3RD GENERATION SURVIVOR

MARK HAMSTRA

When Nicholas D'Agostino Sr. and his brother Pasquale opened their first food store together on Manhattan's Upper East Side in 1932, it provided a level of service unmatched by other New York establishments.

Seventy-five years later, Nick D'Agostino Sr.'s grandson, Nick D'Agostino III, is still striving to achieve that same distinction in the 20-store chain of supermarkets he owns with his father.

“That was the first store where there were so many skills in one place,” Nick III said in an interview with SN, describing the original D'Agostino's location on 83rd Street and Lexington Avenue. The company now has 16 stores in Manhattan, one in Brooklyn and three in suburban Westchester County.

The original D'Agostino store was a bit of an anomaly — offering baked goods and groceries under one roof during a time when they were generally handled by specialists — and it soon added even more amenities, as Nick Sr. augmented the store's offerings with his skills as a butcher.

Service and the range of quality product offerings still distinguish D'Agostino's Supermarkets from its competitors. Despite working with spaces that are often smaller than a suburban drug store, D'Agostino's has long strived to blend the high-caliber craftsmanship of a neighborhood butcher and baker with a strong produce offering and a range of premium grocery items to create a unique experience for the consumer.

“This was always a service-oriented company,” Nick D'Agostino III said. “We're actually trying to get back into that mode now — we're getting back to what we used to do, which is to provide more services.”

The company is currently revamping its Internet presence, expanding its catering capabilities and enhancing the in-store experience, among other endeavors, as it embarks on the next quarter century of competition in one of the country's most rough-and-tumble retail markets.

D'Agostino's has long faced a range of rival food retailers, from local bodegas to traditional chains like Associated and C-Town and more upscale operators like Food Emporium and Citarella, and it has done so in an area where operating costs can far exceed what they are in other markets. Although it has not had to go head-to-head against Wal-Mart supercenters like many of its counterparts elsewhere in the country, D'Agostino's has had to contend with other nontraditional competition, including Internet grocer FreshDirect, a local New York phenomenon whose fleet of orange-and-green trucks barreled into D'Agostino's long-held home-delivery turf. D'Agostino's has also recently had to contend with competition from Whole Foods Market, the high-end natural/organic specialist that now has three large, high-volume stores in Manhattan, with more on the way, tapping into the upscale consumer base that has been at the core of D'Agostino's success.

D'Agostino's is just now coming to grips with its new competitors as its seeks to build a solid base to grow its $200 million in annual sales and capture a bigger portion of Manhattan's estimated $2.1 billion grocery business.

“Recently the two biggest changes have been FreshDirect and Whole Foods, and they have been two of the biggest challenges,” D'Agostino said. “FreshDirect is just a different technology, and it has taken us awhile to learn how to deal with them. They stepped right into our territory, which was home delivery, and we had been doing that business for a very long time. I don't think we did a very good job of reacting to them — so many other Web-based services had been a quick fire and then burned out, but FreshDirect hasn't burned out.”

He said he is taking a similar tack to fight back against FreshDirect that video-rental chain Blockbuster has taken in recent advertisements promoting its stores as a better alternative to Netflix, the online DVD rental service. In the Blockbuster TV ads, consumers are shown to enjoy the convenience of having a store nearby to satisfy spur-of-the-moment movie cravings, while they can also avail themselves of the Blockbuster mail-in service.

“We're telling people they can get service in the stores as well,” D'Agostino said. “I think we have that advantage. If FreshDirect gets something wrong in your order, all that happens is you get a credit for next time, and you are stuck with not being able to finish your recipe. With our stores, if anything goes wrong with your order, we're right there to help you.”

The company has been in the business of home delivery since its early days when many of the chain's first customers were the maids and other domestic workers who prepared meals and shopped for New York's wealthy denizens. In fact, D'Agostino's was one of the first food stores to offer a form of online shopping, through the early Internet service called Prodigy, touted as the first consumer-friendly dial-up Internet technology, and a telephone service that allowed customers to call D'Agostino's and place an order for home delivery called TeleDag.

D'Agostino's is currently evaluating its Internet service offering, which is provided by GSN of Minneapolis.

“We are looking at what the offer will be on the site — what people will get if they join now,” D'Agostino said, noting that the online business is profitable. Home delivery accounts for 10% of sales at D'Agostino's, the company said.

D'Agostino doesn't pull any punches when discussing the incursion of his other new rival, Whole Foods.

“Whole Foods is a little more insidious,” he said. “People assume that because they are going to Whole Foods, everything is good for you, but that is not always correct. For example, sugar can be organic, but in certain quantities, it may not be good for you.”

He also said the organic/natural halo that Whole Foods wears seems to extend into its labor practices, which he criticized as inferior to those of his own company.

“People think that because they have this organic image, they are treating their employees like gold,” he said. “But just because a 19- or 20-year-old doesn't complain about their benefits, doesn't mean they are correct. What happens when they are 60 years old and there's no pension, or the health care isn't what they need?”

D'Agostino's, he said, has long enjoyed a good working relationship with the United Food and Commercial Workers local and takes pride in providing a secure working environment for its employees.

“Those are the things that are important to us,” he said.

Family Partnership

The company began as a partnership between brothers, and has always been sort of an extended family. Nick D'Agostino Jr., who remains chairman but no longer is as involved as his son in day-to-day operations, began working for his father's company in 1960 and became chief executive officer in 1982. Nick D'Agostino Sr. died in 1996.

Nick D'Agostino Jr. was at the helm of the company for much of its growth and has been involved in a wide range of industry activities, including serving as chairman of Food Marketing Institute the year he became CEO.

Nick D'Agostino III joined the company full time in 1983, and moved up through various positions until he was named president and chief operating officer in 2005.

He also had worked in the stores as a teenager, and even hosted childhood birthday parties in the basements of the stores.

“Growing up, I always wanted to do this,” he said, although at one point he reportedly considered entering the military before his father asked him to join the company. At the time, Nick D'Agostino Jr.'s brother had just left the company, and Nick D'Agostino III said his father needed help running the business.

“Because of my uncle leaving and my father being there alone, having me here made it at least look like there was a plan for succession,” he said. “Everyone in the company could feel a little more comfortable knowing there was a plan in place.”

Nick D'Agostino III is the only member of the third generation in his immediate family left after the departure of his two brothers, although he has three cousins who still work for the company. One of his brothers, Walter, left about five years ago after the company failed in a bid to acquire Kings Super Markets, the upscale New Jersey chain that at the time was owned by London-based Marks & Spencer. Walter D'Agostino had been slated to run that business. Their other brother, David, left about a year ago to pursue other interests.

None of Nick D'Agostino III's four children, the oldest of whom is a film major in college, are working in the family supermarket business yet.

The family ties that have long bonded D'Agostino's management extend beyond blood, however. Many of the employees who work for the company are second and third generation themselves, with tenures counted in decades.

“At one time people would come right from Italy, and show up at our warehouse in the Bronx, and they knew they could get a job cutting meat,” D'Agostino said. “I know of at least half a dozen people that couldn't speak English that were hired by my father. As with any small business, you hire the people you know — your friends and your relatives.”

As D'Agostino's has grown through the years — it was up to eight stores by 1960 and has operated as many as 25 — the company has tried to continue to imbue a family-owned-and-operated culture into the business.

“With some of the people who have been here two and three generations, it certainly feels like family,” D'Agostino said.

One such employee, John Vasapoli, director of merchandising and produce, said he recalls Nick D'Agostino Sr., the chain's founder, as a very involved owner who visited his stores daily.

“He would come around and say hello to everybody, whether you were a customer, worker or a supplier, and he always visited the stores,” Vasapoli said. “At the same time, he was firm, and he was very demanding about what he wanted.”

Leading Edge

Vasapoli, who began in the business in 1971 and has had stints running all of the chain's perishable departments, said D'Agostino's has always been among the first to adopt innovations.

“We had organics back in 1986, before they were even mainstream,” he said. The company continues to carry an extensive selection of organic and natural products — perishable, frozen and dry — highlighted by its “Earth Goods” shelf labeling.

D'Agostino's was also an early adopter of bar-code scanning, when its store at Broadway and 74th Street launched the service in 1980.

“It was like entering the Space Age,” Vasapoli recalled.

He pointed out that the stores always sought to incorporate the most advanced thinking in their merchandising strategies, and often sent department directors on field trips to gather intelligence on other leading supermarket operators.

“We always went out and checked out the competition, either here or somewhere else in the country,” he said. “Whenever we heard about something that was happening, there was no hesitation to put us on a plane and send us out to see what was going on. A couple of times we went to Europe to do some food research. We went to see that European flair and how things were merchandised out there.”

For example, he said, the chain picked up the idea of displaying unrefrigerated produce on slanted wooden racks, something that was done in Europe but not widely practiced in the U.S. at the time.

He also said the company sent managers out to see Eatzi's, the prepared-foods specialty store in Dallas that opened in the late 1990s, and to other innovative merchants, such as Andronico's in Northern California.

In most locations, D'Agostino's operates in a tightly configured space as small at 5,000 square feet, offering an edited assortment but allowing customers to do a full grocery shop with everything from laundry detergent to pots and pans. Its stores — carrying the tag line “Supermarkets of Distinction” — still strive for a European ambiance and are accented with the red, green and white colors of the Italian flag.

Burt P. Flickinger III, managing director of Strategic Resource Group, New York, said D'Agostino's also has been at the forefront of many local legislative efforts and has been a leader in the operation of clean, well-merchandised stores in a market where the competition often lagged in such areas.

“They've obviously been one of the great New York grocers since the depths of the Depression,” he said. “They opened in the most challenging of times, and they contributed a lot to the quality of operations in New York, which were not that good until the D'Agostino family raised the standard in meat and deli and fresh products.

“Nick Sr. and Nick Jr. and his sons have been very aggressive in growing the business, and some of the private-brand business they have done is among the best anywhere in the U.S.,” he said.

He pointed out, for example, that D'Agostino's carried the upscale President's Choice label, owned by Canadian retailer Loblaw Cos., long after other chains had stopped selling it.

Flickinger said his family, which operated a New York-based wholesaling company, and members of the D'Agostino family worked together pressing for legislative changes in New York such as allowing the sale of wine coolers in supermarkets. (Grocery stores are still barred from selling wine in New York state.)

Battling Rent Costs

One of the keys to the success of D'Agostino's, Flickinger said, has been its mastery of the New York real estate market.

“Even as rents have skyrocketed as everything from banks to chain drug stores have bid up the prices of the leases, the D'Agostino family stayed strong and have grown the business, and they probably still have many opportunities ahead to expand into the suburbs,” Flickinger said.

“One of the things D'Agostino's has done is that it has held onto its leases over the years,” he added, while others have abandoned many of their sites to other retail uses, such as banks, chain drug stores, clothing stores and restaurants.

Although D'Agostino's has suffered hard blows in its battles with FreshDirect and Whole Foods, Flickinger said he sees the chain pulling itself up off the mat as other weaker players bow out of the market and D'Agostino's retains its strong neighborhood locations.

“There's been so much grocery store contraction with the competitive entry of FreshDirect, which knocked everybody back 2% to 3% in sales in the first half of this decade,” he said. “Now there are very few new store openings, with the exception of Whole Foods and Trader Joe's, and as leases expire and get converted to some other format, D'Agostino's will be able to gain more sales and rebuild market share. There is significant contraction in the supermarket sector expected for the New York market for the second half of this decade and into the next decade.”

D'Agostino said the high cost of rent makes it difficult for his chain to expand too fast in the city, and for now its three stores in Westchester County are all the suburban stores he has planned.

“The suburbs are an opportunity, but it's not what we're best at — we're best at operating urban stores,” he said. “We're still looking for new sites in New York City, but it's a challenge, with the high price of real estate. Developers and landlords have to realize that we provide an amenity, and supermarkets can't afford to pay what a bank can pay.”

A year ago when D'Agostino closed its store near Manhattan's Union Square — just three blocks from a new Whole Foods and not far from where Trader Joe's opened its first New York City store — the asking price to rent the 6,000-square-foot space reportedly had shot up to $135 per square foot.

In its expansion to the suburbs, D'Agostino's has sought to give the upscale shoppers of Westchester a taste of the city. In fact, its outdoor ad campaign along the Metro North railroad line used by Westchester commuters was themed, “Bringing the Best of New York to You.”

It has augmented the stores with amenities its urban stores cannot accommodate, however, such as a kitchen for demonstrations and cooking lessons at its Rye Brook, N.Y., location, formerly an Edwards supermarket. Its latest Westchester store is a converted Foodtown in Chappaqua, N.Y., that has recently been carpeted.

Farewell to Kings

D'Agostino's has dabbled in other businesses through the years, operating a drug store at one point and a plant in Texas that supplied processed meats for food-service institutions.

Its biggest effort at expansion, however, fell through when in 2002 it was unsuccessful in acquiring Kings. D'Agostino said he has admired the upscale merchandising Kings offers, and analysts indicated at the time that it would have been a good fit — doubling D'Agostino's size in an adjacent market with a concept similar to its own.

The company had finalized a deal to acquire Kings for $160 million and had reportedly even begun planning an ad campaign touting the merger, but failed to come through with the financing it needed.

“What we found out is that making acquisitions is a very different business from running supermarkets,” D'Agostino said. “What we do best is cut meat, buy food and put it on shelves. We have to educate ourselves on high finance.”

Kings, which also attracted interest from the parent company of D'Agostino's rival Gristede's, was sold last year to a private equity group.

D'Agostino's has also gone through several changes in its wholesale supply operations through the years. In the early days, the family simply picked up products itself from wholesalers and producers, and brought them to the stores. It eventually opened its own warehouse in the Bronx and was a self-distributing chain for many years before closing the facility in the mid-'70s.

It was a longtime member of the Twin County Grocers Cooperative, which also supplied the local Foodtown chain, and was instrumental in getting that co-op back on its feet after a financial scandal and bankruptcy filing in the late 1990s, according to Flickinger.

D'Agostino later became a customer of Supervalu, Minneapolis. It canceled its supply pact with Supervalu in 2004 and switched to C&S Wholesale Grocers, Keene, N.H.

“The [Supervalu] contract was up, so we decided to look around and see what was best,” D'Agostino said. “The decision was also partially influenced by Supervalu's decision to leave New England — we were certainly the last stop for Supervalu, and C&S was getting heavier into this area.”

Reaching Consumers

One of the major challenges D'Agostino's now faces, D'Agostino said, is getting its message out to consumers.

The chain seeks to battle the ever-present challenge of high-price perception in New York City through a combination of everyday low prices — signs tout “Smart Pricing” on some 500 grocery items — and the use of S&H Greenpoints, the modern electronic version of the former Greenstamps program in which consumers earn rewards based on purchases.

The “D'Ag Rewards” card also holds the key to the next generation of marketing for the chain, which has long been lauded for its traditional broadcast and print advertising campaigns.

Facing rising costs for such campaigns and a smaller sales volume to fund them, D'Agostino is taking a closer look at the Internet, direct mail and involvement in community activities to get its message across.

“You can't just drop a circular — that doesn't work in New York City,” he said.

The company has long been involved in charitable activities in the community, donating nearly 300,000 pounds of food to City Harvest last year, and supporting other charities such as the Juvenile Diabetes Foundation and Meals on Wheels. The D'Agostino family has also been involved in several local, national and international Catholic charities.

It is seeking to expand its community presence, however, through such programs as catering a New York City Opera event in September that seeks to expose people to that form of entertainment. The chain has hosted the program for the past two years.

“We are looking at events we can support — the kinds of things where we can get our name out there,” D'Agostino said.

Part of its effort to communicate with customers is also happening at store level, where D'Agostino is seeking to enhance the in-store experience.

“What's changed in the industry is that going to the mall is considered like a vacation and going to the supermarket is a chore,” he said, noting that customers used to line up for hours to be among the first to shop at a new D'Agostino's. “That's the kind of atmosphere we want to have in our stores — we want D'Agostino's to be a place where people want to spend time.”

He recalled that early in the chain's development, his father and grandfather and the other family members involved in the business went to all the stores every day, and people who worked in the stores had a genuine bond with the local customers. Store managers knew when a local family had a baby, for example, and would check on them to make sure they had everything they needed. Sometimes managers would open the doors after-hours to accommodate a local shopper when one came knocking.

To maintain that high level service, D'Agostino said he starts by trying to set a good example himself and carefully hiring the right people to work in the stores.

In short, he is battling the competition by making nice with his customers.

“Fighting with customers is not a pleasant thing — if you can please customers, it's a lot more fun,” he said.

His pointed out the dedication of his employees after the 9/11 terrorist attacks, when many D'Agostino's workers found a way to get to the stores and keep them open for customers even though some competitors were closed.

Another example, he said, is on Halloween, when all employees wear costumes to work.

“New York City's a tough town,” he said. “You have to do something to make people smile.”

DEEP GROCERY ROOTS

The history of D'Agostino's involvement in food retailing actually extends back longer than 75 years, although it was in 1932 that Nicholas D'Agostino Sr. and his brother Pasquale incorporated the business as D'Agostino Brothers and opened their first store together on Manhattan's Upper East Side.

“They bought that store from my great-grandfather, but my family had been in the grocery business before that,” explained Nick D'Agostino III, the grandson of the founder. “Even my grandfather and my great-uncle before that had been food peddlers in the streets.”

His grandfather trained as a butcher with the local German butchers that dominated the New York City meat scene at the time, and was later able to parlay that expertise into a strong meat offering at the D'Agostino stores.

D'Agostino said from the stories he's heard about the early stores, he believes they were largely full-service locations, where the employees pulled items off the shelves and bagged them for the customers. Home delivery has always been a significant part of the business, and the chain long served as destination for the domestic help of Manhattan's wealthiest residents.

“We still have quite a strong cadre of people like that,” said D'Agostino. “We serve a lot of people near the U.N., some of whom have their own chefs who will stop by the store.”

Today such shoppers represent a much smaller percentage of the chain's customer base, however, and the company has had to adapt its marketing to target the end users of its products.

Another major change that has impacted D'Agostino's stores has been the increase in dual-income families.

“It used to be that lots of mothers were home and did their shopping,” D'Agostino said. “Families were a big part of our business — we used to have a store that served the families in Stuyvesant Town [a large residential complex in Manhattan], but we don't have that store any more.”

The company has grown steadily over the years, as opportunities for good locations arose, and had about 16 locations when D'Agostino joined his father, Nick D'Agostino Jr., in the business in 1983. It also expanded into suburban Westchester County, where it has three locations, and to Brooklyn, where it still operates one store.

The company developed a knack for cramming a lot of SKUs into the tight urban confines of New York City's retail space.

“You couldn't just build a store the way you wanted to,” Nick D'Agostino III said. “You had to kind of fit it into whatever space you could get.”
— M.H.