RIVALS SEE ADVANTAGE OVER C&S

David Ghitelman / Elliot Zwiebach

MINNEAPOLIS -- Supervalu and Nash Finch, looking to take advantage of the rapid unraveling of their longtime competitor, Fleming Cos., Dallas, came out swinging last week at their emerging rival, C&S Wholesale Grocers, Brattleboro, Vt., which is in the process of buying Fleming's grocery distribution business. (See story, Page 1.)

Executives from Supervalu and Nash Finch, both based here, speaking during separate investor conference calls on Thursday to discuss quarterly earnings, said C&S' experience as a distributor to large chains makes it a poor fit for Fleming's small-chain customer base.

"C&S primarily provides services to large chains, primarily operates in non-union environments, and does not provide a full suite of support services," said Jeff Noddle, chairman and chief executive officer, Supervalu. "This contrasts with the small-chain customer base of Fleming and, when combined with a predominately union workforce, represents a sizable departure from C&S' current business model."

Ron Marshall, CEO, Nash Finch, echoed those remarks and said his company is well positioned to pick up some of Fleming's wholesale business, even if C&S acquires Fleming's assets.

"Our business model is dramatically different than the C&S model," he said. "C&S is a magnificent logistics services company, but its strength is dealing with large regional retailers like Pathmark and divisions of Ahold.

"However, I don't think it is particularly good dealing with midrange and smaller retail accounts, whereas the entire suite of services offered by us, Supervalu and Fleming provides something C&S is not capable of providing."

Noddle said Supervalu may bid on some Fleming assets. "Our interest in any Fleming assets would be evaluated on a case-by-case basis," he said. "The bankruptcy auction process may offer us an opportunity to bid on property on a liquidation level."

He said it is still not clear whether C&S plans to retain all of Fleming's assets, "but I think it will play out rather quickly in the next month or two." He noted that C&S has "retained the right to assign these assets to others" in a filing before the U.S. Bankruptcy Court overseeing the Fleming case.

Marshall did not rule out the possibility that Nash Finch may pursue some of Fleming's assets. "We're looking at a wide array of opportunities regarding Fleming," he said.

He declined to respond directly to an analyst's question about whether a change of ownership at Fleming will negate its contracts with customers. "There's been a lot of conjecture and speculation about the enforceability of those contracts, particularly after what those poor customers have been through the past four months," he said.

Asked about accounts Nash Finch has already picked up from Fleming, Marshall said the situation is "exceptionally fluid, with primary and secondary business moving back and forth, so it would be premature to characterize the amount of new business coming in, though we hope to win our share."

Noddle said that in addition to adding new customers as a primary supplier, Supervalu has been trying to woo retailers left in the lurch by Fleming by acting as their secondary supplier. This provides no bottom-line gain, he said. "What we think we're doing is planting some pretty good seeds for the future," he said.

He noted that of the $600 million in new distribution business the company gained during the quarter, roughly $550 million came from former Fleming customers, including Miner's Inc., a 20-store chain based in Duluth, Minn.; L&L, an 11-store chain based in Lansing, Mich.; and 11 SuperTarget stores, operated by Target here, in Texas, Louisiana and Oklahoma.

In other topics covered in the call, Noddle said Supervalu's retail customers are handling supercenter competition very well, and "our 50 best customers in particular continue to grow market share and, for the most part, continue to grow same-store sales" despite the presence of Wal-Mart in their operating areas. He said the company continues to see a high level of promotional activity, although it has subsided from last year's levels.

"Even though the economy has not yet fully recovered, consumers seem to be willing to spend a little more," Noddle observed. "Meat prices were higher than last year's levels, but there was no meaningful inflation in our total market basket of goods."

In the 16-week first quarter, sales grew 3.4% to $5.84 billion and comparable-store sales were up 1.1%. However, net income declined 4.5% to $73.7 million, with the earnings drop partly the result of approximately $5 million in litigation costs during the quarter. A Supervalu spokesman explained to SN that most of these litigation costs stemmed from two cases: a suit involving Rainbow Foods, then a Fleming subsidiary, with both companies alleging unfair competitive practices; and an AIDS discrimination lawsuit. Both cases were settled for undisclosed terms, the spokeswoman said.

At Nash Finch, sales fell 2.2% to $888.6 million for the 12-week second quarter ended June 14, and 3.2% to $1.7 billion for the half, while net income dropped 23.2% to $7.3 million for the quarter and rose 12.9% to $10.5 million for the half.

On a segment basis, sales in Nash Finch's food-distribution segment declined 1.7% to $420.7 million for the quarter and 5.2% to $809.2 million for the half, while operating income declined in both periods; sales in the military segment rose 5.4% to $247.9 million and 6.1% to $494.6 million for the half due to increased business from the military deployment in the Middle East, while operating profits fell; and sales in the corporate retail segment dropped 10.2% to $220 million for the quarter and 8.6% to $441.5 million for the half, with profits flat for the quarter and down for the year to date.

Same-store sales in the retail segment dipped 12.3% for the quarter and 11.6% for the half, primarily due to supercenter competition and difficult economic conditions, Bob Dimond, executive vice president and chief financial officer, said.

"We are encouraged with the improvements in second-quarter results relative to the first quarter," Marshall said. "Sales to new food-distribution customers greatly reduced the sales gap compared to last year, and our retail segment profit rebounded due to improved operational execution in both gross margin and expense control."