MINNEAPOLIS -- Supervalu here and C&S Wholesale Grocers, Brattleboro, Vt., agreed last week to a facilities swap that will enable Supervalu to strengthen its operating efficiencies in the Midwest, while C&S does the same in New England.
As part of the exchange, Supervalu will take over the supply agreements, inventories and trade names from three Midwestern facilities formerly operated by Fleming, and C&S will add four New England facilities that have been operated by Supervalu.
The three Fleming distribution centers -- in La Crosse and Waukesha, Wis., and Massillon, Ohio -- were scheduled to be shut down over the weekend. C&S said it will continue to operate three of the four Supervalu distribution centers, which total nearly 800,000 square feet -- in Portland, Maine; Andover, Mass.; and Cranston, R.I., all of which Supervalu owns -- and continue to lease out the fourth facility, a 700,000-square-foot warehouse in Suffield, Conn., that Supervalu closed in 2001.
The swap involved a like number of customer accounts, with Supervalu indicating it will add approximately 250 former Fleming customers in the Midwest, while C&S said it is picking up 250 independents and regional chains from Supervalu in New England.
According to Mark Gross, C&S executive vice president, those 250 accounts represent 600 stores; when added to C&S' existing base of 400 independent stores in New England and 1,000 locations it added late last month in California and Hawaii, the wholesaler will have 2,000 independent stores, representing a combined volume of approximately $3 billion -- $1 billion each from its existing base, from California and Hawaii and from Supervalu -- or about 22% of its total volume of $13.5 billion.
Gross said C&S intends to broaden its organization, which is heavily chain-oriented, to accommodate its expanded base of independent accounts. "We think this is a market segment we can serve well, and we will put the resources of our organization behind servicing these independent customers," he told SN.
"We already have a team in place devoted to serving our independent base, and we intend to expand that team with personnel from Supervalu, Fleming and elsewhere."
Gross also said C&S hopes to expand the Piggly Wiggly franchise it acquired as part of its acquisition of Fleming. "There are a number of parties in this country who would like to work with us to grow the Piggly Wiggly label, including retailers and wholesalers, and we believe a brand name like that is very attractive," both in markets where the Piggly Wiggly name can be strengthened and in markets where it could be introduced.
Supervalu and C&S said in a joint statement the asset exchange is expected to close in the next few days.
Securities analysts told SN they believe the asset exchange is a plus for both companies.
According to Chuck Cerankosky, an analyst with McDonald Investments, Cleveland, "For Supervalu, giving up some assets to C&S, which wants to expand in New England, will allow it to increase business by the same amount in the Midwest, thereby pumping more volume through the same distribution assets, so it ends up with about the same level of sales but with improved profitability in the Midwest and a higher return on assets, and that's been one of Jeff Noddle's goals for Supervalu."
The deal also strengthens C&S, he pointed out, "because to the extent it can pump enough new volume through its system so volume per warehouse goes up, it becomes more efficient and a stronger competitor, and efficiency is everything in the distribution world."
According to Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., "The swap plays to each company's strengths, and it probably solidifies each one's market share where each is already strong, which clearly makes this a very creative match."
Wolf likened the swap to a fill-in acquisition "where the assets each company is picking up have not been degraded, but still have value."
Jonathan Ziegler, principal in PUPS Investment Management, Santa Barbara, Calif., said Supervalu has never had a strong presence in New England, "so improving its position in the Midwest, where it is strong, and helping C&S improve its position in New England, its core market, plays to each company's strengths."
Supervalu has been operating in New England since 1992, when it acquired the facilities in Maine, Massachusetts and Rhode Island as part of its acquisition of Wetterau. It added the Connecticut facility in 1994 when it acquired Sweet Life Foods.
"We're obviously very disappointed to leave New England because we have an excellent group of independents there," Jeff Noddle, chairman and chief executive officer of Supervalu, told SN, "and it was difficult to make the decision to leave those retailers and our employees there. But ultimately we have to invest capital to make the most reasonable return for our shareholders, and this transfer will enable us to put capital into our core areas, which will provide higher returns than what we were likely to achieve in New England."
Noddle said he anticipates C&S will hire the vast majority of employees at the facilities it is turning over.
Once Fleming closes the three Midwestern facilities Supervalu is acquiring, Noddle said his company plans to seek buyers for the two Wisconsin facilities, while the leased facility in Massillon "could have its lease rejected in bankruptcy court."
With the three warehouse closings, hundreds of employees will be terminated, Noddle said, "but Supervalu will have openings at some existing distribution centers." He declined to estimate the number of employees that might be needed.
According to Noddle, Supervalu will supply former Fleming customers previously served from the two Wisconsin warehouses out of distribution centers here and in Pleasant Prairie, Wis.; Oglesby, Ill.; and Champaign, Ill., while former customers of the Massillon warehouse will be serviced by Supervalu facilities in Xenia, Ohio; and Pittsburgh.
With Supervalu's exit from New England, the two companies will not be competing at the wholesale level anywhere in the United States "as things stand now," Noddle told SN, other than some overlap between C&S-supplied stores and Supervalu's Save-A-Lot format in some parts of the Northeast and California.
According to Noddle, "Our interest in acquiring former Fleming assets centered on generating growth and improving efficiencies in our overall logistics business, [while] C&S looked to expand its business in New England by adding a strong independent customer base to its operations. Supervalu's New England business will complement C&S' growth strategy."
Noddle said the intent of the swap is to eliminate the exchange of any money, "although there will probably be some cash accrued to Supervalu once inventory levels are determined," he pointed out.
Supervalu said it expects the asset exchange will be revenue-neutral this year, with any earnings benefits being offset by start-up costs and the tax impact from the sale of the New England operations. It said earnings in fiscal 2005 will benefit by an expected 7 to 10 cents per share.
