Lucky to Pare Down to Core Food Business
When Lucky Stores opened its red-brick headquarters here about 15 years ago, relations between labor and business were much more adversarial. Odd as it might sound, the building’s designers opted to omit windows in the name of security.
John M. Lillie, Lucky’s chairman, pointed out the design quirk Monday, chuckled and commented that he looks forward to ripping out a few bricks and installing some windows. These days, however, he’s concentrating on remodeling the company itself.
In an effort to fight a takeover threat by New York investor Asher B. Edelman, the company has closed its Gemco discount department stores, announced it may sell its specialty stores and is concentrating on its core business--supermarkets.
“Pure companies can be managed more effectively,” Lillie said in an interview at company headquarters southeast of Oakland. “What the restructuring will do . . . is create a pure food company of sufficient size to be an effective competitor and of sufficient size in individual markets to be an aggressive player.” More details of Lucky’s restructuring plan are expected to emerge after the company’s board of directors meets Thursday. Some industry analysts question whether Lucky can realize enough value from the restructuring to placate shareholders, who have watched the company reject Edelman’s $37-a-share cash offer as inadequate.
Lillie would say little about adversary Edelman, although he noted that the two met at a Christmas party some years ago in the ski country of Sun Valley, Ida., where both art lovers own residences. Lillie’s office, like Edelman’s on Fifth Avenue in New York, contains wall-to-wall contemporary art.
Lillie, 49, who grew up near Pasadena and has a Stanford MBA, is optimistic that the restructuring will ultimately make Lucky a much stronger company with a stable core--its food business. The company operates 575 supermarkets, including Lucky in Orange and Los Angeles counties, Food Basket in San Diego, Eagle stores in the Midwest and Kash ‘n’ Karry in Florida.
“I’m not sure the investment community has adequately focused on the value of the food business. It will stand out as a very attractive food company,” he said.
Leaving the corporate headquarters on a dazzling sunny morning Monday, Lillie went to one of the company’s showcase stores in nearby San Ramon to show off what the company is doing. The produce looked polished, fresh fish was displayed on ice and computer terminals were available that enable shoppers to get directions for finding groceries.
At the cash register, he produced his own bank card to show how groceries there can be paid for with several kinds of automated teller machine cards.
Lillie acknowledges that the company, which historically has followed a strategy of offering everyday low prices, did not adapt quickly enough to a changing marketplace.
“We were a little slow to see how our traditional customer had moved into this convenience need,” he said. “Our market research in Chicago said you weren’t in the supermarket business unless you had a deli. We didn’t have any. We were behind the 8-ball.”
Future of Specialty Stores
However, in the last few years the company has moved to install delis, fish counters, bakeries and other services geared to two-career couples and busy single customers.
But still remaining for Lillie and Lucky are the specialty stores and what’s to become of them in the reorganization. One option would be to spin off the units, which include auto parts and fabric stores, to shareholders. Alternatively, they could be sold outright, as was the company’s money-losing Gemco unit.
Although Lillie declined to comment on the specialty stores’ potential value, he noted that “each is a fine business in its own right.” Analysts expect that the company could reap about $450 million after taxes on the sale of these “cash cows,” which generate more money than they spend.
The company moved much more quickly and decisively when it came to determining the fate of the Gemco membership discount department store unit. The unit, which had a $28-million pretax loss in the first six months of this year, had been under scrutiny for some time, Lillie said, but he denied speculation that the unit had been for sale before Edelman made his bid.
“We’d been approached, but we hadn’t had any discussions,” he said. However, of some Gemco workers’ complaints that Edelman caused them to lose their jobs, Lillie said: “I don’t think we can blame him for the layoffs. I suspect we would have made the same decision several months later.”
Although Edelman formally withdrew his bid last week in the face of Lucky’s fierce determination to remain independent, Wall Street sources speculate that the investor might soon buy a substantial stake in the company on the open market to use as leverage in negotiations. The tactic recently worked well for Campeau Corp., which on Sunday announced a deal to acquire Allied Stores after weeks of complex maneuverings.
Such a prospect doesn’t appear to faze Lillie. “If it happens,” he said, “we’ll decide at that point in time what to do.”
