Affiliated Southwest in Bankruptcy; AWG Buys Assets

ELLIOT ZWIEBACH

KANSAS CITY, Kan. — Associated Wholesale Grocers here began supplying most of the remaining members of Affiliated Foods Southwest last week after entering into an agreement with the Little Rock, Ark.-based member-owned cooperative to purchase certain assets from it, primarily the inventory.

The agreement was expected to be approved by the U.S. Bankruptcy Court in Little Rock late last week after Affiliated filed for bankruptcy protection under Chapter 11 last Tuesday.

Affiliated's customer base encompassed approximately 400 stores in a six-state area generating $730 million in sales as of last June, but those numbers had dwindled considerably by last week, with volume and customer counts down by about half, Al Miller, an Affiliated spokesman, told SN.

“As our credit collapsed and our warehouse supplies ran down, we advised our members to find secondary sources of supply, and within the last couple of weeks, as service levels at the distribution center fell to 68%, we suggested they make those sources primary,” he explained.

Affiliated's primary distribution areas included Arkansas, Louisiana and Texas, plus 33 corporate stores in Mississippi, Tennessee and Oklahoma, “so given the logistics — with AWG operating warehouses in Memphis and Nashville; Kansas City; Springfield, Mo.; and Oklahoma City — they were the logical company for our entire demographic to shift to,” Miller said.

However, some members were reportedly in discussions with Minneapolis-based Supervalu and with Grocers Supply Co., Houston, he noted.

“AWG provides the best opportunity for independent retailers throughout Arkansas, Texas and Louisiana to grow their business and meet the needs of their customers,” said Jerry Garland, AWG president and chief executive officer. “AWG's resources will be focused on providing the retailers with a smooth transition, with little disruption in product availability.”

Industry observers said the deal will add approximately $350 million to AWG's sales base of $7 billion.

At its peak two years ago Affiliated had approximately 2,700 employees, but as its volume shrunk, the warehouse staff had fallen to 900 at the end of its fiscal year last June and was down to 530 earlier this week. Concurrent with the bankruptcy filing, 225 of those employees were released, Miller said.

Neither Affiliated's distribution center nor any of its corporate stores will be among the assets AWG is acquiring, Miller said. Of the 33 stores, which operated under the banners Harvest Food, Save Mart and Piggly Wiggly, Affiliated has sold 21 and closed four since late 2008, with eight still on the block, he noted.

Miller said it was Affiliated's loans to members that sealed the company's fate.

“Unlike most other cooperatives, one of the advantages of this company over the years was that we afforded members the opportunity for financing, which we felt gave them a competitive advantage over other independents,” he explained.

“We would provide the money for them to add new stores or expand and then sell those loans to a lending institution and recover the capital. But when the banks tightened their loan policies earlier this year, they pulled the loan lines for the capital we needed to pay for inventory to support our stores.

“With inventories reduced, we advised our members seven weeks ago to find secondary sources of supply and then, in the past week, advised them to make those secondary suppliers permanent.”

As previously reported in SN, Affiliated began overhauling management in February when it brought in David Hendrix, a member retailer, as chairman to succeed John Mills, who had served as chairman, president and CEO since 2004.

Mills was let go in mid-March and Randy Arceneaux, a former Fleming executive who had joined Affiliated six years ago and was chief operating officer, added the title of president.

The company also began reviewing policies to become more efficient, Miller said. It was able to eliminate 57 jobs earlier this year by streamlining its operations and combining responsibilities.