MAKING THEM RICH DOWN HOME Food Lion stock made millionaires of 87 local investors who had faith in a Salisbury, North Carolina, supermarket. It became America's fastest-growing chain.
By William E. Sheeline REPORTER ASSOCIATE Sandra L. Kirsch

(FORTUNE Magazine) – PAUL RITCHIE was behind the clerk's window at the Salisbury, North Carolina, post office when Ralph Ketner, a boyhood friend, walked in to talk about the new grocery store he planned to open. If Ritchie wanted to buy some stock, there were still a few shares available. Ketner's family had owned grocery stores in and around the prosperous railroad and textile town for three decades. Says Ritchie: ''Knowing how smart Ralph is, I thought, 'Somewhere along the line that's bound to be a good stock.' I bought it without hesitation. Ten shares for $100.'' That was in 1957. Ritchie quietly went about his way, rising from postal clerk in Salisbury, a town of 24,000, to postmaster of neighboring Landis, population 2,300. Ketner, meanwhile, was busy putting in up to 100 hours a week at his struggling chain of grocery stores. Today the company, Food Lion, is the largest publicly held corporation in North Carolina after Duke Power; it is the fastest-growing supermarket chain in America and one of the most prodigiously profitable investments of all time. Ritchie, who retired in 1979, never did sell the stock. After splitting 12,960 ways in 31 years, the ten original shares have grown to 129,600. At around $11 apiece, they are worth about $1.4 million. Ritchie is not alone. When Ketner was peddling his stock, he and two partners, his older brother, Brown, and a friend named Wilson Smith, thumbed through the local phone book and put in calls to everyone they knew. ''We basically grew up on the wrong side of the tracks, so we didn't know any wealthy people,'' he says. ''We called cotton mill workers, railroad workers, postal workers, and friends from church.'' In all, they contacted about 250 people, half of whom bought up to 100 shares each at $10 a share. At least 87 Food Lion millionaires now live in Salisbury and in surrounding Rowan County. J. J. Barger, a druggist in nearby Faith, population 659, bought 50 shares. Harold Melton, who owned a furniture store, bought 20. A pediatrician, a clothing salesman, a linotype operator, a builder -- all bought a piece of the new store. The late James F. Hurley Jr., then publisher of the Salisbury Post, bought each of his three sons 100 shares. ''He just wanted another grocery store here for an advertising account,'' recalls son Jim, the present publisher and a wry observer of Salisbury life. ''He didn't think it would amount to much.'' The value of each original stake today: $14 million. Fred Stanback, a businessman who was in an investment club with Ketner in the early Sixties, bought some stock and later sold it. But Stanback -- who counts among his friends Warren Buffett, the celebrated investor and chairman of Berkshire Hathaway -- had third thoughts and later bought back into the miracle blooming in his own yard. One of the biggest individual investors, he now owns nearly 1% of the company. The stock has been just as kind to Delhaize, a Belgian supermarket company that showed up in Salisbury in 1974 looking for an investment opportunity. By 1976 the Belgians owned a 50.4% stake in the company that cost them $16 million; their present holdings are worth $1.6 billion. The $3-billion-a-year company churning out this hometown wealth is a fastidiously lean operator gorging on growth. Over the past 20 years sales have grown at an average annual rate of 37%, and earnings 55%, rewarding stockholders with annual returns on equity averaging 24%. ''It's a machine,'' says Jay Myers, a stockbroker in Charlotte who grew up in Salisbury. ''Year in, year out, with no variation. It's the most consistent growth company I've ever seen.'' The lion's share of that growth comes from new stores: The company added 95 in 1987, ending the year with 475 stores spread over eight Southeastern states. It is adding another 100 this year, 26 of them in Florida, the region's most populous market. So far the headlong growth has not confounded the narrowly focused strategy that makes Food Lion a winner. The company sells basic groceries at low prices in no-frills stores that are built for speed, not comfort. Backing them up is a hyperefficient warehouse and distribution system. ''Our whole secret is volume,'' says Chairman Ralph Ketner. ''We just generate the volume and control expenses.'' The company builds in clusters, expanding concentrically from warehouses, adding stores in peripheral markets, and then saturating those areas with more stores. Unless you live in the Southeast, don't expect to see a Food Lion in your town soon. Enter a store, and there isn't much that seems special. At 25,000 to 29,000 square feet, it is slightly smaller than the average supermarket and is stocked with only the briskest-selling products, about 15,000 items, vs. 20,000 for a conventional store. The design is spare, and clutter is kept to a minimum. Shelf tags announce, ''Why pay more?'' There may be fewer brands on the shelves, but the cans are stacked high, vaguely suggesting a wholesale warehouse. The company primes the pump by selling key staples at or below wholesale costs. Says Ketner, a lively man who sometimes sounds like a talking billboard: ''We sell all coffee at cost, all shortening, all baby food, all cat food, all dog food, all detergents. When Jimmy Carter was President, I was looking for more items to cut the price on. I figured, 'Well, he's a rice and grits man,' so now we sell all rice at carload cost.'' Margins on other goods such as produce and frozen foods are comparable with or slightly smaller than those at other supermarkets. BECAUSE SPACE is limited, a manufacturer must have products that perform to keep their place on a Food Lion shelf. ''The space he gets is dictated by his volume,'' says Tom Smith, 47, the company's workaholic chief executive. ''It's very simple. We've got five beer distributors and 100% of shelf space. If Stroh's does 30%, he gets 30% of the space. Then we check it again six months later.'' Despite the low prices, Food Lion's profit margins are fat by industry standards. The company has averaged an annual 2.7% return on sales over the past decade, vs. the 1.5% typical for supermarkets. Its secret: relentless cost cutting. Last year its selling and administrative costs amounted to 12.3% of sales, well below the 20% average of major competitors. At Food Lion they save everything -- boxes, tires, envelopes (reused for interoffice mail) -- and waste nothing. Heat thrown off by refrigeration units is captured and recyled. Fat and bones cut from meat are ground up and sold as fertilizer. Other grocery chains do many of these things, but Food Lion makes a fetish of efficiency. The motto that's drummed into managers' heads: ''We may not do anything 1,000% better, but we do 1,000 things 1% better.'' Frugality starts at the top -- for example, nobody flies first-class. Says Ketner: ''It's just a lot easier to move six feet farther back in that airplane and not spend the extra $300 or $400, which can cause you to have to generate $15,000 worth of sales.'' Some of Food Lion's policies run solidly against current fashion. In an age of decentralization, management controls a host of key operating details from headquarters, a sleek, two-story (soon to be four) brick and glass building located to the west of town by a distribution center the size of 15 football fields. Lights, heating, and refrigeration systems in all the stores, from Delaware to Florida, are turned on and off by a computer at headquarters. Virtually all major decisions -- buying, pricing, merchandising -- are made by the central brain trust. Explains Smith: ''When we want to push a particular product, we can say, 'It goes here on the shelf or it goes here on display.' That way we've got somebody very experienced deciding the best place to put it, rather than having 500 people with their own ideas.'' Regional staff teams can adjust the mix to local preferences, but in general if you're a Food Lion customer from Richmond, Virginia, and you walk into a store in Ocean City, Maryland, you know where to find the ketchup. And that bottle costs the same by the beach as it does in the hinterland. Bucking the trend toward lean inventory, Food Lion stuffs its warehouses to the walls. The company is an aggressive buyer, ordering huge quantities to keep unit costs low. It takes massive advantage of the periodic promotional deals manufacturers offer. If Ocean Spray is selling CranApple juice at a discount, Food Lion will load up on enough of the stuff to last until the next promotion. ''They use inventory as a weapon,'' says Bob Goodale, president of Charlotte-based Harris Teeter, a ritzier 128-store supermarket chain. ''They are not concerned about the cost of space or the cost of money. It is a very simple thing -- simple things are sometimes elegant.'' Keep it simple. That maxim drives everything Food Lion does. ''Complexity adds costs,'' says Brian Woolf, the company's chief financial officer. The message is preached with missionary zeal to employees. And management keeps the details of every job simple and clearly defined, from bagger and cashier to produce manager to warehouse supervisor. That allows for better accountability and more systemized training. FOOD LION RELIES mainly on television ads to publicize its low prices. All are written in-house to keep costs down, and many star CEO Smith. Last year the company blitzed Jacksonville, Florida, the hometown of rival Winn-Dixie, with TV ads for six months before its first stores opened there. Smith promised viewers that Food Lion's arrival there would lower area prices, and so it seems to have. In a January survey based on a 17-item market basket, a Jacksonville newspaper found that food prices in local stores were nearly 6% lower after Food Lion entered. Claims Smith: ''The grocery market down there is $850 million, so all those people have $50 million left over just to spend any way they want to. So that's what we offer.'' The simplest ingredient is plain old hard work, with management setting the pace. ''They're there every day,'' says Myers. ''They go in in the dark and they come out in the dark -- they're very pale managers.'' The company looks for potential hirees who possess a ''Food Lion personality,'' which includes a willingness to work hard, stay within the system, and go for the next rung on the ladder. In the pursuit of productivity, there's no time for rest. ''You've got to produce, you've got to sacrifice,'' says Ken Barbee, a 17-year veteran of the company who now manages Store No. 30, in Albemarle, North Carolina. The company also pays its 34,000 employees a little less on average than competitors. But it rewards those who thrive in the system with attractive profit-sharing and stock option benefits. Says Barbee: ''It's just amazing what Food Lion has done for me and my family. '' His profit sharing and options are worth about half a million dollars. The culture is not for everyone. ''Either you get the job done or there are two people waiting to take your place,'' says Juanita Coley, a former Food Lion manager who left the company in 1983 and now manages a Harris Teeter store in Charlotte. ''It's management through intimidation.'' Food Lion's back-to-basics approach springs from the late-blooming intuitive genius of Ralph Ketner. By the fall of 1967, Food Town, as the chain was originally called, had opened 16 stores and closed nine, and was foundering as it tried to drum up business with a panoply of giveaway schemes. In search of a better approach, Ketner visited a supermarket chain in Ohio that specialized in undercutting the competition and came back convinced he could do even better. He gathered up six months of his invoices, drove to Charlotte, and spent three days in a motel studying the shelf movement of each product. If he cut prices to the bone, how much volume would be necessary to offset the loss in gross profits? Says Ketner: ''I worked it out -- a 20% increase in sales, I go bankrupt, 30%, 40% . . . bankrupt.'' If volume increased a full 50%, the company might stay in the black. Ketner's knack for numbers is legend in Salisbury. People delight in telling how when Ralph is waiting for a freight train at a railroad crossing, he will add up the numbers on the cars and deliver the total as the caboose rumbles by. Ketner was Food Lion's in-house computer long before the actual hardware was available. ''I never met a mathematical genius like him,'' says Brian Woolf, who joined Food Lion in 1980 and is its Harvard business school graduate. ''I think that skill was one of the great strengths of the company in the early days. He could dazzle and confuse the vendors when they came in with deals.'' Ketner started 1968 by lowering prices 10% to 15% on 3,000 items. The new policy, dubbed LFPINC -- lowest food prices in North Carolina -- paid off. By year's end the chain had nine stores, and sales were up 54%, to just under $9 million. The following year sales for those stores increased 71%, to more than $15 million. Earnings soared too as the company hunted down and dispatched unnecessary expenses. ''Our bumper stickers, highway signs, everything zeroed in on LFPINC, and each year we continued to cut more prices, and it just fed on itself,'' remembers Ketner. Food Lion was growing briskly by 1974, when Delhaize approached Ketner about investing. He quickly agreed. ''It was primarily so the other original investors and I could get some cash,'' he says. ''I had paper, but I couldn't afford to go out and buy a car.'' But Ketner persuaded the Belgians to be hands-off managers; the five Delhaize directors have agreed to vote with top management on major issues. Ketner also took a fancy to the Delhaize lion logo, which he adopted. Nine years later it became the basis of the new corporate name. Food Town was moving into Tennessee, home to another Food Town grocery chain. Characteristically, Ketner reasoned that the cheapest possible change would be to Food Lion. ''Those big canopy signs cost a lot,'' he says, ''and I figured that all I had to do was buy an L and an I, because I could move the O and the N over. It cost us roughly $5,000 per store; if we'd changed it to some entirely different name, we'd have been looking at millions of dollars.'' Today's chief cost cutter, Tom Smith, is making sure the Ketner system continues to flourish as the business grows at a furious pace. No relation to retired founder Wilson Smith, he grew up in China Grove, right next to Salisbury, the son of a Cannon Mills construction worker, and started at the original Food Lion as a bag boy while still in high school. He became a store manager and worked his way through Salisbury's Catawba College, graduating with a degree in business administration. He went to work for Del Monte for six years until Ketner hired him back as the company's only buyer in 1970. As Food Lion rushes headlong toward a projected 1,000 stores by 1992, Smith worries about the risks. ''One of the things I've tried to do all along is look at companies that have grown fast and have gotten into trouble,'' he says. One that he ponders is A&P, which spent all its money on expansion and let its existing stores run down so badly that longtime customers began to shop elsewhere. CAN SMITH and his managers avoid the same fate? The company says it gives its stores a face lift after three years, and guts and refits them after ten years, although Bob Goodale of Harris Teeter says, ''We aren't seeing it.'' Right now only 69 of Food Lion's stores are ten years old or more. The company expects to grow at a 20% clip for the next five years, and reinvestment costs are not outpacing that growth. But when the momentum inevitably slows, those costs will begin to eat bigger chunks of Food Lion's gross profits. Keeping the stores properly staffed may be an even tougher task. Food Lion's goal is to have 80% of a new store's management drawn from existing operations, but currently the proportion is less than 50%. ''The growth we've , had has been so fast that we simply don't have enough experienced people to promote,'' acknowledges Vince Watkins, who oversees management training. The company is adding about 10,000 new employees this year, and ''Food Lion personalities'' are hard to find. Says Gynn Eller, head of a major Food Lion supplier: ''The farther away from Salisbury they get, it seems like the harder it is to get their total philosophy across.'' If there's a solution to be found to Food Lion's growing pains, Smith is the man to find it. He is driven. He's at work before six in the morning, and he doesn't leave for home until after seven in the evening. He's there seven days a week, leaving the company only a couple of times a year to ''clear my mind.'' He does that by hunting. His office walls are hung with hunting trophies -- zebra, lynx, deer -- from around the world. Among his trophies is a huge lion, in full stride with teeth bared. ''He worked hard to get that lion,'' says Eller, who was with him when he bagged it. After tracking the animal for nine days without firing a shot, Smith perched in a tree overnight in the rain, waiting. In the early morning darkness of the tenth day, he spotted it darting across a field. He took one shot and the lion went down. This is a patient, determined man. MEANTIME FOOD LION keeps making Rowan County richer. The most telling example is Catawba College, a 1,000-student school that is associated with the United Church of Christ. In the mid-1970s, a dreary time for the local economy, the school could barely meet its goal in a $1.5 million fund drive. By the 1980s the campus was run down and the student body shrinking. Two years ago the college launched a capital fund drive and raised $27.2 million; of that amount, $15 million was donated Food Lion stock. ''In this town you don't ask somebody for money,'' says Jim Hurley, who led the drive. ''You ask them for Food Lion shares.'' Some old-timers still don't understand that they have a lion by the tail. During the drive two years ago, Ketner brought Catawba President Stephen Wurster to visit with Zeda Barger, the 81-year-old widow of the druggist in Faith who bought 50 shares in 1957. She was waiting for them in the living room of her tiny two-bedroom brick home off Faith Road. She couldn't understand why Ketner was coming to ask her for money. That original $500 was a loan, she told him. ''Zeda, you didn't loan it to me,'' Ketner replied. ''You bought stock in the company. That stock's worth about $2.5 million.'' Catawba College now has renovated buildings, a new student center and cafeteria, six tennis courts, beautifully landscaped grounds, and a growing student body. Zeda Barger gave $750,000 in Food Lion stock, and there's a dormitory with her name on it, right next to the new Ralph W. Ketner School of Business.


-- Jim Woodson tired of pushing a mower around his two-acre backyard. Eyeing Food Lion's stock in the early 1970s, he thought, ''Maybe I can make a couple of dollars and buy me a nice riding mower.'' He bought about 400 shares, took several thousand dollars in profits shortly after, and, pleased with himself, bought the mower. Thus, the 72-year-old attorney's Food Lion tale became the saddest in Salisbury: That stock would be worth $3 million today. ''I would think it's one of the most expensive riding lawn mowers in North Carolina,'' he says laconically. At least it has run faultlessly. Says Woodson: ''If it ever gives me any trouble, I think I'll call Ralph and ask him to have it fixed.''


-- Food Lion is not the only company whose owners peddled shares door to door and made the townfolk rich. Take the five men in Two Harbors, Minnesota, who at the turn of the century decided to exploit a mineral deposit at the edge of Lake Superior to make an industrial abrasive. Customers were in short supply, so creditors were paid in shares and employees sometimes found stock certificates in their pay envelopes instead of cash. By 1904 the value of two shares had fallen to one shot of whiskey on the ''barroom exchange'' in Two Harbors. Eventually, though, Minnesota Mining & Manufacturing perfected a product called sandpaper, and if your grandfather had been one of those factory hands who found, say, ten shares in his pay envelope, those same shares would have split 768 ways and be worth $500,000 today. Led by William Norris, the founders of another Minnesota company, Control Data Corp., sold stock for $1 a share to 300 friends and associates in the Twin Cities. Started in 1957, Control Data went on to challenge IBM's computer supremacy in the 1960s, only to have Big Blue beat it back. As a result Control Data's stock price has gyrated a lot over the intervening years, but 1,000 original shares bought for $1,000 31 years ago are now 9,000 shares worth about $240,000. And says Norris proudly: ''I've had letters from people saying they sent their kids through college on the money they made.'' Tyson Foods, a chicken processor in Springdale, Arkansas, certainly saved the best parts for the hometown faithful. Springdale citizens who held on to the 1,000 shares they bought for $1 each when the company went public in 1963 now own 120,000 shares worth roughly $2.4 million. Sooner or later, like all investors, local folks discover timing is everything. Forest City, Iowa, became famous back in 1971 for the more than two dozen ''Winnebago millionaires'' -- many of them farmers in bib overalls -- who made their fortunes off the recreational vehicle company headquartered there. Since then they have been riding a bumpy road. One hundred shares, which originally cost $1,250, split 320 ways by 1972 and were worth $1.5 million. Then the OPEC oil-price explosion shattered RV sales, and those 100 shares tumbled to $160,000. They are now back up to $340,000. With examples like these in mind, Robert Ketner, Ralph Ketner's son and an investment adviser at Merrill Lynch, has urged his father to diversify some of his holdings in Food Lion. To enable Delhaize, the Belgian owners, to sell Food Lion shares and still keep control of the company, the stock was divided into A and B shares -- voting and nonvoting -- back in 1983. Now Ralph simply shrugs and tells his son: ''I am diversified. I've got half A and half B.''