Tuesday, May 3, 2011

Thoughts on tradional supermarkets and Winn Dixie

The death of Dixie

Winn Dixie went bankrupt around 2006 and has been in turn around mode ever since. The big problem for Winn Dixie is that the traditional supermarket model has been disrupted quite dramatically. For a long time grocery stores enjoyed competitive advantages of having scale in a community (more efficient to service 10 supermarkets in a city, than just 1 in each city) and being the first supermarket in the area (acquire better lots, higher traffic, closer to residential areas, people become accustomed to the supermarket and it's employees and therefore it becomes sticky.)

Yet, there was a large disruption within the traditional supermarkets: WalMart.  Once Walmart started to offer groceries it became a huge hit with consumers, in fact it's currently the largest grocery retailer. The massive scale of Walmart and efficient distribution system allows WalMart to offer grocery products cheaper than traditional grocery stores.

This caused supermarkets to change or die. The supermarkets that have changed and thrived, have been service oriented supermarkets. Supermarkets that go the extra mile to service their customers in order to oblige those customers to come back.  Generally these supermarkets pay their employees very well with stock options, high salary and great benefits. Some grocers have thrived by being the organic grocery or simple & small, but for old supermarkets, a drive in customer service was necessary. The supermarkets that decided to keep the old model of paying employees below average wages and keeping the stores less than fresh have been in a tail spin, which allowed Winn Dixie to end up in bankruptcy court in 2006.

Spirit of Dixie

Peter Lynch took over Wnn-Dixie and has be on a mission since to change the supermarket around. He closed down over half the stores, and consolidated the operation from over a thousand stores to under 500 stores. He then went about making Winn Dixie a more service oriented supermarket, investing a massive amount of money in remodels and increasing the customer service of the overall operation. Yet, even with all the hard work to turn around the store, he couldn' control the economy of Florida that went into a deep recession since 2007 due to a hard hit real estate sector.

People were pinching their pennies and were willing to drive to Walmart in order to save on their grocery bill. Also, Winn-Dixie with their incredible turn around in customer service and store quality has not been able to top the store quality of their closet competitor, Publix. So Winn Dixie is in a rut, they will never have prices as cheap as Walmart and they will never have the customer service of Publix (Publix pays their employees very well, and is actually an employee owned company, giving it a structural advantage in giving employees an incentive for great customer care.)

Cheapness of Dixie

For all it's warts and faults,  does Winn Dixie deserve to be priced so low? Currently Winn Dixie has an EV/Sales of 0.05, that's opposed to Whole Foods with 1.14, SuperValue 0.24 or Kroger of 0.27. Winn Dixie also has over 7B in annual sales, which means means if Winn Dixie could reach a reasonable profit margin of 0.01%, that's 70M in net income. Currently, Winn Dixie has a market cap of around 400M and an enterprise value of 330M. The company also has over 500M in NOL and is trading below half of book.

My guess is, all the negativity of Winn Dixie is already priced in and most people have been too negative on Winn Dixie's prospects.  If Winn Dixie feels any material increase in year over year, same store sales the we will see a jump in price.  

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