C&S TO TAKE OVER PATHMARK'S DISTRIBUTION

ELLIOT ZWIEBACH Additional reporting: DEENA AMATO-McCOY

WOODBRIDGE, N.J. -- Pathmark Stores here said it has entered into a longterm supply agreement with C&S Wholesale Grocers, Brattleboro, Vt., under which C&S would take over Pathmark's distribution facilities and become the chain's supplier for substantially all groceries and perishables.

The deal -- scheduled to close before the end of Pathmark's fiscal year at the end of January -- would involve an estimated $1.6 billion in merchandise, C&S executives told SN. That additional volume would make C&S the nation's third-largest wholesaler, with sales of $5.2 billion -- moving it past Wakefern Food Corp., Elizabeth, N.J. ($4.3 billion); Nash Finch Co., Minneapolis ($4.1 billion), and Richfood Holdings, Richmond, Va. ($3.8 billion on an annualized basis) but still considerably behind Supervalu, Minneapolis ($16.6 billion); and Fleming Cos., Oklahoma City ($16.5 billion).

C&S said it has designated Grocery Haulers, Edgewood, N.Y. -- which took over Pathmark's transportation business last week -- as its labor supplier; it also said Grocery Haulers has agreed to assume the existing collective bargaining agreements with Teamsters Local 863, whose members staff the warehouse facilities.

Observers said the deal would enable C&S to become a significant player in the New York metropolitan marketplace while also casting its eye farther south toward Philadelphia, Washington and Baltimore.

C&S already does some business in the Washington area, having signed a contract earlier this year to distribute frozen foods and slow movers to the Safeway division there.

Asked whether C&S plans to expand its operations in the New York metropolitan area, Kim Keyes, C&S' corporate spokeswoman, told SN, "That's an area where we've expanded our business recently" -- a reference to the addition of Grand Union's wholesale business in the past year and a half.

However, she declined to comment on any long-range expansion plans beyond the Pathmark transaction.

C&S, a privately held company, has been expanding its distribution rapidly over the past few years, picking up the former .... New England division of Grand Union Co., Wayne, N.J., in June 1995, then adding the chain's New York division last January.

Besides the Safeway contract, C&S also supplies all Wal-Mart supercenters on the East Coast; A&P's Food Mart operation and Edwards Super Food Stores in New England; BJ's warehouse clubs; and several independents in New Jersey and Pennsylvania.

Howard Goldberg, a high-yield analyst with Smith Barney, New York, said he expects C&S to use Pathmark's New Jersey facilities "as a beachhead to expand its business in the New York metropolitan area -- though it will certainly have a very full plate initially with the logistical challenge of integrating the Pathmark business with distribution to Grand Union. As a result, it may be a while before C&S looks for additional business."

Keyes said C&S is supplying Grand Union from a distribution center in Windsor Locks, Conn., and has "no specific plans" to move that business, or any other customer's business, into the Pathmark facilities.

"We want to look at the operation there and understand it better, though we typically do shift customers to more convenient facilities," Keyes said.

Financial analysts said the ability to consolidate distribution for both Pathmark and Grand Union into a single facility could add benefits to both companies over time. Under terms of the agreement, C&S would purchase Pathmark's warehouse complex in Woodbridge, N.J., and assume the leases on facilities in North Brunswick and Dayton, N.J., including all fixtures, equipment and inventory.

The Woodbridge complex includes a 475,000-square-foot dry grocery warehouse opened in 1968 and a 255,000-square-foot perishables facility opened in 1970. The leased facilities are a 425,000-square-foot dry grocery distribution center in North Brunswick, N.J., and a 112,000-square-foot frozen-food warehouse in Dayton, N.J.

Keyes told SN it is too soon to determine whether any renovations would be needed. According to Harvey Gutman, senior vice president of retailer development at Pathmark, "We challenged ourselves over the last year or so [to look at] all the functions Pathmark undertakes to determine what areas we could do better.

"Outsourcing distribution operations will be an improvement for the chain. It's something that prudent, well-managed companies look to do as a viable alternative to increasing their operating costs."

Ted Bernstein, a high-yield analyst with Grantchester Securities, New York, said Pathmark's outsourcing arrangement with C&S is "extremely significant because Pathmark was underutilizing the distribution infrastructure it had in place, which was geared to a company with better sales that was expected to grow more rapidly.

"As a result, it has not been achieving the economies of scale that would have come with operating the warehouses at full capacity, and it has had a lot of square footage and equipment that was not being used to best advantage.

"Now, instead of incurring those expenses, it can realize better savings by going with an outside source of supply. And because C&S operates at a higher volume level, it can utilize the assets more fully and pass some of those savings on to Pathmark."

Goldberg said he believes the decision to turn Pathmark's distribution over to C&S is a positive move, "because it puts the warehouse in the hands of a company regarded as one of the nation's most efficient operators and removes Pathmark from the obligation of devoting resources and energies to operate a warehouse."

The deal with C&S would allow Pathmark to concentrate on its retail business, Bernstein noted, "with less management overhead devoted to distribution, which is consistent with the cost-saving strategy that's been in place since Jim Donald came in to run the company and make it leaner and more efficient."

According to Donald, chairman, president and chief executive officer of Pathmark, "Entering into a longterm supply agreement with C&S enables us to continue to receive efficient distribution services and to focus even more on our core business -- operating first-class supermarkets and providing great service to our customers.

"The agreement with C&S is a logical extension of the outsourcing of our trucking business to Grocery Haulers" -- an arrangement that began last week.

Observers estimated the price of the land, building, fixtures and equipment at the Woodbridge complex would be $50 million. Executives at Pathmark and C&S declined last week to discuss the value of any part of the deal.

A Pathmark spokesman told SN some proceeds would be used to pay down debt, "and we expect to improve our acquisition costs of product," he added.

Goldberg said using the proceeds to reduce part of Pathmark's $1.465 million debt would be a very positive development. "And Pathmark could redeploy some of the money into cap-ex spending, which has not been aggressive in the recent past," he added.