ROUNDY'S INDEPENDENT RESOLVE

ELLIOT ZWIEBACH

PEWAUKEE, Wis. -- Roundy's is staking its future on the independent retailer.

At a time when some industry observers point to a precarious future for independents, the wholesaler based here is recommiting itself to serving this sector exclusively.

"Some other wholesalers operate corporate retail stores and supply products to alternative formats, but we have no intention of doing either," Gerald F. Lestina,

president and, as of next week, chief executiveofficer of Roundy's, told SN. "Our core business is serving independent retailers, and a lot of those retailers would view us as committing ourselves to their competition if we took either approach. "Besides, there's no long-term future in servicing supercenters because they will eventually build their own distribution facilities. And there's no long-term benefit in operating corporate stores because they compete with the retail customer base we service." Roundy's does operate eight corporate Pick 'N Save stores, but only for research and development purposes, Lestina explained. Lestina disputed the notion that the independent's time has passed.

"Over the long term, the independent, because of his ability to merchandise to specific markets, still has a tremendous future. The key to Roundy's long-term success is the fact we are blessed with a strong independent base in a fairly condensed geographic area."

After the breakdown of its efforts last year to merge with Spartan Stores, Grand Rapids, Mich., Roundy's is re-energizing its own plans for growth and expansion through a series of strategic efforts that include:

Consolidating facilities by reducing 10 operating divisions down to four or five over the next five years.

Reducing costs through implementation of Efficient Consumer Response practices and possibly moving to third-party providers for some services.

Expanding its customer base through new accounts, wholesale acquisitions or a merger.

Experimenting with new formats that its independents can use to fight new competition. Roundy's, the nation's sixth-largest wholesaler, is a cooperative that branched out into voluntary wholesaling through acquisitions in the 1980s. Its operations are primarily in the Midwest: Wisconsin, Illinois, Michigan, Indiana, Ohio, West Virginia and Kentucky. Its customer base consists of 1,200 retailers, including 165 cooperative members who account for 15% of its volume. Lestina, 52, has been president and chief operating officer of Roundy's for 15 months. He will assume the CEO title next week as part of a succession that will see John Dickson retire as chairman and CEO June 6. Once Lestina takes over as CEO, the post of chief operating officer, which was activated only during the transition, will remain vacant. Dickson will become chairman emeritus, and the title of chairman, which was also transitional, will remain vacant as well, Lestina said. Lestina said Roundy's has a lot of options for growth.

"As we attempt to build sales and reduce operating costs, we can turn corners quickly because we're not operating on a nationwide basis," Lestina said. "Our objective is to grow, and we can grow by developing business within our area or through an acquisition of or merger with another wholesaler. And if any opportunities present themselves and the fit is right, we will pursue them." Lestina said there's also a chance that Roundy's will seek to go public in the next few years, "which seems more logical than a potential merger. "In the long term, it will be difficult for cooperatives to compete because of their limited capital base. But before we can consider going public, we need to develop a stronger earnings trend -- a more solid track record -- for at least three years." Earnings have been disappointing, he noted, with gross profits eroding at a rate of about one-tenth of 1% per year for the last three years. Sales during the same period have been relatively stagnant, dropping 2% last year to $2.5 billion after Roundy's sold a West Virginia distribution center "that didn't fit into our long-range plans," Lestina said. He said he anticipates a 4% sales increase this year as the company focuses on developing new accounts plus remodels, expansions and new-site development for its Pick 'N Save retail group. Rick Mazer, a San Francisco-based consultant, told SN Roundy's greatest challenge will be trying to grow in a low-growth business. "It's a zero-sum game out there, and Roundy's was thwarted in its attempt to merge with Spartan," he said. "That merger made sense because the two operations are contiguous, and it would have enabled Roundy's to rationalize some smaller warehouses to achieve greater economies of scale. "I believe it's possible for Roundy's to make it on its own because of the geographic protection it enjoys, but it needs to merge with Spartan or to be acquired itself by a larger wholesaler to achieve sufficient economies of scale." Lestina said he believes Roundy's can achieve greater economies on its own through warehouse consolidations -- a five-year process he said will begin early next year. "We've already gotten out of manufacturing -- selling our bakery operation in 1992 and our dairy and ice cream businesses last year -- as we seek to focus on our core wholesale business. "Our objective is to reduce our 10 operating divisions down to four or five facilities doing the same volume as all 10," he said. "Right now the only one of our 10 facilities that's operating close to peak capacity is our Milwaukee distribution center. In fact, we're using outside storage there. The other nine have room the grow." The wholesaler operates six full-line distribution centers and four specialty facilities. The full-line operations are in Milwaukee; Muskegon, Mich.; Columbus and Lima, Ohio; Eldorado, Ill., and Westville, Ind. The specialty centers consist of perishables warehouses in Evansville and South Bend, Ind., and nonfood facilities in Mazomanie, Wis., and Van Wert, Ohio. Lestina said the company has not yet decided which facilities will be closed. "Consolidation will happen, but we have not yet addressed it with the people in the operating divisions," he explained. The determining factor in those decisions will be sales per square foot, Lestina noted. He said he expects to announce the first consolidation moves by the end of this year. Besides rationalizing its warehouse operations, Roundy's is attempting to reduce costs through greater efficiencies, Lestina said. "We need to strengthen our technical support through ECR, and since we've put more emphasis in that area, we've seen inventory levels drop an average of 7%. "We're already working with major vendors on electronic data interchange and continuous replenishment, and the next step will be getting into category management. We've done most of the preliminary planning, and we expect to roll category management out within 60 days." Roundy's is also considering transferring some activities to third-party providers, "not only in data processing but also possibly in the areas of human resources or transportation," Lestina said. "We will basically examine every component of our operation and determine how it fits into our long-term plans and what third-party alternatives are available." Roundy's examination of all cost components prompted it to eliminate its flight department, which included a corporate jet, two pilots and a hangar. Getting rid of that operation May 1 cut expenses by $500,000 to $600,000 a year, Lestina said. According to Mazer, Roundy's can prosper, despite its small size relative to wholesale industry leaders, by taking "evasive action and buying differently than its competitors -- for example, by putting more money into forward buys and doing more business with diverters." Asked about Mazer's comment, Lestina told SN, "Forward buying is critical when the opportunity presents itself. "But Roundy's has raised its parameters and put a greater emphasis on return on investment, and while we haven't eliminated the practice of forward buying, we have downplayed it. "As for diverting, the wholesale industry continues to work with diverters because of ROI considerations, so why not admit it? If we can divert product in and out and get a good ROI that exceeds the costs of handling the product, why not do it?" To help its customers become more competitive, Roundy's is experimenting with formats and in-store components, Lestina said. "With the expansion of supercenters we have to come up with alternative formats that address some of the new competitive challenges they pose," he explained. "It's difficult for a single-store conventional retailer to operate as he once did. He must explore different possibilities -- for example, becoming a limited-assortment store, a super-convenience store with gas pumps out front or an upscale niche operator. "Part of our strategic plan is to develop stores in one or more of these formats." Some Roundy's customers in West Virginia, Kentucky and Ohio operate a limited-assortment format called Mor-for-Less that may work in other areas, Lestina said. "We think that format is expandable with some fine-tuning, and we want to strengthen it by getting more product continuity to build more customer loyalty, perhaps by developing a specific private label to replace the various controlled labels that move in and out of the stores," he said. Roundy's is also remodeling and enlarging some of its eight corporate Pick 'N Save stores to develop concepts it hopes to offer to its retail customers to make their stores more competitive.

Roundy's had 23 corporate stores at one point in the early 1980s, "but we've opted to retain only a small core of stores for ourselves to test things like electronic shelf tags, robot front ends and frequent shopper cards," he explained. The latest efforts -- at remodeled stores due to open in July in Waukesha, Wis., and at year's end in Pewaukee -- include testing the salability of preseasoned, precooked fresh meats, giving more emphasis to prepared salads and offering a wider variety of takeout delicatessen items, he said. According to Lestina, the eight corporate Pick 'N Saves and the 57 units that license the name have been an excellent source of growth in recent years on the cooperative side of Roundy's business "because they've become such a dominant retail venture in Wisconsin. "However, in the future we expect the voluntary side to grow faster because Pick 'N Save has saturated so much of the Wisconsin market that there are fewer development opportunities there, while we see opportunities on the voluntary side for new business from additional customers and site development."