Unified, AG Join Forces To Solidify West Coast

ELLIOT ZWIEBACH

LOS ANGELES — Unified Western Grocers here moved a step closer to fulfilling its long-held goal of consolidating the West Coast's retailer-owned cooperatives with the announcement last week that it has signed a letter of intent to acquire Associated Grocers, Seattle.

The transaction, expected to be completed by late summer, would boost Unified's current $3 billion volume by approximately $950 million and strengthen its position in the Pacific Northwest. The letter of intent represents a preliminary agreement by Unified to purchase certain assets and to assume certain liabilities of AG. No final price has been set.

“We learned well from our merger with United Grocers [in Portland, Ore., in 1999] that what appears on the surface is not always what it seems, so we will go slowly in assessing the organizational structure so we can redesign it to be most effective for the combined entity,” Al Plamann, president and chief executive officer of Unified, told SN. (See “Deal Culminates AG's Strategic Review” on Page 60 for a comments from AG CEO John Runyan.)

Reaction to the pending sale by AG members appeared to be positive, based on a sampling by SN last week. “Unified Western Grocers seems to be a very good fit because, like us, they are a cooperative, so they share the same challenges and experiences,” said Larry Nakata, president of Town & Country Markets, a six-store operator based in Seattle. “And they will bring a large volume to the new entity that is important to help us compete effectively in the marketplace in terms of cost of goods.”

According to Craig Cole, president and CEO of Brown & Cole, Bellingham, Wash., scale is the key factor in the potential merger. “In an industry that's consolidating, scale is driving efficiencies and the cost of goods, and if the wholesaler-supplied sector wants to remain competitive, it must achieve scale as well. So on that basis, this combination of warehouses makes a lot of sense.”

But Cole acknowledged that the combination of Unified and AG might not be enough. “It used to be that a $1 billion warehouse [like AG's] was a big deal, but it's nothing now. And even at $4 billion, the new entity will still not be a giant player in the industry, though it will be getting into the zone that's large enough to get the attention of suppliers and have some purchasing clout.”

Paul Kapioski, a member of AG's board of directors and owner of West Seattle Thriftway, said he's excited about the future for AG's retailers as part of Unified. “Unified presents the best synergies for independents up and down the West Coast, and as a $4 billion company, we should be able to go to market a lot better.”

Unified has been talking with AG about a possible merger for several years, Plamann said. It has been supplying nonfoods to AG since late 2001. There were reports that a foreign-based company seeking a U.S. entry was also recently eyeing AG, though SN was unable to determine the identity of that company.

Unified officials have expressed an interest since the late 1990s in uniting several Western cooperatives — beginning on the West Coast with United Grocers in Portland and AG in Seattle, and possibly encompassing other distributors in the Intermountain region and Texas. Last week's letter of intent to purchase AG is Unified's first such move since September 1999, when its predecessor company, Certified Grocers of Los Angeles, merged with United Grocers to form Unified Western Grocers.

“The I-5 corridor is a great distribution pipeline,” Plamann said, referring to Interstate 5, which runs from the Mexican border north to Canada. “It's about 1,500 miles long, with the potential for distribution over a 300-mile area [to the east of the highway].

“A possible move to an east-west corridor, like I-10, which runs east from California to Texas, could offer additional opportunities to bring additional cooperatives together,” he added, though he said Unified is not pursuing any other combinations at this time.

Unified has 510 members operating about 2,500 stores in California, Oregon, Arizona, Nevada, Hawaii and Washington, plus non-member customers in Colorado, Mexico and several Pacific Rim nations. AG distributes to 123 members operating 310 stores in Washington, Oregon, Alaska, Hawaii, Guam and the Pacific Rim. The two companies overlap in the Pacific Northwest and the Pacific Rim, “so we see some potential synergies in both areas,” Plamann said.

In fact, if the merger goes through, Unified's Pacific Northwest Division will have sales of about $1.75 billion, making it the company's largest division, compared with $1.5 billion coming out of the Southern California division and $750 million from Northern California, Plamann said.

Deal Culminates AG's Strategic Review

SEATTLE — John Runyan, president and chief executive officer of Associated Grocers here, which has agreed to be acquired by Uni-fied Western Grocers, Los Angeles, said the progress AG has made in the last 18 months “will now be enhanced by bringing together the best of both companies [to] create a very competitive grocery industry force for independents in the Western U.S.”

AG has been evaluating strategic alternatives since at least 2000, when Robert Hoyt, president and CEO at the time, told SN the company was considering a possible sale if it got the right offer.

That was the year AG reported its first-ever loss as it dealt with a trio of challenges, according to Hoyt: lending money to members whose owners were poor operators or whose stores were in poor locations; installing a new information system that seriously malfunctioned; and losing a large portion of its revenue base when Kroger Co. acquired 80 QFC stores.

Although AG was able to replace that business with 74 former Fleming customers in eastern Washington, those stores were a greater distance from its western Washington distribution facilities and cost the company more money to service, Hoyt said.

In 2001, AG went through a financial restructuring to strengthen its market position by focusing on revenue-enhancement initiatives and investments to gain new operational efficiencies. During that year the company closed its nonfoods distribution center in Kent, Wash., and began outsourcing nonfoods to Unified.

AG hired Robert P. Hermanns as president and CEO in mid-2002, while continuing to consider possible merger scenarios.

In 2003, AG replaced its Teamster drivers by contracting with an outside transportation company.

In September 2005, Hermanns abruptly left AG and was succeeded by John Runyan, whose mission was “to ensure that our members stay competitive for the next 10 years and beyond,” according to Ron Brake, chairman of the cooperative's board.

“The company is in phenomenal shape — the best financial condition we've been in for at least 20 years,” Brake said. “But the board decided we needed to turn over every leaf to prepare ourselves for the future, because in five years or so, the major manufacturers are not going to call on a company of our size.”

Earlier this year AG completed a four-year sale-leaseback of its headquarters and 1 million-square-foot distribution center, which freed it to reach a preliminary agreement on the sale of the company, Runyan indicated.

Al Plamann, president and CEO of Unified, said the company will use AG's warehouse temporarily.

“Long term, we could expand our Portland [Ore.] facility, which we own, though adding nearly $1 billion in volume means we'd have to operate a smaller warehouse in Seattle for fast movers and other items,” he said. “Or we could look at a greenfield solution.”
— E.Z.