Bagged In 

Beset by self-imposed obstacles and stronger competition, Richmond's greatest retailer slowly backed itself into a corner.

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Few knew it at the time, but Ukrop's Super Markets faced a critical juncture in August 1997. The then-60-year-old grocery chain had always found a way to stay in front of an increasingly competitive supermarket industry. Ukrop's pioneered the customer value card to combat pricing pressure from bigger chains, launched a prepared-meals operation when dual-income households pulled stay-at-home moms out of the kitchen in the 1980s and opened in-store banks to capture Richmond's backlash after North Carolina's big bank takeover in the mid-1990s.

Running out of ideas and maxed out in Richmond, enjoying an almost unheard-of 40-percent share of the grocery market, the chain took its first big leap in the summer of 1997, opening a store in the far reaches of Fredericksburg, a Washington commuter city 50 miles up Interstate 95.

It represented the first major challenge for newly christened chief executive Robert S. Ukrop, who took the reins of the venerable grocery chain's operations after his brother, James E. Ukrop, launched First Market Bank later that year.

The Fredericksburg experiment failed — miserably at first. There was an already crowded market featuring sophisticated grocery chains such as Giant Food and Shoppers Food Warehouse. And Ukrop's policies of closing on Sundays — for commuters who do most of their shopping on weekends — and refusing to sell beer and wine were crippling obstacles.

It took seven years for the Fredericksburg Ukrop's to post a profit. But that didn't stop the chain from trying again, opening two more stores in Williamsburg a few years later (one of which closed last year) and taking an even bigger leap to Roanoke.

“They made a couple of boneheaded mistakes, like Roanoke; they went outside their home base where they had no name recognition,” says David J. Livingston, a supermarket consultant based in Milwaukee. “It's just too far away. They maybe got a little too aggressive.”

Speculation over Ukrop's demise has come rapid-fire this summer. In a span of just two months, news that Richmond's greatest retail brand had ceded its kingship to Food Lion in terms of market share, and then put itself up for sale, blew cannonball-sized holes in the chain's long-impenetrable armor.

But the problems at Saint Ukrop's have been festering for some time. Sales in Richmond have been on the wane since 2006, when they peaked at $590 million, according to Food World, an industry publication. The privately held company's sales had dipped to about $540 million in the 2009 market study, down from $565 million in 2008. It may not or may not be an act of desperation attempting to sell the company during the worst recession in 75 years, but it's skirting awfully close, some say.

“Obviously they wouldn't be selling if they weren't in trouble,” Livingston says. “It's a bad market. How many people are trying to sell their house in this market? Something's motivating Ukrop's to sell.”

The company has yet to acknowledge it's actively pursuing a sale. Bobby Ukrop dismissed the first report in Food World in a letter to employees July 15: “The truth is that there have always been companies interested in buying us, so there's nothing new here.” His brother, Jim Ukrop, who recently stepped down as the company's chairman, also refuses to discuss the industry reports.

On Aug. 18, an hour after local media picked up on a sales-related story in Supermarket News, Ukrop would say only that the reports made for “very interesting reading.” On the supermarket's Twitter feed (@Ukrops), a post appeared Aug. 18 at 3:48 p.m. saying, “People sure do like to talk.”

When asked to confirm a report that an unnamed private equity firm was leading the bidding, the elder Ukrop declines. “I can't respond,” he says. “It's not appropriate for me to say anything.”

It's long been rumored that Jim and Bobby, who each have a 49 percent stake in the 28-store supermarket chain, with the remaining 2 percent going a family trust, have been at odds over how to manage Ukrop's. Jim, 72, is largely credited as the savvier businessman, overseeing most of the chain's most important innovations in the 1980s and 1990s. While running Ukrop's, Jim had an insatiable desire to grow market share, and often took an aggressive approach to his competitors. Bobby, who is deeply religious, is said be see the business more as community mission, and the two have clashed through the years about how best to operate the grocery chain.

To pursue a sale in such a difficult economy only heightens speculation that there's a family split, especially if the chain is sold to a private equity group, which would tend to operate in a very unUkroplike manner. Such a group would keep the brand alive, which seems a better alternative on its face than selling to, say, Harris Teeter. But private equity firms tend to take over, slash and burn staff and operations and squeeze out as much profit as possible for a few years and then sell the business.

“They are business people and investors, not social workers,” says Mark Gottlieb, a forensic accountant and business valuator in Great Neck, N.Y., of private equity groups. “Even in their preliminary proposals they must have both an entrance and exit strategy, and that's the difference between venture capitalists purchasing the business and [grocery store] operators.”

It's a likely scenario, one that could involve Supervalu, the grocery distributor that supplies Ukrop's. If Ukrop's sells to an established chain, Supervalu stands to lose its biggest customer in Central Virginia. But Supervalu's involvement likely wouldn't alter the private equity group's singular mission.

“They usually never put money back into the stores; their business is to take as much out of these stores as investors,” says Livingston, the supermarket consultant. “To raise prices and cut labor. You cut, cut, cut everything you can. After you milked it dry, you sell it for whatever you can.”

What may make Ukrop's more attractive than the typical grocery store acquisition, however, is the immediate revenue potential of opening on Sundays and selling beer and wine. Opening on the busiest grocery shopping day of the week could increase sales by 15 to 30 percent, analysts say, but that's not factoring in the potential customer backlash that could come from a sale. What's more, whenever there's an acquisition in the grocery business, there tends to be an immediate drop-off in business, Livingston adds. “You can usually expect a 15- to 20-percent decline in sales,” he says, which is a natural part of new management adjusting to a new market.

Taken together with the economic climate, Ukrop's pursuit of a sale is becoming a somber reality. But it might trace it roots to the Fredericksburg experiment, which came amid the chain's push to larger, more comprehensive stores featuring grills and cafes, in-store banks and, for a spell, even a special day care for parents to drop off their children while they shop. As Target, Wal-Mart and discount warehouse stores such as Sam's Club and Costco offered superior one-stop-shop alternatives, the smaller, more specialized grocers such as Whole Foods and Trader Joe's moved in on Ukrop's loyal base. Ukrop's found itself stuck in the middle.

“The point is the competition, in spite of the economy, is very, very difficult,” Gottlieb says, “and these larger retailers because of their buying power have become very, very competitive.” S

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