Strength in Numbers

MARK HAMSTRA

Jim Denges is pretty optimistic these days.

The chief executive officer of Central Grocers, one of the nation's largest cooperative wholesalers, just saw his company complete the best year in its history, and he's preparing to significantly expand his business in the year ahead through the assimilation of most of the former members of a local competitor, Certified Grocers Midwest.

“Business has been very strong,” he told SN last week. “Even without the new membership, business has been very good.”

As Denges prepares to transition his business into a brand-new 970,000-square-foot distribution center in Joliet, Ill., next April, he has good reason to be confident. The cooperative wholesalers — or as many prefer to call themselves, retailer-owned distributors — have been on a roll.

According to Washington-based National Cooperative Bank, nearly all of the nation's largest grocery co-ops had strong sales and profit growth in the last year. Fourteen grocery wholesaling cooperatives are among the NCB Top 100 list of co-ops, plus two grocery private-label co-ops.

“The cooperative industry is doing very, very well, and their membership continues to be strong,” said Barry Silver, managing director, NCB. “It's very much a truism that the cooperatives that remain are stronger today than they were yesterday.”

Food-price inflation also has been benefiting the wholesalers' top lines, they said, while their members have seen their business grow as consumers have cut back on dining out and purchased more food at retail instead.

Lurking just beneath all the positive sentiment among the retail-owned distribution segment, however, is the possibility that weakening consumer spending will impact some of the independent food retailers that these wholesalers serve.

Most of the cooperative wholesalers themselves, by contrast, have very little debt and are expanding their businesses using the cash flow they generate from their operations.

“Many of the co-ops, regardless of their size, have really taken some large steps in the last five or six years to consolidate their membership and expand their warehouses, without a lot of debt,” said Silver. “There are some co-ops that have no debt at all.”

Several cooperatives have been expanding their membership through mergers and the addition of new customers from other wholesalers. Los Angeles-based Unified Grocers, for example, picked up 325 new members and boosted its annual volume to $4 billion through the 2007 acquisition of Associated Grocers of Seattle. That deal followed a string of previous acquisitions by Associated Wholesale Grocers of Kansas City, Kan.; Associated Grocers of Florida, Pompano Beach, Fla.; Associated Wholesalers Inc., Robesonia, Pa.; and a previous acquisition by Unified that consolidated Northern and Southern California.

The moves have given the surviving wholesalers additional volume to better leverage their fixed infrastructure costs and have made them competitive with the largest of the voluntary wholesalers.

Al Plamann, CEO of Unified, told SN last year that he was pushing for $15 million to $20 million in synergies from the acquisition of AG of Seattle.

In Salt Lake City, Associated Food Stores said an acquisition of a local wholesaler a year ago and the addition of about 100,000 square feet of perishables distribution space — about 55,000 square feet on two levels — have helped it expand its offering and appeal to a broader range of consumers, Dick King, vice president of vendor and trade relations at AFS, told SN.

In Illinois, Denges said Central would deliver to about 150-170 additional stores once its new DC in Joliet is complete, on top of the 230 stores that it currently serves from its smaller facility in Franklin Park, Ill.

“The new volume should help us in our operations and our efficiencies, so there are a lot of things going for us right now,” Denges said.

The deal to pick up the members of Certified, which is dissolving, also makes sense geographically — Denges estimates that 90% of the wholesaler's business will be within a 100-mile radius of the new Joliet DC.

Central plans to phase in the new warehouse, which includes 40,000 feet of office space for the company's new headquarters, department by department as Certified winds down its operations.

“Probably our biggest challenge is going to be adjusting to all that volume,” Denges said.

Central, with the addition of the new members from Certified, will have volume of nearly $2 billion. In the most recent fiscal year, which ended in August, Central repaid to its members more than $26 million in rebates — a record for the wholesaler.

Denges can look to New England for an example of another co-op that is leveraging a new distribution facility.

Associated Grocers of New England, based in Pembroke, N.H., opened a new warehouse two years ago and has seen its business expand since then, according to Mike Bourgoine, CEO. In June the company reported that revenues for 2007 totaled $315 million, an increase of $35 million, or 12.5%, over year-ago levels.

“We were picking up new customers consistently throughout the year,” Bourgoine told SN. “You couple that with the fact that we opened up the new distribution center two years ago, and it just all came together for us. We had a very good year. The new business made the facility more productive, and therefore more profitable.”

He said the company's new customers, primarily in Maine and Massachusetts, came from competing wholesalers in his region, including Associated Grocers of Maine, Bozzuto's and C&S Wholesale Grocers.

“We also had some nice organic growth from our existing customers,” Bourgoine added.

WARY OUTLOOK

Wholesalers said that despite the successes they have enjoyed in the past year, they remain concerned about the weak economy, and specifically how that will impact shoppers' spending habits in supermarkets in the year ahead. Although consumers seem to be patronizing supermarkets more than ever, they are also being more selective about what they buy, the wholesalers indicated.

“The most pressing concern for us right now is the economy slowing down and creating changes in consumer shopping habits,” Bourgoine said. “The biggest concern is that people will go to less expensive food outlets. We know that once people change their habits, it's hard to get them to change back later.

“We have been trying to help our members give their customers better deals, and give the customers more reasons to shop with us, so we've been more aggressive with our promotions and more creative with our promotions.”

Jay Campbell, CEO of Associated Grocers of Baton Rouge, La., said his co-op also had a successful fiscal year, which just ended in May, and despite the relatively strong economy in his region, he is a little concerned about consumer spending.

“With everything that's happened with the stock market and on Wall Street, people are a little frightened, and we are probably not immune from that,” he said.

But for the most part, Campbell said the area his company serves has been “somewhat insulated” from many of the problems that have plagued other local economies, such as the decline in the value of home prices, and that has helped keep the business on a positive arc.

“We are under a construction boom right now with new roads and highways because of some of the storms that we've had,” he said, noting that his company's same-store sales have continued to trend positive since the new fiscal year began on June 1.

In addition, the region's petrochemical industry has been strong, he added.

“There are a lot of people still working, but now that we are going into this Christmas season, we know that a lot of the retailers in the malls that sell clothing and jewelry and electronics and furniture are going to be hurting,” he said.

FUEL COSTS

The biggest concern for retailer-owned wholesalers, Campbell said, has been the cost of delivering to customers because of the high price of fuel during the past year.

“Even though diesel fuel costs have come down quite a bit in the last 30 to 40 days, we have experienced some very, very high costs in terms of making deliveries to stores,” he said.

Although many wholesalers incorporate a fuel surcharge to help them compensate for the rising costs, AG of Baton Rouge does not, Campbell pointed out.

“We have absorbed all of the fuel increases that have occurred since June of 2007,” he said. “We have not made any adjustments at all. It has been difficult economically to do that, but we have also created some significant efficiencies in our organization to be able to do it.”

Despite absorbing the fuel-cost increases, “profit remains very good” at AG of Baton Rouge, Campbell said.

“We didn't want to do anything additional to increase the cost of goods to our customers, because they were already getting an increase from inflation,” he said.

AG of Baton Rouge is fortunate that it doesn't deliver beyond a radius of about 275 miles, Campbell pointed out.

Bourgoine of AG New England said his company did enact a fuel surcharge as prices skyrocketed, but it has since been scaling the charges back.

“Up until recently, gas prices have been a real challenge for us, and we have been considerably over budget,” he said. “But obviously, the relief we're seeing now has been beneficial. Hopefully it will stay [lower] like this for a period of time and let us try to recoup some of the budget shortfalls that we experienced in the first eight or nine months of this year.”

Bourgoine said the company was considering trying to “lock in” at a lower rate for fuel to better fix its costs going forward.

“We haven't committed to it, but we're considering it,” he said. “Trying to catch the bottom is a very difficult thing, but even if we don't catch the bottom [in terms of the lowest fuel price], we think it might be a wise thing to do, especially as we go into the home heating oil season in the winter in the Northeast.”

Even though AG New England has a formula to calculate a fuel surcharge, the company has been reluctant to pass on the full increase that the formula suggests in order to keep costs down for members, Bourgoine explained.

“It went up so fast, and we didn't think it was appropriate to increase our fuel surcharge that quickly, so we've dragged our feet on passing it along, and we are aggressively dropping our fee as we go forward, because our customers need the relief,” he said.

King of AFS in Salt Lake City said the company has worked hard to strip costs out of the transportation system to compensate for the fuel-price increases.

“We've looked at ways to reduce our costs,” he said. “We run double trailers, and we work hard to make sure they are cubed out — we try not to send a truck out unless it has a full load. We also checked our customers' schedules, and if they can get by with one less delivery per week, we try to do that for them.”

COOPERATION AMONG CO-OPS

When AG of Baton Rouge, Central Grocers, AG New England and other co-ops meet this month at the Retailer Owned Food Distributors & Associates Fall Conference, one of the topics of discussion will be how the co-ops can work together better to increase efficiency, according to J. Ferrell Franklin, president and CEO of the group, which is itself a co-op representing the interests of cooperative wholesalers.

“There are several areas where we duplicate each other where we might be able to make a combination in certain regions,” he said. “We will be looking at some of those opportunities where we can work together to reduce costs.”

ROFDA already does some joint purchasing on behalf of its members, which include 18 co-ops representing more than $30 billion in retail volume.

“We try to build centralized agreements that our members can participate in,” Franklin explained, noting that the agreements cover a “hodgepodge” of consumer goods and supply items.

At this month's meeting, the association will return about $2 million in savings to its members, Franklin said.

Denges of Central Grocers said he expects that the economy will be a major topic of discussion at this month's meeting, which begins this Saturday in Santa Ana Pueblo, N.M.

“I'm sure the economy is going to be one of the highlights of the discussion,” he said, noting that the highlight of belonging to ROFDA is the ability to share knowledge with similar business leaders.

COPING WITH CREDIT

While most cooperative food wholesalers seem to be in a strong financial position, the current liquidity crisis could affect their individual retail members, according to Silver of NCB.

“To the extent that local and regional banks don't have money to lend, that could have an impact on the ability of individual retailers to expand, regardless of how strong some of those retailers are,” he said. “When you look at the whole depth and breadth of the grocery industry, everyone will be affected to some degree.”

He said some retailers might see their existing lines of credit reduced or even eliminated “through no fault of their own.”

“Because of the illiquidity in the banking sector, retailers should be diligent to make sure they have the ability to continue the lines of credit they have with their financial institutions,” Silver said. “They should be prepared to expect possible reductions in their working capital facilities.

“It's important for retailers to take a look at that, and to step back and say, ‘Just because someone has been lending me working capital all these years, what would happen if they couldn't do it all of a sudden?’ We are starting to see that in the industry.”

Denges of Central Grocers said his company “is in pretty good shape” credit-wise because of the structure of its own credit agreement, but he said some members have begun to see “some pressure” from the bank-credit crunch.

“It's getting a lot tighter for them,” he said.

The credit crunch is impacting Central Grocers, however, to the degree that it is slowing the process of finding a buyer for the company's current distribution center, Denges explained.

“It would be nice to have a buyer, but it's not going to curtail our move into the new facility,” he said.

Bourgoine said the impact of tighter credit on AG New England “has been minimal.”

“We've had some increase in rates on our short-term borrowing in our credit line, but now that's backed off a little,” he said. “But the rates we're paying today, even at the highest point, are not as high as they were a year ago. You get used to having good rates, and then all of a sudden they start going up, and you begin to get concerned about it.”

Campbell of AG of Baton Rouge said that in his area of the Deep South, the credit crisis has not impacted the local banks as severely as it might have in other areas of the country.

“The local banks were not necessarily involved with the derivative security agreement problems,” he explained. “But, to the extent that they do have exposure to consumer loans and credit card debt, some of them have taken write-downs, but they do have credit available, and the rates are still very competitive.”

While housing prices in much of the rest of the country have been declining, Campbell said Louisiana has not seen prices drop as severely as other areas of the country, such as Florida, California and Nevada.

Silver of NCB said that in general, cooperative wholesalers are active in encouraging local banks to provide capital for their members. Some wholesalers also occasionally act as banks and provide expansion and renovation debt facilities for their members, he explained.

At AFS in Salt Lake City, King said the company has focused on shoring up its own financial position so that it is capable of supporting its independent members.

“We have a strong financial balance sheet, which has enabled us to give more back to our owners so they can expand their stores, and put in the perishables cases that we need to help us move the product through our facility,” he said. “Over the past two years, we have set up programs where they can borrow money back on some of their equity in the company, so we have taken it upon ourselves, even before the economic situation came about, to make more money available to our stores to expand and remodel. That's been very successful for us.”

Silver said NCB itself continues to be strong, and “has continued to lend money as consistently as we always have.”

The bank's portfolio of food-related cooperatives “is performing as well as it always has, and that is very positive for us.”

ATTRITION BY RETIREMENT

In addition to economic issues, Franklin of ROFDA said one of the major concerns of the group's cooperative wholesaler members is attrition from retirements at family-owned businesses.

“All of the wholesalers recognize that as an issue, and they all have different training programs in place and different ways to get people involved in those stores where there's not a successor coming up in the family, so they can retain the volumes that they have,” he said. “The wholesalers have to lead that effort, because a lot of time the independents don't have the resources, and they need to rely on their wholesaler to devise a plan that makes sense for them.”

Bourgoine said the issue of customer attrition due to retirements at family-owned independent businesses might be gaining more prominence simply because of the aging of Baby Boomers.

“Those independent retailers are often a family business, so there's always that transition from one generation to the next that can be a challenge,” he said. “So when our customers decide to exit the business, and there isn't a family member there to carry on, there's always the potential for that customer to sell to a competitor or to another chain.

“We've experienced some of that, but we try to provide counseling to our members on estate planning,” he added.

AG of New England uses a University of New Hampshire family business planning program to educate its members about how to properly plan for succession, Bourgoine explained. The wholesaler is currently preparing an upcoming seminar for its members about how to prepare a business to pass it on to the next generation.

Campbell of AG of Baton Rouge said succession planning has long been an important issue for co-op wholesalers.

“We've been working on that for years,” he said. “We work with the next generation to make sure they understand the business, and make sure they are interested in it. We want to learn what they consider to be the obstacles to going into the grocery business, and we want to do what we can to remove some of those obstacles.

“It's kind of fun to see that next generation come in and see the excitement of running a grocery business, and the love of dealing with customers,” Campbell said. “I think you have to make sure they understand that their labor is going to be rewarded appropriately, because it is a tough business running a retail grocery.”

Campbell said he has been battling attrition of another type, as some independents in Louisiana have been battered so much by the string of hurricanes in the last three years that they are leaving the area.

“It's hard to go back when something you cannot control is driving you out of business,” he said. “We have some people who have been hit by four major hurricanes, and they have said they have to rethink their business.”

In some cases, Campbell said, the operators were the only food retailers in their area.

“If they leave a small community, and they were the only one serving that community, then that's not good, and we have to try to find somebody to fill that void.”