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FLEMING'S PLAN MIXES STORE SALES, CONVERSIONS

DALLAS -- Fleming here said last week it will convert at least 15 conventional stores to value-pricing formats next year while continuing to seek buyers for most of its conventional locations -- a strategy complicated by integration activities among potential retail buyers and the prices the distributor is seeking.Fleming said in April it was developing a strategic plan that could result in the sale

DALLAS -- Fleming here said last week it will convert at least 15 conventional stores to value-pricing formats next year while continuing to seek buyers for most of its conventional locations -- a strategy complicated by integration activities among potential retail buyers and the prices the distributor is seeking.

Fleming said in April it was developing a strategic plan that could result in the sale of its 161 conventional stores; it said in a subsequent filing with the Securities and Exchange Commission it expected to complete most of the sales by today, the end of its third quarter. However, the company has sold only six units, all from its Thompson's Food Basket, Peoria, Ill. chain and closed six other Food Basket stores while retaining one location.

Fleming said last week its revised strategic plan calls for converting stores to value formats, retaining significant wholesale volume to improve distribution and gaining further efficiencies through additional consolidations while solidifying its balance sheet.

The company also said it will continue to consolidate distribution facilities into super-regional centers; to invest in distribution flow-through technology to strengthen service levels to customers, and to use proceeds from the sale of conventional stores to pay down debt and position the company to achieve projected positive cash flow from operations in 2001.

According to Mark S. Hansen, chairman, president and chief executive officer, "We believe these strategies maximize our return on assets and focus the company's resources on our very best growth prospects while improving our cost structure.

"The conventional supermarket segment is a better growth vehicle for the national retail consolidators or the strong independent retailers with in-depth local market expertise. In the middle ground, operating conventional retail stores does not meet our aggressive growth strategy."

What does meet that strategy, the company said earlier this year, is converting as many as 100 stores over the next two years to value formats like Food 4 Less.

Fleming operates 26 stores under the Food 4 Less banner -- a value format that has "exceptional competitive advantages," Hansen said.

However, Fleming may not be able to use the Food 4 Less name in all areas, the company pointed out.

Kris Sundberg, a Fleming spokeswoman, said Fleming's ability to find buyers for its conventional stores has been complicated by integration activity among potential buyers. "We got into the marketplace at the same time the national chains were absorbing previous acquisitions, and they haven't been in a position to take on additional acquisitions, so the market has started to back off a little," she explained.

Industry analysts said the process may also be complicated by the prices Fleming is hoping to get.

There's a big spread between previous acquisition prices and the prices sellers are seeking today," Gary Giblen, director of research for C L King Associates, New York, said, "and some potential buyers are having a hard time adjusting to this new world."

According to Ted Bernstein, managing director for Grantchester Securities, New York, "It's not like Fleming is having a fire sale, so it's very price-conscious. Hopefully, it can complete the selling process soon because it's a smart strategic move that makes a lot of sense for the company."

Giblen said Fleming's stock price has fallen over the past couple of weeks as it became clear the company would not complete the intended sales by the deadline it set in its SEC filing. "And the delay could have some short-term implications in terms of paying down debt less rapidly than the company planned and slowing down the process of reinvesting the sale proceeds to convert stores to the value formats," he pointed out.

The asking price was apparently the sticking point in reported efforts by Schultz Sav-O Stores, Sheboygan, Wis., to acquire one of the conventional chains -- Sentry Food Stores, Milwaukee -- during the summer, Giblen noted.

Fleming said plans for its conventional retail stores include the following:

Retaining 40 of the 43 Rainbow Foods stores in Minneapolis and adopting more price-oriented programs. The company said it expects to sell three stores -- losing the volume of one and holding on to the volume of the other two -- and convert two units to a value retail format.

Selling most of the 55 Abco Desert Markets in Phoenix and Tucson to multiple buyers, while converting three units to value formats.

Seeking buyers for 24 of the 34 Sentry units in Wisconsin (plus two drugstores and a liquor store) and converting the other 10 to value formats.

Contemplating alternatives for 16 Baker's Supermarkets in Nebraska, including a sale or conversion to an alternative format.

Hansen said he is optimistic Fleming will be able to find buyers for its conventional stores among its customer base. "The strong local market knowledge of our independent retailers makes many of our conventional retail stores very attractive growth vehicles for those independents," he said, "and we expect several customers to acquire many of our conventional stores, helping them become more successful niche players, particularly with our distribution expertise to support their growth."

Giblen said Fleming should not have too much trouble selling Abco and Baker's because both are "attractive assets with good locations, so it's just a matter of time."

However, he said Sentry and Rainbow are "more challenged assets," making them more difficult to sell and apparently leading, in part, to Fleming's decision to keep and reposition the Rainbow units.

Hansen said Fleming will retain most of the Rainbows because of continuing improvements in performance, including positive same-store sales gains. "The physical plants are in great shape, and we expect to remain a strong competitor in [the Minneapolis] market," he said.

Sundberg told SN the Rainbows will not be converted to a value format, "but we will refocus those stores for greater price impact to bring them more in line with the value-oriented retail disciplines we will be using elsewhere."

Hansen said Fleming will convert its Minneapolis distribution center to a facility dedicated to supplying the Rainbow operation "to significantly improve productivity and profitability with the higher throughput of reduced stock-keeping units and advanced distribution techniques."

Distribution for independent customers formerly supplied by the Minneapolis facility will be consolidated into the company's LaCrosse and Superior, Wis., distribution centers, he noted, "which will bring even greater efficiencies of size to those operations and benefits for those retailers -- a strategy that, unlike our competitors, focuses on the growth of our independent retail customers."

Fleming said it is "in discussions" to sell the Abcos to other retailers, with the expectation "there will be several buyers of multi-store groups." Sundberg said Fleming hopes to complete the Abco sales before the end of the year.

The company said it is taking steps to sell the corporate Sentrys to existing and new Fleming customers "as we stay committed to building a strong Sentry franchise brand in southeast Wisconsin through excellent local operators."

Fleming also said it expects to retain a substantial level of the supply service for many of those units.

Besides the apparent efforts of Schultz Sav-O Stores to buy Sentry, Giblen said many industry observers had expected Albertson's, Boise, Idaho, to show some interest in the chain. However, Albertson's has said it is reluctant to make large acquisitions while it seeks to improve earnings following integration disappointments, Giblen noted.

Sundberg said Fleming is considering alternatives for the Baker's stores, including a sale or possible conversion to another format, similar to what it plans to do with Rainbow. "We're keeping our options open," she told SN.

When the strategic plan has been fully implemented, Fleming said it expects to reduce the number of conventional retail stores from the 267 it had in 1998 to approximately 50 locations by next year.