Growth Engine: Associated Wholesale Grocers

ELLIOT ZWIEBACH

Associated Wholesale Grocers has quietly become the nation's second-largest member-owned cooperative, primarily through a series of strategic acquisitions.

Jerry Garland

And it intends to continue to grow very deliberately.

“To meet our objectives, we believe our best opportunities are to look first at contiguous areas that we can reach from our current facilities and build market-share before investing in concrete and racking,” Jerry Garland, president and chief executive officer, told SN.

“Our track record has shown that the right acquisitions or mergers can be accretive to both the existing membership as well as potential new members because economies of scale do work and produce stronger distribution operations as well as stronger members at retail.”

From its base in Kansas City, Kan., AWG has doubled its volume over the last decade to an estimated $7 billion-plus, expanding north to Nebraska, south to Texas, west to New Mexico and east to Florida. The only larger member-owned cooperative is Wakefern Food Corp., Keasbey, N.J., with $10.6 billion in annual volume.

AWG's goal is to continue to grow contiguously, Garland told SN, and talks with other companies are going on all the time.

“Are we on the cusp of anything new? No, we're not,” he said. “But whether the talks are active or passive and whether we initiate them or someone comes to talk to us, there's always talk about ‘what if’ scenarios.

“Sometimes we look at different areas to see what synergies exist and how healthy the retailers in that area are and how likely they are to grow. But these deals always take anywhere from six months to two years, and some never happen at all.”

Its most recent add-on was Affiliated Foods Southwest, Little Rock, Ark., which agreed to sell much of its business to AWG in May when the co-op filed for bankruptcy. AWG added approximately 400 stores generating an estimated $350 million in sales across a six-state area.

The bulk of those customers are in Arkansas, Louisiana and Texas — areas AWG already had well covered.

“AWG provides the best opportunity for independent retailers to grow the business and meet the needs of their customers,” Garland said at the time. “AWG's resources will be focused on providing the retailers with a smooth transition, with little disruption in product availability.”

Retail Experience

Garland, who became AWG's leader in March, has been with the company for 18 years, following a 24-year career with Kroger Co. Asked how his retail experience has helped with his years as a wholesaler, Garland replied, “Kroger was a great training ground. As a wholesaler, you can answer most of your own questions by asking yourself, ‘How will this work in the store?’

“I think every wholesale executive has to know that the register rings at the store.

“At AWG our culture is predicated on the premise that if the retailer is not successful, AWG cannot be successful. The best measure of a wholesaler, to me, is whether your retail members are building new stores and reinvesting in remodels — which they do only if they are profitable.”

Over the last 12 months AWG members have added more than half a million square feet of new retail space, Garland noted.

AWG has seen its business grow in the downturn, especially sales of its Best Choice and Always Save labels.

Garland said the weakened economy has helped AWG add new customers at a quicker pace. “As the economy has worsened, we've actually gained customers because cost of goods becomes even more important.

“Retailers typically begin to get interested in new sources of supply when they're financially challenged,” he explained. “When the business isn't being challenged, they maintain existing wholesale relationships. But when things are not going well, that's when they tend to look elsewhere.”

Garland said the economy has prompted AWG to fall back on one of its historic strengths — cost controls. “Main Street America continues to struggle as the job picture has worsened. Combine that with an overall deflationary trend in grocery prices of about 2%, and the focus in the grocery business falls back on expense control in a tougher sales environment.

“Our customers seem to be adapting very well to this tighter economy by staying focused on the basics of the business.”

Asked if the company hopes someday to become a national operation, Garland replied, “Our goal is to be large enough to leverage our size for the benefit of our retailers, yet small enough to continue to answer our own phones.”

He is convinced the member-owned cooperative model works best for retailers “because it is much simpler to grow and operate since our owners and our customers are the same people,” Garland said.

AWG serves nearly 2,400 retail stores across 23 states out of eight distribution centers. Sales this year will grow 1% to 3%, he said, “though as we go through the year that rate of growth will be harder to achieve because of deflation. But we have increased promotional activity and other efforts to help our retailers attract more business.”

Most of its promotional efforts have been directed toward its two private-label lines — Best Choice and, primarily, Always Save — “because people are looking for value, and we're holding the line on cost increases of the Always Save brand,” Garland said.

In addition, with meat sales strong, AWG has been increasing its promotions and special programs in that department, he added.

Adding Volume

According to several retail members, AWG has been able to strengthen its leverage with suppliers and lower the cost of goods to its member companies as it's gotten larger.

“The company has done a terrific job integrating each acquisition into the general operations, and all that additional volume has helped keep SG&A costs down for the members and helped us lower our cost of product,” Roger Collins, chairman and CEO of Harps Food Stores, Springfield, Ark., and a 25-year AWG member, pointed out.

“As a cooperative, any money that comes down to the bottom line means more for the members, so the increases in sales and rebates have been very well received.

“And as an employee-owned company, Harps is a real advocate of sharing in the success of a company, and AWG has done a really good job of helping to bring costs down.”

Jeff Reasor, president and CEO of Reasor's, a 15-store chain based in Tahlequah, Okla., that switched from Fleming to AWG in 1996, said the benefits of the cooperative's growth have been “pretty simple — a nuts-and-bolts kind of thing.”

AWG operates six full-line grocery distribution centers and two general-merchandise warehouses.

“As AWG has grown, its increased buying power has enabled a lot of folks to take advantage of better prices. That means the company is more attractive to new members. And for existing members, it's opened doors to vendors who give us more credibility and make more well-defined, less ambiguous promotional opportunities available that were previously available only to larger companies.”

Jimmie Gipson, chairman and CEO of Houchens Industries, Bowling Green, Ky., and an AWG member for about six years, told SN he prefers being a member of a cooperative.

“A well-run co-op is the best thing for an independent operator because you get a better cost of product,” he said. “It seems today that most voluntary wholesalers have more overhead, whereas co-ops are run by retailers who are more focused on getting the best cost of goods they can.”

According to Garland, the weak economy continues to pose challenges to the business. “Driving sales while controlling expenses and delivering higher quality are constant objectives,” he explained.

“What no one could have anticipated was the continuing uncertainty in the overall economy and the possible political responses to various issues facing our country today, including health care and the possibility of losing LIFO for inventory accounting.

“As business representatives, we owe it to our industry to be involved in these debates and represent those values that we believe made our country great.”

Looking back, growth at AWG has been consistent for nearly a decade.

“Our record over the last few years has been remarkable,” Garland said — with a particularly outstanding year in fiscal 2008, when sales rose 20%, patronage dividends jumped nearly 24% and rebates were up more than 18%.

“These numbers are the result of retailers who have a strong desire to build their businesses, combined with AWG associates who are motivated to serve those retailers,” he pointed out.

“What we're seeing is the benefit of trust between the parties that results from transparency in our programs and faith in each other's competency to complete the tasks.

“Showing prospective members the same financial reports we show our board of directors and detailing all our sources of income and expenses is a powerful marketing tool.”

Although some cooperatives have non-member customers, AWG does not.

“We did create a non-member program to deal with the issues of ‘up-front money’ necessary to join the co-op and the lump sums others paid for the wholesale business, but virtually no one has ever used it because, after careful analysis, most retailers like the idea of keeping the profits generated by their own business,” Garland explained. “In fact, most recoup their entire investment in AWG in less than a year.”

Over the last six years AWG has seen members add 930 new stores with sales totaling more than $4 billion, Garland said.

Corporate Stores

Besides operating 75 corporate stores in Oklahoma under the Homeland banner — a result of acquiring the wholesale business and, subsequently, the stores of that onetime independent chain — AWG also licenses 23 limited-assortment stores called ALPS — Always Low Price Stores — most of which are located in southern Missouri. Although the number of ALPS units has remained fairly static for several years, “those stores are doing well because of the economy,” Garland said.

On the distribution side of the business, AWG is continuing to implement new technologies to drive out costs and improve productivity, Garland said. “Specifically, we are in the midst of installing a new warehouse management system across the company that has proven beneficial in tracking product movement throughout our facilities,” he explained.

Over the last few years the company has also installed a voice-activated picking system and consolidated all grocery procurement through the main office.

AWG operates six full-line grocery distribution centers in Kansas City, Kan.; Springfield, Mo.; Oklahoma City; Memphis and Nashville, Tenn.; and Fort Worth, Texas — plus two general-merchandise facilities in Fort Scott, Kan., and Memphis.

All are operating above the industry average in volume, Garland said, “and all are capable of handling more business.”

The Fort Worth facility lost an estimated $600 million worth of business last September when Minyard Food Stores, Coppell, Texas, sold 37 of its 58 stores to Grocers Supply Co., a Houston-based wholesaler, “but the majority of the business that we lost has been replaced by new business,” Garland said.

He said he sees a positive future for independent operators.

“The independent operator is community-based and is more flexible to meet consumer demands,” he explained. “So today I am even more optimistic than I was a few months ago that the independent will not only survive but will also continue to thrive by listening to and responding to the needs of his customers.

“Independent retailers have shown they can compete on every level — pricing, promotion, variety, presentation and especially customer service.”

$7B
AWG sales have doubled over the last decade.