STAKING OUT RETAIL

Elliot Zwiebach

PEWAUKEE, Wis. -- At Roundy's here, the focus is squarely on retail as it begins life as a voluntary wholesaler.

Since its acquisition last June by Willis Stein & Partners, a Chicago-based private equity firm, Roundy's has staked a major claim on the retail business in Wisconsin, acquiring 21 stores in the state, including seven Kohl's Food Stores from A&P, with the possibility of purchasing the 23 remaining Kohl's locations.

Roundy's is also prominently mentioned as a potential buyer for the Dominick's chain in Chicago -- a possible homecoming of sorts for Robert A. Mariano, Roundy's chairman, president and chief executive officer, who spent 25 years with Dominick's before it was sold to Safeway in 1998.

Roundy's makes no secret of its interest in growing its retail business. "We'll look at anything that makes sense for our retail network," Mariano told SN.

That could also encompass potential wholesaler acquisitions, "but only if they are in contiguous markets," he said. However, any acquisitions on the wholesale side may be some time off, he added.

Even before its acquisition, Roundy's owned 60 corporate stores and had made it clear it wanted more. Given his retail background, Mariano was a natural to oversee Roundy's accelerated retail expansion.

"The fact Roundy's had corporate stores was important to Willis Stein because it assured the company of a certain amount of volume on the wholesale side," he said. "But we can't go into retail solely as a way to move volume through the distribution centers.

"With corporate stores, we have to be aggressive by offering values because the consumer comes to the store to buy products, and unless you're of a mind to make a detailed operating effort at store level, you shouldn't be in retail."

Until last June, Roundy's had spent the previous 50 years of its existence as a member-owned cooperative.

But the time was right for a change, Mariano told SN. "Roundy's had always done a good job, but once its board of directors determined it needed a new financial structure, it concluded that the sale of the company made the most sense."

With the sale came the transformation from a member-owned cooperative into a voluntary wholesaler. According to Mariano, the change did not have much impact on Roundy's customer base. "Everyone had a chance to vote on whether to sell the company, and the vote in favor was close to 100% -- we did not lose any customers in the transition," he said.

"The only difference now is, the retailers don't have shares in the company. But in terms of service and their involvement in ongoing initiatives, everything is essentially the same."

Besides focusing attention on growing its corporate retail base, Roundy's is also focusing on serving the retail needs of its wholesale customers, Mariano pointed out. "Our job is to focus on being a sell organization, not a push organization. We've got to sell it out the front door, not just push it through the back door.

"If we're not drawing consumers to our independent customers' stores more frequently, then our wholesale business is at risk. As a wholesaler, we must understand that a sale is not complete until the consumer pays for the product and walks out the door.

"If you don't take care of the customer, you'll have no business. That's fundamental. The good news is, at Roundy's, we're blessed with great retail operators who 'get it' in terms of serving their customers. We already talk the same language as our retail customers, and we understand one another.

"Now it's just a matter of organizing Roundy's with a clearer view of what we want to do."

Although Mariano was reluctant to talk with SN in detail about the company's long-range plans, he discussed several of the directions in which Roundy's is heading, including the following:

Being more aggressive in adding corporate stores, both through acquisition and organic growth.

Preparing to launch a brand strategy for Pick 'n Save, one of its corporate store groups.

Using corporate stores as a testing ground for programs that can be rolled out to independent customers.

Bolstering wholesale sales by continuing to refine service levels.

Roundy's serves 800 supermarkets in 14 states out of eight distribution centers, with most of its volume concentrated in Wisconsin, Illinois, Indiana, Michigan and Ohio and additional customers in Kentucky, Maryland, Missouri, New Jersey, New York, Oklahoma, Pennsylvania, Tennessee and West Virginia.

Sales for fiscal 2002 are estimated at $3.7 billion, up 5.7% from the prior year's $3.5 billion.

Wholesale sales dipped last year by approximately 0.4%, "but wholesale is holding up," Mariano told SN. "We're all coping with the competitive landscape, including new store openings and alternative distribution channels."

While some grocery wholesalers are seeking new sources of business among those alternate channels, Roundy's is sticking with its supermarket base, Mariano said. "Given our size, we need to stay focused on supermarkets before meandering off to serve other formats," he explained.

At the time the company was sold, Roundy's owned 60 corporate stores -- 35 Pick 'n Saves in Wisconsin, Ohio and Indiana; 21 Copps stores in Wisconsin (acquired in mid-2001); and four smaller Orchard Markets in Ohio.

Under its new ownership, Roundy's has acquired 21 additional stores through acquisitions: four Gold's Pick 'n Saves in the Greater Milwaukee area; seven Prescott Pick 'n Saves in the Oshkosh area north of Milwaukee; three former Rainbow locations from Fleming in the Milwaukee area, which Roundy's plans to reopen under the Pick 'n Save banner by early spring; and the seven Kohl's in the Madison area from A&P -- a deal it expects to finalize late next month.

According to Mariano, Roundy's plans to convert new corporate stores to either the Pick 'n Save or Copps banner, with six of the seven Kohl's set to reopen under the Copps name while the assets of the seventh will be incorporated into an existing Copps location.

Besides the corporate-owned Pick 'n Save units, Roundy's has been licensing the Pick 'n Save name to members since 1985, with 37 licensed operators at the time of the sale to Willis Stein.

Roundy's plans to maintain the separate identities for its two store groups, Mariano said -- Pick 'n Save as an everyday-low-price operator, and Copps as a high-low promotions-oriented chain.

"Pick 'n Save delivers the fundamentals, so we're continually making sure our pricing is spot-on," Mariano explained, "and Copps has been in the market for over 100 years, and consumers know what those stores stand for, and we don't want to confuse them by making a change.

"The name on the store creates a certain image in customers' minds, and you can't go in and change it overnight. Consumers don't understand that."

Roundy's has three new corporate stores under construction: a Copps in Green Bay, Wis., that's scheduled to open in late summer; a Pick 'n Save in Hale's Corner, Wis., scheduled for a late spring opening; and a Pick 'n Save in Northridge, Wis., near Milwaukee, that's due to open at the end of the year.

All three are in the 65,000- to 70,000-square-foot range -- the size of most existing Pick 'n Save stores and of some of the newer Copps.

Mariano said Roundy's plans to launch its first-ever brand strategy program for its corporate Pick 'n Save stores later this year. Asked to describe the strategy, Mariano replied, "It's no different than the way you sell Tide. We need to find out what customers think of the brand and determine what are its strengths and weaknesses, and then deliver the things they want and change the things they don't want."

Research is already under way, Mariano said. Although he said he was reluctant to discuss specific plans for the launch, "pieces could begin showing up later this year," he explained.

Mariano, 53, came to Roundy's with stellar retail credentials.

After a 25-year career with Dominick's, where he ended up as president and CEO, Mariano left the company when it was sold to Safeway and spent a couple of years doing consulting work before deciding to seek a new position in the industry.

"I started visiting mid-size buyout firms in the Chicago area to see if they were interested in doing something in the food sector," Mariano explained. "I told them that if they were going to do a deal, I would like to look at it to see if I could be part of it."

Ultimately, he hooked up with Willis Stein.

Coming from the retail side of the business, Mariano told SN he thinks he understands the need to stress retail as part of the wholesale process among Roundy's customer base.

Accordingly, Roundy's plans to use its corporate stores as a testing ground for programs that will be offered to independent customers, though it hasn't pinpointed any of those programs yet, Mariano said. "We've only been here a few months, but there are programs we want to roll out to help our customers do things smarter."

Roundy's was in good shape operationally when the new owners took over, Mariano said. "Jerry Lestina [his predecessor as president and CEO] did a good job -- he understood the value of service levels."

However, Mariano said the company is making "modest efforts" to boost service levels, though he declined to be specific.

Earlier this year, Roundy's consolidated two distribution facilities, closing a warehouse in Muskegon, Mich., and transferring that volume to a warehouse in Westville, Ind. -- a move conceived by the company's former management and executed after the company's sale, Mariano said.

Some of Roundy's eight facilities are operating at full capacity, others below capacity, Mariano said, "and we're evaluating all distribution."

He declined to pinpoint whether any more warehouse consolidations might take place. "We're still evaluating, and a conclusion could be six months away," he said.