BELLINGHAM, Wash. -- Haggen Inc. here said last week it will become a member of Associated Grocers of Seattle later this year after buying from Supervalu for almost 20 years -- a move that some said could signal Supervalu's eventual departure from the Pacific Northwest and could heat up competition among the remaining wholesalers there.
For Supervalu, Minneapolis, a withdrawal from the Northwest would be another step in a series of market exits over the last 12 months designed to focus business on more profitable ventures. Recent shifts in Supervalu's business have included a move out of New England last fall in a swap with C&S Wholesale Grocers, Keene, N.H., that gave it a larger presence in the Midwest; its departure late last year from Denver, where it sold its warehouse to Kroger in exchange for a supply agreement; and its decision in April to give up the D'Agostino Supermarkets account in New York.
A Supervalu spokeswoman told SN the distributor is evaluating the loss of Haggen's volume "to determine what would be appropriate next steps or options for us, and we expect to provide an update when we report our first-quarter results on July 22."
If Supervalu does abandon the Pacific Northwest, it could accelerate competition among the area's remaining wholesale players: AG in Seattle; URM, Spokane, Wash.; and Unified Western Grocers, Los Angeles, which operates a Portland, Ore., distribution center that delivers nonfoods to AG customers and also distributes groceries to a handful of Washington-based accounts.
"Right now it's pretty clear there's too much wholesale capacity in the region, and that may be part of the reason Supervalu might be willing to leave," a local observer told SN.
"That overcapacity, combined with capital-strained cooperatives with a fragmented decision-making mechanism and a shrinking market as Wal-Mart [Stores] enters could heat up competition, and that could lead to some wholesale consolidation," the observer added.
Haggen operates 31 supermarkets, plus a pharmacy in a medical clinic, that account for volume of just under $800 million. It has been purchasing its wholesale groceries -- totaling approximately $225 million, industry sources told SN -- from Supervalu's Tacoma, Wash., facility for just under 20 years, Becky Skaggs, a Haggen spokeswoman, told SN.
Skaggs said Haggen opted to change suppliers following a routine review, "which showed us it made great sense for us and AG to form a business alliance."
One industry observer said Haggen put its wholesale business up for bid earlier this year, "and AG made an aggressive proposal, while Supervalu decided it couldn't make money selling at the level Haggen was demanding. Supervalu is a very disciplined company, and it won't go after business just to get business if it can't make money."
A local observer told SN one of the issues Haggen was seeking was a willingness for its supplier to warehouse Haggen's private-label line, which is supplied by Topco -- a move to which AG agreed. "Haggen was looking for that because it provides it with the opportunity to operate more like a self-distributing chain than it could with a voluntary wholesaler like Supervalu," he said.
The switch of Haggen to AG is expected to be completed before the end of the year. The additional business will boost AG's $900 million volume by 25% to nearly $1.3 billion, industry sources told SN.
Jeff Noddle, chairman and chief executive officer, Supervalu, said in a prepared statement last week that Haggen did not fit into the distributor's long-term plans. "As capacity issues still loom in our industry, the challenge is to determine the best economics for both parties and allocate our resources accordingly. Unfortunately, the economics to maintain this account were not satisfactory," he explained.
The loss of Haggen's volume will result in Supervalu's Tacoma distribution center losing close to half its volume, local sources said, leaving the facility with only a single customer -- the military, which operates several bases in the Pacific Northwest.
"It's probably fair to say Supervalu is looking strategically at the Pacific Northwest to see if the region fits in with its long-term plans," one industry observer told SN.
Another local source offered a similar assessment. "Supervalu is a very strong wholesaler, but its presence in the Northwest market has been pretty limited, and Tacoma, which is an old facility, has been a marginal operation to begin with and a difficult distribution center for it to maintain," he said. "With the loss of Haggen's business, the economics of operating here may not work, and this could be a market Supervalu would not find particularly advantageous."
Noddle said in April Supervalu anticipated losses from attrition of $200 million to $400 million this year, "[and] we're going to make every effort to offset [those losses]."
The switch by D'Agostino, Larchmont, N.Y., to C&S in April represented a loss of approximately $65 million in wholesale business to Supervalu. With the loss of Haggen's estimated $225 million in wholesale volume, the combined loss for Supervalu totals about $290 million.
Chuck Cerankosky, an analyst with McDonald Investments, Cleveland, said Supervalu is a very disciplined company that looks not just for sales gains but also for an adequate return on investment. "That's why it walked away from the Kmart business two years ago when it was available -- because it involved lower margins -- and both Kmart and Fleming, which took on that business, ended up filing Chapter 11 bankruptcy petitions.
"But there's an ongoing flow of volume in and out of all wholesale businesses, and Supervalu can make up the loss of a chain like Haggen by picking up 31 separate independent operators."
As to whether Supervalu is likely to remain in Tacoma, Cerankosky said, "Supervalu will have to decide if it can make up that business or generate an adequate return by reducing the scope of its operations there or by simply shutting down the warehouse."
Dale Henley, president and CEO, Haggen, said the retailer's relationship with AG is unique "because not only does it provide Haggen with the benefits of self-supply but also the advantages of a strong wholesale partner."
Bob Hermanns, president and CEO of AG, said the cooperative's volume has been essentially flat for the past couple of years.
While declining to pinpoint how much volume the Haggen deal would add to AG's total, Hermanns said it represents the cooperative's largest retail pickup in years and will make Haggen one of its largest-volume members.
Asked how the new arrangement came about, Hermanns replied, "Through constant prospecting. We talked with them and a number of other potential new accounts in the Pacific Northwest, and we were successful in coming together."