ASSOCIATED FOOD STORES FACE SUPERCENTER PRESSURE

CATHY ZAVODNI

SALT LAKE CITY (FNS) -- The key to independents to avoiding a "life threatening" blow by mass merchandisers and supercenters is "to try to emulate their strengths and then gird our loins and compete," said Jack Shaum, chairman of the board, Associated Food Stores here.

Speaking at the member-owned wholesaler's recent annual meeting, Shaum noted that with the efficient operation of its one-year-old, 1-million-square-foot integrated warehouse in Farr West, Utah, 60 miles north of here, the co-op is fast approaching competitors such as Wal-Mart, Albertson's and Kroger in its ability to obtain, handle and distribute inventory at the lowest possible cost.

Associated, a 62-year-old cooperative, serves 405 member stores, 100 non-member stores and various convenience stores in an eight-state area -- Utah, Arizona, Idaho, Nevada, Wyoming, Colorado, Montana and Oregon. The company also owns 22 corporate stores. In addition to the Farr West warehouse, Associated operates distribution centers in Boise, Idaho, and in Billings and Helena, Mont.

Shaum also said other keys to independents' survival are to "take care of our customers" at retail and to "tear down the walls among us."

He noted that as an example of cooperation for the common good, his store -- Stop & Shop in Ogden, Utah -- and two other Associated members there -- Wangsgards Market and Acres Market -- have together saved more than $100,000 in yearly advertising costs by running joint newspaper ads.

Rich Parkinson, Associated's chief executive officer, said that savings and efficiencies at the warehouse level can materialize at retail in enhanced gross margins and ultimately the stores' profitability. An efficiently operating warehouse system is needed to help independents compete in their eight-state market area, which has seen a growing presence of supercenters. Wal-Mart operates 60 supercenters in the area.

The increased number of supercenters has divided a slow-growing sales pie into ever smaller pieces, Parkinson told SN, which is reflected in Associated's financial results. Warehouse sales for fiscal 2002, ending March 30, were down 2.8% to $982.9 million from $1 billion in 2001. Along with competitive pressures and flat markets, start-up problems at Farr West also had an effect on wholesale business, said Parkinson. Corporate retail sales, however, were $410.9 million, up 8.5%, compared to $378.8 million last year. This gain was due mostly to the six-store Dan's operation being corporately held for only part of fiscal 2001 vs. all of fiscal 2002.

Associated's total payments to members, including cash rebates and Class C stock, declined 8.6% to $23.4 million, from $25.6 million the previous year. Member rebates as a percentage of wholesale purchases were 2.18%, compared to 2.17% the previous year. Discussing the warehouse at the meeting, Parkinson reported that after a slow first few weeks, the new facility is on target toward achieving its "right product, at the right time, in the right condition" goals. He cited improvements in warehouse efficiency over the past year. These include: cases picked per hour per picker rose from 129 to 178; on-time departures rose to 99% from 85%; and total labor force decreased to 562 from 846. The Farr West facility accounts for 70% of the co-op's sales. Parkinson noted that the warehouse management systems used at Farr West will be evaluated for applicability at the other facilities.

"The challenge this year will be to continue to sustain the performance improvements achieved during Farr West's first year," said Parkinson.

Associated also will focus on the retail side of the business, both corporate and member stores.

To enhance the competitiveness of its own retail stores, two outside directors -- Dick King, former president of Albertson's, Boise, and Jeff Philipps, president and CEO of Rosauers, Spokane -- have been added to provide experience and unique perspective on strategic directions the corporate stores should take.

"This is the first time Associated has ever brought in outside board members," Parkinson told those attending the annual meeting.

To provide assistance to independent members, retail sales counselors will continue to offer point-of-sale advice and to find ways the warehouse can increase product and service.