LOS ANGELES -- Unified Western Grocers here is looking for new revenue opportunities.
Al Plamann, president and chief executive officer of the member-owned cooperative, told SN he is confident Unified can overcome what he perceives as short-term obstacles to the cooperative's long-term growth.
"We're excited about the way 2002 is developing," he said. "We've had a long run of significant retail growth in Southern California since the middle of last year, plus steady growth in Northern California and, for the first time in the last year or so, a rejuvenation of growth among some of the strong retailers in the Pacific Northwest.
"So our core business is strong, our retail members are capable of growing their businesses, and we have the financial and management resources to help them do that."
Wholesale sales remain strong, and the acquisition of United Grocers, Portland, Ore., in 1999 gave Unified a sales lift, but the loss of some national-chain accounts last year, combined with other factors, resulted in a 5% sales decline -- to $2.9 billion from the prior year's $3.07 billion.
But while sales are likely to remain flat this year, Plamann said, the prospects look good. "We believe sales will pick up because of opportunities we're exploring today," he told SN.
Those potential opportunities include the following:
Growing sales among Unified's existing members.
Developing a new base of customers among smaller neighborhood markets.
Looking for new business in Las Vegas, Arizona and Washington.
Expanding its business among Asian retailers.
Plamann said Unified is also embarking on a five-year plan to integrate its distribution facilities to achieve greater efficiencies; developing a Web linkup with vendors; and reorganizing its specialty food operations.
Unified was formed when Certified Grocers of Los Angeles acquired United Grocers two and a half years ago. Since then, 50% of its sales come from customers in Southern California, 25% from Northern California and 25% from the Pacific Northwest.
The cooperative supplies 3,000 stores, including 690 members with 1,250 stores that accounted for 90% of sales, and approximately 550 non-member customers, who operate 750 stores.
According to Chuck Pilliter, executive vice president and chief operating officer, "Our wholesale business is extraordinarily strong, and we anticipate increases this year totalling $100 million, or 3.6%."
The two primary drivers behind those increases are Unified's distribution agreement with Associated Grocers, Seattle, to provide health and beauty care products and general merchandise to AG customers, and Unified's ability to attract new customers in the Pacific Northwest, Pilliter said.
Three factors combined last year to offset those gains, he pointed out: the loss of $100 million worth of sales to Cala Foods, Bell Markets and Foods Co. -- three Northern California chains owned by Kroger Co., Cincinnati -- when Kroger decided to self-distribute to those stores; a drop of $40 million when Unified eliminated bill-through sales in the Pacific Northwest; and a decline of $10 million when Unified closed six corporate stores in Southern California because of underperformance.
The six corporate stores were all former Albertson's locations that Unified acquired in 1999, "but they just didn't perform up to the level we had hoped for," Pilliter said.
Most of the retailers who took over former Albertson's and Lucky Stores locations in Southern California at the same time experienced reduced sales because of customer loyalty to those two franchises, he said. "And while the stores certainly made a significant contribution on the wholesale side, their geographic dispersion over a wide area made it difficult to market them as a group," he noted.
Since the stores were closed last year, two have been sold to existing customers to keep the volume within Unified, two are being sold to chain operators, and the leases of the remaining two have expired.
Unified operates 12 other corporate stores: eight SavMax stores and two Apple Markets in Northern California and two Thriftway units in the Pacific Northwest.
Around the time Unified acquired United Grocers, it was talking with other Western cooperatives about staging a series of mergers to combine them into one entity, Plamann acknowledged, "but we find it's easier to get into procurement alliances, as we have with Associated Grocers on nonfoods, than to deal with all the challenges of integrating different companies.
"That attitude may not last forever, but for the moment, any momentum toward consolidation among Western cooperatives has softened significantly."
Besides the alliance with AG, Unified is involved in procurement alliances for meat with other cooperatives that distribute the Western Family private-label line; and for private label with other noncompeting wholesalers -- Associated Wholesale Grocers, Kansas City, Kan.; Roundy's, Pewaukee, Wis.; and Wakefern Food Corp., Elizabeth, N.J.
Asked if Unified might be an acquisition candidate, Plamann told SN it isn't likely.
"We haven't been approached for years," he said. "I think the reason is, we're an incredibly tough competitor, and it would be difficult for another wholesaler to maintain our existing cost structure. It could certainly be as efficient, but it would require some increase in selling prices.
"In addition, our retail members feel strongly that maintaining a cooperative structure allows them to have a significant degree of control over their own destinies."
As it moves forward, Unified is on the lookout for ways to shore up its sales base, Plamann said, noting the company projects a 1.6% sales increase this year from 30 to 50 new-store openings by member companies. Some of that growth will come as Southern California operators expand their geographies, he pointed out.
"Some of the Hispanic operators we serve are looking beyond the traditional center-city sites in Los Angeles and Orange counties northward to the San Joaquin Valley [in central California] and eastward toward Las Vegas and Phoenix," Plamann said.
Unified is also mining new territory on its own, he added, butting heads with Minneapolis-based Supervalu and with its joint-venture partner, AG of Seattle, as it goes after new business in Washington. "Our volume north of the Columbia River is not large, but the opportunities are great," Plamann said.
Beyond geographic growth, Plamann said Unified sees opportunities to expand its business among Asian retailers. "Many small distributors are servicing that business, but they are relatively inefficient," he noted. "And as the Asian population on the West Coast grows, there will be volume opportunities.
"We already have a variety of Asian offerings, but we need to expand them."
Another source of additional revenue, Plamann said, is neighborhood stores -- stores of 3,000 to 10,000 square feet that are smaller than supermarkets but larger than convenience stores. Although Unified currently services approximately 700 such retailers, the company believes there is a potential base of more than 17,000 customers on the West Coast.
Pilliter said Unified will be going after more of those customers this year, beginning in Northern California.
"The potential is huge," he declared. "There are so many stores that fit into that category, and it's a business that's supplied by other companies.
"Over our history, we've designed marketing and merchandising programs to supply supermarket customers, but this new program will address individual issues of small grocery stores, liquor stores, specialty stores and convenience retailers.
"What we're doing is tailoring terms and conditions so that we can accommodate customers with smaller orders delivered more frequently, which requires a different cost equation and a different method of selling, and we're working on enhancing that."
According to Plamann, "When we looked at our customer base, we found we had a whole array of these smaller retailers who order one or two times a month. But because our offerings are geared toward supermarket customers, we've been trying to fit those smaller operators into a program that doesn't really work for them.
"So we've developed a new organization, with a special inventory assortment and a simplified pricing program."
To oversee the neighborhood store program, Unified brought in personnel from a distributor in that field, Plamann said.
Another new initiative at Unified involves a five-year plan to assess its 10 distribution facilities, "looking for ways to integrate them to make sure we have the most efficient network," Plamann said.
"We think we need to consolidate some of our facilities within California, and we may need to remodel others, and at the end of five years we could end up with the same number of facilities, though the mix may be different."
Unified has five warehouses in Southern California, three in Northern California, one in Portland and a small facility in Seattle.
"What we're looking to do is reconfigure those facilities around fast- and slow-movers and high- and low-volume items," Plamann said. "We know what we want to do conceptually, but we're not sure yet how to take the fullest advantage of what we have."
The initial changes are likely to occur in Northern California, where Unified expects to decide by early summer what it wants to do and then to spend a year implementing that decision, he said.
Among other Unified initiatives:
Providing easier access to retail support services by setting up a Web site linking retail customers with outside vendors for information on marketing, advertising, sales and business solutions. "Right now, those services are scattered in different places and it's hard for retailers to take advantage of them," Plamann said. "But creating a single site will make it easier to reach vendors for technical or merchandising assistance."
He said the linkup will be available before the end of the year.
Reorganizing Grocers Specialty Co., a Unified subsidiary, by dividing it into three divisions: general merchandise/health and beauty care; Hispanic foods, and specialty foods, including organic and natural foods, non-Hispanic ethnic foods, health and diet foods; and high-end and gourmet products.
Introducing a patronage certificate program in lieu of annual patronage dividends to strengthen the company's capital structure.
Unified paid out $14.9 million in patronage dividends last year, "and we will still pay those dividends," Plamann explained. "But instead of distributing the money in cash, we will give members a note that pays interest.
"We're not doing this to plow the money back into the business for new projects. But having that money will enable us to reduce our borrowing levels and build our equity base."
"And at the end of six years, members will get a refund on the first year's certificate that will include five years of accumulated interest," PIlliter said, "so it's a positive for customers."
However, Unified will continue to pay cash dividends on dairy sales "because that's such a competitive category, and paying the dividend in cash enables retailers to build that rebate into pricing on a more current basis," Pilliter said.
