Wal-Mart may be preparing to take a bite out of Jacksonville, Fla.-based grocer Winn-Dixie and its trough of Southeastern stores now that the 1,070-unit chain's troubles are growing. Winn-Dixie is undergoing a massive restructuring after posting a second quarter loss in January. But the loss has also triggered a plunge in company stock and a spate of shareholder lawsuits over alleged mismanagement. “The company is in a fight for its life and the outcome is far from certain,” says analyst Robert Campagnino of Prudential Equity Group in a recent report.

Winn-Dixie's troubles began in the late 1990s after years of expansion by rivals, including Wal-Mart. The chain let its older stores languish as it focused on expanding its newer, larger Marketplace superstore format. Now, in a second attempt in five years to spur a turnaround, Winn-Dixie executives are looking to sell or close non-core markets and under-performing stores. “As we implement our plan, we will make many significant decisions that we will announce in due course,” Frank Lazaran, Winn-Dixie president and CEO says in a prepared statement released last month.

Insiders say Winn-Dixie may retreat from the Carolinas and Atlanta, where it operates its 44-store SaveRite division. “I would not be surprised if they pulled out of metro Atlanta,” says Doron Valero, president and COO of Equity One. Winn-Dixie operates 52 stores in Atlanta, 45 in Charlotte, N.C., 35 in Greenville/Spartanburg, S.C., and 31 in Raleigh/Durham, N.C.

Winn-Dixie's well-placed stores in infill markets may make its assets appealing to a suitor such as Wal-Mart. The behemoth is slowly expanding its Neighborhood Markets, which fit into 40,000 square foot to 50,000 square-foot spaces, and would like to further penetrate the Southeast. “If Wal-Mart thought they could take 25 percent of Winn-Dixie's properties and turn them into gems, they'd take it,” says John Pharr, senior vice president of operations at Regency Centers. Wal-Mart officials said they do not comment on rumors and speculation.

Wal-Mart's Deep Pockets

Most of Winn-Dixie's rents are low at $5 to $6 per square foot, much less than the going rate of up to $18 per square foot. And the price of land for developing new stores isn't getting any cheaper. “It's some terrific real estate at rock bottom rent prices,” Pharr says. “Wal-Mart has a pocketbook and they are the only one looking at the prize.”

Regency Centers operates seven Winn-Dixie anchored centers, down from 17 in 2000, according to Piper Jaffray. Pharr said Regency's exposure is limited and many of its Winn-Dixie centers are located in strong in-fill locations. Companies with more exposure, including North Miami Beach, Fla.-based Equity One, may be more concerned. Equity One owns 17 Winn-Dixie's, including a location in Salerno Village in Stuart, Fla., that is expanding. Valero said low rents make the stores attractive. “We have good locations and occupancy costs are relatively low — well below 3 percent,” Valero says. “It's attractive real estate. There will be a supermarket even if Winn-Dixie does not make it, but I don't think their intention is to retreat in order to close.”

But even Valero knows that the patient may not survive after the surgery. “There's no doubt they have the capability to tackle the problem, but the question is, will the customer continue to come,” he says.

Winn-Dixie is fighting for a comeback. It retained VML, a Kansas City, Mo.-based brand marketing consulting firm to help boost its image, in hopes of improving sales and market share. The chain is also implementing a 700-store, $165 million makeover. Renovations include improved lighting, décor and produce layout. So far, 98 makeovers are competed, with the remainder expected during the next 12 months.

Closings or decisions to sell markets are expected by the company's third fiscal quarter ending in April.