DUAL ROLE

GREG GATTUSO

RICHMOND, Va. -- A pair of supermarket chain acquisitions this year has helped regional wholesaler Richfood Holdings here emerge as a formidable retailer as well. Those acquisitions -- of 45-store Farm Fresh and 37-store Shopper's Food Warehouse -- boost the wholesaler's number of corporate stores to 99, making it the largest food retailer in the Mid-Atlantic, with some $2 billion in retail sales.

"Two years ago, we were approaching a point where there would be unprecedented consolidation in the retail segment," John E. Stokely, president and chief executive officer, said in an interview with SN. "It was important for us to participate."

Although retail sales accounted for only 9% of Richfood's fiscal 1997 volume, that ratio will increase dramatically as it integrates Farm Fresh and Shopper's -- chains that had been Richfood customers -- with $762 million and $855.8 million in annual sales, respectively. Richfood executives expect to increase sales -- at both the wholesale and retail level -- by creating signature perishables departments in each chain.

In addition to its retail acquisitions, Richfood has made a series of accretive wholesale acquisitions this decade, propelling overall sales 220% since 1992 to a record $3.41 billion in fiscal 1997. Earnings have risen accordingly, 330% since 1992, to a record $61.4 million last year.

"We think that the successful integration of the company's two recent major acquisitions present both risk and opportunity for the future earnings power of Richfood," said Jeff Omohundro, a research analyst with Wheat First Union here, in a report. "It is our view that management is pursuing an effective strategy that, over time, may prove to substantially add to the company's earnings."

Company officials outlined the following strategies to develop the business:

Continuing to make acquisitions as a means of remaining the dominant food distributor in its Mid-Atlantic base of operations.

Refurbishing retail operations to ensure their high positions in their respective markets and expanding into contiguous markets.

Seeking out new wholesale customers and building business with existing customers. As reported in SN, Richfood this year completed the purchase of Farm Fresh, Norfolk, Va., for about $221 million in cash and assumption of $29.5 million in capital leases plus other liabilities. More recently, Richfood acquired Shopper's Food Warehouse, Lanham, Md., as part of a $207 million deal to buy out Shopper's parent company, Dart Group Corp., Landover, Md.

Other Dart holdings acquired by Richfood were Total Beverage Corp., a discount beverage retailer based in Washington, and majority stakes in Trak Auto, an auto parts chain, and Crown Books, a book retailer with stores in the Washington area and other markets. Richfood sold Total Beverage Corp. last month to RSS Acquisition, an affiliate of Springfield Fine Wines, for an undisclosed price, and said it plans to divest the other noncore holdings as soon as possible.

The two supermarket acquisitions represent a sizable increase in Richfood's portfolio of stores, which had included 15 Metro supermarkets and two smaller Basics units in the Baltimore area, doing about $339 million in combined annual sales.

The addition of Shopper's to the north of Metro/Basics, and Farm Fresh to the south, extends the company's corporate store base geographically from Delaware to southern Virginia. Importantly, the company said, its acquisitions do not overlap Richfood's existing retail customers.

"We will not compete with our retail customers," Stokely said. "All of our acquisitions create benefits for the retailer."

In Shopper's Food Warehouse, Richfood saw a well-positioned warehouse-style, price-impact chain that commanded 14% of the $5.8 billion Washington market -- and room to grow. In addition, Shopper's capital structure and stores (averaging 48,000 square feet) were both "in good shape," according to Stokely.

Richfood was familiar with Shopper's because it had been one of Richfood's largest wholesale customers, accounting for approximately $300 million, or 9%, of Richfood's sales in fiscal 1998. Stokely said Richfood expects to expand the chain north to New Jersey, Delaware and Pennsylvania, and south to the Carolinas.

Stokely said Richfood does not intend to "tinker" with the stores' offerings, which include bank branches and pharmacies, and prices, according to one industry source, 16% to 18% lower than Safeway and 8% to 10% lower than Food Lion. The chain will continue to be run by its president at the time of the merger, Bill White.

Like Shopper's, Farm Fresh was another large retail customer (accounting for about 10% of Richfood's wholesale volume) that the company was targeting for takeover. Its acquisition was effected through a prepackaged voluntary reorganization of the chain under Chapter 11 of the U.S. Bankruptcy Code.

"Farm Fresh was a customer of ours for some time," Stokely said. "We worked with them over the years to survive and thrive in the face of an extremely competitive market and a leveraged position. We thought they might someday sell the business, so we kept an eye on it and were prepared to step in."

Stokely said the 40-year-old chain had a lot going for it -- a good name, a 35% share of the Hampton Roads (Va.) market and "good people at the store level."

But Farm Fresh, an upscale operator in a market crowded with everyday-low-price operators including Food Lion, Wal-Mart Supercenters and Super Kmart, was losing its appeal. Its loyal following of customers was drifting away to newer stores, Stokely said. Farm Fresh's high debt restricted its flexibility and limited the amount of remodels it could perform.

"They were not committing capital to stores to keep them competitive," Stokely said. "They were not bad, but not updated like they needed to be."

In addition, real-estate developers tended to overlook the chain when offering prime store locations because of its weak capital structure.

With the merger complete, Richfood intends to spruce up the chain with an $80 million facelift over the next three years -- approximately one renovation every four weeks.

"Farm Fresh is as good as any average grocery store in the country," he said. "We want it to be better."

Customer service at Farm Fresh was another area that needed to be improved, internal research found. Surveys of customers identified service as a crucial aspect of the stores that needed to be improved.

"The customers said 'You have to do a better job of customer service,' " Stokely said. "When surveyed, the associates agreed with that. So it was unanimous. And you know, getting anybody to admit they have a problem is 90% of solving it.

"We have plenty of employees there to help the customer," Stokely said. "But we need to create a culture of customer service. We need our employees to make eye contact, to say 'thank-you,' and to show shoppers where the product is.

"Just saying 'hello' is very important, and it delivers a high impact at a low cost."

Before the Farm Fresh deal closed, company executives gathered all 5,000 employees at one place at one time for a two-hour motivational rally.

"We wanted to explain that this is a new day, a new beginning of growth. But we told them with opportunity comes obligation."

Stokely said Richfood wants Farm Fresh to be synonymous with its signature departments -- produce and meat -- while delivering values throughout the store.

He believes Farm Fresh's former customers will abandon the competitors in the Tidewater region -- including Harris Teeter, Hannaford Bros., Super Fresh, Winn-Dixie and a handful of independents, once the stores are refurbished and customer-service levels are improved.

"Farm Fresh was their hometown store," Stokely recalled from Richfood's customer research. The rest were perceived as "interlopers."

Stokely said Richfood will also convert Farm Fresh's 12 experimental Rack n' Sack price-impact warehouse stores to the conventional format, to bolster Farm Fresh's position as an upscale operator.

Farm Fresh ads are being overhauled as well. Once cluttered with products -- a common tactic to generate co-op dollars from manufacturers -- the ads will now read more like "invitations" to customers to visit Farm Fresh, with a message that emphasizes customer service and a few price promotions designed to generate excitement.

Heading the Farm Fresh chain is president Ronald E. Dennis, a food-industry veteran who joined Richfood last October after the acquisition was announced. Dennis was most recently president of Kash n' Karry Food Stores, the Tampa, Fla.-based Food Lion subsidiary. Prior to that post he was vice president of the Florida division of Albertson's, Boise, Idaho. On the wholesale front, Richfood is trying to increase volume in several ways. First, it aims to sell its 1,400 existing retail store customers more products, and more kinds of products. Currently, Richfood is the primary distributor for most of its customers, supplying 50% to 60% of their total purchasing requirements.

However, "We want to put more of their products on our trucks," Stokely explained. Richfood supplies grocery, dairy, frozens, produce, meats, deli, bakery and nonfood items. (About the only line Richfood does not supply is pharmaceuticals -- those lines are supplied through an alliance with Wakefern Food Corp., Elizabeth, N.J.)

Stokely said wholesale volume will also grow through the expansion of its current retail customers, who have announced 30 new store openings in the next 12 months.

With a handful of wholesale acquisitions in the 1990s (including that of Super Rite Foods, with $1.5 billion in sales, completed in 1996), Richfood is committed to being an "active participant" in the consolidation trend at the wholesale level, and to offering the benefits of improved efficiency to its retail customers.

"With inflation so low, we have to focus on costs," Stokely said. "Low costs can be a powerful weapon, because we can move product from Point A to Point B at a cost that creates a competitive advantage for our retail customers.

"The wholesaler's role is to drive logistics savings through the entire system," he added.

Richfood is also integrating back-office functions, such as real estate, for all three retail subsidiaries into one unit, creating further cost savings and reducing redundant functions.

The wholesaler is also seeking new customers. In addition to its corporate stores, Richfood services a handful of regional chains and independent operators, including Ukrop's Super Markets, Richmond, Va.; Genuardi's Family Markets, Norristown, Pa.; Redner's Markets, Baldon, Pa.; Camellia Food Stores, Norfolk, Va.; several IGA licensees and other independents. The company's three distribution centers -- located in Richmond, Va.; Philadelphia; and Harrisburg, Pa. -- have a total of 100 million cubic feet of warehouse capacity, with the room to increase business without adding incremental warehouse space, Stokely said.

Richfood's largest customer, Giant Food Stores, Carlisle, Pa. (a part of the Dutch retailer Ahold), accounts for about 18% of Richfood's volume.

And although Ahold announced plans last month to acquire the self-supplying Giant Food chain in Landover, Md., it remains to be seen whether that will mean a switch in wholesalers for Giant of Carlisle.

"The announcement of Ahold's intent to purchase Giant Food has raised some questions regarding the potential impact the purchase may have on Richfood -- since Giant self-distributes products to its retail stores," said Wheat First Union analyst Omohundro. He noted that the supply contract between Richfood and Ahold is not due to expire until December 1999. However, he said, it is unlikely that Richfood would lose this chunk of its business because Giant of Landover may not have the excess distribution capacity to service Giant of Carlisle.

"Richfood has had a long-term successful relationship with Ahold, which we think continues to be in good shape," Omohundro said. Richfood has been able to increase its private-label brands and penetration. The program offers about 2,500 stockkeeping units, primarily under two names: the flagship Richfood brand and the lower-priced Value Choice brand. (A third label, Econ, is being phased out.) Sales penetration is about 14% for its Pennsylvania division customers and 22% for its Virginia division customers.

The 1990s: A Decade of Growth

Richfood has expanded its business in the 1990s through a number of retail and wholesale acquisitions.

Year Completed Acquisition

Waynesboro (Va.) division of Fleming

1991 Cos., Oklahoma City (wholesale and retail operations).

1993 Civilian division of B. Green & Co., Owings Mills, Md. (wholesale operation).

Rotelle (frozen-food distributor, which was shut down in 1998 after Richfood transferred frozens operations into its

1995 Harrisburg, Pa., warehouse). Camellia Food Stores (wholesale inventory, dairy operation and lease for truck fleet).

Super Rite Foods (whole sale

1996 distributor and operator of

Metro and Basics stores).

1997 Norristown Wholesale (perishables operation).

Farm Fresh (45 retail stores).

1998 Dart Group Corp. (includes 37

Shoppers Food Warehouse stores).