RETAILERS BATTLE RISING FUEL COSTS

SN STAFF

Rising gas prices present challenges to be overcome while merger activities present opportunities for growth, top-level industry executives told SN on the eve of this week's Food Marketing Institute convention.

With rapidly rising fuel prices top of mind, the executives said they are looking for more efficient ways to operate.

John Runyan, president and chief executive officer of Associated Grocers of Seattle, said his company is encouraging its retail members to optimize deliveries by cube and weight using computerized routing and scheduling programs - an effort that has reduced travel by an average of 92,000 miles per four-week period from what it was a year ago, he pointed out.

Rich Niemann Jr., CEO of Niemann Foods, Quincy, Ill., said his company also is trying to conserve "by consolidating loads and working to fill trailers better."

Shelley Broader, CEO of Kash n' Karry Stores, Tampa, Fla., said the chain is putting measures in place "to control additional fuel expenses, such as limiting travel and procuring fuel."

Mike Proulx, president and chief operating officer of Bashas' Supermarkets, Chandler, Ariz., said his company has tried to minimize the impact of gas prices "by making every effort to ship product efficiently by equipping our truck fleet with fuel-efficient devices that extend mileage per gallon."

Ron Johnson, managing partner, president and CEO of Minyard Food Stores, Coppell, Texas, said the chain is "scrutinizing all our loads to make certain we can justify each delivery and to ensure we're always shipping full truckloads by squeezing in as much as we can so we don't have to raise our prices. We're also

encouraging the stores to order differently, and we've reduced the number of deliveries wherever it's practical or feasible - something we had done previously but that we've now gone back to scrutinize again."

Rick Roche, CEO of Roche Bros. Supermarkets, Wellesley Hills, Mass., said his company is trying to offset fuel increases "by becoming more efficient in other areas," such as cutting back operating hours where possible and reducing individual department payrolls "where reasonable."

Utility cost increases resulting from higher fuel costs are also a concern, according to Roger Collins, chairman, president and CEO of Harps Foods, Springdale, Ark., "and we're looking at adding some equipment that can reduce utility costs in our stores. But we're not sure what we can do about the cost of shipping goods from our wholesalers and the increasing costs of some products."

Steve Smith, president and CEO of K-VA-T Food Stores, Abingdon, Va., also said spikes in utility costs and packaging costs are big concerns. "While we're working extremely hard to keep our supply costs down, I'm afraid that's going to get worse instead of better. And while gas cost increases are evident immediately, the supply costs lag behind that, and it's hard to pass on to customers - for example, if you're paying more for plastic bags or meat trays, how do you pass that on?"

Ric Jurgens, CEO, Hy-Vee, West Des Moines, Iowa, said it is difficult to apply the increase in distribution costs to individual items across the store. "As a result, most of the fuel increases come directly off the bottom line," he said.

Bob Tiernan, president and chief operating officer for Grocery Outlet, Berkeley, Calif., said he expects to lose at least one point in margin because of increases in diesel fuel. "But we don't pass those increases to customers," he said. "It's just a matter of finding efficiencies in other places, and that's what we're trying to do. However, if there is no let-up, then we'll have to do something, such as carefully raising the price on 15 or 20 items, most likely in the deli and frozen food areas, because that's where the costs are."

Turning to industry consolidation, executives told SN said they expect the trend to continue.

"I think acquisitions are going to increase, especially among smaller companies," Collins of Harps told SN. "Costs are up and interest rates are going up, and I think that's putting a lot of pressure on people."

The pending sale of Albertsons to Supervalu and other buyers, he added, provides a good lesson for retailers "to continue to try to improve and make changes that are in step with customers and to always be looking to improve by reducing costs and increasing sales."

Other executives offered a similar opinion. "I think it's a really good time for good regional operators - the ones who are in touch with their markets. Clearly, the bigger-is-better theory has not always proved to be true," Smith of K-VA-T said.

"There are still a few regional chains that will probably be sold in the next couple of years, though Minyard will not be one of them," Minyard's Johnson said.

Broader of Kash n' Karry said she expects the number of large acquisitions to diminish, "but we can expect to see consolidation of smaller companies for a while, similar to Hannaford's purchase of Victory Markets or Food Lion's purchase of Harvey's."

John Catsimatidis, CEO of Red Apple Group, which operates the Gristedes chain in New York City, said he expects Ron Burkle, majority owner of Pathmark, to lead a consolidation in the Northeast. "There are people who will see opportunities, and I think Ron is the only guy who has money and understands business at the same time," he told SN.

Tiernan of Grocery Outlet said he expects industry consolidation to continue, with small independents becoming casualties to the spread of Wal-Mart supercenters and Winco warehouse stores.

Learning AT FMI

Executives said they will be looking for different things at FMI.

Darioush Khaledi, chairman, president and CEO of Top Valu Markets, Long Beach, Calif., said his company developed its own private-label line, called Valu Plus, when its wholesale supplier did not offer a lower-priced alternative to its primary label, "and we're hoping to gain more understanding about private label at the convention to decide whether to expand our own line or abandon it," he told SN.

Smith of K-VA-T also said he's interested in sessions on private brands "because it's a big part of our business and a growing part of the whole industry."

Runyan of AG Seattle said he will attend FMI "to meet with other CEOs to see how they're handling [industry issues] because we all face the same kinds of problems. Basically, we're looking for best practices - we're receptive to listening to anything we can learn from other companies."

Catsimatidis also said he will be attending to talk to others in the industry. "I am a people person, and my priority in going is to see other people," he explained.

Johnson of Minyard's said he'll be attending FMI "to get a flavor of what's happening in the industry and what CEOs in different marketing areas are thinking. I also think it's important for a CEO to see the new products that are available. Our buyers and category managers see that stuff all the time, but FMI is a good time for me to walk around and talk to people and ask questions and see what's available."

Looking at new products with several members of the executive team is "a golden opportunity" and helps Hy-Vee make decisions as a group, Jurgens said. "Hy-Vee has always been a big supporter of the FMI show, and we probably send more representatives than any other retail chain," he said. "We have always found it to be the premiere educational opportunity for Hy-Vee."

Collins of Harps said several of the company's executive vice presidents will be going "to try to see any new things that are happening that we might be able to take advantage of. In particular, we'll be looking for new kinds of equipment and technology that can save us on utility costs and to learn more about what people are doing in the area of selling gas, which we're getting into, and utilizing groceries to reduce the cost of gas."

Paul Butera, chairman of Certified Grocers Midwest, Hodgkins, Ill., said executives will be looking for more modern deli and bakery cases more than grocery items. "The food comes here anyway," he said.