RICHFOOD RECEIVING KUDOS FOR EXPANSION

RUSSELL REDMAN

MECHANICSVILLE, Va. -- Richfood Holdings here is getting good reactions from several industry analysts to its recently announced ambitious growth plans.

Richfood's plan -- boosting sales about 67% in four years within its current trade area -- is not unrealistic, analysts contacted by SN said. They noted that the company has come far already, from sales of just under $1 billion in 1990, and has extra distribution capacity from its acquisitions of Super Rite Corp., Harrisburg, Pa., and Rotelle, West Point, Pa.

The wholesaler aims to grow from $3.3 billion in sales now to $5.5 billion by the year 2000, Donald D. Bennett, chairman and chief executive officer, and John E. Stokely, president and chief operating officer, told shareholders and the board of directors late last month. They also announced that Stokely would assume the CEO title Jan. 1, allowing Bennett to focus on mapping out Richfood's expansion course in its mid-Atlantic market.

Aug. 29, the day of Richfood's annual meeting, the board declared a three-for-two common stock split to be distributed on or about Sept. 30. It also said it would maintain the company's quarterly cash dividend, 3 cents a share, for the first quarter after the split.

"They've already doubled the size of their business in the last few years. So to grow again in the next four years by less than double means slowing down, as far as Richfood is concerned," said Mark Husson, managing director at J.P. Morgan Securities, New York.

"The way you achieve it is by being not too precise about how you define the trade area. For instance, they're in New Jersey slightly now and could do more there. They're slightly in North Carolina, so what about doing all of North Carolina and even South Carolina? As long as they keep East and relatively coastal, they will be in their core market area."

Cody McGarraugh of Scott & Stringfellow, Richmond, Va., said $5.5 billion is "a pretty reasonable number" for Richfood. "That equates to about 15% to 20% annual growth," he explained. "The way they'll get there, basically, is that their customers are all growing pretty rapidly. As each of their current customers adds new stores, it fuels their growth also."

Richfood's leading customers are undergoing healthy expansion, noted Lee Wilder of Interstate/Johnson Lane, Atlanta. "Their top 15 retail customers are probably expanding at a high single-digit or low double-digit rate over the next year or two in terms of square footage," she said. "Ukrop's is expanding, Giant Food Stores is expanding and Farm Fresh is growing again."

According to Husson, "I think the total amount of new square footage their retail customers have in the pipeline over the next year to 18 months is over 10%."

Yet any sales gains Richfood seeks from customer expansion could fall short of expectations, said Gary Giblen of Smith Barney, New York. "Ukrop's has greatly accelerated its store expansion strategy, but with the others I don't know," he said. "Farm Fresh is not expanding. They're shrinking; they recently sold stores to Hannaford Bros. Giant has been growing at only a moderate clip.

"The other concern that always arises is if [a retailer] gets too big and powerful, then it might decide to go to self-distribution or force a lower-margin supply agreement," he added.

Despite casting its expansion net over the mid-Atlantic only, Richfood has numerous opportunities to snare new customers, analysts told SN.

"They have a relentless appetite for new customers, and that is a key focus of management from the top on down," Wilder said. "Their market share in Virginia is already high, so most new retail customers likely would be in the Maryland-Delaware-Pennsylvania area."

The wholesaler probably is looking south for new customers as well as in Pennsylvania, according to McGarraugh. "They've worked up from the Richmond area into Pennsylvania. So I think you'd see them going more to the South, maybe into North Carolina. There are several small grocery-store operations there that are being served, [by another wholesaler] but can be served better by Richfood," he said.

Regarding potential new customers for Richfood, observers cited small independents from Fleming and Supervalu; Lowes Food Stores, a 50-unit chain based in Winston-Salem, N.C.; and Bi-Lo, Mauldin, S.C., a 260-store Ahold USA chain.

"If you look at Ahold USA's trade areas, that effectively defines where Richfood thinks it ought to be in business and sort of broadens their whole perspective," one observer told SN.

Adding a sizable amount of chain business, though, is a long shot, according to Giblen. "That's not likely. The great American dream of wholesalers these days -- in light of the slower growth by independents -- is to pick up chain business. But that really doesn't happen, except in cases of financial distress," he said.

To reach its growth target, Richfood will have to supplement any gains in wholesale volume with acquisitions -- its main expansion vehicle in recent years, analysts said.

"It would require additional acquisitions. They could certainly move south as well as fill in their mid-Atlantic territory," Wilder said.

Possible acquisition targets could include divisions of big wholesalers like Fleming or Supervalu plus small specialty distributors located in or around Pennsylvania and the Carolinas, analysts said.

In hunting for acquisitions, wholesale or retail, Richfood may have to do some deep digging, Giblen noted. "I'm skeptical of the availability of acquisitions," he said.