AG TAKES STAKE IN BROWN & COLE

BELLINGHAM, Wash. -- Brown & Cole here has a new partner.

After 95 years as a family-controlled business, the 35-store retailer sold a 25% equity stake earlier this year to its supplier, Associated Grocers of Seattle, in exchange for capital to expand.

The balance of the retailer's equity is controlled by members of the Cole family and key executives, said Craig Cole, chairman, president and chief executive officer.

Brown & Cole is AG's largest customer, and AG had been one of the retailer's primary lenders as it grew through acquisition from four stores in 1989 to 35 by 1997. In January, AG converted debt to equity and made a cash infusion, providing the retailer with a source of capital to invest in its new store base in return for a five-year agreement by the retailer to increase the amount of goods it buys by a minimum of $25 million a year. This arrangement enables AG to negotiate better volume discounts and also enables Brown & Cole to continue to grow through store improvements and selected acquisitions, Cole explained.

Giving up a portion of the company's equity was not a difficult decision, he told SN. "It might be difficult for a lot of family-owned enterprises, but we haven't referred to ourselves that way or acted like a family-owned business since 1989. We believe that if we're run as if we're owned by outside investors and are accountable, then all shareholders benefit.

"Giving AG a stake in the company was a way to foster mutual growth. It's a strategic partnership that strengthens our balance sheet and enables us to continue to grow."

What Brown & Cole sought to do was give AG an equity position that reflected a mirror image of its stake in AG, Cole explained. "We own 27% of AG, based on the equity we've accumulated over more than 60 years of membership, so we gave them 25% of the equity in our company and committed to concentrating more of our purchases through AG. If AG sells it, that's where we'll buy it."

Bob Hoyt, a member of AG's board of directors and president of the member-owned cooperative at the time it became a stakeholder in Brown & Cole, said the arrangement is unique among the co-op's members, "though we would entertain similar deals with other members," he added.

"We see a lot of wholesalers acquiring stores to defend their market position. But at AG, we'd prefer to procure product and let the retailer -- the guy who knows how to merchandise best and who's closest to the customer -- run the stores. So the idea with Brown & Cole was for them to drive traffic and do the merchandising and for us to provide the best procurement and service possible."

In prior years, AG served as a banker to its members, Hoyt pointed out. "We've gotten out of the banking business in the last few years, but we have facilitated the process of getting our members access to capital," he said. "We want to be the lender of last resort rather than first resort, and if we do make an investment, we want a piece of the action."

That's what happened with Brown & Cole, he explained. "This was definitely a proactive initiative, and if they are successful, we get rewarded, and if they are not, we have to suffer the consequences. But we believe they have a winning strategy in the marketplace."