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THE WHOLESALE VIEW

Industry consolidation in the retail segment is likely to have a positive effect on the fortunes of the distribution segment through the balance of the year, wholesale executives told SN.They also said controlling costs will be the key to survival in the next few years."The balance of the year will be healthy for the industry as a result of all the mergers, which will add debt to the acquiring companies,"

Industry consolidation in the retail segment is likely to have a positive effect on the fortunes of the distribution segment through the balance of the year, wholesale executives told SN.

They also said controlling costs will be the key to survival in the next few years.

"The balance of the year will be healthy for the industry as a result of all the mergers, which will add debt to the acquiring companies," said Rich Parkinson, president and chief executive officer of Associated Food Stores, Salt Lake City.

"That should provide some relief in margins, and we think it will take some of the acquirers' attention away from other matters and provide independents with opportunities to grow and to take advantage of that window of opportunity for a couple of years."

Doug Carolan, president and CEO of Associated Wholesale Grocers, Kansas City, Kan., offered similar thoughts. "Margins seem to be in good shape, and certainly the consolidation that's going on looks like it will strengthen the players who are left."

According to John E. Stokely, president and CEO of Richfood Holdings Co., Richmond, Va., lack of food inflation will make operating conditions difficult, "and we still see a period of intense competition because stores are being built faster than population is growing.

"But the companies that do well will be the ones who take costs out of the system and find ways to drive productivity, while the companies not able to operate their businesses at peak efficiency will be hurt. The key to any business is to control costs, and if you can't, it gives those who can a competitive advantage."

Al Plamann, president and CEO of Certified Grocers of California, Los Angeles, also said companies that take control of costs will thrive while others will not. "The outlook is good for the more aggressive wholesalers who have actively taken new strategic directions or who have rationalized their operations. But for those who still tend to look backward or who haven't made significant changes because of a lack of financial capacity, the competitive marketplace will become even more difficult."

Gerald F. Lestina, president and CEO of Roundy's, Pewaukee, Wis., said he agreed. "Wholesalers who have properly reinvested in their infrastructure and in technology will do well. My concern is for the small wholesaler who serves smaller independent retailers. That segment is being overwhelmed by supercenters."

Ron Marshall, president and CEO of Nash Finch Co., Minneapolis, said, "Wholesaling has become very competitive, [and] everyone's having a tough time because of consolidation. That means wholesalers must become sharper and more efficient."

The Y2K issue seems to be under control, the executives said.

"Roundy's was 100% compliant with Y2K by the end of the first quarter, so we've had nine months to test the system," Lestina told SN. "We've actually been testing it since we began installing increments of the system early in 1998, and we have nine more months to make sure we're ready to turn the corner on Jan. 1."

According to Mike Wright, chairman, president and CEO of Supervalu, Minneapolis, "We've been working with [customers] on Y2K, and we think they're in good shape in that area."

Discussing the outlook for 1999 within their own companies, the executives made these observations:

Lestina said Roundy's anticipates a fifth successive year of record earnings. However, he said, sales are likely to be flat, prompting the company to "look very actively at acquisitions to grow the top line."

After making some isolated acquisitions of small groups of stores here and there, Lestina said, Roundy's is now looking at major wholesale or retail acquisitions "because the days of going out and taking away other wholesalers' customers is not the way to grow the business anymore."

Parkinson said Associated Food Stores anticipates record sales this year because of the effect of Y2K on its members' heavily Mormon customer base. "Y2K has really heated up consumer purchases [because] people have been pursuing a food-storage program in response to the Mormon Church culture that teaches them to be prepared for emergencies."

Carolan said AWG expects to experience double-digit sales growth for the second consecutive year because of growth among existing members and the addition of nearly $100 million in new business this year.

Wright said Supervalu is anticipating "another record year." Besides expanding its own retail holdings, the company is putting "enormous amounts of money" into growing its customers' retail operations.

Marshall said Nash Finch, which is undergoing extensive changes under its new management, is "guardedly optimistic" about its prospects this year, "[although] we've made no secret that 1999 is a transitional year for us." Earnings will be flat, "but there are signs of improvement in 2000."

Plamann said Certified expects its pending merger with United Grocers, Portland, Ore., "will make us a more powerful competitive force."

Stokely said Richfood plans to continue integrating its two most recent acquisitions -- Farm Fresh, Norfolk, Va., and Shoppers Food Warehouse, Lanham, Md. -- to grow sales and enhance margins. "At the same time, we will be working to continue to maximize the efficiencies of our logistics network because we feel there are still things we can do to drive efficiencies for our customers in terms of doing a better job utilizing what we have."

The wholesale executives' complete comments follow.

Doug Carolan

president and CEO

Associated Wholesale Grocers

Kansas City, Kan.

We have a very positive outlook for AWG for the balance of the year. It will be a very positive year. We had double-digit growth last year, and we expect double-digit growth again this year.

Our retail members currently plan to add 1 million square feet of new supermarket space this year, compared with 600,000 square feet last year, and several new stores will open. In addition, we're constantly picking up new members, and we're close to adding $100 million in new volume this year, compared with $50 million added last year. The reason for the pickup is that we're sticking to basics to deliver the right product at the right cost at the right time. Retailers are always looking for more efficient operations, and that's what we're providing.

For the industry overall, it will also be a good year. Margins seem to be in good shape, and certainly the consolidation that's going on looks like it will strengthen the players who are left. Everyone is trying to improve operations and formats, and we're all trying to get better at what we do.

So we're looking for good returns on the bottom line for the industry, with very satisfactory profits. The top line will be somewhat lower because the industry continues to be fragmented, with lots of alternative outlets selling food products and making it difficult for the industry to grow the top line -- e.g., Kmart's thrust with its Pantry departments, regular Wal-Marts that sell fresh milk, drug stores like Walgreen's that have added ice cream and milk, and of course there's a certain share-of-stomach going to restaurants.

So there will continue to be this proliferation of competitors. But supermarkets are historically good fighters, and that's where flexibility comes into play. Supermarkets have evolved into selling more general merchandise and nonfood to offset some of the erosion in food, and that is paying off in additional sales per square foot.

Rich Parkinson

president and CEO

Associated Food Stores

Salt Lake City

We see a very strong environment in the Intermountain West. For us, the Y2K situation has really heated up consumer purchases, particularly in the Salt Lake City area, where people have been pursuing a food-storage program in response to the Mormon Church culture that teaches them to be prepared for emergencies. As a result, sales have been very strong.

However, a church conference in April said Y2K won't be a big problem, and that has slowed sales somewhat. However, we expect sales to pick up again in August through October, and we anticipate record sales levels.

We're also excited about our first retail acquisitions -- four stores from Lin's in early March and eight stores from Macey's, our largest retail customer. Both companies gave us the first opportunity to buy when they decided to sell. We think both will assist us in increasing our profits.

I don't think we'll acquire any more stores this year, but we'll keep our eyes open for companies that want to sell, and we will assist our customers to buy stores.

For the industry, we think the balance of the year will be healthy as a result of all the mergers, which will add debt to the acquiring companies. That should provide some relief in margins, and we think it will take some of the acquirers' attention away from other matters and provide independents with opportunities to grow.

Al Plamann

president and CEO

Certified Grocers of California

Los Angeles

At Certified we have a positive outlook for the remainder of the year. We have several initiatives in place to grow sales, and we've become much more efficient at what we do. And the proposed merger with United Grocers will make us a more powerful competitive force.

For the industry as a whole, I think the outlook is good for the more aggressive wholesalers who have actively taken new strategic directions or who have rationalized their operations. But for those who still tend to look backward or who haven't made significant changes because of a lack of financial capacity, the competitive marketplace will become even more difficult and they will be hurt.

Gerald F. Lestina

president and CEO

Roundy's

Pewaukee, Wis.

Roundy's has had four successive record-earnings years, and we anticipate this being the fifth record year. At the same time sales have been traditionally flat in the company, and our objective this year is to look very actively at acquisitions to grow the top line.

We've made isolated acquisitions -- three stores here, three more there -- but now we're looking at wholesale and/or retail acquisitions. We operate 20 corporate retail stores, and we're looking for major acquisitions because the days of going out and taking away other wholesalers' customers are not the way to grow the business anymore. Most companies are growing through acquisitions, and we expect something to happen for us this year.

Regarding the outlook for the industry, I believe wholesalers who have properly reinvested in their infrastructure and in technology will do well. My concern is for the small wholesaler who serves smaller independent retailers. That segment is being overwhelmed by supercenters. But regional and national wholesalers who have updated technology, reinvested in their infrastructure and are retail-driven will have a fine year.

Roundy's was 100%-compliant with Y2K by the end of the first quarter, so we have nine months to test the system. We've actually been testing it since we began installing increments of the system early in 1998, and we have nine more months to make sure we're ready to turn the corner on Jan. 1.

John E. Stokely

president and CEO

Richfood Holdings Co.

Richmond, Va.

Richfood will continue to capitalize on the acquisitions we made in the past year -- Farm Fresh and Shoppers Food Warehouse -- along with our existing Metro retail stores. With the two newest additions, we feel much work needs to be done in terms of growing sales and enhancing margins. At the same time, we will be working to continue to maximize the efficiencies of our logistics network, because we feel there are still things we can do to drive efficiencies for our customers in terms of doing a better job utilizing what we have.

For the industry, conditions are going to continue to be difficult with the lack of inflation, and we still see a period of intense competition because stores are being built faster than population is growing.

The companies that do well will be the ones who take costs out of the system and find ways to drive productivity, while the companies not able to operate their businesses at peak efficiency will be hurt.

Mike Wright

chairman, president and CEO

Supervalu

Minneapolis

At Supervalu, we're looking forward to having another record year, which is running contrary to some other publicly owned wholesalers. We continue to support a strong and growing independent sector, and we continue to grow with our own retail operations and in our distribution segment as well.

Overall, we feel we supply the greatest group of independent retailers, and they operate contemporary, modern stores. We've been working with them on Y2K, and we think they're in good shape in that area.

We continue to put enormous amounts of money into growing our customers' retail operations -- with approximately $150 million being invested this year, which is above our average of $100 million-plus per year over the last 10 years -- to help them get stores ready to compete with the major companies.

I expect the industry to have a better year this year than in 1998 because last year was disastrous for publicly owned companies, with Fleming writing off $600 million to $700 million and writeoffs at Nash Finch as well.

Ron Marshall

president and CEO

Nash Finch Co.

Minneapolis

At Nash Finch we are guardedly optimistic about the outlook for the balance of the year. We've made no secret that 1999 is a transitional year for us as we move through a lot of changes, but we're optimistic for the long run.

Because of all the changes, this won't be a year of dramatic improvements. In fact, it will be a flat year for earnings. But there are signs of improvements in 2000, and that's when we expect to see a significant impact from what we're doing now.

From the standpoint of our customers, this has been a fairly good year, and as we track our bellwether stores, there are some excellent customers who are doing very well.

For the industry as a whole, it's clear that wholesaling has become very competitive. Looking at the Strategy 2005 study from Food Distributors International, we feel good about the prospects, but everyone's having a tough time because of consolidation. That means wholesalers must become sharper and more efficient.