The prices right.

• Author: Donsky, Martin
• Position: Ralph Ketner of Food Lion - Economic Almanac; includes related article on stock prices

Ralph Ketner tried every gimmick in the book. He gave away trading stamps, television sets and, for a time, new Cadillacs. He handed kids free movie tickets and stuffed their parents with pancake breakfasts. He even hired beauty queens to visit his stores.

Nothing worked. In 1967, his seven supermarkets - the remnants of a chain that once numbered 16 stores - produced a meager $36,000 in profits. Ketner wasn't so sure he'd be in business come 1968.

"At the end of 10 years of the hardest work imaginable, we had just seven stores to show for it," he says. "Had we been smart, we would have known we were bankrupt."

Ketner's Food Town never went under. Later this month, at age 70, he will step down as chairman of the board of the nation's fastest-growing supermarket chain, a giant that racked up $4.7 billion in sales in 1989 and, despite its size, is growing at a 20 percent-plus rate for both sales and earnings. Rechristened Food Lion in 1983, the company Ketner, his brother and a third partner founded in 1957 now employs about 42,000 full- and part-time workers at some 680 stores in 10 states - North and South Carolina, Virginia, Georgia, Florida, Kentucky, Tennessee, West Virginia, Delaware and Maryland. Construction is supposed to start this year on its seventh distribution center, a $20 million warehouse in Green-castle, Pa., enabling Food Lion to expand in western Maryland and northern Virginia and to enter Pennsylvania.

Call it the Culture of Cheap. Food Lion's cookie-cutter approach and tight operating controls have produced the highest net-profit margin in the industry, despite the lowest gross margin. Look at it this way: Suppose Food Lion and Winn-Dixie each spend 35 cents to buy a can of peas. Food Lion sells it for 40 cents; Winn-Dixie might sell it for 42 cents. But when all is said and done - after expenses - Food Lion ends up with 2 cents, Winn-Dixie with a penny.

Dozens of Salisbury investors - doctors, schoolteachers, postal workers and others who gave Ketner $100, $500 or $1,000 back in 1957 and held on to their stock are now millionaires. Eight stock splits and a recapitalization have turned 100 shares - each worth $10 back then - into just under 1.3 million shares, worth about $13 million at today's prices. Stockbrokers tout new companies with this description: "It's another Food Lion."

Ketner's 7.3 million shares are worth about $75 million, and he's already given millions to Catawba College and several charities. "Here I am, worth millions of dollars," he says. "Who in the world would have ever thought that Ralph Ketner, who sold ice cream for a nickel an hour, could give $5 million to this or $1 million to that?"

The official version of how the company was saved, published in the company's 1987 annual report and titled "It Started As A Dream," tells Ketner's idea: What would happen if prices were cut on all 3,000 items the chain stocked? Would sales increase enough to compensate for reduced margins?

Obviously, they did. Sales jumped 54 percent that first year, as customers responded to Ketner's slogan - LFPINC: Lowest Food Prices in North Carolina. In 1969, sales jumped 71 percent; in 1970, 46 percent; in 1971, 65 percent, and up and up, year after year. Significantly, sales and profits increased from both new stores and growth at existing stores. Last year, the typical Food Lion store open at least a year increased sales nearly 9 percent.

But where did Ketner get the idea to cut prices? Did the founders really dream about owning a megacompany?

"About the only dream I had in high...