MONTVALE, N.J. — A&P last week said it had reached an “innovative” new distribution agreement with C&S Wholesale Grocers that the parties said would reduce costs and inventory levels while improving efficiency and selection.
The 10-year agreement replaces previously separate agreements between C&S and A&P and its affiliates and combines them into a single contract designed to serve all of A&P's store formats, including Pathmark, which had an existing deal with C&S when A&P acquired the chain last year.
“Having two companies come together brought a lot of complexities, and one of them was having three separate contracts with C&S — one for Pathmark and two for A&P, one for groceries and another for deli and frozen,” Rebecca Philbert, senior vice president of merchandising and supply & logistics, told SN in an interview last week.
The new deal, Philbert said, realigns responsibilities along the supply chain to eliminate duplication of duties and to foster collaboration between the parties, Philbert said.
Although Christian Haub, A&P's executive chairman, earlier this month said the deal would allow A&P to handle procurement responsibilities and C&S to serve as a third-party logistics provider, Philbert explained the deal is not quite as rigid as that. “It's not that A&P will take over all the procurement, it's that we both have defined responsibilities and we'll work together on different facets,” she said.
The agreement provides that the actual costs of performing distribution services will be reimbursed to C&S on an “open-book” or “cost-plus” basis, whereby the parties will negotiate annual budgets that will be reconciled against actual costs on a periodic basis, A&P said in a government filing last week.
The parties will also annually negotiate service specifications and performance standards to govern various warehouse operations.
In consideration for the services it provides under the agreement, C&S will be paid an annual fee and will have incentive income opportunities based upon A&P's cost savings and increases in retail sales volume, A&P said.
Observers expect the agreement will allow A&P to have more freedom in pursuing procurement practices such as making forward buys — a responsibility that some said was limited for Pathmark per terms of its deal with C&S. Pathmark's deal with C&S, struck as the retailer battled heavy debts in the 1990s, was considered onerous by some industry observers.
Burt P. Flickinger III, managing partner with Strategic Resource Group, New York, said the agreement updates what he called a “20th century model where there was some good for the retailer,” but which was “fantastic for C&S.”
Keene, N.H.-based C&S, Flickinger noted, came to prominence by pioneering outsourced distribution and logistics for retailers, including A&P.
“The way C&S is looking at the contract is, the more money A&P and Pathmark make through the shared procurement and additional size and scale, the more money C&S is going to make,” he said. “That will help C&S expand from a multiregional to a national food wholesaler to challenge Supervalu.”
Philbert said the agreement will enable both A&P and C&S to achieve cost savings, further contributing to the attainment of A&P's synergy goals as part of the Pathmark integration.
“The key to any good business relationship is collaboration, and that's what this is about,” she said. “We've collaborated on how to improve, whether it's how to take costs out of the operation by setting service standards, or getting product to the stores more efficiently and in the manner in which they ordered it. We're working together to improve service levels, in-stock conditions, and the method by which we get product to our stores at the lowest cost possible.”
The companies said the deal will pave the way toward developing one of the lowest-cost distribution systems in the industry. According to Philbert, A&P still operates a single warehouse, while C&S controls its others. The distributor recently shuttered a food distribution center in Islip, N.Y., that served A&P's Waldbaums banner.
An A&P spokeswoman said the deal will have no effect on Grocery Haulers, the transportation provider for Pathmark.
Philbert said the distribution changes should result in better product availablity and more competitive prices.
“[Consumers] won't be disappointed by an out-of-stock,” she said.