If sure and steady win the race, then it's no surprise Affiliated Foods Midwest Cooperative has been winning enough races to reach its 75th anniversary this year and close in on $1 billion in sales.
From its base in Norfolk, Neb., AFM has major ambitions to dig its roots even deeper into the vast Midwest with a major push for new members in Minnesota and Wisconsin.
It just implemented a new system infrastructure to allow for long-term growth, and it's on the verge of launching a banner program that it hopes will strengthen the ability of its members to compete.
And while it's never relied on growth by acquisition, it's willing to consider doing whatever it takes to secure its long-range future - a future it believes ought to include more joint activities with other cooperatives.
"One of the things that's different today about the cooperative food distribution business is that we all talk to each other more openly than we used to and we look for ways we can help each other," Martin Arter, AFM's president and chief executive officer, told SN.
"Right now we're working with Affiliated Food Stores [the Salt Lake City-based co-op] to aggregate volume to get a better cost of goods from vendors so we can offer our members better prices, and we're working with other members of ROFDA [Retailer-Owned Food Distributors and Associates] to buy various food items, including ice cream, and a variety of supplies at better prices."
Cooperation is the key, he said, because the biggest competitive threat comes not from other retailers but from Wal-Mart Stores. "Wal-Mart is the biggest long-term threat to all of us, and even though some members may be surviving that threat, Wal-Mart just keeps coming, and every time someone has to shut down his business, it affects the rebates paid to everyone in the cooperative.
"And as the communities in rural America suffer, where will the young entrepreneurs of the future, who make up the bulk of independent operators, come from? If the store base of a town is gone, it will be too costly to re-establish those businesses."
Arter said he believes the time may come when cooperatives across the U.S. combine into a national operation. "We each travel a lot of miles, but how many miles can you travel before it makes sense to partner with somebody else?
"It's exciting to think about that kind of future, where each cooperative leaves its ego at the door. We just have to be able to trust each other to be a repository for dispensing information to others in a consortium of co-ops."
Linking up with other co-ops should not be a problem, regardless of geography, he added, because of the ability to connect electronically to procure and ship product. "With technology, does it matter if your partner is eight states away?" Arter asked. "As a member of the Topco cooperative, we're already buying with other companies."
Arter, 44, has been with AFM for 25 years, starting in the warehouse on a part-time basis in 1981 and working his way up on the distribution side before moving into general administration in the main office eight years ago. He was named AFM president in 2001, and when Virgil Froelich retired as CEO in 2003, he added that title.
AFM operates two warehouses - a 1-million-square-foot facility in Norfolk and a 400,000-square-foot center in Elwood, Kan. - that serve 857 retailers in 12 states: 231 in Nebraska, 157 in Iowa, 113 in Kansas, 108 in South Dakota, 68 in Minnesota, 66 in Missouri, 59 in Colorado, 19 in Wisconsin, 16 in Wyoming, 13 in Illinois, four in Oklahoma and three in North Dakota.
Approaching a Milestone
Sales for the year that ended last June 24 were $993 million, up 19% over the prior year - largely benefiting from the impact of Fleming Co.'s failure in 2003, Arter noted - and by the time its 75th-anniversary year ends later this month, AFM expects an increase of about 2%, which will push sales over $1 billion.
"I'm glad we'll achieve that level," he said, "but we're really looking past that as we continue to grow, and we think the second billion will come a lot faster than the first one did because the environment for co-op members is very good right now. I believe we could see our sales grow as much as 10% over the next five to 10 years because of the dividends we're returning to our members."
Arter said this year was more difficult than last because of the ongoing growth of supercenters and rising fuel prices. He told SN he expects sales growth of 5% next year as the company adds new members and as existing members increase sales by reinvesting in their stores.
"Our growth is predicated on how well the members take care of their customers, and if they're not investing in their stores, that's not good," he explained.
In a bid to encourage more members to put more money back into their stores, AFM's development subsidiary lowered its lending rate from 8% to 4% for a six-month period earlier in the year, "with the result that, instead of borrowing $2 million-$3 million in a year's time, which is the norm, borrowings went up to $10 million-$11 million," Arter said.
Members put money back into approximately 250 stores, compared with a norm of about 100 a year, he noted - "and the projects were larger this year," he added.
"I'm in favor of lowering the rate again," he said, "and we'll probably want to do something similar down the road because a lot of members had plans to reinvest within five years but just kept putting it off. But the message we are spreading is, do it now - don't wait."
Besides the benefits stemming from Fleming's shutdown, AFM has also grown the last few years as a result of disillusion by some operators that were supplied by voluntary wholesalers, Arter indicated.
"We've had growth opportunities as Fleming's supply agreements were ending and as their warehouses were closing down," he said, "and we've also been able to attract customers from voluntaries who wanted to be with a supplier who's interested in taking care of them as individuals - someone who's there to answer the phone when they call and who gives the same prices to everyone.
"A lot of independents are looking at what their future is going to be, and they're not seeing it with large voluntaries."
Arter said AFM has been able to survive for 75 years - while companies around it were folding or merging - by keeping its operating costs and margins low, operating without debt and passing vendor-allowance dollars back to its members.
"We also believe in carrying enough inventory to provide members with high service levels, and we pay out patronage dividends in cash, which has been a huge selling point to prospective members," he said.
"In addition, we have $2 billion in retail sales moving through our warehouses, and our largest member accounts for less than 4% of warehouse volume, so no one member is too big a part of the business. And we know how to run a distribution center efficiently so we haven't had to protect our volume by owning stores.
"So although we've been losing an average of 25 stores a year for the last five years, mostly in smaller communities, we've also been able to pick up 40 or 50 new members each year."
A large part of AFM's strength comes from the loyalty of its members, Arter added. "We have an awesome membership that supports us," he said.
Duane Severson, vice president and chief financial officer, told SN he attributes AFM's longevity to its focus on its members. "We do not operate any corporate stores so we're really here to provide the best benefits to our customers.
"Some co-ops operate corporate stores to protect their volume, but we don't have any group that makes up a large percentage of our sales base, and that's proven very beneficial because it allows us to run the warehouse in the proper way."
He also cited AFM's policy of paying all member rebates in the form of cash dividends.
"We strive to operate very efficiently, and that leaves us with profits at the end of the year that we give back to members in the form of a healthy dividend, which amounted to $37.5 million last year."
Arter said he sees AFM's greatest potential sales growth coming from Minnesota and Wisconsin. "We've pretty well saturated the Nebraska-Kansas-South Dakota corridor, which doesn't have the population or the growth potential of Minnesota and Wisconsin."
Retailers in those two states, along with those in Illinois and northern Iowa, already have wholesale suppliers, Arter acknowledged, "but we think a lot of those stores would be willing to come with us if they have that option. Because we pay rebates in cash, those operators can pick up close to 4% on their overall purchases at the end of the year, and that makes us very attractive to a lot of retailers."
Arter said he sees the potential to add 150-200 customers in the four-state area targeted for growth, which could prompt AFM to seek a third distribution facility.
The Norfolk warehouse is operating at 75%-80% of capacity and the one in Elwood is at 60%, "but at some point it might be necessary to open a third facility - either by building or acquiring one or partnering with a third-party distributor for warehouse space," Arter said.
"We're willing to look at all options, and if it's the right thing for us, we'll take a serious look at it. But the major consideration is, it's got to be right to serve our customers."
While AFM does not operate corporate stores, it is set to launch its first significant banner program at two member stores later this summer and two more in the fall. The banners are AFM Market, AFM Hometown Market and AFM Marketplace. (See related story.)
"We decided to try offering store banners because it gives independents a chance to associate themselves with a buying group so that when a consumer walks in, she knows what to expect," Arter explained.
The idea for offering a banner program evolved from AFM's move in 2003 to become an IGA-licensed distributor after some non-member IGA retailers approached the company at the time Fleming was collapsing. "We helped fill their pipeline," Arter said, "and some told us they had been considering moving to us anyway and wanted to know if IGA would be available to them if they did, and then IGA asked if we would like to become a licensed distribution center."
The IGA affiliation has enabled AFM to add new business from IGA retailers across its 12-state area.
AFM has 40 IGA members, of which 24 were IGA customers when they joined the company, he said.
Arter said he anticipates adding at least 30 IGA stores a year for the next few years, with about half coming from AFM's existing membership and half from new customers.
Besides warehousing IGA products, AFM carries Topco's Shur-Fine and Shur-Fresh labels. "In fact, we're Shur-Fine's largest customer, and that's one more weapon in our arsenal," Arter noted.
The only acquisition AFM has made in its history was in 1999, when it purchased Affiliated Foods, Elwood, Kan., after an effort to combine AFM, Affiliated and United-A.G., Omaha, Neb., broke down in 1994.
The acquisition was an "insurance policy," Arter explained, after a 1968 fire destroyed the company's Norfolk warehouse and forced the company to rely on other wholesalers. Since then, several area distribution centers have either closed or become more efficient, he said, reducing AFM's ability to rely on outside help in case of another emergency. Having a second warehouse also gives the company the flexibility to do more forward buying in "if some catastrophic event creates shortages," Arter said.
AFM is looking at investing its annual capital budget of $4 million-$5 million a year over the next two years on expanding its warehouses - adding perishables space at both facilities and increasing space for dry groceries in Norfolk, Arter said.
To illustrate the need for more space, Arter said AFM bought 140 loads of turkeys in February, and 80 loads stored on-site and the balance in outside storage.
AFM owns 50 acres in Norfolk, "and we're utilizing about 65% of that space," Arter said. "But we're hoping to add more space because we have 250-300 of our own trailers coming in and out every day plus more than 2,000 vehicles total, and ingress and egress has become a problem."
In an effort to improve the lifestyle of its warehouse employees, AFM restructured their work schedule earlier this year so personnel can work four 10-hour shifts a week and have more days off, Arter said.
To save money next year, AFM purchased additional transportation equipment this year "because in 2007 the tractors coming out will have new emission standards and we'll lose 0.8 miles per gallon. So the 20 tractors we bought this year will give us better mileage - at least eight-tenths of a gallon more than equipment we might buy next year," he explained.
To help keep the membership operating up to its full potential, AFM members for six years have been participating in share groups comprised of eight non-competing companies of a similar size to critique each other's stores and profit-and-loss statements. "The share groups expose our members to input from their peers rather than one of our retail counselors, and they usually take the critiques more seriously," Arter said.
"The share groups also give members a chance to visit other stores - and if you know a group is coming to your store, you clean it up, which makes it look better for customers."
Another way AFM tries to help members boost volume is by holding a series of special three-day sales throughout the year, "which have proven to be a good way to create excitement and keep consumers close to home on a weekend so they don't feel the need to go to a supercenter," Arter explained.
AFM Set to Launch Three-Tiered Banner Program
NORFOLK, Neb. - Affiliated Foods Midwest Cooperative here is on the verge of launching a banner program this year aimed at strengthening the image of its member retailers.
"This will be a growing experience for us," Doug Burkink, project engineer, told SN.
The first two banner stores - both operating under the AFM Marketplace banner - are scheduled to open in Lexington, Neb., and Viroqua, Wis., this summer, followed in the fall by another Marketplace and an AFM Market in Reedsburg, Wis., and Axtel, Neb., respectively.
"We're looking forward to seeing how the first couple of stores do and hoping their experience will get other members excited," Burkink said.
AFM became interested in a banner program "because we saw the success other wholesalers were having, and some independents we picked up had been part of those programs and asked us about doing something similar," he explained.
AFM hopes the program will help independent members improve their image in the community, he pointed out.
"We hired a company to survey consumers, and what we learned was very important in shaping what we're doing in this program because it gave us a better understanding of how consumers perceived our members' stores," Burkink said.
"What we found, particularly in some of the rural areas we serve, is that consumers didn't realize their store was part of a $1 billion company with sufficient buying power to compete with the large chains. We also found that consumers didn't realize the store was part of a buying group with access to a broad variety, top quality merchandise and competitive pricing because we had not done anything over the years to tell our story, except by word of mouth."
Martin Arter, president and chief executive officer of AFM, said the reason for developing the program "was to give independents the option to associate themselves with a buying group so that, when a consumer walks in, she knows what to expect."
The banners will be available at three levels, based on the specific offerings that are included rather than on store size. The banners are:
AFM Market, which will require retailers to use standard signage and colors, carry a minimum of 50% of the Shur-Fine or IGA products AFM carries, adopt formal sanitation standards and participate in special events.
AFM Hometown Market, which will require the same basics as the Market format, plus offer a pre-packaged deli, a thaw-and-sell bakery and home meal replacement products; carry 75% of the Shur-Fine or IGA store brands available; and maintain a minimum of two end displays with products from AFM's warehouse.
AFM Marketplace, which will require the same basics as the Market format, plus offer branded meat, fresh or frozen seafood, a full-service deli and a full-service bakery; inclusion of 90% of store brands; use of full-color ads; acceptance of debit and credit cards; inclusion of a customer-service center; and the need to offer four of seven other departments, such as floral, pharmacy, bank, video/DVD and catering.
Signs at the stores' entry will inform customers the store is a member and owner of AFM, a cooperative of store owners that buy together to sell for less. "By having ownership in our own warehouse, we are able to offer variety and prices which no other store can beat," the signs will say. "Local ownership offers the commitment to customer service you deserve."
Burkink said he expects AFM to establish an ad program for participating stores.
AFM has tried a couple of banner programs over the years, "but those didn't have any controls set by us," he said.
The company initially disclosed plans for the banner program at its fall food show last September, followed by a formal presentation at its spring show last February.
"We want to get some stores open and make sure it works before marketing it more aggressively," Arter said.
For Mogens Knudson, owner of Plum Creek Marketplace in Lexington, Neb., the conversion of his store will primarily involve a new decor package "that will give a different feel to the store," he said, but little change otherwise.
"We will continue to emphasize our local ownership and community involvement, and while we may lose some name recognition initially, we expect to overcome that by letting customers know we will still have the same people and the same programs we've always had, though in a more up-to-date setting," he told SN.
AFM Integrates Its IT Systems
NORFOLK, Neb. - Affiliated Foods Midwest Cooperative here has been STAR-struck since March, when it replaced its entire computer infrastructure in an effort to serve customers better.
"Instead of having separate systems that talked to each other, we installed a single integrated system designed to replace every single task we do," Robert Rothove, AFM's special projects coordinator, told SN.
The overhaul, called STAR - Strategic Transition for Affiliated's Re-investment - involved installation of two new mainframe computers, new software packages for purchasing, accounting, order management and warehouse operations, and implementation of voice-pick technology.
While the voice-pick technology is designed to help eliminate mis-picks, the new system is also giving AFM better reporting metrics, Rothove said.
However, the process of getting to that point has been extremely challenging, he recalled.
"It was a lot tougher than we thought. But this was a once-in-a-lifetime event, and while a number of things went wrong, some things did go right.
"We had hoped the switch-over would be a non-event - something that was transparent to our customers - though we did encourage them to order heavy in advance, just in case. What went right was that we shipped groceries and kept our customers in business. But some of those groceries went out late, and there were some software bugs that hadn't come out during testing that had to be solved as they arose.
"As a result, people throughout the company had to work very hard on every single project, and it probably took two or three weeks before we were back to some degree of normalcy - and now, slightly more than two months later, we're still not quite there yet. We're still in a transition phase, but we can see the end, finally."
Another new technology at AFM is Access, a communications program - essentially an electronic retail price book - that enables each member to get immediate information on pricing, allowances and inventory levels "in a form that's truly usable to them," Martin Arter, president and chief executive officer of AFM, told SN. "In the past, it was available to them via satellite fax, but now it's there at their fingertips to view and facilitate ordering."
A Long Struggle
NORFOLK, Neb. - "Buying together to sell for less" - that's the slogan Affiliated Foods Midwest Cooperative lives by today as it marks its 75th anniversary.
It was that same philosophy that brought together five grocers in northeast Nebraska in 1929, who each put up $50 to begin buying merchandise together. Two months later, however, their venture became one of the early victims of the Depression as the bank where they had deposited their money failed and their capital was lost.
The grocers decided to invest new capital to keep the business going, and in 1931, they incorporated under the name Associated Stores Wholesale Co. and established their base in Plainview, Neb.
By 1934, with volume increasing, Associated Stores relocated its base here, 125 miles northwest of Omaha, where the company remains. It changed its name to General Wholesale Co. in 1936 - reflecting the fact that many of its members operated general stores with food, not just food stores. In 1942, the company became a cooperative.
It was a struggle to survive in those early years, according to Virgil Froelich, 77, who joined the company in 1946 and retired as chief executive officer in 2003. "We weren't doing much volume because most of the members were quite small and they were competing against three or four other small retailers within their communities," he recalled in an interview with SN. "And many customers coming into those stores bartered for groceries with eggs or cream, so there wasn't a lot of money coming in."
The co-op moved through six general managers in its first 17 years before Maynard Howard was hired in 1948 to head what was then a 91-member operation.
"Our financial situation remained tenuous for many years," Froelich recalled, "because we had a lot of out-of-stocks, which came about because we didn't have much money available or a good credit rating. During many of those years vendors had us on a c.o.d. program that required the warehouse manager to have the bank cut a check before orders would be unloaded.
"As a result, we had trouble attracting new customers because of our reputation for having more outs than product."
More Hard Times
The company relocated a couple of times within the city of Norfolk before moving to its present site in 1952.
However, a fire in January 1968 destroyed the company's distribution center - and even after the company completed what had been intended as an addition to the burnt-down warehouse that June, the roof on the new facility collapsed from the weight of snow that December, and the company was forced to cut the number of employees from 80 to 38.
"During that period we had to move our offices across the street to the Holiday Inn," Mildred "Mid" Stewart, the company's longest-tenured employee, told SN. (Stewart joined AFM in 1942 as a freight bill typist, which she said required her to learn the weight of every item in the warehouse so she could make sure the trucks were not overloaded. Stewart continues to work at AFM as an accounting supervisor.)
While the warehouse was being rebuilt after the fire, AFM relied on two rival companies - Associated Grocers of Denver and United-A.G. of Omaha - to supply its members. "Sure, they were competitors, but they were also both cooperatives," Stewart said.
AFM moved into its current facility in 1969.
In 1976, Froelich succeeded Howard as general manager. A year later the company changed its name again - to Affiliated Foods Cooperative - and Froelich's title was changed to president and chief executive officer.
Froelich said he set to work immediately to repair the company's inventory problem and restore its reputation.
"I went to the stockholders and said we couldn't give any more credit on deliveries - members needed to pay for their groceries when the trucks were unloaded. I told them that if they agreed to follow that procedure, I'd make sure we had sufficient inventory, and as a result we were able to strengthen our in-stock position by the early 1980s, which helped sales increase and attracted more stores to join us."
It was around that time that the company also began offering more member services like accounting and insurance, Froelich said.
EXPANSION TO IOWA AND MINNESOTA
When a cooperative in Des Moines, Iowa, went out of business in 1991, "a lot of its members came to us, which allowed us to expand our distribution into Iowa," Froelich recalled.
"Then, when a wholesaler in Minnesota closed, we crept into Minnesota, and little by little we kept expanding."
By that time, the company was solvent and operating debt-free, Froelich said.
In 1994, Froelich attempted to engineer a merger of his company with Affiliated Foods of Elwood, Kan., and United-A.G. of Omaha "so we could consolidate buying and reduce transportation costs. However, United-A.G. pulled out because a couple of its larger members were concerned they would lose some of their investment."
Although Froelich's company and Affiliated Foods agreed in late September 1994 to a merger, the talks were abruptly terminated that November. At the time, Froelich told SN that specific structural and operating differences between them made the combination difficult.
Five years later, in 1999, AFM made its first and only acquisition when it purchased the assets of Affiliated Foods. "By that time, several of their retailers had joined us and their volume dropped to the point they couldn't support a warehouse any longer," Froelich told SN.
That acquisition broadened the company's base into Colorado and Kansas, and the following year the company changed its name again - to its current moniker, Affiliated Foods Midwest Cooperative - to reflect the scope of its distribution.
Asked how AFM has managed to survive to age 75, Froelich replied, "By improving ourselves day by day and building our company on the basis of consistency. You've got to be consistent. You can't deviate for one member - all decisions must be made in the best interests of the entire company."
Froelich gave up the title of president to Martin Arter in 2001, and when he retired in 2003, Arter became CEO as well.