Covington Says Plan Is Safe Bet for Nash Finch

MARK HAMSTRA

MINNEAPOLIS — During Nash Finch's third-quarter earnings conference call this month, Meredith Adler, an analyst with Lehman brothers, New York, questioned whether the new strategies proposed by Nash Finch “could lead to chaos.”

It sounded complicated, she said, for customers to suddenly work with three different wholesaling divisions within Nash Finch rather than one.

But Alec Covington, chief executive officer of the food retailer and distributor for the past six months, disagreed, and the company's investors appear to be behind him. Despite a quick sell-off of the stock when Nash Finch first announced a third-quarter loss, the stock rebounded as Covington outlined his vision in the conference call and in subsequent investor presentations.

“One of the reasons the stock performed as well as it did is because the marketplace was convinced that we listened to the investors,” he told SN last week. “They are convinced that we understand what we do well, and we're going to stick with what we do well. We're not going to go off on some kind of tangent that takes us into an area where there's a lot of risk.”

As described in last week's SN, Nash Finch is planning to restructure the company's distribution business into three major “sub-brands,” one each for produce, meat and Center Store, in order to do a better job at each. He said the strategy is merely a refinement, based on feedback from consumers about how they shop in different categories, of the distribution business that Nash Finch already conducts.

The result should allow the company to generate strong cash flow and pay down debt, he said, despite the fact that wholesaling generates weaker net margins than retail.

“It's not a complicated story — if you focus on distribution, you have less of a demand for cash than you do with retail,” he added. “The cash-on-cash returns in this company are excellent. In the last year, when results have been less than pleasing, we still generated a lot of cash.”

Covington said he brings this new emphasis on improving distribution at a time when other wholesalers such as Supervalu and Spartan Stores have chosen to focus a larger part of their business on retail operations, and when independent operators have shown signs of strength by successfully differentiating themselves.

“I think there's an opportunity for Nash Finch to raise the bar in terms of execution and logistics,” he told SN. “We can step in and fill a need that hasn't been filled for these independents in the last few years.”

Dan Neumeister, general manager of Central Market, a three-store Nash Finch customer in North Dakota and Minnesota, said his company is “pretty much right in line with Alec Covington.”

“We're excited about the changes at Nash Finch,” he told SN. “We see this as a real positive.”

He said the previous Nash Finch regime, under CEO Ron Marshall, who resigned late last year, was less decisive. “Now we've got someone there who's making decisions, and we like that,” he said.

Richard Riesbeck, president and CEO, Riesbeck Food Markets, St. Clairsville, Ohio, said he too is seeking changes in direction under Nash Finch. The chain previously had been a customer of Roundy's, but joined Nash when that company acquired two Roundy's warehouses last year.

“We asked Nash Finch some time ago to streamline their procurement and merchandising functions in such a way that would result in more consistent and longer time extensions of deal periods,” he told SN in a written statement. “Our current focus is to create a more aggressive EDLP approach in Center Store, with as many as 10,000 items in a permanent state of price reduction.”

He said the company needs to maintain pricing on key items that is “within striking distance” of big-box retailers.

“The alternative is to live with dramatically lower levels of product movement, even in entire categories,” he said.

Covington said one of the goals of the new distribution structure would be to move toward an EDLP structure in Center Store by seeking a more consistently low level of pricing from vendors.

“When you are distributor trying to distribute all categories, different priorities get in the way of doing each individual category right,” he said.

“So what we plan to do is unbundle that so that the methodology we are using to distribute produce will allow us to deliver it fresh, just as the efficiencies we are using in the Center Store will allow us to be efficient.”

On the retail side, Nash Finch will continue to operate some corporate stores but will seek to recast them into more well-defined formats that have proven success against big-box competitors, such as the Avanza store in Denver, which targets Hispanic consumers, and some of the EDLP stores the company operates.

It will then make those formats available through licensing to its independent customers. Nash Finch's retail presence has been cut down from 80 stores a year ago to 67 locations, with another five corporate stores slated for closure by year-end.

The company has seen its overall financial performance falter since the acquisition last year of the two DCs from Roundy's and as its retail stores have succumbed to competitive pressure.

Covington said he believes Nash Finch will benefit in the long run from the acquisition of the Roundy's warehouses — located in Lima, Ohio, and Westville, Ind. — although he said the timing the purchase was probably not ideal because of the large number of executive departures that occurred around that time.

“The acquisition was done at a time when there was a lack of management stability, and it made it a bigger effort to integrate that business and get that job done,” he said.

However, he noted that the purchase added several “strong and sophisticated” customers to Nash Finch's wholesaling business, including Riesbeck Food Markets and Martin's Super Markets in Indiana.

“At the end of the day, we got some good customers, some good facilities, and they fit nicely within our geographic reach,” he said.

Covington said he expects to have the basics of the new strategies in place by the end of next year.

“There are very few strategies that are worth doing that can be done in weeks,” he told SN. “Most things take time. We have no crisis in our company, so we have no reason to move at a reckless speed. This is not a quick fix.”