DEFENSE SPENDING AT AWG

ELLIOT ZWIEBACH

KANSAS CITY, Kan. -- Associated Wholesale Grocers here is attempting to fuel its members with the offensive firepower needed to be winners in the battle with supercenters and other competitors.

The cooperative wholesaler is building up its customer base, expanding its product lines and improving its warehouse service to enable its retailers to repel the influx of supercenters that have invaded its Midwestern stronghold.

Indeed, AWG appears to be located in supercenter country, with nearly 40% of its independents now challenged in some way by supercenters.

To keep the competitive hounds at bay, the co-op is also keeping its retailers fixed on the importance of store upgrades and ongoing improvements. "What we've tried to do is to keep members focused on their customers, not on the competition," Doug Carolan, AWG's executive vice president and chief operating officer, told SN. "When one of our members is faced with a new supercenter, we tell him not to focus on the supercenter per se but to try to understand what he does best and then to position his store to meet the needs of the marketplace." Retailers can't afford to put off improving their operations until a competitor discloses his plans, said Michael DeFabis, president and chief executive officer.

"We want him to strengthen his position, expand or remodel his stores and do what he's capable of doing long before a supercenter opens, because supercenters will take business away from even the best operator and we want our group of stores to be positioned as survivors," DeFabis said. AWG has developed a multifaceted plan to help its independents and overall business, a plan that "looks beyond survival to offense." Elements include the following:

· An anticipated push for customers in the Southeast after expanding its customer base in Oklahoma and extending its reach into northern Texas, following its 1995 acquisition of a distribution center from Homeland Stores, Oklahoma City. · Expansion of its product lines to include ice cream and novelties, fresh fish and flowers after establishing a general merchandise/health and beauty care subsidiary last year. · A revamped management team featuring executives with retail backgrounds to meet future member needs.

· Installation of a scan-and-pick program in its meat warehouse here, which could markedly reduce errors -- a program expected to be expanded to other facilities over the next few months. AWG's 1995 sales totaled about $3 billion, up 15% from $2.6 billion in 1994. Its retailers operate under a range of formats, including warehouse stores (Price Chopper), superstores (Country Mart), perishables-oriented conventional units (Apple Markets) and perishables-oriented combination stores (Sun Fresh). Other banners include Cash Saver and Thriftway. The wholesaler operates out of three distribution centers. Its 800,000-square-foot facility in Springfield, Mo., and 700,000-square-foot warehouse here each account for annual sales of about $1.3 billion. Its 500,000-square-foot facility in Oklahoma City generates yearly sales of about $600 million.

The bulk of its volume emanates from Kansas, Missouri, Oklahoma and Arkansas, with the balance coming from areas that touch those states, including parts of Kentucky, Tennessee, Nebraska, Iowa and, most recently, Texas. Most of those areas are prime territory for supercenters. More than 100 of those stores have sprung up there in the last few years, taking an estimated $1 billion of wholesale sales out of the region annually. AWG officials estimate that close to 300 of the cooperative's 800-plus retail members have been impacted to some degree by supercenters. However, they expressed confidence that AWG retailers can survive and prosper against the retail giants. A handful of AWG members questioned by SN said they have found a variety of formulas for success and survival against supercenters. Bob Hufford, president and chief executive officer of Town & Country Grocers, Fredericktown, Mo., said his Country Mart store in Farmington, Mo. -- despite the opening of a Wal-Mart supercenter three blocks away -- has increased its volume fourfold since expanding from 12,000 square feet to 42,000 square feet, upgrading its perishables operations and increasing its variety. John Utter, owner of two Apple Markets stores here of 25,000 and 32,000 square feet, said he is able to compete with one of Wal-Mart's original hypermarkets in Bannister, Mo. (a Kansas City suburb) "by being price-competitive on the most sensitive items, giving outstanding service and operating stores that are probably the cleanest you'll ever see."

Jim Queen, owner of three Price Chopper stores here and an AWG board member, said he accelerated his remodeling plans on a store in Paola, Kan., when Wal-Mart announced plans a year ago for a new supercenter nearby. "We had planned to wait another year before upgrading that store," Queen told SN. "But when we found out that a supercenter was going to open near us in three or four years, we decided to firm up our customer base now by immediately expanding the store from 31,500 square feet to 45,000 square feet and remodeling all perishables departments, with plans to upgrade the grocery department soon." Gerald Harp, president of Harp's Food Stores, Springdale, Ark., and a board member, said six of his 38 stores compete directly with supercenters, including three conventional Harp's units and three Price Cutter warehouse stores.

"Our strengths," he explained, "include better locations in some cases, competitive pricing on certain items and constant attention to what the customer wants -- particularly, cleaner stores and more service." AWG has benefited from its members' resolve against supercenters and from its expansion efforts. In the past year, the co-op has concentrated much of its energies on the Oklahoma City distribution center it acquired after Homeland decided to downsize its operation from 112 units to 67. Homeland spun off 29 stores to AWG members, closed 16 locations and sold the warehouse to AWG as part of a long-term supply agreement with the wholesaler. Although AWG was already supplying some retailers in Oklahoma, "our business has grown since then," DeFabis said, "and we've been able to pick up a lot of independent retailers with whom we'd developed relationships over the years, who switched over to us once we had a distribution center there."

Including its existing customer base in Oklahoma, AWG is supplying nearly 150 stores out of the Oklahoma City facility, and its $600 million volume there represents double the business Homeland was doing, Carolan noted. "And we'll beat that volume figure if we continue to grow, which we expect to do," he said. DeFabis added, "There's no reason we can't get $1.3 billion a year -- the kind of volume we get out of Kansas City and Springfield -- out of Oklahoma City." AWG is contemplating construction of a new distribution center to replace the Oklahoma City facility in the next few years. "Prior to the year 2000, we will have to decide whether to build a new distribution center or dramatically reconfigure what we have, because our present facilities can't hold the volume of $1 billion or more that we contemplate," Carolan said. "We've already completed a study that favors a new facility. But we won't make a final decision on that until 1998, because we won't build a distribution center with the hope the business will come. We want to build the business and then develop a distribution center to handle the volume." Most of the volume AWG has added in the past year has come from Texas -- from retailers in the Panhandle and south to Amarillo -- after the acquisition of the Homeland facility. Although the cooperative will continue to prospect for additional business in Oklahoma and northern Texas, it also intends to turn its sights eastward in the next couple of years, DeFabis said. "As a mature business, we're always looking for established businesses to add, as we did with the acquisition of Food Barn in Kansas City in 1993 and Homeland in 1995. But now our priorities are to look east and southeast." AWG's business extends 30 miles east of St. Louis and southeast to Little Rock, Ark., he noted. However, he declined to be specific on where he thinks new business might be found. AWG also anticipates new business within its existing customer base. With that in mind, it is building a 275,000-square-foot addition to its distribution center here -- including 135,000 square feet for dry groceries and 140,000 square feet of new freezer space with a 36-foot-high ceiling. The expansions are scheduled to open in the fall. "We intend to grow our local business dramatically over the next few years," DeFabis said. "And since we use a lot of outside storage now, we believe we can pay for the expansion by what we'll save on outside storage." The additional freezer space will allow AWG to get into the manufacture of ice cream and novelties if it so chooses, Carolan said.

"To be an effective wholesaler in the 1990s and beyond, you've got to be full-service," he explained. "That means you need to handle everything a store needs -- ice cream, which is the biggest category we don't supply, as well as categories like fresh fish and flowers. The more we can put on one truck, the more efficient we can be." Queen expects the cooperative to expand into milk and ice cream within the next five years. "We're growing so rapidly in Oklahoma that it may take that long to get a program going," he said. AWG's new nonfood program comes from Value Merchandisers Co., a wholly owned subsidiary that AWG established in mid-1995. "We did a member survey several years ago, and at the top of the list was the need for us to be in HBC/GM," DeFabis said. "It took us three years to deliver, but we opened VMC as a wholly owned subsidiary last year." VMC operates out of a 230,000-square-foot distribution center in Fort Scott, Kan. -- cross-docking 60% of the merchandise before shipping it to one of its three warehouses and delivering the other 40% directly. The subsidiary's volume is about $125 million. "We opened with the philosophy of delivering product to our members at cost -- with no overhead -- in an effort to give them a competitive edge against mass merchandisers," Carolan said. "And in only a few months, VMC has dramatically lowered our retailers' costs, improved the variety they carry and enabled them to have a structured sales program to promote nonfood categories." AWG had been reluctant at one time to develop its own in-house nonfood operation, "but with increasing competition from major discounters like Wal-Mart, Kmart and Target, it became very important that we put that program together," Queen said.

According to Utter, the introduction of VMC "has lowered the cost of goods and allowed us to make a better profit. And it also forced us to take over that department and run it ourselves. "Now we control our own destiny instead of relying on someone else to do it, and we can do a better job controlling the inventory and the in-stock conditions. And it gives us an advertising vehicle for nonfood, which we didn't have before, so we can promote more often and at a more competitive cost." To accommodate future growth, AWG bolstered its management team late last year by adding and promoting executives with strong retail backgrounds. "When people working for a wholesaler come from a retail background, they have a better understanding of the impact that programs and decisions make at the retail level," Carolan said. Among the changes is the appointment of Tom Williams to executive vice president for division operations -- a position that had been vacant for several years. Williams, a 12-year veteran of AWG after several years with Cincinnati-based Kroger Co., formerly headed the wholesaler's Kansas City distribution center.

AWG also appointed three executives to head each of its warehouse operations: Jerry Barber, formerly president of Eagle Food Centers, Milan, Ill., as manager of the Kansas City division; Maurice Henry, a 10-year AWG employee who once worked for a St. Louis retailer called Tom Boy, as Springfield division manager, and Jerry Garland, who joined AWG three years ago after working for Harvest Foods, Houston, and Kroger, as Oklahoma City division manager. DeFabis once headed the Preston-Safeway chain in Indianapolis, and Carolan formerly worked for several divisions of the former National Tea Co.

Rounding out the top management team are Gary Phillips, former head of AWG's Springfield division, who was named executive vice president of finance and administration, and Joe Campbell, who continues as AWG secretary-treasurer. Dave Trottier, owner of the eight-unit Smitty's Supermarkets, Springfield, Mo., said he likes being part of a cooperative "because their pricing is anywhere from 1.5% to 3% cheaper [than traditional wholesalers], and the year-end rebates of 2.3% to 2.5% of total warehouse sales are the best in the U.S. "And as a cooperative, it's not in the retail business, so all its efforts are directed to improving the members' business. I think other wholesalers who are in the retail business and compete with their customers do them a disservice." Asked about AWG's efforts in technology, Carolan cited the scan-and-pick personal order verification system the company introduced in mid-January in its meat warehouse here, which is designed to virtually eliminate errors.

The system, he said, uses a scanner attached to a selector's wrist that tells that person what slot to go to and how many cases to select. The selector then scans the bar code on the storage rack to make sure he or she is at the correct slot before picking the required number of cases. Carolan said the system is more accurate than other picking systems because it eliminates the use of paper labels, which can be lost before or after they are attached to cases being moved to pallets. Also, it prevents a selector from moving ahead with an order if the bar code registers an incorrect item in the picking process. "Our error rate today on a 100-case order is 0.5%," Carolan said, "but with scan-and-pick we anticipate reducing that to four-thousandths of 1%." AWG will expand scan-and-pick through the year to include all perishables in Kansas City, with dry groceries coming onstream at the end of the year or in early 1997 "if the results are up to expectations," he said.