ALL TOGETHER NOW 2006

ELLIOT ZWIEBACH

The key to long-term survival for the industry's smaller member-owned cooperatives may be more collaboration.

In the post-Fleming environment, where large wholesalers like Supervalu and C&S Wholesale Grocers keep building their distribution base, where old-line wholesalers like Roundy's transform themselves into retailers and where midsize wholesalers like Fresh Brands and Certified Grocers Midwest merge - what does the future hold for the little guy?

While a handful of wholesalers operating below $1 billion annually are voluntaries, the majority are retailer-owned cooperatives. And those co-ops are learning the value of increased collaboration, they told SN.

Most of the collaborative buying involves packaged private-label goods and some fresh products purchased through Western Family Foods or Topco Associates. Additionally, some co-ops have joined together to purchase warehouse supplies and store equipment through their membership in Retailer-Owned Distributors and Associates (ROFDA), whose members include 18 co-ops, and there have been discussions about aggregating their buying power for national brands.

Executives at several companies told SN they believe those kinds of efforts could be the template for the future.

"Group buying is magical," said James Ried, president and chief executive officer of Olean Wholesale Grocery Cooperative, Olean, N.Y.

Olean has been in a meat-buying consortium for more than 10 years - initially with three other East Coast co-ops before it was joined by several Western co-ops connected with Western Family. Most of the same co-ops are also part of a store development consortium "that's enabled us to get certain products for our business partners - our customers - that we couldn't get before," Ried said.

Michael Burgoine, president and CEO of Associated Grocers of New England, Manchester, N.H., said he is also a believer in group buying. "Bigger is better," he explained, "because these consortiums enable us to consolidate purchasing power to get better prices and make ourselves more competitive with large wholesalers and chains. A house of our size could never accomplish what we do without these consortiums."

Asked how far AGNE or other cooperatives can go with collaboration, Burgoine said, "As far as the personalities involved will let it go. Co-ops today are starting to see that we're in a situation where we need to do as much as we can together. Wal-Mart brought that need to be more competitive on price to the surface, and co-ops are realizing the value of pooling our purchasing power so we can go to vendors and demonstrate greater clout and buying power."

Martin Arter, president and CEO of Affiliated Foods Midwest, Norfolk, Neb., said he agrees that Wal-Mart has been the uniting factor for some cooperatives. "Until Wal-Mart came along, we tended to compete with each other, but we realize now we need each other to survive and we have to leave our egos at the door. Who cares if our territories overlap a bit when it comes down to a question of long-term survival?"

While Arter buys equipment, batteries, tires and stretch wrap with some other ROFDA members and other product categories through Topco, "we're very open to doing more buying together. We've got to think differently today and pool our buying power to demonstrate our ability to perform because vendors won't keep calling on us if we can't perform."

He said he believes co-ops should even consider working with some voluntary wholesale companies. "Over the long term we are going to need to use technology to be more efficient, and we can learn from each other - and from voluntaries - about logistics or how to improve procurement," he explained.

For Calvin J. Miller, president and CEO of Associated Grocers, Miami, getting the nation's cooperatives to buy most merchandise as a single entity would fulfill a lifelong dream, he told SN. "If we banded together, what a force we could be," he declared. "Seeing all co-ops with one centralized buying unit would save all of us millions of dollars a year. And becoming one buying group, we could buy as much and be as powerful as the largest retail or wholesale buyer in the U.S. We could still all run our own companies, but by joining together in a single buying group, we could lower costs to our retailers and help them get stronger as we get stronger."

'Taking Baby Steps'

Better buying would certainly level the playing field for smaller co-ops, J. Ferrell Franklin, president and CEO of ROFDA, told SN. ROFDA, based in Gardendale, Ala., is an umbrella group for 18 co-ops in the U.S. whose combined volume, Franklin said, is $25 billion - larger than any conventional chain's volume other than Kroger, Albertsons or Safeway.

"We would like to see all co-ops combine to procure all goods and supplies," Franklin said. "While each company would maintain its own individual identity and structure, the procurement piece would involve a 100% joint-buying effort.

"But when you try to implement it, that's where things start caving in because somebody feels he has to give up control that he doesn't feel comfortable giving up or losing some function that has always been handled on-site. That resistance may change one day. Our members have been buying together to some degree since 1990, and things have gotten better over the years because the group knows this is the right thing to do. So we're taking baby steps, and I think all the members would agree they are a lot stronger together than they are individually."

Jay Campbell, president and CEO of Associated Grocers, Baton Rouge, La., said he sees collaboration among co-ops as a key to survival, more so than potential future mergers among them. "Collaboration is a great asset. It doesn't guarantee survival, but it's a great tool because it creates synergies. We think AG can prosper by collaborating with other companies to achieve synergies and better procurement," he said.

Buying some items with other ROFDA members "enables us to get the benefits of a merger without doing so," Campbell added.

Western Family Foods, Portland, Ore., offers its nine large and small members a full line of private-label goods, plus joint buying programs for beef and pork as well as seasonal products. All members are in the meat program, Ron King, president and CEO, told SN, including AGNE; Olean Wholesale; Affiliated Foods, Amarillo, Texas; Associated Food Stores, Salt Lake City; Associated Grocers of Maine, Gardiner; Associated Grocers, Seattle; Associated Wholesalers, Robesonia, Pa.; Unified Western Grocers, Los Angeles; and URM, Spokane, Wash. - along with one non-member, AG of Miami.

However, only the larger co-ops are in the seasonal buying program, King pointed out - all but AG, Maine; AGNE and Olean - "because their volume on seasonal goods is not high, so container-loads are not their sweet spot."

Over the years, Western Family has offered other group programs - such as switching services for financial transactions and a voice-only long-distance program - that ended when less-expensive technology became available. The company is considering expanding its meat program to encompass chicken, seafood and frozen meats and is also looking at offering store services and warehouse supplies.

Topco, Skokie, Ill., has a national-brand program - called World Brands - for its retail customers and is trying to develop a similar program for customers in its wholesale channel, John Stanhaus, senior vice president of Topco and president of the wholesale channel, told SN. "The challenge is developing a program that will work for vendors and for wholesale members, who typically don't have the same control at the retail shelf as the chains," he explained.

Topco's wholesale channel includes seven cooperatives and three voluntaries. While all buy Shurfine and other Topco private labels, there is less-consistent participation in other, non-branded categories, including fresh meat, produce, equipment, supplies and business services, Stanhaus noted.

"When it comes to those categories, buyers believe they could get a better price if they had more volume, plus they value the relationships they have with local salespeople and are reluctant to participate in [programs with] a purchasing organization like Topco.

"But studies show there's an advantage of as much as 700 basis points gained by the large multi-regional chains over their smaller competitors, and aggregating their buying can enable those smaller companies to make significant inroads into that advantage," he pointed out.

Co-Ops Optimistic for Future

Despite the pressures on the traditional supermarket channel, most of the co-op executives interviewed told SN they don't see long-term survival as an issue.

Campbell said survival is not a concern for AG, Baton Rouge, "because our sole reason for existing is to serve our owners. If we have one owner or 301 owners, as long as they want us to be in business to assist them, we will be in business. As long as there are independent customers interested in being in the supermarket business, we will be in business."

Last fall's hurricanes gave AG a major jolt, Campbell said, with about 25 member stores still out of commission. "Katrina really scrambled everyone's eggs, but every operator is doing more business now because of the move by displaced people to new areas, so everyone is enjoying a spike in volume," he noted, with some members experiencing double-digit volume surges.

He said same-store sales, which were increasing at an annual rate of 3% to 7% before the hurricanes, are growing at even greater rates today.

Industry consolidation has been a positive for AG, Campbell said, "because most acquisitions are overpriced and make the acquired companies weaker. Winn-Dixie's bankruptcy has allowed our members to further differentiate their offerings to consumers and made them a more attractive shopping alternative. Whether consumers are comparing our members' stores to Winn-Dixie, Albertsons or Wal-Mart, our retailers have always prided themselves on being legitimate shopping alternatives."

According to David Schools, senior vice president of Piggly Wiggly Carolina Co., Charleston, S.C., "We don't plan on just surviving, but on getting better, by continuing to push service at retail and wholesale, and greater flexibility through technology."

AG, Miami, helped secure its survival by becoming an IGA wholesaler after Fleming's implosion, Miller told SN. Starting with 15 IGA members in 2004, AG added 20 more last year and anticipates 15 more in the next six months, he said.

Associated Grocers of the South, Birmingham, Ala., faced a potential challenge to its survival last year when Ahold was contemplating the sale of Birmingham-based Bruno's, Gerald Totoritis, president and CEO, pointed out. "We wondered what impact it would have on us in terms of vendor coverage if Bruno's was acquired by a company whose buying office was located somewhere else," he explained.

As it turned out, however, a subsidiary of C&S acquired most of the stores, re-bannered them as Southern Family Markets and retained local buying offices, he pointed out.

Totoritis said his company has benefited from uncertainties at Bruno's and Winn-Dixie. "For the fiscal year ended last April, our comparable-store purchases were up 5.8%, and that certainly wasn't because there were fewer Wal-Mart Supercenters. We believe a good portion of that came from former Winn-Dixie and Bruno's customers."

Burgoine said he expects sales at AGNE to grow over the next few years at a rate of 5% to 10% annually - about the same rate of growth experienced over the last 10 years - with additional sales coming from increased volume at corporate stores, the addition of new members and additional business from alternative channels.

"We're not going to be chasing major chain business, the way [New England neighbor] C&S does," Burgoine said. "Our future seems to be serving a more midsized market - essentially getting a bigger piece of a smaller pie."

According to Ried, Olean just completed the second expansion of its distribution center, boosting its size to 340,000 square feet, and is completing some racking projects that will position the company for future growth. "What gives us an edge in recruiting new customers is that we're strongly retailer-oriented, and we deal 100% with independents," he said. "We provide the services they need and pay attention to their needs. We have a sign in our lobby - 'Retailers have paid for many warehouses. This one they own.' I think that says it all."

Ownership Gives Co-Ops an Edge

Asked how they expect to meet the challenges of an industry in which increased consolidation is making it more difficult for companies to survive, most executives said one of the primary keys to their success is the relationship they have with their members - a closeness voluntary wholesalers cannot match, they noted.

"Being the biggest doesn't make you the best," Totoritis, of AG of the South, told SN. "What makes you the best is attention to customer service. We don't have to please Wall Street four times a year - we have to please our shareholders 52 weeks a year, and that makes us a little bit more focused on providing service, paying more attention to detail and making sure we have on-time deliveries.

"We understand the independents' business, and our commitment is to work with them to make it as easy as we can for them to run their businesses.

"For a voluntary, it's very difficult to meet the expectations of a co-op member, who's accustomed to a feeling of ownership and to receiving profits that are paid back to the members. It's that feeling that will enable co-ops to survive."

AG of the South maintains a staff of field counselors at a time when some wholesalers are cutting back or charging a fee for those services, Totoritis pointed out. "Consolidation is certainly a concern, but we believe there will always be a place for a company like ours that believes our customers are kings and that service is as important as price."

According to Schools, of Piggly Wiggly Carolina Co., "We don't look at sales as just wholesale distribution. We see ourselves as partners with our retailers."

For AGNE, longevity of relationships is a key, Burgoine said. Referring to the swap between C&S and Supervalu following Fleming's demise - in which Supervalu traded some of its New England customer base to C&S in return for some former Fleming operations in the Midwest - Burgoine said, "Independents want a relationship with their supplier that they know will be secure for a long period. Being part of a co-op, members know they have a better chance of getting groceries from the same supplier every week for the foreseeable future, which makes the co-op a more appealing model."

Ried said Olean is firmly in favor of providing as many store services as possible. "If the independents are to survive, they have to find their niche and do what they do well, and we're very bullish about providing information to our retailers on new trends to help them be more successful," he explained.

Campbell of AG, Baton Rouge, said he agreed. "Our sole reason for existing is to serve our owners, the retailers. To us the retailer is paramount, and we have to make sure he's successful by using whatever tools we can."

Accumulating volume is not the goal, Campbell pointed out. "We're not pre-occupied with finding new volume. Instead, we are focused on keeping our customers in business and being the best we can for them, whether we have half the volume we have or double it."

Miller of AG, Miami, offered similar thoughts, noting that some of the business his company is picking up comes from former customers of voluntariess who are dissatisfied because of out-of-stocks or poor service.

The fact that AG, Miami, owns its own real estate also helps, he added, because it enables the company to keep costs down, "so we don't worry about competition as much because we have that [real estate] strength that a lot of wholesalers in the state don't have."

Associated Foods Midwest expects to pass the $1 billion mark for the first time this year, Arter said. "The biggest strength co-ops have is that our customers are member-owners. Last year we gave back $37.5 million to our members."

Another strength is trust, he added. "A lot of customers we pick up tell us they don't trust their current wholesalers because all the money is being shifted to public shareholders and corporate stores, and they don't feel the playing field is equal. They feel they're not getting the full benefit of allowances and special pricing. What they like about us as a co-op is, they can call us anytime and we'll tell them our costs in and out."

Under the Radar

Some of the industry's smallest cooperatives

Company: Stores Served; Operating Area; Top Executive; Annual Volume (in millions)

Affiliated Foods Midwest, Norfolk, Neb.: 850; 12 Midwestern states; Martin Arter president, CEO; $1,050

Piggly Wiggly Carolina Co., Charleston, S.C. : 125; South Carolina, Georgia; David Schools president, CEO; $775

Associated Grocers, Baton Rouge, La.: 250; Louisiana, Texas; Jay Campbell, president, CEO; $700

Associated Grocers, Miami, Fla.: 400; Florida, South America, Central America; J. Calvin Miller, president, CEO; $600

Associated Grocers of the South, Birmingham, Ala.: 320; Alabama, Mississippi,Georgia, Florida, Tennessee; Gerald Totoritis, president, CEO; $375

Associated Grocers of New England, Manchester, N.H., New York: 350 ; New England,; Michael Burgoine, president, CEO; $28

Olean Wholesale Grocery Cooperative, Olean, N.Y.: 139; New York, Ohio, Pennsylvania; James Ried, president, CEO ; Not Available