Piece by piece, Toledo's Food Town supermarket chain began disappearing last week. The first of 18 liquidation auctions were held in northwest Ohio and southeast Michigan to clear fixtures from closed stores.
Soon the chain's owner, Spartan Stores Inc., will finish efforts to dispose of the remaining 26 Food Town stores, bringing its 32-month ownership of the 54-year-old grocery chain to a disappointing conclusion. The Food Town name seems likely to disappear as well, although Spartan is trying to sell some of the stores.
What went wrong? How did a business, buoyed by hopes of a deeper-pocketed owner, stumble so rapidly and so hard?
The answer, experts say - and even the company concedes to some extent - is that Spartan was victimized by a quickly changing and intensely competitive Toledo area grocery scene, and it was too slow to adapt. In other words, it fell to a combination of circumstances it couldn't control along with apparent management missteps.
Farmer Jack, a new, notable competitor, entered the market within months of Spartan, a move that seemed to throw the marketplace and Spartan into a spin.
Further, Spartan, of Grand Rapids, Mich., chose for nearly a year to stay out of the heavy discounting and pricing specials that competitors were busily engaged in, and thus lost loyal shoppers.
Jim Sautter, owner of Sautter's Five-Star Markets in Sylvania and Waterville, said Food Town's new owner perhaps didn't understand soon enough how to run a grocery chain the size of Food Town.
``A wholesale operation is a lot different than a retail operation,” he said. “Unless you know what you're doing, you can get yourself into a whole lot of trouble real quick. I think Kroger and the others guys seized the opportunity to go after them.”
He added: ``Is there anything they [Spartan] could have done differently? You know, I'm not sure. I don't know if it would have made any difference.''
Spartan, which declined to discuss with The Blade last week its problems with Food Town, issued a statement. It noted that since it bought Food Town, up to nine supermarkets opened in the Toledo area, encouraging even loyal Food Town customers to shop around.
``In retrospect, we realize that some decisions that were intended to be in the best interest of our customers did not have the appeal we had hoped,” the statement said. “This, combined with a depressed national and local economy, made the past year a particularly challenging one for many retail operators in Toledo.''
Spartan, founded in 1917 and primarily a wholesaler to 450 groceries in Ohio, Michigan, and Indiana, bought Seaway Food Town Inc. in August, 2000, seven months after the Maumee grocery and discount-drugstore company began looking for a buyer. Reaching a deal took several revised offers. The purchase was valued at $179 million in stock and cash.
Many considered the purchase a way to strengthen the 47 Food Town supermarkets in Ohio and Michigan. With a 25.5 percent market share, the chain was second only to Kroger in metro Toledo. Seaway, which also owned 26 Pharm drugstores that were purchased by Spartan, showed a profit of $7.5 million on sales of $659 million the last fiscal year before the transaction.
That same year, Spartan, which at the time owned 47 groceries in Michigan, had a profit of $15 million on sales of $2.7 billion, mostly from its wholesale business.
The Michigan firm hired a former executive of the San Antonio, Texas, H.E. Butt grocery chain to oversee the Food Town supermarkets and a retail drug executive from the Raley's supermarket and drug chain of Sacramento, Calif., to oversee the Pharms.
Within three months of the Food Town purchase, another longtime local grocery chain all but vanished. Churchill's Super Markets agreed to sell three of its four stores to Detroit's Farmer Jack, which later added three stores in the metro area.
Plus, Giant Eagle, a Pittsburgh grocery chain, opened a suburban Toledo store shortly after the Spartan purchase, and Kroger added stores and expanded others.
By the next spring, it became clear the Toledo area's major chains had begun a vigorous campaign of specials and discounts to steal customers from one another. Tactics included a large number of 2-for-1 specials and discount prices such as Kroger's 99-cent gallons of milk and 39-cent loaves of bread and Farmer Jack's $1.39 soft-drink 12-packs and 59-cent-a-pound turkeys.
Food Town, by most accounts, was a successful grocery chain before selling to Spartan. The company's revenues and profits increased in each of the three years before the sale.
Richard Iott, who was chief executive officer and president of Seaway Food Town at the time of the sale to Spartan, said last month that Food Town succeeded because it was fanatical at obtaining the lowest price possible on its purchases from wholesalers, comparing costs with other retailers and wholesalers.
The company's motto was that it made money buying products, not selling them, Mr. Iott said.
Along with controlling costs and increasing its productivity, the company was able to consistently eke out profits throughout the chain, often puzzling competitors who noticed that several Food Town stores seemed to be too close together and that the company's sales-per-square-foot figures were below industry norms.
As a member of Spartan's board of directors, Mr. Iott is prohibited from discussing Food Town after Spartan acquired it. But he gives the Michigan company credit for seeing the potential of the Pharm stores and for wishing to take Food Town to a higher level and to expand its wholesale business throughout Ohio.
Spartan, in its statement last week, said that by 2002 it re-evaluated some moves in an attempt to reinvigorate the stores. Nevertheless, the company said, the performance of Food Towns “did not improve substantially, and over time led to our decision to look for alternative options for the stores.''
Some in the grocery industry contend Spartan may have underestimated the competition from the outset and that when it responded, time had run out.
``I don't think they ever took their competitors seriously,” said Ryan Mathews, a Detroit-based grocery industry analyst with FirstMatter, of Westport, Conn. “I think they thought it was 1975 and if you offer cheap groceries, folks will come on in. It was the wrong market, the wrong strategy. ...”
At the time of the Food Town purchase, he praised Spartan for its “cutting edge thinking” and “dedication to product quality.”
By the end of 2001, nearly a year after the local pricing war was in evidence, Spartan officials told Wall Street analysts that the firm wouldn't use aggressively priced weekly advertisements as competitors did, nor would it provide double and triple coupons.
Instead, Executive Vice President Dave Staples said Spartan would “target certain players in that market, not necessarily small independents, to recoup our market share that has been lost in this initial onslaught.”
Food Town increased its Toledo market share to 27.6 percent in 2001, and Spartan announced plans to remodel all stores within five years and better tailor merchandise to specific neighborhoods.
But Food Town's market share slumped, to 21.5 percent in the latest figures that were out this month, and the company's earnings overall were noticeably hurt by poor results in its northwest Ohio groceries.
Its profit in fiscal 2002 was less than half that of a year earlier, and in its latest fiscal quarter available, which ended Jan. 4, the company had a $57 million loss, nearly all of it from a write-down of the value of its acquisitions, including Food Town.
To try to stem its financial bleeding, Spartan closed six “under-performing” Food Towns last fall, laid off 34 grocery managers, shut its only Toledo area warehouse, and closed 13 more Food Towns in the last four weeks. By early this year, however, it decided to get out of the local grocery market and said it would sell or close its remaining 26 Food Towns.
In hindsight, Mr. Mathews said, Spartan may have been better off not buying Food Town. ``The things that make you a great wholesaler don't necessarily make you a great retailer,'' he said.
Some local grocery experts contended Food Town lost its identity as a hometown supermarket after Spartan bought it.
``I don't think anybody realized what a presence Wally [Iott] had with Food Town locally,'' Walt Churchill, Jr., former chairman of Churchill's Super Markets, said of the former chief of Seaway Food Town. ``[Spartan] really did their best to be active with the local community, but it just never materialized with the general community the way it was before.”
Spartan did a lot of good things, with stores that looked good, he explained, but it wasn't close to the customer.
The Food Town owner made a mistake, Mr. Churchill said, by not identifying which stores were money-losers and closing them right away. ``Food Town was having a hard time justifying keeping all of them open, and when they got a chance to sell them all, they did. But Spartan kept them all open,” he said.
Further, Food Town's current owners did not seem accustomed to dealing daily with a unionized work force and it did not often enough seek the expertise it had in its experienced local managers and employees, said Deb Collins, a Local 911, United Food and Commercial Workers, union representative assigned to Food Town.
Dave Long, a commercial real estate agent with CB Richard Ellis/Reichle Klein in Springfield Township, said another misstep was the increase in Spartan private-label products in the Food Towns, replacing some national brands. The products were more profitable to the company, but likely irked some customers.
Another apparent mistake, he said, was the firm's discontinuing the popular Food Town Plus Card, which provided discounts on groceries and at events around the Toledo area. Kroger and Farmer Jack each have similar no-cost cards aimed at luring and retaining customers.
Jeff Hershey, a grocery consultant with Market Insite Group, in Troy, Mich., said Spartan's failure with Food Town may be related to its becoming a public company when it acquired the Maumee firm.
``Operating as a public company is much more difficult than as a private company,” he said. “You're held to the line much more in order to create profit and show growth.''
Under pressure from Wall Street to create profits, it may have taken steps that cost it market share, Mr. Hershey said.
``At the time of the acquisition, it was a gamble,” he said.
“They tried to buy their market share and Spartan had a very good reputation, but it was not known as a very aggressive company. I think it was ill prepared to meet those changes that occurred.''
First Published April 20, 2003, 11:02 a.m.
