Dillon Companies Inc. Business Information, Profile, and History

History of Dillon Companies Inc.

Dillon Companies Inc. is one of the largest owners and operators of convenience stores in the United States. Dillon, which functions as an autonomous, wholly owned subsidiary of The Kroger Co., operated about 230 supermarkets and 940 convenience stores going into the mid-1990s. Conservative, intelligent management helped the company to grow steadily since its inception in the early 1900s.

Although Dillon Companies was officially founded in 1921, the organization's roots date back to 1913. It was during that year that John S. Dillon opened his J.S. Dillon Cash Store in Hutchinson, Kansas. Dillon was the son of a Presbyterian preacher, the father of seven sons and three daughters, and a carpenter by trade. He had opened his first business, a wagon and buggy repair shop, in the 1890s in Sterling, Kansas. His new dry goods and grocery business, with a tin roof and coal stove heat, proved an important learning experience. Most importantly, Dillon discovered that crediting customers, as was customary at the time, could lead to serious financial problems.

Dillon's second effort in Hutchinson represented his attempt to employ a new marketing concept--cash and carry. Other food stores at the time operated on a credit basis. Customers would buy their groceries on a charge account and pay later. As a result, the store owner was forced to continually carry a very large investment in inventory. In addition, most stores delivered the groceries to the customer's home. After his experience in Sterling, Dillon decided to make his J.S. Dillon Cash Store a cash and carry, meaning that customers had to pay cash and carry the food home themselves. He would attract business by passing the savings on to the customers in the form of lower food prices. Customers were slow to accept Dillon's concept. But when they began to realize how much money they could save, the store caught on and became very popular. Dillon opened a second market in 1915. He managed the new shop himself and placed Ray E. Dillon, his 18-year-old son, in charge of the original store. The company was incorporated under the name Dillon Mercantile Co., Inc. in 1917.

In 1918, Ray left the business to serve in World War I, joining his brother, Clyde, in the renowned 35th Division. With his sons at war in France, John Dillon decided to sell his company to his investment partners. Soon after he sold it, though, the war ended and both brothers eventually returned to Hutchinson. John and Ray opened a new store together in 1919, called J. S. Dillon and Sons Store, and incorporated the venture as J.S. Dillon and Sons Stores Company, Inc. in 1921. It was in their first store that the Dillons established the basic principles upon which the company would be built during the twentieth century. In addition to the cash and carry concept, they placed a great emphasis on cleanliness, service, and value. Hanging in a conspicuous space on the wall in their early stores, in fact, was a sign which read "Dillon Honesty, Economy, Efficiency, and Courteousness."

The Dillons' first store was successful, and they began branching out during the mid- and late 1920s with new stores. Ray had attended a Super Market Institute meeting in Cincinnati in 1920 and was excited about opportunities for growth. "I saw what others were doing and I was inspired to grow larger, faster," he recalled in the December 23, 1979 Hutchinson News. Also in the early 1920s, Ray met and married Stella Schmitt, whom a local business college had recommended in response to Ray's request for a bookkeeper. Clyde joined the operation as well, and he and Ray gradually assumed control of the business. John Dillon sold his interest in 1925 and retired.

Despite the Great Depression in 1929 and the succeeding lean years, Dillon sustained steady growth throughout the 1930s. To attain those gains, the Dillon brothers typically worked from 7:00 a.m. to 7:00 p.m., five days per week, and until 10:30 p.m. on Saturdays. In addition to hard work, innovation remained a Dillon hallmark, as Ray and Clyde introduced such novelties as public rest rooms and off-street customer parking. The Dillon brothers put great effort into pleasing their customers and finding new profit centers. For example, during the Depression years, Ray saw a need for what he termed "a practical gift for business people to give at Christmas time." His answer to that need was a Dillon Store fruit basket. The fruit basket was a big success, and Dillon eventually developed a large base of customers who would purchase the baskets every year. Even as the company grew to corporate status, Ray considered the project "his baby" for several years. By the late 1970s, Dillon was selling 13,000 baskets every Christmas and had to develop an assembly line system every year to pack the gifts of fruit.

By the end of the 1930s, the Dillons were operating 24 stores in central Kansas. Part of Dillon's success during its early years was attributable to Ray's personnel policies. He took pride in hiring the "right people" for the job, and attributed the success of the company to its workers. In addition, he decided in the early 1920s that he wanted to hire employees that would stay with the company for the long haul. He studied the J.C. Penney employee benefit program, which was designed to encourage workers to stay with the company, and then labored to devise a system that would produce similar results at Dillon. The outcome of his effort was one of the first employee profit sharing plans. In fact, starting in 1922, Dillon began encouraging his workers to buy stock in the company. Some of those who followed his advice in the 1930s and 1940s eventually became millionaires, leaving huge estates to their survivors.

Importantly, the Dillons began to convert their stores to self-service food markets in the early 1940s, evidencing a nationwide trend. They also added centralized bakery operations, which served the entire Dillon chain. In 1941, Clyde Dillon was killed in a hunting accident in Colorado. Among Clyde's survivors was his son, Paul, who would join the executive ranks at Dillon in the 1970s.

Dillon's growth prospects during the 1940s were thwarted by World War II. Because of a shortage of materials, very little new construction was allowed. In addition, many of Dillon's employees were called away from their jobs for military service. Although Ray opened three new stores, he also closed down three others, and the company spent the 1940s reorganizing and positioning for future expansion. Ray remodeled most of the chain's stores and expanded his warehouse facilities. He also converted the remainder of the outlets to self-service stores, which resembled the modern system of food aisles and checkout cash registers.

By 1949, Dillon was still operating 24 stores in 14 different central Kansas towns. Its work force surged back to 800 following the return of U.S. forces. In 1946, Dillon's 25th anniversary, the company generated sales of $12.6 million.

The Dillons played catch-up during the postwar economic boom that took hold in the 1950s. Ray replaced six of the chain's existing stores with new units and added a total of five new stores during the early and mid-1950s. More importantly, he purchased the entire Wichita Division of the Kroger Company in 1957, which tagged 16 stores onto the Dillon portfolio and significantly broadened its regional presence. Dillon also bought out King Sooper, a small regional grocery store chain. Besides adding links to its chain during the 1950s, Dillon began experimenting for the first time with merchandise other than traditional grocery items, including health and beauty aids, housewares, books and magazines, and various soft goods. Likewise, Dillon lead the charge into the emerging frozen foods market by incorporating large freezer sections into its floor plans.

Although the company's founder, John S. Dillon, died in 1957, he had lived long enough to see the chain that bore his name grow into a multimillion-dollar venture. But only his sons and grandsons would watch the rampant expansion that followed. Following its 1957 acquisitions, in fact, Dillon expanded at an explosive pace. The company went public in December of 1957 to raise growth capital and by the late 1950s was operating a total of 40 supermarkets in 20 Kansas towns. During the 1960s, the company added many new stores, including several in northwestern Arkansas and northern Oklahoma. It also built a giant new distribution center in Hutchinson, which included new offices, warehouse space, and a frozen food warehouse. Reflecting its enduring emphasis on innovation, Dillon computerized its operations in the mid-1960s. It also became one of the first Midwest grocers to implement a discount pricing policy during the late 1960s, and was among the first supermarket chains to adopt an environmental program aimed at reducing pollution and recycling waste.

Even more important to Dillon's growth during the 1960s and 1970s than its core supermarket business was its expansion into a variety of related businesses. Throughout the period, Dillon purchased a string of other companies that complemented its grocery operations. Reflecting its growing diversity, the organization changed its name from J.S. Dillon and Sons Company to Dillon Companies in 1968. One year later, Dillon joined the New York Stock Exchange. "There is no standing still," Ray Dillon declared at the time, according to company annals, noting that "you either grow or shrink."

By the end of the 1970s, Dillon Companies had become a multi-billion-dollar corporate conglomerate. Its core supermarket division, Dillon Stores, consisted of a chain of large grocery stores in Kansas, Oklahoma, and Arkansas. In addition to that operation, though, were a number of healthy subsidiaries. It continued to operate its King Sooper chain, for instance, which encompassed more than 30 stores in the mid-1970s. Dillon also bought City Market Inc., a chain of 16 grocery stores in the West, and Fry's Food Stores, a 28-store chain in Arizona. Dillon also owned Mr. D's Food Centers, which consisted of four ultra-modern supermarkets in Wyoming, and Gerbes Super Markets, Inc., an operator of ten supermarkets in Missouri.

Aside from supermarkets, Dillon also set its sights on the burgeoning convenience store industry during the 1970s. That move represented a major shift in the company's market focus. Indeed, by the 1980s, Dillon would be one of the largest operators of convenience stores in the nation, a status it achieved largely through acquiring other chains. During the 1970s, for instance, Dillon purchased Time Saver Stores, a 101-outlet chain of convenience stores in Louisiana. It also bought Quik Stop Markets, Inc., a 35-store chain of outlets in San Francisco, and the 54-store Kwik Shop, Inc. chain in the Midwest. Peripheral investment activities during the decade included controlling interests in Wells Aircraft, Jackson Ice Cream Co., Bohm-Allen Jewelry, and department store chain D.G. Calhoun.

After 64 years in the grocery business, most of it at the helm of Dillon Companies, Ray Dillon retired in 1979. The 82-year-old Dillon had previously relinquished daily operating activities to other senior executives, many of whom were Dillon family members. At the time of his departure, the company was ranked as the 33rd largest U.S. grocery store chain and was boasting about $2 billion in annual sales. The massive $2 billion mark contrasted with the $165,000 annual revenue of the first store that Ray Dillon had managed in the early 1920s. Indeed, Dillon had turned his one-shop operation into a corporate giant with more than 200 supermarkets, 300 convenience stores, and 18 department stores scattered throughout 11 states. An employee who had invested $100 in Dillon in 1957 would have seen the stock value rise to more than $1,500 by 1979. "It was a slow steady pull," remarked the energetic Dillon, before his departure, in the December 23, 1979 Hutchinson News. "We just kept grinding away."

After Ray Dillon's departure, son Ray E. (Ace) Dillon Jr. became the board chairperson. The younger Ray had already proved himself by leading the company as president for more than a decade. Richard W. Dillon, another son, became president, and Paul Dillon (son of cofounder Clyde Dillon) became senior vice-president. Under their direction, as the company had been for several years, Dillon continued to expand at a rapid pace. Between 1979 and 1982, in fact, Dillon added about 15 more supermarkets and 50 new convenience stores. It also diversified into a range of new ventures, including real estate, investments, and restaurants. By 1982, Dillon had bolstered its revenues to $2.8 billion, about $50 million of which was kept as earnings.

Dillon's unchecked growth through acquisition during the 1970s reflected a predominant grocery store industry trend toward consolidation. Partly because of advancements in distribution, food preservation, and electronic information technologies, companies were finding that they could achieve significant economies of scale by acquiring their competitors. Dillon, for example, succeeded by purchasing companies and allowing them to operate relatively autonomously. It benefitted from greater influence with its suppliers and, in some cases, by integrating some of its subsidiaries' activities such as reporting or warehousing into the larger Dillon organization. As the food industry became increasingly competitive during the late 1970s and early 1980s, consolidation intensified. It was not surprising, then, that supermarket powerhouse Kroger made a bid for Dillon Companies in 1982.

Kroger had been a major player in the U.S. grocery store industry since the early 1900s. The chain was founded in the 1880s by Barney Kroger, who started his company in a bright red wagon that he would haul around Cincinnati to sell tea and coffee. By the time Barney retired in 1928, he was a wealthy grocer with a chain that dwarfed the Dillon venture at the time. The chain expanded at a pace similar to that achieved by Dillon during the mid-1900s, making it the second largest grocer in the nation next to Safeway. After acquiring Dillon in 1982, the Kroger portfolio swelled to more than 1,200 food stores, 500 drug stores, and 33 manufacturing plants by the mid-1980s.

Although Kroger was known as an aggressive, bottom-line competitor, it also had a reputation for leaving its successful acquisitions alone. In fact, when Kroger bought out the Dillon chain, it promised the Dillon brothers that it would allow them to continue running the company with only minimal interference. Kroger lived up to that promise during the 1980s. Dillon Companies Inc. became an independent division of Kroger and sustained its fast expansion. The greatest difference effected by the acquisition was that Dillon suddenly had access to a larger pool of capital. Between 1982 and 1987, Dillon tagged 30 more supermarkets onto it chain. It also launched an initiative to renovate a large number of existing stores. Most notably, Dillon aggressively attacked the convenience store segment. It grew its number of convenience store outlets to more than 900 by the late 1980s, a three-fold increase since the late 1970s.

Dillon expanded during the late 1980s and early 1990s, though at a much slower pace than it had throughout the late 1970s and mid-1980s. A U.S. recession slowed overall expansion in the industry, and Dillon's access to capital was curbed. In fact, Kroger was forced to borrow $5.3 billion in 1988 as part of an effort to fend off a hostile takeover. Industry leader Safeway Stores was consumed in a similar takeover and was subsequently sold off in pieces, making Kroger the top player in the industry. By that time, Dillon was under the leadership of President David Dillon, a great grandson of John S. Dillon. David Dillon reigned in expansion plans during the remainder of the 1980s and into the 1990s.

Kroger restructured its finances during the early 1990s as the U.S. economy began to recover. Dillon began buying and building new stores and also continued to revamp existing outlets. By 1994, Dillon was operating 240 supermarkets through its various operating companies. Its Dillon Stores had ceased to be the largest revenue producer in its supermarket holdings. In fact, only about 20 Dillon stores were operating in the early 1990s. The original chain had been overcome by Dillon's 66-store King Sooper division, its 45 Fry's stores, and chain of 36 City Markets. Dillon's convenience stores had swelled to about 930 in number by 1994. The company had sold most of its peripheral holdings with the exception of a real estate company and two dairies. Although its financial statistics were not disclosed, Dillon's parent company posted record revenues in 1993 and was supporting Dillon's long-term growth strategy in the supermarket and convenience store markets.

Principal Subsidiaries: City Market; Dillon Food Stores; Fry's Food Stores; Gerbes Supermarkets; King Soopers Inc.; Kwik-Shop; Loaf 'N Jug; Mini-Mart; Quick Stop Markets; Sav-Mor; Time Savers Stores; Tom Thumb Food Stores; Turkey Hill Minit Markets.