SOUTHWEST SEEKS TO SELL 23 UNITS, CLOSE BALANCE

DAVID GHITELMAN

PHOENIX -- Southwest Supermarkets here last week filed in U.S. Bankruptcy court here for Chapter 11 relief.

In the wake of the bankruptcy, the company is attempting to sell some of its stores to Bashas', Chandler, Ariz., and close its remaining locations.

The Southwest liquidation was also seen by some analysts as putting additional pressure on Fleming, Dallas, Southwest's principal supplier, although other analysts said that Fleming has been preparing itself for the loss of business from small supermarket chains by pursuing customers in other channels. Not a Fleming customer, Bashas' self-distributes.

The pre-negotiated sale involves 23 Southwest stores, a Bashas' spokeswoman told SN -- 17 in the Phoenix market and six in the Tucson market. She added that Bashas' expects to close the transaction, pending court approval, before the end of the year.

Southwest is reportedly selling the stores to Bashas' for between $7 million and $7.5 million, according to published reports. SN was unable to confirm that figure.

Anthony J. Gioia, Southwest president and chief executive officer, said in a statement, "The filing of the Chapter 11 case will allow certain of our stores to serve our Hispanic community under Bashas' Food City banner. We feel this process will serve the interests of our customers."

Wayne Manning, Bashas' president and chief operating officer, told SN, "We cater to Hispanics, as did Southwest. Also, most of the communities served by Southwest had only one supermarket, and we want to maintain both service and jobs in those communities."

A local industry observer told SN that Southwest had originally been modeled after the Houston-based Fiesta Mart chain of Hispanic-oriented stores, although with a greater emphasis on food than general merchandise.

However,he said, Southwest was characterized by "weak management all the way through" and "unnecessarily dirty stores." He said the company's "demise began when Bashas' started making a real effort to get involved with the Hispanic community" around seven or eight years ago.

"Customers saw the difference in cleanliness and product assortment," he said. "Southwest lost its appeal."

He also noted that Southwest's stores tended to be small, 20,000 to 27,000 square feet, in a city where 70,000- to 90,000-square-foot stores are the norm. "Phoenix is a place where large stores count," he said.

Still, he said he believed that Bashas' was likely to profit from its purchase of the Southwest units, noting that if the reported sale price is correct, then Bashas' only has to keep five or six stores operating to earn back the cost.

"I give them high marks for making this thing work," he said. He added that the Southwest liquidation, following hard on the heels of the departure of Abco Markets earlier this year, should help rationalize the Phoenix supermarket industry.

"It was the right thing to happen in this market," he said. "There were too many chains here. Now, it more closely resembles the supermarket structure in a typical large city."

A Fleming spokesman told SN, "It's a little too early to tell" how the Southwest's departure will affect its principal supplier.

"It is certainly a meaningful amount of business, although it was the minority of business from our Phoenix division."

Gary Giblen, director of research and senior vice president, C L King Associates, New York, told SN that the loss of Southwest's business is further evidence of "the ticking time bomb is clearly there for Fleming."

He added, "Fleming has two types of customers: mom-and-pop chains that are vulnerable to competition and consolidation, and troubled large chains," alluding to Fleming's supply contract with Kmart, Troy, Mich. (See Page 4 for more on a potential downgrade of Kmart's credit rating.)

However, Debra Levin, Morgan Stanley, New York, said that the loss of Southwest's business should not have a long-term effect on Fleming.

"Fleming has said small chains and independents are a contracting business," she told SN. "They will decline 1% or 2% a year for the entire industry, and Fleming has made a great effort to diversify its business.

"Only 40% of Fleming's food-distribution business now comes from traditional supermarkets."