SPARTAN OF THE WAYS

DAVID ORGEL

GRAND RAPIDS, Mich. -- Spartan Stores here will see a transition of leadership next month that represents more than just a change of chief executive officers.

The 80-year-old operator has spent most of its existence as a cooperative wholesaler and has finally cut the last strings that attached it to that business philosophy. When president and chief operating officer James Meyer takes the CEO reins from Pat Quinn on July 15, he will lead the for-profit company into an era when improving financial results is a top imperative, the two executives said in a joint interview.

"I need to take the company forward in a significant way in improving results," said Meyer, 51, a 24-year Spartan veteran who became president and chief operating officer last August with the understanding he would succeed Quinn, 63, who is retiring. "That is not to say what happened historically is bad. But as the company matures, expectations of shareholders are maturing as well."

Meyer said the company expects to report "very good" results for the year ended March 29, which will compare favorably to a year-ago period in which Spartan posted a net loss of nearly $21.7 million, which stemmed from special charges. But Meyer stressed that Spartan will need, among other things, to further improve the top line if financial health is to be maintained. Spartan posted volume of $2.5 billion in the year ended March 30, 1996.

Meyer's emphasis on building financial performance coincides with Spartan's abandonment of the practice of giving rebates to members -- a traditional co-op practice. With earnings no longer funding rebates, there is a greater focus on retaining profits to help the company grow and provide acceptable market returns on investment for shareholders. Retailer equity ownership is no longer viewed as merely the prerequisite for supply arrangements. It is now weighed against the benchmark of other market investments.

Spartan will acclimate to this new environment and focus on top-line growth at a time when local competitors -- both retailers and wholesalers -- are consolidating into bigger-volume, more formidable players. And Spartan is still looking over its shoulder to gauge the potential of third-party distributor competition.

Meyer's battle strategy will include the following:

Building merchandising programs and sales with existing retail customers, partly by touting the advantages of Spartan's pricing program.

Soliciting new customers and ensuring that existing stores continue to be supplied by Spartan if a retailer decides to sell out.

Enhancing efforts to seek potential acquisitions.

Moving into the next levels of re-engineering programs, which include technology implementation that will help make Spartan's operations closer to those of a chain environment.

Gaining additional benefits on the labor front through increased efficiencies and a new incentive program.

Challenges of New Leadership

The leadership transition signals a major event for the company. Quinn has been at Spartan since May 1985, when he joined as president and CEO. He had previously held executive positions with Nabisco and D&W Food Centers. Quinn has been credited with spearheading numerous acquisitions and making the company an industry leader in re-engineering efforts.

Meyer's appointment capped a near yearlong executive search for Quinn's successor, explained Donald Koop, chairman of Spartan, and of retailer Family Fare Super Markets, Hudsonville, Mich. Koop said that after an exhaustive search, the board realized the right man for the job was already at the company.

Meyer has spent virtually his entire career at the company, beginning with his appointment as retail accounting manager in October 1973. He has since held a great variety of positions, including controller, vice president of finance and administration, senior vice president and chief financial officer, and president and chief operating officer.

But Meyer is quick to point out that his experiences at the company reached beyond the financial and administrative aspects of these roles. "In the last 12 years under [Quinn], I've had great freedom to get involved with every aspect of the business," he said. "In particular in the last four or five years, I had responsibility for all aspects of our subsidiary companies. The presidents reported to me. So I became more familiar with sales and marketing at those companies."

Meyer assumed day-to-day operations of the company when he became president last August. But when he formally takes the helm as CEO in July, he will lead a wholesale operation that caters to two different classes of customers: supermarkets and convenience stores. The company supplies about 500 independent supermarkets and 9,000 convenience stores. But because of the far larger size of supermarkets, that sector represents about two-thirds of the business. Spartan doesn't own supermarkets, but wouldn't rule out corporate stores, Meyer said. Supermarket customers are located in Michigan, Indiana and Ohio. The convenience store side was built up in recent years through acquisitions. Spartan has no set agenda on how its business will break down in the future, Meyer added.

"The convenience business acquisitions were financially beneficial, and if future deals arise on the convenience side, we would entertain them," he explained. "We don't have a predisposition to move in a particular direction, whether supermarket or convenience stores. But we do see a similarity in terms of products. Supermarkets have a much greater [stockkeeping unit] count, but they have similar items to convenience stores and both types of operations are compatible to our long-term business philosophy."

Spartan's move away from a co-op structure was a long time in coming. Technically, the wholesaler moved from a cooperative to a for-profit company in 1973, but that change was in many ways only technical. "Philosophically, we were still functioning as a co-op," Meyer said. That included the practice of giving rebates to members based on the amount of goods they purchased. The final step away from rebates didn't happen until April 1 of this year.

The for-profit company direction involves retaining more earnings to enhance shareholder value. "One of the challenges for co-ops is retaining enough equity to fund the growth necessary to keep moving forward," Meyer said. "Spartan has always retained a fairly significant amount of profit, as compared to the cooperative group of wholesalers. But with our new orientation and with cost-plus and the elimination of rebates, we will be able to increase the amount we are retaining to strengthen the company and improve value."

Even the way Spartan governs itself has completely changed from a co-op philosophy. The board now includes members who are not retail customer shareholders. "As of two years ago, we formalized our governance structure of the board along the lines of a public company with the executive committee, nominating committee and compensation and audit committees," Quinn said. "So we've become more sophisticated. We're also looking for another outside board member."

These days Spartan speaks of investors and customers, as opposed to members. While all Spartan customers own some share in the company, the ownership stakes vary widely. Accordingly, the voting power of retailers varies. Stock ownership also includes those who are not customers. For instance, employees can buy stock, as can shareholders of some customers.

With this structure in place, the company is ready to address heightened financial expectations. The $21.7 million loss in the year ended March 30, 1996 stemmed from a $46.4 million reorganization charge, including $35.4 million related to the company's re-engineering program. Despite the loss, Spartan has continued to improve operating earnings, which increased in that period to $14.3 million -- the fourth consecutive year of advances. Spartan has not yet released figures for the latest fiscal year.

"It's safe to say that this year's results will be significantly different than last year's," Meyer said. "We're going to report a profit. There will not be a repeat of that restructuring charge. The financial performance for this year is going to be very good."

But Meyer doesn't expect a significant change in the sales number compared to the period ended in 1996, which was about $2.5 billion. "As we look down the road, sales need to rise at a more rapid rate than over the last several years," he said. "Growing the business is imperative -- it's not an option."

Spartan is in a good position to accomplish this because of the efficiencies steadily built into the business for customers and prospective customers, Meyer said. "Given the investments we've made, we are positioned as an efficient distributor of goods and services to our customers. We'll grow our base with existing customers, solicit new customers supplied by other distributors and keep our eyes open for acquisitions."

Why is Meyer emphasizing the need to advance results now? Over time, some of the larger Spartan customers have been growing their ownership stake in the company and expect management to enhance the value of the company for shareholders, Meyer said.

Another imperative for improving results involves the company's ability to make financial transactions. Spartan realizes the need to grow through acquisitions and hopes to utilize its own equity capital in a transaction.

"If we're going to use our stock as the currency for an acquisition, the value of that currency is determined based on what kind of a return it provides," Meyer said. "As an example, when we talked with Roundy's about a possible merger in 1994, it would have been a stock transaction. For us to maximize our investment value, it is imperative that we improve our financial results."

Better financial numbers would also be beneficial if Spartan ever decided to go public because it would help attract equity buyers, Meyer said. He stressed that Spartan is not currently contemplating going public, although it could be an option down the road.

Because improving the top line is all-important, Spartan's goal is to attract more business. The company will partly rely on its cost-plus pricing program to attract greater portions of existing customers' business, Meyer said. Cost-plus involves the unbundling of the cost of goods to customers, and it is already leading to reduced costs.

"We have some untapped sales with existing customers who source some of their product from competitors," Meyer said. "Some parts of our company's cost-plus program are unique and present opportunities to draw customers and bigger portions of their business."

Beefing up merchandising programs is another route to building business with customers. About two months ago, Spartan formed a team of executives to explore meal-merchandising concepts. The team is led by Shari Steinbach, meal-solutions and consumer affairs manager. It includes meal-solutions specialists Kathy Pompliano, Lynda Wieferich and Chef Dirk Rusthoven.

Spartan's team will assist customers, formulate new recipes, work closely with suppliers and help develop meal marketing, advertising and signage direction. The signage focus in particular is generating a lot of early retailer interest.

"There's a lot of need in the marketing, advertising and signage area," Steinbach said. "A lot of stores are smaller independents and don't want to invest in their own logo for marketing and signage, so we are creating generic materials," Steinbach said. "We are using our established logo "Make Mealtime Easy" for that purpose."

"The team is looking at the scope of food service," Quinn explained. "How to help retailers to make them more capable. And what is the role of the wholesaler, such as supply, technical assistance, format assistance, training or other things."

Added Meyer: "It's still a new venture. They've been gathering data, but haven't released recommendations."

Recently Spartan has formed fresh-food partnerships to help supply retailers, such as a bakery and deli arrangement with Lipari Foods, Warren, Mich. Meyer said that, at least in the short term, such partnerships will continue to be a key component in the wholesaler's fresh-food supply approach.

"Where this may ultimately lead is what the team is attempting to determine," Meyer said. "We have an open mind."

Fortunately for Spartan, the wholesaler supplies independents who are pursuing a wide range of meal strategies.

"We're seeing aggressive approaches and excellent formats from some stores on meal programs," Quinn said. "There's not a uniform format. There are delis, sit-down restaurants, sushi bars and many other directions. Our people like doing their own thing. They aren't cookie cutter. We work with them."

Spartan isn't just looking to its existing base to improve sales. New customer solicitation is "an area of real focus for us," Meyer said. And the company has stepped up attempts to identify prospects. Cost-plus pricing is an important weapon because it enables Spartan to compare its offerings, line by line, with many other providers.

Acquisitions may play a part in growing the top line, the executives said.

"We have accelerated our efforts to seek out acquisition candidates," Meyer said. He said Spartan would consider a retail or wholesale deal outside its three-state operating area and would even consider a market not contiguous to its current ones, if it seemed appropriate. Spartan's independents have done their part in helping the entire group sustain its base. Spartan has managed to hold onto its store base by avoiding the transfer of units out of the group.

"Our independents are doing well," Quinn said. "We're seeing some retailers reinvesting and adding stores, while some are selling stores. So the stronger ones are growing, and the stores are staying within the Spartan group. So we're seeing incremental growth because the stores are taken over by larger, more sophisticated operators."

While Spartan is pleased that stores are remaining within the network, the wholesaler would also like to see growth in the number of units supplied, Quinn said.

"It's like treading water with incremental growth because while it's good we are retaining the stores, if [stronger Spartan independents] weren't buying stores that were already supplied by Spartan, they might be buying stores that weren't. And that would also be more growth for us. So that's the other side."

Re-engineering

Moves to Higher Levels

Spartan continues to move to higher levels in one of its most successful initiatives: building efficiencies through re-engineering. Spartan first began its re-engineering program in 1992, which in the early stages involved an examination of all its business processes. The program came to be known as BASE (Business Automation Support Environment), and the company became known for making major efficiency strides even before Efficient Consumer Response was a common industry term.

Today Spartan looks back on a number of accomplishments, but also many continuing challenges on the efficiency front, Meyer said.

"One of the biggest accomplishments was our pricing program rollout, with successful rollouts of cost-plus and menu pricing as critical components," he said. "Another success is our account manager program, where we have retail counselors as other organizations call them, or account managers as we call them, which is a corporate commitment to having people in the store maintaining the regular contact with customers."

Certainly a large part of re-engineering has involved a significant investment in technology, with many programs implemented, and others left to move ahead on, Meyer said.

The company is in the process of implementing a platform which will be used uniformly across Spartan and its subsidiaries. The platform will allow all of the various systems to interact with each other. The program would link systems for financial functions, human resources, payroll, warehouses and other areas. "That's in process right now," Meyer said. "There are pieces up and running here at Spartan, and we're about to move forward into some of the subsidiary companies."

Another key technology initiative is Spartan's "Model Store" program. This incorporates a group of technologies grafted into one product, Meyer said.

"It's the communications vehicle we use to retrieve information from retail that we use for formation of our orders to vendors. It's a piece of technology we've developed to put us in a posture similar to a chain, where they have all that information in their structure."

Model Store allows Spartan to more efficiently formulate orders, replenishing what has been sold at the cash register by using scan data.

Model Store is "still a work in progress with continually forthcoming versions," Meyer said. "Installations are scheduled every week throughout the balance of the year."

Both Meyer and Quinn pointed out that Spartan's electronic data interchange capabilities are still notably ahead of its vendor partners.

Meyer said this fact slowed Spartan's efforts in further investments in EDI and electronic data flow. "We ended up being in front of the vendor community, and had nowhere to go with the technologies we were developing. We're continuing to move forward. More and more of the vendors are catching up with us."

New Horizons in

Labor Agreements?

Meyer also hopes to capitalize on efficiencies in the labor arena. In March, Spartan negotiated a new labor contract "which has the potential for efficiency improvements beyond our old labor contract," he said.

The hope is that Spartan can reward associates for advanced productivity as opposed to relying solely on engineered labor standards. "None of this is in place yet. But we are developing the framework for a rollout with our warehouse associates and our driver component. It's really a philosophy that will focus on how we can give people incentives to be more efficient."

The company also rolled out this fiscal year an incentive program that includes a significantly larger portion of management. "It will be more tied to performance than it has in the past," Meyer said. "We anticipate that over the next couple of years, the rollout will ultimately make its way to our entire workforce."

In planning Spartan's battle strategy, executives are trying to position independents favorably against a formidable field of local retailers. Quinn pointed to a still-aggressive Meijer, also based in Grand Rapids, which he calls "the exemplar of the industry in terms of supercenters." So far other supercenters have mostly steered clear of Spartan's operating area because of the presence of Meijer. Quinn noted a revival of area chains, which are becoming more aggressive, including Farmer Jack and Kroger. And Spartan independents face off against category killers and other conventional stores as well.

Spartan is also seeing its wholesaler competitors get larger in a consolidating industry. Quinn and Meyer consider Spartan's biggest wholesaler competitors to be Roundy's, Pewaukee, Wis., and Supervalu and Nash Finch Co., both based in Minneapolis.

Remaining viable in the future will be the challenge, agreed both executives. But they stressed that Spartan has created a vision for the future that should carry it through.

"The survivors among wholesalers will be those that break loose from the habits of the past and give thought to what a wholesaler/distributor is going to look like in the future," Quinn said. "Those who think along those lines will do fine."