MEGAFOODS SEES BIG PAYOFF FROM CUTS

Elliot Zwiebach

MESA Ariz. - Mega foods Stores here expects to save "in excess of 1% of 1994 sales" as a result of its new management reorganization and cost-cutting program, Jack J. Walker, the chain's executive vice president and chief financial officer, told SN last week.

While Walker declined to project sales for the year, industry observers estimate the figure at about $765 million. Based on Walker's comments, that would translate to a savings of more than $7.5 million.

Walker also said Megafoods' decision to retain Fleming Cos., Oklahoma City, as its supplier - rather than switch to Safeway - was prompted by a guarantee of an uninterrupted source of supply and the ability to get back part of its working capital deposit from Fleming. Observers said Megafoods could get back as much as $10 million, although it will have to pay its bills to Fleming twice weekly instead of once a week.

Securities analysts said Megafoods could use the savings from cost-cutting and the deposit refund to meet a $5 million interest payment in October, to remodel stores in San Antonio and to complete construction of four new stores this year and 11 next year.

Megafoods operates 71 strores, including 36 warehouse stores in Arizona, California and Nevada and 35 conventional Handy Andy stores in Texas.

The chain's cost-containment program involves the elimination of 10 staff positions here and 40 in San Antonio. The layoffs follow installation of accounting, control and communications systems over the past year at the chain's main office here, as well as the integration of 15 former warehouse stores within the Handy Andy conventional framework in San Antonio.

No store-level cutbacks are contemplated, Walker said.

The management reorganization primarily involves the appointment of Fred Ries and Kevin Durrant to run Megafoods' core stores outside Texas - Ries as senior vice president of Megafoods operations and Durrant as vice president and director of operations.

Brooks O'Neil, an analyst with Piper Jaffray, Minneapolis, said Megafoods ahd undergone "a very significant number of changes in its management group" prior to the current changes, "and at some point it will be important to achieve some stability there."

He said he believes the new supply agreement "is very much in the retailer's interest to stay with Fleming because Megafoods absolutely cannot afford any disruptions in service to its core stores that might have come with a change in suppliers."

Under the new supply agreement, Fleming's Phoenix distribution center will supply the needs of Megafoods' 36 stores outside Texas - a move that negates Megafoods' plans to switch to Safeway as its supplier on Aug. 9.

"The deal with Fleming is not a better economic deal for Megafoods than the Safeway deal was," Walker told SN, "but it has certain attributes that the Saffeway deal didn't offer, including an assurance of uninterrupted deliveries at the same high service levels we've enjoyed, a willingness to allow Megafoods to buy private-label goods from sources other than Fleming and all the benefits of our cost-sharing arrangement without the risk of a 90-day cancellation."

Robert E. Stauth, Fleming chairman, president and chief executive officer, said the new agreement is advantageous for both companies.

"Megafoods will be able to capitalize on Fleming's purchasing power, broad selection of products and retail service. And the agreement enhances Fleming's credit position with Megafoods and gives Megafoods access to the products and services required to grow its market share."

The five-year agreement is non-cancellable, Stauth noted, "Except in the case of a change of control of Megafoods."

Megafoods has been a Fleming customer since 1987. Despite rejecting the Safeway deal, Megafoods still expects to purchase dairy products from Safeway, as it has for the past 18 months, Walker said.

Specific management moves include the following:

Jack Walker will continue as chief financial officer and has added the new title of executive vice president "to make it clear I'm second in command," he told SN. He will continue to report to Dean Miller, chairman, president and chief executive officer.

Fred Ries has been named senior vice president of the

Megafoods division. He was vice president of procurement and merchandising for Megafoods and previously worked with Smith's Food & Drug Centers, Salt Lake City.

In his new position Ries oversees operations, procurement, buying and merchandising and reports to Miller.

He succeeds Mick Hahn, who has left the company.

Kevin Durrant has been named vice president and director of operations for the Megafoods division, a new position. A Megafoods employee since its inception, Durrant is in charge of all district managers outside Texas and will report to Ries.

Robert Ling has been hired as corporate counsel, a new position. He was vice president, general counsel and secretary for Reliable Drug Stores, Indianapolis.

Ling reports to Walker.

Diane Klein, who was appointed vice president and controller last month, will retain that post.