GAS PRICE ACCELERATION LEAVING SKID MARKS

DAVID GHITELMAN / Additional reporting: JON SPRINGER / ELLIOT ZWIEBACH

The dramatic increase in fuel prices in the Upper Midwest is increasing costs to wholesalers and retailers, with the greatest effects on smaller distributors.

Also at greater risk are wholesalers that increased delivery distances by closing warehouses, according to industry sources.

Average U.S. on-highway per-gallon diesel prices have risen from $1.31 in January to $1.45 in early July, according to government figures. In the Midwest, the price has gone from $1.29 in January to $1.45. Industry sources estimate that a typical food-industry truck, fully loaded, consumes five to six gallons per mile.

David Busch, vice president for administration at Roundy's, Pewaukee, Wis., told SN, "Obviously, fuel-price increases are having an impact, and we have instituted a fuel surcharge on all deliveries.

"The surcharge is different at each of our eight distribution centers, depending on the cost formulas each one uses. We budget fuel costs at the beginning of the calendar year, based on cost per gallon, and when we exceed that budgeted level, a surcharge kicks in and stays in effect as long as the price of diesel remains above the budgeted number.

"The surcharge kicked in in April, when fuel prices began going up and we started to exceed our budget. Although the retail price of fuel is at $1.65 to $1.68 per gallon, we buy in bulk, so the price we're paying is in the mid-$1.40s. At this point we don't anticipate any significant downward dip.

"Of course, our retail members are not thrilled with the surcharge, but there is a level of understanding about it -- and being a cooperative probably makes that level of understanding a little higher."

Burt Flickinger, retail consultant at Reach Marketing, Westport, Conn., told SN the rising cost of gas has been "a big issue, a huge issue even since February."

He said companies that should feel particular pressure are Fleming Cos., Dallas, and Nash Finch Co., Minneapolis, wholesalers that have closed warehouses in the last year or so.

"When Nash closed six distribution centers and Fleming closed eight, diesel was less than a dollar a gallon," said Flickinger.

"Now, Fleming is hauling produce from Indianapolis to Syracuse, and Nash Finch is long-hauling from Dakota to Denver," he added. "It's a high transportation cost and a long way to go for product with a short life cycle.

"What's compounding the issue is that Wal-Mart has a record number of store openings scheduled in Iowa, Illinois, Wisconsin, Ohio, Kentucky, West Virginia and the Southeastern states. This puts tremendous volume pressure on independent stores. As independents lose volume, trucks are delivering less per retailer.

"As a result, the regional wholesalers like Fleming and Nash Finch are being squeezed by Wal-Mart on one side and high operational costs on the other."

Fleming could not be reached for comment, but William A. Merrigan, senior vice president for distribution and transportation at Nash Finch, discussed with SN his company's efforts to reduce fuel costs.

"We're looking at buying fuel with a couple of companies that buy fuel across the U.S., so we can take advantage of better prices outside the Midwest, but until then we are passing along all increases to our customers in the form of a fuel surcharge.

"The surcharge is a formula that's been in place for years but didn't kick in until last fall, when gas prices began going up. The formula is in place in the computer, and when prices reach a certain point, the surcharge is automatically computed and added in.

"Prices have been going up since September. They levelled off in the spring, then began rising again in early May.

"We expect prices to begin falling within the next 60 days. Now that Saudi Arabia is loosening up production, other oil countries will probably follow suit. But we're never going to get back down to the previous levels."

Other retailers and larger distributors tended to downplay the surging fuel costs.

Michelle Croteau, public relations manager at Lunds Food Holdings, Edina, Minn., told SN, "We have seen surcharges added to some of our invoices by just a few of our wholesalers but it hasn't affected the prices in our stores at all."

Ruth Mitchell, assistant vice president for communications at Hy-Vee, West Des Moines, Iowa, said, "We have not made any changes in our distribution procedures or costs, despite the increase in fuel prices we've been experiencing since May.

"The way we operate, we determine a breakeven price for fuel based on an eight-quarter running average, and, until our costs exceed that level, we don't increase our delivery costs.

"Buying in bulk as we do, the average for diesel prices in June was $1.40 per gallon, compared with less than $1 a gallon a year ago. But we still haven't exceeded the breakeven price. And even when we average in the most-recent quarter, ended June 25, we still expect to be 8 cents or so below the breakeven level.

"The average cost of diesel was $1.34 per gallon in March, $1.31 in April and $1.38 in May, which is when we began to see increases. When our distribution manager purchased gas at the end of June, he paid $1.43 a gallon, which was down slightly from the $1.46 we paid earlier in the month.

"We've also seen some increases in the price of goods coming in, and we add that increase into the cost of goods to the store.

"We haven't made any changes in our delivery systems to accommodate the fuel increases because we've always operated very economically. For instance, we don't necessarily make assigned runs if we can't maximize a delivery load.

"A lot of companies adhere to a strict delivery schedule for each store, but if a store orders only half a truckload, we'll change the delivery time until we can combine his order with another order so the trucks go out fully loaded."

On the wholesaler side, Rita Simmer, a spokeswoman for Minneapolis-based distributor Supervalu, said rising prices have not affected the company greatly.

"Fuel costs are a very small component of our business," Simmer said. "A lot of people have asked us about it recently. But that's what we're telling everyone, including Wall Street."

Simmer said Supervalu uses a "built-in surcharge" to protect itself from wildly varying fuel prices.