What was Good Food’s first bad move that led to its eventual decline?
Directions: Read the passage and answer the question.
When one company acquires another, the larger firm usually takes over the smaller one. There are exceptions to the rule, however, such as the Good – Value Mart merger.
Once the leading chain of supermarkets in New England, Good Food Stores have been steadily declining for twenty years. Their sales fell from 25 per cent to 5 per cent of the market. During the same period (1958–1978), earning plunged from over 8 million to a loss of 23 million. With such a track record, Good Food stores hardly seemed a likely candidate for acquisition.
But the Midwest - based Value Mart chain acquired Good Food earlier this year with high hopes of turning around the New England chain. Value Mart is a privately owned chain of supermarkets, with approximately sixty stores throughout the Midwest. The average sales for last year ran a little over 6 million per store. On the other hand, Good Food is a publicly held company that averaged sales of 4 million in each of its 230 stores. In the last five years, Value Mart’s earnings reached nearly 15 million, while Good Food lost 40 million during that same period.
The chairman of Value Mart, Harold Brown, is an old hand at putting ailing supermarkets back on their feet. In 1963, Mr. Brown helped turn around an old Cincinnati chain; he changed it from an unprofitable, out of date store to a market leader with a profit of 7 million in just six years. After leaving the Cincinnati chain, Brown, along with thirty other investors, bought Value Mart and turned it around, so that in the past year it has surpassed even the Cincinnati chain in sales. Brown’s two success stories now account for 60 per cent of the supermarket business in the Cincinnati area.
Although Brown’s track record has been good (and was, in fact, the reason Value Mart was able to obtain the necessary funds to acquire Good Food), there has been some speculation on whether Value Mart has undertaken more than it can handle. A powerful New England trade member wonders whether Value Mart has the know-how and strength to take on the leading established New England chains. Good Food’s problems started in the late 1950s and early 1960s, when they failed to follow their competitors move to the suburbs and large shopping centres. This put Good Food behind in market share.
Good Food then made another bad move in 1962 in an attempt to regain some of its lost market share. They acquired a wavering division of supermarkets in the New York area and tried to establish themselves there, while maintaining a policy of low investment and high prices back home in New England. The strategy did not work, and consequently Good Food had to pull out of New York. In addition, Good Food has lost customers in New England. Good Food’s woes were increased by mismanagement. Complacent task forces were formed to “study” problems instead of dealing with them immediately. Coupled with this was a group of directors who were, for the most part, not industry experts but bankers and lawyers.
The choices facing Good Food in 1976 were as follows: sell, if possible; liquidate; or push onwards. The decision was made to seek a merger partner, and Value Mart was contacted through Good Food’s investment counselor. Given Good Food’s unpromising situation, it seems surprising that Value Mart was interested. Mr. Brown, however, fresh out of a Cincinnati price war, realised that his home market was saturated and that acquisition or territorial expansion was the necessary means for growth.
Value Mart took charge of the situation and began to reorganise even before the merger was completed. Their top executives took over key positions in the Good Food organisation, a move that included ousting Good Food’s president. In an attempt to drastically cut down on administrative expenses, over two hundred jobs at the management level were abolished. (It is expected that this alone resulted in savings of over 3 million.)
Another change was placing control of grocery merchandising and buying in the hands of those at the corporate level, rather than dividing this function amongst Good Food’s store managers and executives. This facilitated the introduction of Value Mart’s tried-and-true policy of “deal buying,” or taking advantage of cut-rate prices to buy huge quantities of canned or packaged goods. Because “buying” in such quantity necessitates ample inventory space, construction was begun the day after the merger, to increase Good Food’s warehousing facilities to the tune of 7 million. The new warehouse will be the largest supermarket warehouse in the United States, and it is expected to save in cost and avoid out-of-stock problems.
The Value Mart strategy for turning around the New England chain also involves deemphasizing non food items and hence attracting customers by placing emphasis on the quality of its produce (fruits and vegetables) and meats. Problems at the store level are being corrected by extending work hours at individual stores, cleaning up dirty premises (Good Food had reduced personnel in its stores in an attempt to cut labour costs, resulting in dirty stores and low morale among the employees), and teaching store managers how to repackage and maintain their fresh produce. Visits to each Good Food store by a Value Mart senior vice-president of operations resulted in control and, equally as important, a demonstrated and direct interest by top management in individual store operations.
This top-level involvement in daily store routine is a far cry from the old Good Food “hands off” approach. The Midwestern senior vice-president not only visits each store to make suggestions, but also comes back unannounced to check on the implementations of changes.
Mr. Brown’s immediate objective is to increase business from present customers. He estimates an increase in volume of over 100 million if sales per customer can be improved by only 10 per cent. Once sales are up and stores are operating smoothly, Brown plans to renovate about sixty-five of Good Food’s largest stores, a move that should bring in an additional 6 - 7 million in weekly sales. Finally, the older and smaller Good Food stores will be given a facelift with the increased revenue from the redone larger stores. Value Mart intends to feed its profits back into the entire operation to keep it going and constantly moving ahead.