This file is copyright of Jens Schriver (c) It originates from the Evil House of Cheat More essays can always be found at: --- http://www.CheatHouse.com --- ... and contact can always be made to: Webmaster@cheathouse.com -------------------------------------------------------------- Essay Name : 1164.txt Uploader : Edwin Email Address : Language : English Subject : Economics Title : Food Lion Inc. Grade : 87% School System : B+ (Letter Grade) Country : USA Author Comments : A case analysis of Food Lion Inc. Teacher Comments : Good analysis. Date : 11/17/96 Site found at : Yahoo.com -------------------------------------------------------------- 1. EXECUTIVE SUMMARY The following is an overview of the case analysis of Food Lion, Inc. The overall environment for Lion Food and it’s competitors is changing from a product-oriented atmosphere towards an emphasis on satisfying all of a consumer’s needs. In order for Food Lion to remain competitive it wants to re-evaluate its future opportunities for growth without compromising it’s profits. Industry-wide, grocery chains are changing the importance on satisfying the consumer in order to keep their profit margins high. Some examples include the move towards a "superstore" witnessed by some of Food Lion’s competitors. Here, customers have a "one-stop" shopping experience. This is conducive to generation of dual-income families and a growing amount of adult singles with busier lifestyles who value time saving measures which also provide convenience. A microscopic look at Food Lion shows that their principal strength is their low pricing strategy which gives them a competitive edge. On the other hand, Food Lion’s sales are relatively low and are slow to increase which is their main weakness. Outside opportunities available to Food Lion include the consumer’s desire for low price shopping and convenience. External threats facing the company are Food Lion’s competitors moving towards the "superstore" format in response to customer’s desired. Our group felt that Food Lion’s main problem was that it had an unbalanced marketing mix. It focused it efforts toward the pricing portion, but failed to also accentuate the product, promotion, and distribution areas. Symptoms indicative of this problem include their declining sales, low name recognition and low quality products. This causes a problem for Food Lion if it were thinking of becoming a superstore because these factors would then make it difficult for them to gain an edge in a market already dominated by other competitors with low prices. With other marketing variables involved, Food Lion would not survive on it’s low pricing strategy alone. As a result of this dilemma, our group felt that it was most prudent to adopt a more comprehensive solution for Food Lion and it’s marketing mix. The alternative we most favour was the adaptation of a larger store format, but not a superstore size, with some additional services to satisfy their customer. Each store format market target market strategy would depend on the specific demographics of the area chosen. We would also suggest that Food Lion follow up with a study after a period of time to determine the success of the new services and additional products based on sales and profit margins. The following is an in-depth look at our findings and the reasoning behind our recommendation. 2. ENVIRONMENT Technology Technology has also changed the shopping arena. Shoppers soon will be able to order tomatoes, flour, cereal, and other grocery items via home computers. For many years Food Lion has been a leader in its use of technology in it’s stores, distribution centers, and headquarters pioneering such systems as in-store processing, inventory management, efficient consumer response and data warehousing. The company’s annual information technology budget is approximately $29.5 million. The latest technology and computer systems will potentially allow Food Lion to hook shoppers up to the Internet. Culture As well as industry, consumer changing. Due to changes in lifestyle, different attitudes about shopping have been established. Such as an idea of one stop shopping indicated what today’s consumers are looking for. Because of the increasing number of working women and singles, these consumers seek for convenience in their shopping attitudes. Thus, the grocery industry has added more non-food items and service department into their stores to satisfy them. Government Food Lion is vehemently opposed to the use of unionized labor. Despite protests from the United Food and Commercial Workers International Union claiming that Food Lion’s wages are well below union standards, management has continued to please its workers and avoid unionization. In fact, Food Lion believes is employee-benefit package is unequalled in the industry. A profit-sharing plan linking an employee’s efforts in making Food Lion profitable with wealth accumulation for the future is already in use. Plans to improve long-term disability insurance benefits are under way. In contrast, several other chains have experienced problems solving labor union problems . Economic In the highly competitive supermarket industry, the battle is never over. There are two ways to increase sales: raising prices or boosting the volume of items sold. Operators raise prices in order to pass on inflationary pressures to the customer or simply to increase profitability. Today, however, chains are unable to raise prices due to low inflation ( deflation in some categories) and the shopping habits of today’s value-conscious consumer. As a result, chain operators are attempting to boost sales through a number of marketing strategies and by squeezing excess costs out of the organization. Demographics Recognizing that demographic and lifestyle changes exert a profound influence on the way people shop and what they buy, retailing formats have continued to evolve. Improved technology has enabled retailers to better identity the buying preferences of the various groups they serve. In addition, more sophisticated product analyses make it easier to develop the most profitable merchandise mix for meeting that demand. This has led to greater use of segmentation strategies-i.e., gearing marketing efforts to specific consumer segments. In this way, retailers can differentiate stores from one another and build consumer loyalty. As a prelude to such segmentation strategies, supermarkets typically conduct exhaustive marketing studies, which allow them to be attuned to -or preferably anticipate- shifts in consumer demand. The results of these studies are used to position stores within the chain. Since different formats are suited to different markets, few chains are banking on a single format. Nevertheless, most stores fall into one of the eight basic categories lists below. · Conventional or traditional supermarkets · Warehouse stores · Wholesale clubs · Convenience stores · Express stores · Superstores · Combination stores · Supercenters 3. MAJOR PROBLEM As a product, the brand name of "Food Lion" is synonymous with low prices. Although they have that area covered. Food Lion’s problem is that they have an unbalanced marketing mix of price, product, promotion and distribution. They have heavily relied upon their recognition with low prices that they failed to enhance the other areas, therefore making it hard for them to provide customer satisfaction in the changing consumer environment. 4. SIGNIFICANT ASPECTS OF THE PROBLEM The core business of Food Lion emphasis on grocery conventional stores which carries fewer brands and items sizes for most of the products. Therefore, it greatly focuses on one group of customers’ needs. They have heavily relied upon their recognition with low prices that they failed to enhance the other areas, therefore making it hard for them to compete with the larger grocery chains and also making it hard for them to provide customer satisfaction in the changing consumer environment. The aspects of Food Lion’s problem are all interrelated. Food Lion need’s to access to a higher customer base, its limited selection of products and services as well as its name association make it difficult to promote and distribute its products. Lately, the biggest trend in the industry has been the shift to bigger stores. Customers now prefer the stores in bigger size which can serve in a variety of products to respond to their needs. Moreover, the stores such as one-stop shopping occur to satisfy the customers’ desire for time and convenience. For instance, Winn-Dixie changes its conventional stores, Lucky concentrates on increasing its store sizes, Bruno applies the techniques of super warehouses, large supermarkets, small warehouse stores, and combination stores. Such changes help the stores more flexible to serve different customers needs and responsive services due to intense competition of industry trend shift. Not only the changing in environment and competitors, but the financial information can indicate that Food Lion needs to adapt its distribution strategy. As from the exhibit, comparing sales between Bruno’s and Food Lion have more than twice in sales dollars, however, the company still has a bit less gross margin than Bruno’s. Notice that Food Lion has a big amount in cost of goods sold which indicates that the company’s expenses in total purchasing cost of goods are quite high. Though it can acquire the goods in inexpensive price because it applies the centralized buyout-and- distribution technique to purchase those goods at one volume price, ordering and transportation cost are still considerably high. Therefore, the total purchasing cost of goods becomes larger. At least Food Lion still has more profit margin since the company has gotten much lower operating cost than Bruno’s. Yet, if Food Lion can reduce its total purchasing cost, it can obtain a lot higher in net profit. In Lucky’s point of view, after the company changed to superstores, its sales increase more than double in sales dollar compared to Food Lion, it has gotten only six more stores than Food Lion, though. Through this, remodelling stores of Food Lion can accelerate its sales. Furthermore, Food Lion’s operating costs are smaller due to its innovation strategy. It can control labor costs, warehouse costs, product costs, and advertising costs. The company can thus generate greater net profit margin. Even though Food Lion has continued to grow and expand in the Southeast according to its goal, most locations of its stores are in North and South Carolina and Virginia. The company, moreover, plans to expand its new stores in these areas in order to saturate the market. However, if there are too many stores existing in one area, too few customers will support those stores. This may cause cannibalization. In the other aspects, in Florida, Delaware, and Maryland, the company has gotten only a few stores in these areas. Therefore, expanding the new stores in the stated areas can earn more net income, in accordance with the company’s goal as to serve as many people in the Southeast as possible. Food Lion’s promotion strategy focuses mainly on advertising and publicity. Its advertising strategy combines cost-saving techniques with an awareness of consumer sentiment. Smith, Food Lion’s president and CEO, is always a representative of the company, e.g., appearing in over half of the television commercials. Hence, there might be a risk of the company’s image since it usually relies on just one person. In addition to a higher quality of products, Food Lion also needs to offer a larger selection of services to satisfy the changing ideals of a supermarket. Many stores are offering services such as photo development, 24-hour pharmacies, delis and personal banking as part of the other "options" offered to shoppers, making it more convenient and less costly to the customers. Many of Food Lion’s competitors are switching towards a one-stop shopping format for their customers and food Lion will lose sale to these rivals if they are not following the trend. 5. SWOT ANALYSIS A. Strengths 1. It’s low pricing strategy allows Food Lion to beat the competition on price. 2. Food Lion’s expansion strategy strengthens it’s position as a retail grocer in the marketplace. 3. Tom E. Smith, Food Lion’s President & CEO, began his career as a bagger in Food Lion. His loyalty combined with his knowledge of the company’s environment is a valuable asset to the company. 4. Food Lion’s attitude toward social responsibility molds it’s corporate image hence it supports Food Lion’s corporate branding. 5. It’s innovative strategy in saving cost and energy makes the management more efficient; Food Lion therefore enjoys a higher profit margin. 6. Food Lion’s high profit margin paves the way for it’s progressive expansion. 7. Food Lion’s policy to avoid labor unions enable Food Lion to cut the labor cost. 8. The increase of Food Lion’s private label stock allows the company to price its national brand products below many competitors. 9. Carefully planned centralized distribution system together with the buyout-and-distribution technique allows for products to be purchased at one volume price. 10. Food Lion’s advertising campaign has been a "saviour" to them in times of distress; i.e. the use of Pearl to deter rumors of devil-worshipping practices. B. Weaknesses 1. Food Lion’s sales are relatively low and slow to increase. 2. Food Lion’s commitment to continue operating the conventional stores creates a gap with it’s customers that desire one stop shopping and end up benefiting its competitors, giving them a competitive advantage. 3. Customers associate the name of "Food Lion’ with low prices and therefore might associate it with low quality products, making it hard for expansion to occur in a better class of neighborhood. C. Opportunities 1. The increase in the number of working women, dual-income families, singles living alone has changed the shopping attitude of consumers. 2. Consumers still desire to shop in the low price stores. 3. Geographical expansion. D. Threats 1. Future prospects for the conventional stores is not very promising. 2. Intense competition in the Southeast. Many stores are changing their strategy from a conventional to large format. Many consumer attracted to shop in the new formats rather than in the conventional stores to larger format. 3. Competitors can exploit the rumors about the Food Lion logo being related to satanic worship. 4. The decline in the quality of the average worker may decline the quality of their services. 6. EVALUATION OF ALTERNATIVES As mentioned earlier, Food Lion’s main problem is it’s unbalanced marketing mix. It has a strong pricing strategy but inadequate promotion; it has low quality products with potentially good distribution system. This unbalanced marketing mix has led to low sales volume. Food Lion has one of the largest profit margins among its competitors. If Food Lion could increase its sales and still maintain its profit margin, it could do significantly profit-wise. Here are a few alternatives to increase sales. 1. First alternative for food Lion will operate its business in two forms. The existing stores are still the conventional stores whereas the new ones will be carefully considered in demographics and psychographics of the areas to be run as the conventional stores or superstores. Specially, in some market areas conventional stores still appropriately match to the number of consumers, but in others they do not match. The advantages of this alternative are the company’s opportunity to gain more profit and market share because it can respond various customers’ needs more potentially from providing increased service department and product categories. More importantly, the company can adapt its strategy to be matched with the strong competition in industry dynamics. Operating superstores needs a lot of capital investment; meanwhile, it has higher operating cost than conventional stores’ operation because of a bigger size of warehouse, employees, equipment, and selling space. Pros · Opportunity to gain more profit and market share · More flexible to serve to different customers’ needs · Reduce risk of being in a maturity of conventional stores in some areas Cons · Higher operating cost · Need a lot of investment 2. Food Lion should continues to expand the number of its conventional size stores. Food Lion could continues its "cookie cutter" approach to new store development. Some of the benefits of this strategy of this strategy would be that Food Lion could continue development of its distribution centers which serve as the "core for continued expansion". Food Lion has a lot of stores in a relatively small area as opposed to other competitors thereby creating a strong market presence. In addition, Food Lion is a convenient alternative to the superstores because it is more accessible due to the number of them. Some of the disadvantages of this approach could be that Food Lion would fall behind its competitors who are building the larger stores. The shift to larger stores appears to be the biggest trend in the industry and therefore Food Lion may be missing an important shift in the market. Pros · Easy to manage the stores · Require less investment to expand · Debt burden would be minimal · Food Lion has knowledge and ability to manage conventional store Cons · May miss opportunity gain more profit from other product offerings · May fall behind to competitors who operate superstores 3. A third alternative for Food Lion is to increase the square footage of its conventional stores and develop a slightly larger stores with more products and services to offer its customers. For example: Food Lion could add a deli and/or a bakery and offer banking services. This larger format, while not as large as the superstore format, would allow Food Lion to better serve its customers and still maintain a more personal atmosphere. Pros · Need less investment compare to superstores · Become closer to superstores concept · More convenient to customers by offering more products Cons · High operating cost · Higher inventory cost · Uncertainty about customers response 7. RECOMMENDATION From the three alternatives discussed above, we would like to suggest for the first alternative. Since the marketing environment and competition change, affecting in some market areas; therefore, conventional store businesses might not be suitable for those areas. Even though operation superstores need high investment and has more operating cost, the company’s financial status has been in a secured position, also the company can offset the high operating cost by gaining some extra profits in superstores’ high profit items. On the other hand, the company cannot be competitive with the trend changes if it still runs the business in only conventional store format. As we mentioned in the major problem, Food Lion has unbalanced marketing mix. Below are our recommendation how to fix Food Lion marketing mix. 1. Product Modifying store size needs some changes in product. Since the existing products of Food Lion are mostly food item with fewer brands, Food Lion’s new superstore will add more brands in food items. Also, they will expand their product into non-food item and service department such as bakery, florist, etc. To satisfy today’s consumers’ demand. Usually, non-food item and service department bring more margins than food item, while those need more operating costs for extra employees and equipment. In Food Lion’s existing conventional stores, service department such as bakery or deli that is related to food -item will be added so that these stores can be penetrated as specialized grocery stores with the lowest price. Furthermore, both stores-superstores and convention stores will use product mix strategies that can be explained as breadth and depth of product. Superstores will expand its product breadth and depth into not only food item but also non-food item. Conventional stores will expand its product breadth and depth within food item category. Additionally, according to product life cycle system, products will be allocated carefully throughout stores to maximize profit. Also, by using private brand strategy, Food Lion can remain selling its product in the lowest price. 2. Price Food Lion’s positioning is the store that brings extra low product prices. Therefore, it has been developed the efficient penetrating pricing strategy. Though it remodels the store form, the penetrating pricing strategy will still be applied so as to retain its price leader position. Furthermore, the company has distribution centers that pursue expansion using its "ink-blot" formula. This distribution strategy can lead the company on setting low prices based on costs since the distribution system reduces warehouse, transportation, and ordering costs. 3. Place Under this alternatives, intensive strategy will be used to support the company’s strategy in responding consumers’ various needs. The Food Lion’s distribution centers should assure an on-time delivery to Food Lion’s stores. The distribution centers should also ensure that every Food Lion’s stores are getting the freshest and best quality products. New Food Lion’s store site is selected based on demographics and psycographics data. 4. Promotion Two strategies need to be implemented under this promotion mix: advertising strategy and sales promotion For advertising strategy, the company should change from relying on only one prototype--Tom E. Smith–-to more suitable format that can strongly appeal to the entirely potential customers. Using mass communication, the company can lower cost per individual reach. Also, a new format of Food Lion stores should be advertised to introduce and create the customers’ traffic flow to the new stores. Sales promotions such as double coupons, trading stamps will pull the consumers’ demand. Besides, this idea enhances the company’s mission. Additionally, various techniques such as direct mail, point of sales, displays will be used to attract local consumers. APPENDIX A APPENDIX B Thousands of units 131.10 136.00 138.00 140.00 145.00 147.00 148.00 150.00 152.00 154.00 APPENDIX C SALES AND NUMBER OF FOOD STORES Year Chain Independents Convenience stores Wholesale clubs Other stores Total Sales Thousands Sales Thousands Sales Thousands Sales No. of Sales Thousands Sales Thousands (bil. $) of units (bil. $) of units (bil. $) of units (bil. $) units (bil. $) of units (bil. $) of units 1994 224.00 18.00 77.00 11.70 27.80 58.00 20.30 750.00 52.60 42.60 401.70 131.10 1993 212.40 17.80 79.60 12.00 27.00 58.00 19.00 690.00 52.00 47.50 390.00 136.00 1992 204.30 17.70 82.00 12.70 27.00 58.20 16.50 500.00 52.80 48.90 382.60 138.00 1991 199.30 17.80 81.10 12.90 27.40 57.00 * * 68.40 52.30 376.20 140.00 1990 189.80 17.50 81.90 113.30 26.90 56.00 * * 69.90 58.30 368.50 145.00 1989 175.60 17.00 82.00 13.80 27.00 57.00 * * 66.40 59.30 351.00 147.00 1988 164.30 16.90 76.10 13.60 25.50 55.00 * * 63.10 62.60 329.00 148.00 1887 156.50 16.80 72.00 13.60 22.40 50.00 * * 662.10 69.60 313.00 150.00 1986 150.20 17.10 69.30 13.50 21.60 47.00 * * 63.90 74.40 305.00 152.00 1985 143.70 17.20 66.10 13.30 20.40 45.40 * * 62.00 78.10 292.20 154.00 Year Chain Independents Convenience stores Wholesale clubs Other stores Total Sales Thousands Sales Thousands Sales Thousands Sales No. of Sales Thousands Sales Thousands (bil. $) of units (bil. $) of units (bil. $) of units (bil. $) units (bil. $) of units (bil. $) of units 1994 224.00 18.00 77.00 11.70 27.80 58.00 20.30 750.00 52.60 42.60 401.70 131.10 1993 212.40 17.80 79.60 12.00 27.00 58.00 19.00 690.00 52.00 47.50 390.00 136.00 1992 204.30 17.70 82.00 12.70 27.00 58.20 16.50 500.00 52.80 48.90 382.60 138.00 1991 199.30 17.80 81.10 12.90 27.40 57.00 * * 68.40 52.30 376.20 140.00 1990 189.80 17.50 81.90 113.30 26.90 56.00 * * 69.90 58.30 368.50 145.00 1989 175.60 17.00 82.00 13.80 27.00 57.00 * * 66.40 59.30 351.00 147.00 1988 164.30 16.90 76.10 13.60 25.50 55.00 * * 63.10 62.60 329.00 148.00 1887 156.50 16.80 72.00 13.60 22.40 50.00 * * 662.10 69.60 313.00 150.00 1986 150.20 17.10 69.30 13.50 21.60 47.00 * * 63.90 74.40 305.00 152.00 1985 143.70 17.20 66.10 13.30 20.40 45.40 * * 62.00 78.10 292.20 154.00 --------------------------------------------------------------