Speaker Name: Tom E. Smith
Speaker Title: President and CEO
Speaker Company: Food Lion, Inc.
Food Lion, Inc. Website
It's certainly a pleasure to be here with you.
I've chosen as my topic today "Finding the Right Company." Obviously, I'm going to be talking to the students and I hope to use Food Lion as an example. I want to pass along some ideas for you to look for when choosing a company with which to make a career. I don't want to insinuate that Food Lion is the most perfect company, but I do think we do some things right that will indicate to you some of the things to search for in order to find a good career.
When I was graduating from college, I remember a lot of the students chose their company based on starting salary. I think some students still do that today, but I would prescribe that that's something that should be on down the list. You need to look for solid things that will help you build with the company. The real goal should be to find the right company as soon as you can. Looking back at those students who went for the top dollar at the time, most of them jumped to several different jobs. They were searching for the right company after they were on the job. I would like and hope to see most of you find the right company very close to the start of your career. That gives you so many more years to work on that career and to build in the benefits of that company; and, of course, those first years normally expand the high earning years toward the end.
In order for me to use Food Lion as an example, I need to go back into our history because some important things happened back then. I need to bring you up-to-date on where we are now and tell you where we're going in the future to sort of set the base. Then we'll work on what we do in Food Lion that allows us to grow at a rapid pace, yet keep our company healthy and strong. That's the combination you search for; it's a tough combination, especially in a growth company, to grow fast and stay solid at the same time.
Food Lion was started in 1957 and you don't have to take a business course to see that the first ten years of Food Lion's history didn't go well. They were years in which our company was struggling; we were a me-too type company--we did not have a niche in the market. We were somewhat of a copycat and we were very small. It was tough to make it; we were a company that was basically bankrupt. But some things happened then that were important as we look back.
One thing was that, for some strange reason, the people of Food Lion thought there must be a place for our company, that we had to survive, that there was a need for Food Lion in the grocery business. Those people joined and held the company together and formed a spirit that stays in Food Lion today. Even though we have 53,000 employees, it's like a family--the group of Food Lion employees. What they were doing in those days was searching for ways to keep us alive and, of course, not spending money because, as I said, we were near bankruptcy. They were counting on every penny, watching every penny, only spending money when it was absolutely necessary, making things last, figuring out ways to do things in the least expensive and smartest way. When people came to work we were all expected to work an hour rather than stand around part of that hour, so there were work lists put together. All this in those days was surviving. But as we look back, hindsight shows we were learning a great lesson in efficiency. We were learning to do things at the least possible cost.
During those times we were looking for ways to make ourselves unique. Unfortunately, it took ten years, but in 1967 we came up with a system. It sounds like maybe I wasn't with Food Lion but I was. I was a bagger and a stocker while I was in high school and college, so I'm familiar with what was going on. I rejoined Food Lion in 1970. We were looking for something that made us unique and we found it. Much as they are today, there were two types of supermarkets back then--conventional type supermarkets, those that had good quality, good service, good variety but high prices, and then there were supermarket, discount stores, which had low prices but normally took away services because they used that labor expense to lower prices. In other words, there was no assistance bagging groceries or getting them in the cars. We decided that we could put the best of both systems together and come up with one system--a system that offered good quality, good variety and service, plus low prices. That was thought to be an impossibility because they just don't go together. But what wasn't known was how effective we'd become and that allowed it to work and as you can see, we started to grow. Over the next ten years we grew from seven to 55 stores, from $6 million to $220 million in sales; over the next ten years from 55 stores to 475, and we ended last year with 881 stores and $6.4 billion in sales.
I have some slides to show the consistency of our company. This is something I would encourage you to look at in a company. There are a lot of growth companies--a lot that succeed and a lot that fail. One thing I think is so important in a growth company is consistency. Some growth companies grow in spurts and it's hard to start up, back off, start up, back off; it's hard to put that type of organization together. I feel the best system is to grow at a steady pace. This first slide happens to be of the stores and, as you can see, we started ten years ago with 182 stores. We ended last year with 881, a good consistent pattern. Of course we can build stores, but we need sales to go with them, and again a consistent path--$.9 billion ten years ago, last year $6.4 billion. But having the facilities and the sales leaves one very important area out--and that's profits. The difficult thing for a growth company is to keep profits as you grow and, thank goodness, working together we've been able to do that. The profits per share, and those are broken down because of some splits during the ten years, ten years ago were 6 cents per share and last year 64 cents--again a consistent growth. I urge you to look back at the history of the companies you're looking at to see whether they have a good consistent path. They'll tell you how they are able to plan and if they are approaching the future in a solid way.
Stock is a different thing and I won't mention much about stock today although our analysts normally like to hear more about it. It looks rather choppy; all we can do is produce the figures and the market takes care of how they want to buy. Actually our stock has grown at a higher rate than sales, and as I'll show you on a compounded growth rate slide, the stock has done very well. In Rowan County where people had faith in a little company back in 1957 and invested $1,000 each, not a whole lot of faith because the most anybody would invest was $1,000, but that $1,000 has now turned into $35 million over those years from a stock price advantage.
Looking to the compounded growth over these years--stores have grown at 20 percent, sales at 25 percent, profits at 26 percent, and the stock price has gone up an average of 38 percent (that's average per year growth). I said I'd come back to the efficiencies and I want to put some emphasis on efficiency because I contend that in the future for companies in the United States or anywhere in the world to compete, they're going to have to be efficient. This is no longer, as you well know, a country in which we compete among ourselves. We compete with the rest of the world and the efficient companies are going to succeed while the inefficient companies are going to have tough times. This is a good area to look at to see how the company you might be thinking about is doing.
In our case, I'll use three slides to show you how we look from that angle. We simply take the figures of our competitors from their reports which shows us that their gross profit is 24.4 percent. That's how much they mark up their groceries; ours is 20.4 percent. It would be very easy to say we're only 4 percent below competitors; actually in a lot of instances we're 15 percent, and in some markets 20 percent below. How does that happen?
Gross profit is how much you mark up the products you buy. We work very hard to buy at the lowest possible price. Our buyers are there to keep the pipeline full, but that's just a small part of their job. They are there to study the market, figure out the best time to buy, study the cycles of companies, figure out how they operate and what they need, and then try to fill their needs by working with them and in turn getting low prices. We can pay 90 cents for something and mark it up 10 percent--have 99 cents on it. Our competitor can pay $1 and mark it up 10 percent and have $1.10--a 10 percent spread even though the gross profit is the same.
Out of that gross profit we have to pay bills. Our competition takes 20 percent of gross profit to pay the bills; we take 13.2 percent, almost a third less to pay our bills. That shows you the differences and how what happened in those early years of looking how to save money helps us today. We do that by finding the pennies--even to this day never allowing them to be dollars--and when we find many, many pennies, then they add up to be a lot of dollars.
Finally, the net results, profit before taxes--our competitors end up with 3.4 percent; we end up with 5.1 percent. We have a good combination. Of all the published grocery companies, we have the lowest mark-up, yet we're among the highest in net. That's very important to us because that allows us to continue to expand, to keep our stores up-to-date, to buy equipment, to compete effectively, and again, this is the result of counting pennies and not letting them be wasted. I would encourage you to look for that in a company.
We're located in two growth areas--the Southeast and Texas. We all know about the growth here in the Southeast, especially in North Carolina, and Texas is scheduled to be the second largest growth area sometime after the year 2000. That gives us a good base to continue our growth and, again, this is a point that's good to look for in a company. Is it in a growth area? Is it a growth type business? What does the future look like from that angle? We now are in 12 states in this combination. In the future, we plan to use these growth areas to expand into other states but our two bases will continue to be in the Southeast and Texas.
We finished last year with $6.4 billion in sales and our plans are to double the size of our company in the next five years. We're geared to do that, we have the resources to do that. Again, I would encourage you to look for this type of opportunity with a company because in a company that is growing that fast, there are opportunities for people. We will be offering many management jobs simply because we're growing so fast. Whereas in the company that's not growing, oftentimes you have to wait a good while for something to come open.
The rest of my presentation is on the things we do in our company that allow us to grow at a rapid pace, yet at the same time keep our company healthy and strong. There are six areas I'd like to talk about:
Training. I'm going to put a lot of emphasis on training. I remember when I graduated from Catawba, I was celebrating and I thought, "I won't have to study now, I can put away the books." Of course, the next week I was in school and today I study more than I did when I was in college. But I realize how important it is and how necessary it is. At Food Lion we offer training to all our employees. We have concentrated training to get someone started on the job; most companies would have that to help employees get off to a good start. It's important, and you want to join a company that offers that kind of training because it's very tough to run a business unless everybody knows how to perform the job.
But even more important, we are dedicated to what we call long-range training. We know as we grow, we've got to have people ready and we want as much as possible to develop the people within our company. We prefer to promote from within. Now for us to do that, we have to go way back and start identifying people early on who have special abilities.
For people who aren't interested in advancing with Food Lion, we offer training to help them be the best. Anybody in our company can ask for training and we'll design a program based on their needs. If a cashier wants to stay as a cashier, but wants to be the best cashier--we do pay based on job performance--then he or she can ask for a training program and we'll design it. We have about 8,000 people in our company asking for that kind of training at any given time.
We identify employees with management abilities as soon as we can, even if they're still part time while in high school or college. We put together a program designed to get them into management as quickly as possible and well prepared. For anyone coming into our management directly or coming through the company to management, the first thing they do is go on a training program for up to a year. The program is designed to teach those people how to manage in Food Lion, the number one thing, but also to teach them how to think like you have to think in our company to be this efficient. We then provide continued training to expand their thinking. From then on a requirement of management is to complete a certain amount of training each year. I have to. No matter what business you go in, things are going to change and improve, and you have to keep up-to-date. We feel at Food Lion that you have to keep expanding your mind to be active and productive.
I am a believer that when someone reaches the point where they think they know what they should know, that's the day they start drifting. You have to keep pushing and you want to find a company that offers you this opportunity. You want to find a company that will help you develop your thinking. College is great; it prepares you, but you still have to continue right on. So don't do like I did and think studying is over. You want it to be there when you join a company.
Incentives. We, as most companies do, offer a very thorough benefits package. I encourage you to look for that because benefits are very important and you will find companies with good benefit programs. We felt at Food Lion that it was good to go beyond the normal benefit package. We wanted to offer employees some incentives that were designed to draw them into the company, to make them focus on the same things the company needed to focus on, so that we'd all have the same goals. One thing that's a must in any company is to make a profit. Of course, you want to find a company that's profitable. With Food Lion it's so important because we don't have that much money to work with since our mark-up isn't that high. We have to depend on everybody throughout the company because they would be the ones finding all those pennies. We talked about profits, how important they are, how important they are to the company because we continue to grow, and also how important they are to individuals because with growth they can grow. We can remodel and we can buy equipment which allows us to compete effectively, but we felt that it would be even more meaningful to our employees if they shared in the profits. So we put together a profit sharing plan. Of course, it is designed to be a retirement plan and like any retirement plan is regulated by the government. The federal government says you can set aside the equivalent of up to 15 percent of someone's pay from the profits of your company. We told our employees that if they would help us to be as profitable as we need to be, that we wanted to share the profits with them. We'd go as high as 15 percent, almost eight week's pay a year, if the profits were at that level. Since 1970, we've set aside 15 percent of each employee's pay all the way down to part-timers who work 1,000 hours or more. I'll give you some examples of what that can mean.
A cashier, and I'm going to use very average wages, makes a salary of $17,000, meat manager $26,000, a store manager $40,000, a supervisor $50,000. We'll put them on the job and project out 20 years what the profit sharing could mean for them. All we'll do during that 20 years is add on the 3 percent cost of living raise each year as a good conservative figure. After 20 years on the job, the cashier would have $254,745 in his or her plan, the meat manager would have $389,610 in the plan, store manager $599,400, and the supervisor $749,250. That's after 20 years. Now a lot of our management people are still in their 20s, so it's very easy for a store manager, for example, to be looking at over $1 million at retirement time, a supervisor $1.5 million. I tell you this because this is the type plan to look for. Salary isn't the only thing. Salary's important; I know you've got to live. But it's good to find a company with a good benefit plan because you're building long range. It's tough, I know, when you get out of college to be thinking about retirement, but that's the time to be thinking about it because you have so much longer to build towards it. The people who start early with us and get on this plan have so much more money. The store manager that starts at age 30 and has $599,000 at 50 years, just think how much that's earning because that money's set aside and it's drawing interest each year plus eight week's pay. So the employee has another 15 years to earn whereas if he or she had started at age 40, that would be 10 years less and those last 10 years are so great because of the amount of money that's there.
We went a little beyond that for management people. In a growth company, it's tough on management. Our company starts at the store manager level. The ideal goal for a manager is to build a team, a team of people that perform, that can be delegated to, make the manager's job easier. The problem in a growth company such as Food Lion is that we're constantly promoting out of that team so the manager is constantly having to re-build the team. We told our management people if they would work as hard as it takes to manage in Food Lion and to hold together a growth company in a real solid manner, then we want them to grow with it. So we offered a stock option plan. Our store managers get 100 shares when they start, 150 shares five years later; supervisors get 1,000 shares when they are promoted to the job. We can go back and see what that's meant to them. Ten years ago the store manager received 100 shares option, it cost (with five years to pay for it) $3,825, today it's worth $98,100; the supervisor got 1,000 shares, it cost the supervisor (with five years to pay for it) $38,250, it's worth $981,000 today. Supervisors actually made more money on stock than they did on salary. The result is that it's brought the interest of our management people into the growth of the company, because they know that option is not worth anything unless our company is solid. So these two plans have been valuable to us as a company, but also to the employees because two of the most important goals of this company are the same goals that our people have. That's good for both parties. There's nothing like owning stock in the company you work for. It makes you a part of it, you feel a part, you're closer tied to it.
Finances. From a financial standpoint, we at Food Lion have always worked very hard and restricted ourselves to a statement that's exactly the way we perform. That might sound a little funny, but in studying growth companies one thing I found over the years is that growth companies can sort of make the figures move a little bit if they need to. It's very difficult as I said earlier to keep the profits up. So some years maybe the profits aren't quite there but companies don't want to report that profits are down, so they knock out some things like training and repairs to get profits up. That's not healthy and causes a lot of growth companies to get themselves in trouble. We won't do that. We want our statement to read exactly the way the company is so that any time an employee or a stock broker or a shareholder looks at it, they know how Food Lion is. That's the type company I think you want to be with. You can get statements on companies if they're public and even some private companies will offer statements, but if you really want to find out, talk to stock analysts. They are experts who spend their time trying to figure out when companies are hiding things and moving things. So spend a little time to make sure you're going with a financially solid company.
Distribution. We have nine distribution centers that cover the Southeast, and are starting to cover Texas. I stress this in to emphasize the importance of infrastructure. One thing I found over the years in studying growth companies and seeing a lot of them start as this type company but end up as a different type company is that they get too solid on the growth and what causes growth. In our case, retail stores would be where the growth would come from. That's where the sales are. So the natural tendency would be to spend all your money building retail stores. But, if we didn't have the distribution centers to handle the product, our concept would fall to pieces. Ask yourself: is this company spending the money and doing the things that make it a solid company? Is it keeping the structure solid so that it can expand as it started out and not change into something that doesn't work?
I'll use a company from our industry as an example. A&P was a great growth company back in the '50s and '60s--a financially strong company with many units--but something happened and in the '70s it almost went under. A&P had devoted their money to new units and all of a sudden the old units were in such poor shape that they were taking away the profits, and the company couldn't produce any longer. When accepting a job, that's something you don't want to fall into because a lot of times the person who just joined would be the first one to leave.
Management Team. The first thing I can say about Food Lion's management team is that it's a youthful group; we have an average age of 41. That's good for Food Lion, it means the managers have a long time to be with the company. But second, and even more important, it's an experienced group, with each member having close to 20 years of experience, 12 years with Food Lion. We're looking at a group of people who've gone through growth years, know how tough it is, know what you have to do to grow and stay solid and produce the profits. In some companies the management has been with the company only a year or two. It can't be a solid company if it's changing management all the time. The first thing that has to happen in a company is that the management has got to get settled in and decide how it's going to operate the company--and that could be good or bad. It would be much better to join a company that's been solid and well planned out.
I said the Food Lion group is a committed group and I have mentioned the stock options and profit sharing and other benefits. But more important at Food Lion, we're committed because of what we're doing--we're lowering grocery prices. Let me give you an example of what we're doing. We went into Jacksonville, Florida, three years ago. The prices there were roughly 16 percent higher than ours. One of our competitor's headquarters was there, and they had their prices 14 percent higher than in North Carolina, even though it was the company's hometown. I made sort of a safe prediction that companies would always lower prices when Food Lion came around and I predicted that we could lower the prices 5 percent in Jacksonville with our lower prices. I didn't know a reporter was listening but after reading his report, I'm glad that he was. The local newspaper came out six months later and said "Nothing has happened in the grocery industry in Jacksonville, Florida, in the last six months except Food Lion entered the market. Grocery prices are 6 percent lower." What's 6 percent worth? People had spent $850 million for groceries in that market the year before. The year after we were there, they spent $50 million less--$50 million less of tax-free money. So we get a great deal of pride out of what we're doing and that in a lot of ways is more important than financial incentives.
I'd encourage you to look for a company that you feel good about. I joined Del Monte after college, a great company for fruits and vegetables, top quality; I always felt good about working for a company like that. And I feel good about working with Food Lion. That's so important, because you want to be proud of your company.
I'd like to comment on some basic philosophies we have at Food Lion.
Store appearance really ties in with what I was talking about earlier--the importance of keeping your infrastructure up-to-date. We have solid rules that a store has to be remodeled between the third and fifth year. It's a light remodeling based on the traffic in the store. Between the ninth and tenth year, the store has to be stripped completely, with all new equipment, all new decor, all new shelving going back into it. That way we keep up-to-date. We won't allow ourselves to vary from that schedule. That would be a question you would ask of a company. "Are you keeping your infrastructure up-to-date? How are you doing it?"
Become better. A philosophy we have at Food Lion and I think a philosophy any good company has to have is the drive and the desire to always become better. Never be satisfied with how you're operating. You can't. You're either going uphill, or downhill, there is no in-between. As fast as business is changing the way competition is, you can't relax and say we're good, we've reached a certain level. Look for a company that's always wanting to be better.
People development. The overriding goal we have at Food Lion is to help everybody reach their potential. I think that's what you want to find--a company that will do everything it can and devote resources to help you reach your potential with that company. We're very focused, we're in the grocery business, we spend all of our time figuring out how to buy and sell groceries at the lowest possible prices. That's good for us because we've got a lot of areas in which to grow. Some companies have to diversify. But some companies diversify just so they can say we're in all these types of businesses. So often they'll find themselves not good in any business because all their attention is spread out. They even get into things they don't know how to do and ignore their core business. A careful point is to watch how a company is growing. Look what they're doing. What are they adding as a good solid business? Are they managed in the proper way? No problem with diversifying if they're doing it in a smart manner.
Profitable growth. You don't want to join a company that's not profitable. It won't be around too long, not unless they convince you why they're not profitable at this time and how they're going to be profitable in the future. But the solid thing is to find a company that's been profitable, continues to be profitable, plans to be profitable, and has a good plan of action to do so.
Hopefully, I've given you a few things to think about when you're talking with representatives from companies. I also had a job recruiting on campuses with Del Monte and one thing I found that most students didn't do, was ask questions. They'd listen to what I had to say, but did not ask questions. Ask questions to be sure that you know everything you can about a company before making your decision.
I wish all of you the best. You hear a lot of negative things about our country but our country has so much to offer to people who are willing to put forth the effort it takes. There is no limit if you select your career properly and always strive to become better. What I hear is that Appalachian students do that. So, good luck.