INDEPENDENTLY HEALTHY

DAVID ORGEL

CHESHIRE, Conn. -- Don't tell Michael Bozzuto that a wholesaler geared primarily to Northeast independents faces a perilous future because of retail consolidation.

The president and chief executive officer of Bozzuto's here, in an interview with SN, said his 51-year-old company is on a growth drive.

The $400 million firm has managed to show substantial net customer gains despite some retail attrition and has built a new warehouse to serve the increased volume. Bozzuto's is also moving to close a deal with Ahold to acquire five stores.

And while the current gains are coming mostly from independents, the voluntary wholesaler has decided to actively pursue supply arrangements with large- and medium-sized chains to balance its business, an increasingly popular strategy for wholesalers. Bozzuto's is already doing some work with Shaw's Supermarkets, East Bridgewater, Mass., among other chains.

The wholesaler will also continue to rely on technology to help its IGA stores and other independents in seven states compete against larger rivals. Bozzuto's is betting that product forecasting and just-in-time deliveries, coupled with savvy electronic marketing, can eventually erase the need for independents to carry in-store the deep levels of stocks currently offered by the big chains.

The company has recently finished a test program for electronic marketing and product forecasting and plans full implementation by later this month.

"People say the independents are dead," said Bozzuto. "There will continue to be consolidation in the industry, but it's important for us to make sure there are creative independents out there. Technology will be a big help to bringing that about.

"Our goal as a company would be to have some large chain business, some regional chains and then a large base of independents. That way each of those different classes can benefit each other, and the mix can benefit the wholesaler. If a chain gives up a site, it might become a niche location for an independent."

Bozzuto's competes with larger wholesalers, including Supervalu, which is based in Minneapolis but has Northeast operations, and C&S Wholesale Grocers, Brattleboro, Vt. Against these bigger rivals, Bozzuto's likes to call itself a homegrown regional specialist. The company was founded in 1945 by Michael Bozzuto's father, Adam Bozzuto, who is now chairman. Executives attribute much of the company's success to low turnover among the nearly 1,000 employees, many of whom have spent their entire careers at the company. Bozzuto's gets deeply involved in community causes, including the Special Olympics.

The wholesaler supplies more than 357 units overall, including more than 115 IGAs, with national brands as well as IGA and Shurfine-label products. There are currently nine corporate stores, including eight in Connecticut and one in Vermont. The wholesaler's customer base encompasses a mix of convenience stores and cash and carries, but its core business is independent supermarkets.

Bozzuto's primary supply area is in a 250-mile radius of Cheshire. While much of its business is in New York and Connecticut, the wholesaler also serves markets in Pennsylvania, New Jersey, Massachusetts, Rhode Island and Vermont.

In addition to its proactive moves, Bozzuto's may be helped by factors outside of its control, said Gary Giblen, a financial analyst with Smith Barney, New York. "Bozzuto's is one of the best wholesalers in the region for its size and has resilient independents. And it may benefit from banner changes in its markets. The big changes at Ahold, with Stop & Shop and Edwards, means store names will change and Bozzuto's independents may be beneficiaries. That situation is similar for Bozzuto's Long Island business, because competitor Mel's is a mess with all the changes of names and ownerships."

On the more challenging side for Bozzuto's, Giblen noted, the wholesaler's core Connecticut market was once a "gold mine" for a few select operators, but has become increasingly competitive.

Perhaps Bozzuto's boldest statement on its future is the new warehouse completed last September on its grounds in Cheshire. The wholesaler has added a 500,000-square-foot facility nearby its existing 280,000-square-foot warehouse. Executives have also made provisions for expansion, with the long-range plan of growing each structure to 1 million square feet, Bozzuto said.

The new facility features a central command center and 85-foot docks. It is geared to high-volume items, mostly food oriented, and chain distribution. The old building will handle items requiring special pick processes, including health and beauty aids, nonfoods, specialty foods and health foods. Bozzuto's currently carries only limited general merchandise, but its goal is to expand in that area, said James Dorcy, vice president of advertising and marketing.

"We see ourselves as long-term players, and we needed the larger warehouse to handle increased volume," Bozzuto said. "Our position is such that we can effectively reach most chains from this location."

The larger capacity available to Bozzuto's is already being leveraged to serve additional accounts. The wholesaler has been steadily adding to its independent base.

"There's about two to three independents per week coming our way, but there's also some attrition with the current store base," Bozzuto said. "But we're having net growth in independents, about 10% a year. Going forward we see the chain part of it coming in more."

The net growth is generated by a number of factors, including taking market share from other wholesalers and facilitating the creation of new sites, Bozzuto said.

Bozzuto's will pick up additional independent business if it closes a deal to acquire five Connecticut stores from Ahold, Zaandam, Netherlands. Four of those stores have operated as Edwards and one as Stop & Shop. Ahold moved to divest these and other stores to gain government approval for its acquisition of Stop & Shop, Quincy, Mass. Bozzuto's acquisition of the five units is expected to close soon.

Bozzuto's plan to branch into chain business represents probably the biggest growth potential. While the company has supplied some chains in its history, executives are now making a more determined effort.

"We hope to be at $500 million or above in sales next year," Bozzuto said. "As you move ahead with chain business, the volume numbers move faster."

Bozzuto's has begun handling some limited supplies for five stores operated in Connecticut by Shaw's Supermarkets, East Bridgewater, Mass. These stores, the first of which opened last September, are the only ones Shaw's operates in Connecticut. The wholesaler provides this chain with items specific to the Connecticut and New York metro market.

That business could be expanded if Shaw's closes a deal to acquire 12 Connecticut stores plus one open site being divested by Ahold as part of the Stop & Shop merger. In addition, there are at least five additional Shaw's stores in Connecticut that have been permitted or are under construction, and more to come, noted Bernard Rogan, spokesman for Shaw's. However, while they said the supply arrangement is going well, neither Rogan or Bozzuto's executives would say if it would extend beyond the five existing stores.

What do independents supplied by Bozzuto's think about the wholesaler's courting of chains? Two contacted by SN said such arrangements were necessary for Bozzuto's -- and its independents -- to continue to prosper.

"Independents keep getting hurt by the chains, but if Bozzuto's sells to the chains, its buying power is better and that helps us," said Robert LaBonne Sr., president of LaBonne's Epicure, a four-unit IGA operator based in Waterbury, Conn. "Bozzuto's must get bigger for us to do well."

Jack Shakoor, president of Jack's IGA, a two-unit operator based in Boonton, N.J., said, "I don't have a problem with them going to chains. That helps me with my costs because chains get tonnage."

Bozzuto said wholesalers in general will increasingly add chain business as dynamics in the industry shift. Bozzuto's competitor C&S currently has supply arrangements with a large number of East Coast chains and is perhaps the most cited case of a wholesaler quickly growing its business with chains. Bozzuto's is currently involved in supply discussions with several independent chains, but Bozzuto declined to elaborate.

Depending on how fast new business develops, independents may one day cease to be the majority of company volume.

"With the quantity of stores, independents will always be the majority," Bozzuto said. "In volume though, that may not be the case. But as independents evolve into larger sites, that will change, too."

The evolving business of independents will be fueled by technology. Bozzuto's is making major strides with PC-based front end systems and tracking customers by transaction.

Bozzuto's has completed testing on a system from Electronic Payment Systems of Pennsylvania that includes product forecasting and marketing capabilities. The program should be in full implementation by the end of September.

"We have a very complete system of tracking profitability and helping to build a loyalty base," Bozzuto said. "We have one retailer that stopped conventional advertising altogether. He found that only 660 customers supported his store, representing 80% of his volume.

"Technology might evolve to the point where big stores aren't necessarily better. Consumers may do more ordering of items in advance. Let's say it's a club pack. They can be stocked in the distribution center, not necessarily in the store. It can be shipped from the warehouse to the store and either delivered to the consumer or picked up at the store along with what the customer needs for everyday usage."

The upshot is that independents, which on average have smaller footprints than chains, can operate just as effectively.

"In that scenario, just because a store has 30 feet of a product, it doesn't necessarily mean it will have a better price than if it only had 2 feet. We'll eventually be able to forecast demand a few days in advance."

The smaller store size of the typical independent hasn't blunted the need for expansive programs on the fresh foods end. Bozzuto's, like many other wholesalers, is leading stores into the age of stepped up in-store food service.

"We've taken retailers and converted their stores to do more with prepared entrees," Bozzuto said. "We have stores that showed a 30% to 40% increase in volume, taking a store from a superette and opening up with prepared entrees. A lot of the independents are making unique products. We're helping them put together marketing programs and menus."

Bozzuto's has been pursuing a number of ECR-related efforts, including an activity-based costing initiative, and is linked through electronic data interchange with a majority of its vendors, said George Motel, vice president of retail management services. But executives note the company, unlike much of the wholesaler community, doesn't talk much about re-engineerings or restructurings.

"We don't have a tremendous amount of red tape," Dorcy said. "That gives us a great advantage. We can make decisions that our competitors may not be able to make as quickly. We don't have to re-engineer the company every six months to a year."

With wholesaler billing strategies the subject of much recent industry attention, Bozzuto's executives stress the importance of detailing cost procedures to customers.

"We've always done a good job of explaining to our customer that our fees are necessary parts of the business," Bozzuto said. "You can't ship something for nothing. Our fees have reflected our income more than some other wholesalers, who looked for other avenues to make up their income."

"We can't deliver at 2% what costs us 6% or 8%. We have to make a profit someplace!" Adam Bozzuto said.

Bozzuto's executives like to think their good communication has paid off. They've retained many customers for long periods of time in mutually beneficial relationships. This, they stress, is their best insurance for growth.

"Our independents are going up against chains and supercenters, but in many cases they aren't just surviving, they're thriving," Dorcy said. "That's quite a statement. And we've got some with 25-, 30- and 50-year anniversaries of being in the retail business."