.
Fight for market share
Recently, the duo has stepped up maneuvers to keep Farm Fresh's 39 percent share of the Hampton Roads supermarket business. The company's sale of stores to Hannaford will bring in about $32 million, which will be used to continue renovations and convert some of the regular Farm Fresh stores to Rack & Sack discount warehouses.
``You should never underestimate a couple of things about Farm Fresh,'' said Jeffrey Metzger of Food World. ``First, they have (a large share) of the market, which is nothing to sneeze at. Secondly, there are the entrepreneurial abilities of Mike and Keith. You can't underestimate their abilities to survive.''
Farm Fresh also has several advantages. Its name is familiar to local customers, and the company's focus has become clearer over the years. Meanwhile, Harris Teeter and Hannaford have found it hard to find good sites in Hampton Roads.
The competitors are entering the market during a retail explosion. They'll likely pay more than $10 a square foot, while Farm Fresh has prime locations at half that amount.
``Clearly, the new competition will have an impact,'' Alessi said. ``But we don't think it will be devastating. We're guerrilla fighters. We conserve our energy. We hit and run.'' ILLUSTRATION: Color staff photos (including color cover photo) by Motoya
Nakamura\The Virginian-Pilot
Farm Fresh wages the fight for market share at the salad bar, bakery
and deli at its Kiln Creek location.
B\W file photos
Michael E. Julian
Keith Alessi.
Color graphic by The Virginin-Pilot
1995 Market share
Among supermarket chains
For complete graphic, see microfilm.
by CNB