EYES ON THE PRIZE

Richard Kochersperger, a professor of food marketing at St. Joseph's University in Philadelphia, has spent years studying food retailing, particularly logistics and distribution, but needs few words -- just one really -- when asked about C&S Wholesale Grocers.What makes C&S different from its competitors?"Vision."Why does it seem to turn up in so many recent stories about the supermarket industry?"Vision."What

Richard Kochersperger, a professor of food marketing at St. Joseph's University in Philadelphia, has spent years studying food retailing, particularly logistics and distribution, but needs few words -- just one really -- when asked about C&S Wholesale Grocers.

What makes C&S different from its competitors?

"Vision."

Why does it seem to turn up in so many recent stories about the supermarket industry?

"Vision."

What do you consider its key strength?

"Vision."

And so on.

Kochersperger will eventually elaborate, but his succinctness speaks volumes: C&S hasn't grown into an industry giant by accident. The closely held company, based in Keene, N.H., has seen sales grow from around $5 billion seven years ago to an estimated $15.5 billion this year, and, thanks to more than $10 billion in new retail accounts added in recent months, should crash through the $20 billion sales mark in 2006, which would make it the largest grocery distributor in the U.S. "The way they're going," Kochersperger said, "they might catch Sysco as the largest food distributor in the country." (Sysco, the food-service company, recorded $29.3 billion in sales during its 2004 fiscal year).

C&S is doing it, as Kochersperger might say, with extraordinary vision: It sees opportunities where others can't or won't.

- Where the grocery distribution business was once a channel for service to independent retailers, C&S saw the opportunity to take on entire chains, proving outsourcing could be a viable strategy for retailers of all sizes.

- Where others saw chaos resulting from the bankruptcy of Fleming Cos. in 2003, C&S saw a solution, fashioning a complex deal to buy all of Fleming's assets out of bankruptcy court and divide them among other wholesalers.

- Where some see a retailer in financial trouble, C&S often sees a partner with a chance for recovery. Its pursuit of new distribution accounts -- which reached the Southeast U.S. this spring after cementing strong positions on both coasts -- is described by observers as "aggressive" but also "strategic."

- Where many see the retailing and manufacturing industries as separate entities, C&S saw they shared common warehousing concerns, and the idea for the ES3 collaborative warehouse was born.

- And in a marketplace where Wal-Mart increasingly makes the rules of retailing, C&S' longtime focus on efficiency and removing costs from the supply chain is proving to be more and more of an attractive offering.

- To be sure, there are some in the supermarket industry who have seen all C&S has accomplished and still don't quite understand it, and questions remain as to several of C&S' initiatives, particularly its ability to service independents and run a retail operation -- key strengths of other wholesalers like Supervalu but nascent competencies at C&S. What all will acknowledge is C&S' enormous growth and its growing influence in the food industry.

C&S, whose chief executive officer, Rick Cohen, is famously publicity shy, declined to respond to questions for this article.

Genius of Deal-making

Some say the explosive growth C&S has experienced in recent years can be traced to Cohen's 1997 hiring of Mark Gross as senior vice president. Gross joined C&S from Skadden, Arps, Slate, Meagher and Flom -- a powerhouse New York law firm recently in supermarket industry news for representing Winn-Dixie in its bankruptcy proceedings.

At Skadden, Gross handled mergers, acquisition financing, bankruptcy workouts and restructuring for such clients as Citibank, Chase Manhattan and United Airlines. Setting his focus on the supermarket industry has had spectacular results, said Burt P. Flickinger III, managing director, Strategic Resource Group, New York.

"C&S is a brilliantly run business," Flickinger told SN. "This was a company that 15 years ago did not have a very strong financial foundation, but by doing very good advance research and anticipating key bankruptcies, they've had spectacular success.

"The key distinction between C&S and other wholesalers is, they're as much of a Wall Street business as a Main Street business."

Gross led acquisition and bankruptcy teams at C&S that managed, Flickinger said, to create success out of "undercapitalized retailers" such as Grand Union, which C&S supplied and later purchased when the company sought repeated Chapter 11 filings in the late 1990s. C&S subsequently spun off the majority of Grand Union's stores to its other retail customers.

"Normally when a retail company files Chapter 11, the wholesaler is in the worst possible position as an unsecured creditor," Flickinger said. "But Mark Gross is a genius of deal-making who's as good or better than any Wall Street firm in putting together creative combinations of companies and turning what other people regard as garbage into gold."

Independent Focus

When C&S completed the purchase and swap of former Fleming assets -- a deal that ultimately netted around 1,000 new customers and $1.7 billion in sales for C&S -- it made for some admittedly nervous times for some retailers. For C&S, it meant aligning a model based on efficiency with the touch-and-feel world of independent retailers.

"We ended up at C&S because of circumstances," explained Jay Roche, president of Roche Bros., the 17-store chain based in Wellesley, Mass., which had its groceries supplied by Supervalu before the asset swap late in 2003. "We had heard horror stories that [C&S] were unreliable, and people told us to go in with our eyes open. I was dreading it."

After a rocky start, things have worked out fine, Roche said.

"Things were not very smooth at the beginning," Roche said. "You name a problem and we had it -- timing, pricing, loads. We gave them six months and started talking to other wholesalers. But then things started straightening out. We meshed our systems and we meshed pricing, and things have worked out great since then. We don't have any problems we wouldn't have with any other supplier. We're a happy customer."

Adjusting to C&S as opposed to his former supplier was a matter of reconciling his expectations, Roche said. C&S, he said, offers less in the way of services than Supervalu but offers competitive prices. "Supervalu could bring more to the table in terms of buying groups and special deals -- but we don't have that kind of expectation with C&S. It's a bare-bones deal, but the upcharges and service fees are very competitive."

The "bare bones" structure of the deals resemble C&S' agreements with chain retailers, which over the years have looked to the company for a financial boost and an ongoing reduction of operating complexity and expenses (including, in many cases, negotiations with unions). Carteret, N.J.-based Pathmark turned over its warehouse to C&S in 1997, reportedly using the proceeds of the 15-year deal to pay down debt. Combining the volume with other supplied customers in the area, such as Grand Union, made the deal make sense for C&S.

Independent customers of C&S contacted by SN were split on the issue of a wholesaler with fewer services to offer.

"C&S is different from other wholesalers, but we like it so far," said Nick D'Agostino III, president of D'Agostino Supermarkets, Larchmont, N.Y., which switched to C&S from Supervalu last year. "There's a little more on our shoulders than there was before, but it's well worth the effort for the price. In some ways, negotiating directly with suppliers is an advantage, because with a company our size we can get better deals."

Lees Market, Westport, Mass., moved to C&S when its former supplier, Star Markets, was acquired by Shaw's. "We looked at three wholesalers -- C&S, Supervalu and Bozzuto's -- and for a variety of reasons, not the least of which was that so many Star Markets people wound up at C&S, we went with C&S because it was going with someone we knew," Al Lees, owner of Lees Market, told SN. C&S, he added, is ideal for a "DIY" retailer such as himself.

"We are painstakingly independent -- we do our own ads, we do our own financials," he said. "What I was looking for was a logistics company that could provide me with a wide range of products at the lowest possible cost, delivered at the times I wanted them: I didn't want any other support."

Low cost is a value built into the C&S culture. A focus on productivity at company warehouses led to the creation of what C&S calls self-managed teams of employees who can earn incentive pay and bonuses based on speed and accuracy of orders filled. After introducing the concept in 1988, volume improved by 35% and absenteeism plummeted to below 3%, helping reduce overall labor costs by 20%, according to the C&S Web site. Today, 65% of the employees at C&S are either on incentive pay or part of a self-managed team, according to C&S.

Fewer Services

John DeJesus, president and chief executive officer of Foodmaster, an 11-store chain based in Chelsea, Mass., told SN he feels C&S tends to overlook the needs of independents like his company, which was a Supervalu customer until the swap.

"I see C&S as a financial institution: They buy product and try to sell it, but as far as the idea of making independents stronger, they're just not into it," DeJesus told SN. "That's not a knock against them -- it's just not their focus. They haven't put their arms around the independent business."

Supervalu "was more on the lookout for smaller customers," DeJesus said, providing Foodmaster, for example, with a loan to help purchase stores to add to the chain, and its representatives were active with tips and suggestions. "They offered more of a helping hand to allow you to compete. Their attitude was: Let's get bigger together."

Another industry observer, who asked not to be identified, told SN that C&S has lagged in technology investments to help independent retail accounts it acquired in the Fleming deal. "When your supplier goes bankrupt, all you want is to get the product on time, and in terms of logistics C&S is the best in the business," the source said. "But once that need is fulfilled, retailers are saying 'Where's the system to give me the reports I need -- velocity reports and category management.' These are things that big chains have internally but independents have to rely on."

C&S, for its part, has acknowledged a need to better understand independents and is turning to product suppliers and its own holdings for help, said Ron Wright, president of C&S Holdings, during a panel discussion at the Grocery Manufacturers Association Executive Conference in June.

"Support of our independents is a competency we need to come up to speed on very quickly," Wright said. "So we'll look for a lot of help for the manufacturer community. You guys have the expertise. We'll be a sponge, very attentive."

Wright added that the 104 retail stores C&S acquired as a result of its recent service agreement with Bi-Lo -- stores the Columbia, S.C.-based retailer regarded as "non-core assets" -- will be an educational tool for C&S with lessons that will ultimately benefit its independent customers. The former Bi-Lo and Bruno's locations have been dubbed Southern Family Markets and will be led by Frank Curci, a former Tops Markets CEO.

"[Retail] provides another way for us to interact with the manufacturing community," Gross told SN in an interview earlier this spring. "We look at the total family of companies seeking to provide solutions in all aspects of the distribution chain. ES3 provides distribution solutions for the manufacturer. C&S is the wholesaler providing distribution from the manufacturer to the retailer, and expansion of retail allows us to provide goods from the retailer to the consumer. We think there are exciting opportunities and synergies in being involved in the entire distribution chain."

The retail buy evoked some skepticism among some industry observers. "The jury's still out on how successful they can be with retail," one source said of the embryonic Southern Family Markets chain. "If you have 100 stores and 50 of them are losers, you're going to be a loser." Cynics see the retail contingent as a small price of C&S' pursuit of a new geography and feel that Bi-Lo will serve as a beachhead for Southern states much like having Pathmark's business helped C&S gather more customers in the Northeast.

Others point to C&S' successes taking on ideas given little chance to succeed.

"I find them to be a hungry company and a nimble company -- some of the things they've done I'm surprised that no else did them, like the Fleming deal," D'Agostino said. "Those were good deals, and they were able to step up to the plate and do them. Others didn't seem willing to take the risk or do the work."

Kochersperger points to ES3 -- the "collaborative warehouse" serving to kick out inefficiencies and add value in the supply chain for manufacturers -- as another example of C&S' evolutionary vision.

"People laughed at ES3 at first, but they just got another commitment from Unilever," he noted. "They realized every manufacturer has got logistics issues, and not many are very good at it, so they've come with a solution. Does it work? I can't answer that. But they're picking up more volume all the time, so manufacturers have got to be saying it's a better alternative than what they were doing previously. That's where the proof is."

History of Growth

1918 -- C&S Wholesale Grocers was founded by partners Israel Cohen and Abraham Siegel in Worcester, Mass., with a 5,000-square-foot, three-story warehouse.

1929 -- A flood damaged the C&S warehouse and destroyed its inventory, but the company relocated the next year to a larger facility in Worcester.

World War II Years -- Cohen's son Lester, who served as a B-24 navigator in the Pacific, brought back the idea that C&S could work with the commissaries on military bases. He brokered several U.S. commissary contracts for the company, and C&S currently services 19 military bases.

1955 -- C&S relocates to a 35,000-square-foot facility in Worcester. Israel Cohen transferred executive power over to Lester, who was known as a hard-driving salesman.

1958 -- C&S won the Big D supermarket account, an eight-store chain that transformed C&S from being a supplier of small independent stores to chains. The company soon began focusing on the acquisition of larger supermarket accounts.

1963 -- The wholesaler moved to a 200,000-square-foot facility in Worcester.

1974 -- Lester Cohen's son, Rick, joined the company, when C&S was a $14 million business.

1981 -- The company moved to Brattleboro, Vt., and built a 300,000-square-foot warehouse facility there.

1988 -- Rick Cohen introduced self-managing teams in the warehouse, where workers determined their own earnings on a "piece-rate incentive."

1993 -- C&S purchased a 350,000-square-foot warehouse in South Hatfield, Mass.

1994 -- The company moved the perishables operations from Vermont to a 445,000-square-foot facility in North Hatfield, Mass.

1996 -- The company began operations at its largest facility, a 1-million-square-foot warehouse in Windsor Locks, Conn.

2003 -- C&S purchased the assets of Fleming Cos., giving it a stronger presence in the East and a new presence on the West Coast.

2004 -- C&S moved its headquarters across state lines to Keene, N.H.