BADGERING THE BIG BOXES

SHEBOYGAN, Wis. -- Does Fresh Brands here know something that the country's larger wholesale/retail food companies don't?Recall that the two largest wholesaler/retailers -- Supervalu, Minneapolis, and Fleming, Dallas -- have in the last few years largely abandoned the business of operating conventional supermarkets to focus on developing alternative formats.Supervalu still operates 59 conventional

SHEBOYGAN, Wis. -- Does Fresh Brands here know something that the country's larger wholesale/retail food companies don't?

Recall that the two largest wholesaler/retailers -- Supervalu, Minneapolis, and Fleming, Dallas -- have in the last few years largely abandoned the business of operating conventional supermarkets to focus on developing alternative formats.

Supervalu still operates 59 conventional supermarkets after closing 30 in 2001, along with 204 units it calls price superstores, but new-store activity has been almost entirely focused on other formats. In first-quarter 2001, the company opened no conventional supermarkets, two price superstores, 16 Sav-A-Lot stores (its St. Louis-based limited-assortment format) and acquired the 53-unit Deals - Nothing Over a Dollar general merchandise chain. As of July 1, Supervalu owned 247 Sav-A-Lot stores and had another 767 Sav-A-Lot franchisees.

Fleming, after selling or closing nearly its entire stock of 150 conventional supermarkets in 2000 and 2001, said in late July that it was exploring "strategic alternatives" for the 110 price-impact stores it operates under the Food 4 Less and Rainbow Foods banners. The company said that it would continue efforts to expand its 17-store limited-assortment Yes!Less banner.

In contrast, Fresh Brands, which owns and operates 27 supermarkets, all but eight under the Piggly Wiggly banner (the exceptions are Dick's Supermarkets, a chain Fresh Brands acquired last year), and distributes to another 73 independently franchised supermarkets, all of them Piggly Wigglys, is openly in the market to acquire two eight-to-10 store chains by the end of 2005 in or contiguous to the Wisconsin-northern Illinois region it serves. The sought-for acquisitions will be conventional supermarkets, Elwood Winn, Fresh Brand's president and chief executive officer, and Michael Houser, its vice chairman, executive vice president and chief marketing officer, assured SN in the course of an interview about the company's plans.

Commented Winn: "We feel very strongly that our business model is extremely successful. We'd rather concentrate on adding other profitable services, such as gas stations and convenience stores to our model" than experiment with different formats.

What could Fresh Brands know about owning and operating conventional supermarkets that its larger rivals don't?

Winn noted that when independent stores become Piggly Wiggly franchisees, they see sales growth. "These newly converted operators report as much as 15% to 20% sales increases simply by allowing us to reset the store, [and] introduce our programs and products," he said.

He added that corporate stores and franchisees are No. 1 or No. 2 in 75% of the towns the company operates in.

However, what Fresh Brands really appears to know but its competition has yet to master is how to compete with the supercenters that have only recently begun to spread across its prairie landscape.

"In two markets where we've competed with supercenters for three years, our market shares have actually increased," he said. The two markets in question, both in Wisconsin, are served by a corporate store (in Racine) and a franchisee (in West Bend).

According to Winn and Houser, Fresh Brands offers its stores -- corporate and franchise -- several strategies that help them compete successfully against the supercenters of Wal-Mart Stores, Bentonville, Ark., and other mass merchants, including:

Providing shoppers with products the supercenters haven't yet learned to offer reliably, such as quality produce, or have decided not to sell, like store-cut meat.

Building bonds with shoppers by mining data from its loyalty card program to reward its best customers with birthday cards and tickets to sports and entertainment events.

Developing innovative store designs, such as that of the circular flagship/prototype store that the company opened here last year.

Exploring additional services, including fuel centers.

Getting With the Program

Winn and Houser were quick to point out that Fresh Brands' relationship with the stores it supplies, its franchisees, is a lot closer than the typical wholesaler to its independent supermarket customers.

"We feel very strongly that we view things from the perspective of a retailer, not a wholesaler," said Winn. "That is key to the level of trust that exists between our franchisees and us.

"Our franchisees buy substantially all their needs from us. They give us a unique control over their operations, since we handle their advertising, accounting, marketing, store design and many other vital functions. We ask them to provide a very capable workforce in-store and a significant level of community involvement.

"Fresh Brands' program provides our retailers with all the advantages of a full-service chain at a much better cost than they could possibly contract for on their own."

Fresh Brands also leverages its franchisees' buying power not just through its strength as a 100-store chain, but through its membership in Topco Associates, Skokie, Ill., a member-owned procurement company. Winn said that Fresh Brands' membership in Topco gives it the buying "clout of a nearly-$40 billion chain."

Beyond getting products in their stores, Fresh Brands also shows its franchisees how to market items, Houser explained.

Since April, when the company launched its "Pampered to Perfection" program, the focus has been on produce, he noted. Currently in 75% of Fresh Brands stores, the program should be fully rolled out by the end of the year, according to Houser. "It looks at every aspect of produce, from the fields to the temperature controls in our warehouse to how it goes out on our trucks," he said.

Behind the scenes at the store, Houser added, "is a computer-based learning curriculum that covers all of the pieces that go into the process of delivering from field to store the very best produce that we possibly can and making sure that it is merchandised correctly."

Next, the focus will shift to meat. "Right now, we're going through the background process, looking at the three main categories of beef, pork and chicken, really delving into what our customers really want," he said. "We expect to be launching that in the first quarter of 2003.

"All of our meat is cut in store. We can provide cuts our shoppers want that Wal-Mart can't provide.

"It's a way for us to distinguish ourselves. It's very difficult for us to distinguish ourselves on Cheerios and Oreos and Scott paper towels."

Not that Fresh Brands has surrendered center-store sales to the supercenters, Houser noted. "At the beginning of 2001, we rolled out a program called 'Preferred Power Pricing,"' he said. "It's a month-long program that focuses on key categories -- like cereal and paper and laundry and baby -- and we've seen much of that erosion stopped. Now, we've got a major initiative on health and beauty care products.

Building Loyalty

Fresh Brands' loyalty card program is another important factor, according to the executives, that keeps its stores and franchisees competitive against Wal-Mart and its ilk. "Most supermarkets have loyalty cards," said Houser, "over 70% have them, but we think we don't really have loyalty cards, we think they have savings cards. There's a big difference. We mine our customer information and use the data on a consistent basis to provide rewards to our very best shoppers."

For example, he added, the company sends out birthday cards signed by store managers to its 50,000 best customers and also provides them with a free chicken dinner to celebrate the occasion.

Houser noted that the stores also use card data to track the shopping habits of steady customers and to take action when those habits become less steady. "We look at it on a quarterly basis, usually looking at shoppers that spend in the $400-a-month range. If we see that figure dropping off, our store managers will call them, find out if we did something wrong.

"We very much value those very best customers because they are the 30% of our shoppers who do almost 70% of our business.

Winn noted that the loyalty program goes beyond what most independent supermarkets could create on their own. "Maintaining that database for all 100 stores is a capital-intensive process," he said. "It is certainly an investment in technology most single-store operators -- even two- or three-store operators -- couldn't afford on their own."

Along with building loyalty over the past decade, Fresh Brands also built a new flagship store last year. The company expects that elements from the store's circular design will be picked up -- in whole or in part -- in its new units, according to Winn.

The company has already opened a new circular corporate store in Kenosha (about two miles from a Wal-Mart supercenter) and has another one under development in North Sheboygan. Five franchisee stores currently being built around Wisconsin will "incorporate many features of the flagship store," said Winn. "In certain departments, they will use a semicircular approach."

The reason, he explained, is size. "The full-round requires a store of 50,000 or more square feet," he said. The original Sheboygan prototype has 60,000 square feet, the two newer circular stores between 50,000 and 55,000 square feet, he noted. Franchise stores of more than 50,000 square feet will use the full-round design, he added, and smaller stores will employ semicircular elements.

Fresh Brands remains satisfied with sales at the flagship, according to Winn. "It continues to perform beyond our expectations," he said, "with particularly positive trends in the meat and produce departments."

Shopping Around

In a nearly motionless mergers and acquisitions landscape, Fresh Brands is one of the few movers.

Purchasing another chain or two is instrumental to the company's growth plans, explained Winn. "The stated objective in our five-year plan for the years 2001 to 2005 is to achieve $1 billion in revenue, which requires roughly a 15%-per-annum growth rate," he said. "Last year, the first year in that plan, we were successful in growing company revenue by nearly 16% to $580 million.

"In order to stay on pace with that growth rate, we have indicated that another acquisition of five to 10 stores needs to be consummated by the third quarter of this year. We continue on the mission of trying to find the next best opportunity for Fresh Brands."

Last year's opportunity was Dick's Supermarkets, an eight-store chain with annual sales of more than $100 million that Fresh Brands acquired for $30.2 million in cash. This was the first time Fresh Brands had ever bought a multi-store chain and the first time it is operating stores under a banner other than Piggly Wiggly.

As Fresh Brands introduces its programs to the newly acquired stores, it is also adopting some of Dick's best practices, the executives pointed out.

The company also has access to the necessary funds to make a purchase. Winn said, "On the strength of our balance sheet, we could borrow funds sufficient to acquire two additional groups of stores in the eight-to-10-store range, roughly a $100 million deal."

It also has the capacity to distribute to additional stores, added Winn. "We have made substantial improvements in our infrastructure to support another 30 to 40 stores out of our existing facilities," he said. "We are looking at contiguous markets. We would like to find something within a 200-mile radius of our distribution centers.

What Fresh Brands doesn't have yet, at least publicly, is an acquisition target, and its third quarter will end in the middle of next month.

Winn, however, will not be rushed. He admitted, "Acquisitions can't always be timed."