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Tuesday, May 9, 2006 - Page updated at 12:00 AM

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Larry's Markets, upscale icon, loses out to the competition

Seattle Times retail reporter

Larry's Market


Founder Larry McKinney

Headquarters Kirkland

Early years McKinney bagged groceries and ran errands for his father's store in Green Lake. He opened his own store in 1964 in Central Seattle. In 1974, he bought his father's store; opened his first store on the Eastside in 1989.

Number of stores Six

Number of employees 550

Amount owed creditors $21.5 million

In the mid-1980s, when the newest sensation was the 24-hour grocery store, Larry McKinney had other, bolder ideas.

The second-generation grocer designed stores with soaring, corrugated-tin roofs and checkerboard floors, places where he dared to sell sushi and high-end wines next to shelves of milk and Tide.

"[Larry's] was one of the first in the nation," Issaquah-based grocery consultant Bert Hambleton said of the upscale grocery format. "It wasn't just a Seattle thing."

Locals may soon bid adieu to this iconic chain. Wracked by debt, high overhead and increasing competition, the Kirkland-based company said Monday it filed for Chapter 11 bankruptcy protection as it pursues potential buyers.

The company said it expects to close a deal within four months, although it declined to be more specific about its plans.

Chief Executive Mark McKinney — part of the third generation to run the six-store chain — said the company doesn't have enough capital to remain innovative and competitive in the current marketplace.

"If that capital is not there," he said, "the right thing to do is to make a decision to sell."

The sale would bring to an end a local landmark company begun in 1964 when Larry McKinney opened his first Larry's Markets in Central Seattle. His parents had run a corner grocery in the Green Lake area, where the entire family worked in the store and lived above it.

McKinney bought his father's store in 1974, replacing it two years later with his 25,000-square-foot namesake.

In the mid-1980s, he built a 45,000-square-foot store in Oak Tree Village, near 100th and Aurora — the first in a string of stores that would change the grocery landscape.

The new Larry's Markets included specialty-store touches such as wine shops, floral shops at the entrances and wider seafood selections.

Hambleton, the grocery-store consultant, said the industry operates on thin profit margins so it's imperative that consumers frequently visit grocery stores. This was the risk Larry's ran in the beginning.

"If you get thought of as a specialty place, then you won't get enough total sales to drive [profits]," Hambleton said. "That's where Larry's Markets succeeded when the naysayers thought they might fail."

The company made mistakes. It closed a 63,000-square-foot Larry's LoBucks in West Seattle in May 1996, a year after opening the new-concept discount store.

When the third generation, led by Mark McKinney, took over in October 2003, the competitive landscape had become far less predictable and far more competitive.

The rise of supercenters, led by Wal-Mart, changed consumers' shopping habits by offering one-stop shopping combined with far lower prices than traditional stores. Traditional grocers merged to create more buying power to compete with supercenters.

Meanwhile, a series of innovative specialty grocers such as Whole Foods and Trader Joe's emerged, offering organic and gourmet foods and specialty services.

Larry's Markets responded by changing its marketing message, a point that might have confused longtime customers.

It came out with a more conventional grocery-store approach, taking out price-an-item print ads. "Perhaps Larry's troubles may have been, without knowing exactly who they were, maybe they tried too many things, contradictory things," Hambleton said.

Hambleton said Larry's might not have been quick enough to focus its position in the market. He used Austin, Texas-based Whole Foods as an example of a company that has honed its format to a degree that it won't compromise.

"They don't sell Coca-Cola," Hambleton said. "One of the things they won't do is re-examine whether they sell Coca-Cola" even if there is demand in that particular marketplace.

Last year, Larry's Markets responded to slowing sales by hiring a chief restructuring officer. The company cut overhead by more than half and re-negotiated supply-chain agreements.

The company shrunk its accounting staff from 12 to five. It went from two store directors per location to one.

In its Chapter 11 filing, the company said it owed $21.5 million to creditors, from produce vendors to Hallmark to Sterling Savings Bank.

Bankruptcy attorney Jay Kornfeld of Bush Strout & Kornfeld said the bankruptcy protection would allow the company to operate normally as it looks for a buyer.

Bankruptcy laws allow the company to pay for deliveries from vendors only from the time it filed for bankruptcy onward.

"We will continue our efforts on the sales front," Kornfeld said. "Otherwise, we will just continue to operate the business as usual."

Ed Fox, a marketing professor at Southern Methodist University's School of Business, said he doesn't see the six locations remaining as grocery stores unless Larry's finds a local buyer.

"There's an issue of scale," Fox said. "I don't know if it would be a big enough real-estate play for any of the big retailers."

Hambleton, the consultant, said it would be difficult to sell all six stores to one buyer. Potential suitors might include New Seasons or Zupan's Markets, both based in Portland.

He doubts, however, that someone would buy the brand name.

"I suspect that Larry's Markets as a brand is probably done," he said. "They would be doing it so they could get the real estate."

Monica Soto Ouchi: 206-515-5632 or msoto@seattletimes.com

Copyright © 2006 The Seattle Times Company

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