THE CONTRARIAN

David Merrefield

On Wall Street, investors who go against prevailing wisdom are often busy selling on a rising market, or buying on a falling market.

And every now and then, it's the contrarians who end up with the best investments and strongest income generation simply by following a strategy that seems to be saying that "everyone can't be right all the time."

To some extent, Roundy's, the wholesaler in Pewaukee, Wis., is staking out a contrarian position for itself by eschewing the conventional wisdom that now surrounds the wholesale side of the business.

Here's the situation: Conventional wisdom in the grocery wholesaling business today calls for making a fundamental shift away from the business of simply supplying products and services to independent supermarkets. Many wholesalers are now in a quest for a new way of doing business because it's generally understood that wholesaling had grown too dependent -- maybe far too dependent -- on "inside margin," the profit that can be made from buying products. The inside margin includes proceeds from forward buying, diverting and the like. There was also the suspicion among wholesalers that independent supermarkets might lose ground to chain operators over the long haul because chains are fully integrated from the point of product receipt to the point the product leaves the store. That means chains are better positioned to find operational efficiencies than is the wholesaler-independent network. And, it is feared, the less efficient wholesaler-independent system might more easily yield position to competitive pressures from chains and supercenters.

In reaction to these long-developing trends, wholesalers developed new strategies to prepare for a future. The new outlook said, in essence, that a total reliance on supplying independently operated supermarkets is a mistake. So, many wholesalers sought merger opportunities in a bid to make sure a substantial amount of cash was flowing, cash that might smother the effect of whatever blows might be coming.

Then, many wholesalers spread the risk by stepping away from pure wholesaling and toward corporate ownership of store groups, and by being willing to supply chains, supercenters or whomever.

Standing in contrast to those strategies that now constitute conventional wisdom about how wholesalers should prepare for the future is Roundy's, as the news feature on Page 1 shows. Late last year Roundy's was involved in merger talks with Spartan Stores, Grand Rapids, Mich., that would have created a company with a combined volume of about $4.7 billion. At that, it would have been the third-largest wholesaler in the nation, a startling reminder of the degree of market concentration that exists in grocery wholesaling.

But the merger effort was called off, apparently in connection with difficulties encountered in integrating the two wholesalers' highly divergent board membership.

Now, as the front-page news article shows, Roundy's is content, or at least fated, to go it alone as a $2.5 billion business. Roundy's is the nation's sixth-largest wholesaler. That's not all, though. The company is reaffirming its faith in the independent sector of the business.

Gerald F. Lestina, president and chief executive officer designee, said the wholesaler will not supply supercenters, as many other wholesalers do, nor will it seek to increase its corporate-store ownership profile.

"Our core business is serving independent retailers, and a lot of retailers [supplied by Roundy's] would view us as committing ourselves to their competition if we took either approach." Roundy's also is clinging to the concept of forward buying, although it's taking a closer look at the practice, and is plumping its bottom line through diverting. Of course, Roundy's is scarcely alone in sticking with these practices, however anti-efficient they may be. At the same time, Roundy's is trimming costs in many ways and plans to remain a strong player with its future tightly knit to the success of the independent supermarket sector.

Roundy's contrarian outlook may or may not prove to be the stuff of success, but there can be little doubt it will win the wholesaler a special place in independents' hearts.