DALLAS -- Fleming here said last week it has entered into an agreement with Save Mart Supermarkets, Modesto, Calif., for the purchase of 28 Food 4 Less stores in Northern and Central California -- including two units under construction -- with a volume of approximately $375 million.
The agreement provides for Fleming to supply the 28 stores for five years, which represents a departure for Save Mart, a self-distributing retailer.
This represents approximately $385 million in annual volume the first year and $340 million in each of the remaining four years -- making Save Mart one of the wholesaler's five largest customers.
Fleming previously said it was hoping to retain $400 million in distribution volume from the sale of its 110-store retail base, "so with 84 retail locations remaining to be sold, this is an encouraging first sale," one industry observer pointed out.
Robert Piccinini, chairman, president and chief executive officer of Save Mart, told SN, "Signing a supply agreement with Fleming is a departure from what we have been doing, and it's taken a considerable amount of thought on our part."
The transaction, whose cost is estimated at $165 million, is expected to be finalized within 60 days.
Fleming said it is continuing to seek buyers for 84 retail stores, including 13 Food 4 Less stores in Utah and Arizona and 71 Rainbow Foods stores in Wisconsin, Minnesota, Texas and New Mexico.
A Fleming spokesman told SN it is not unusual for self-distributing chains to negotiate supply agreements with wholesalers like Fleming. "In some cases, it's more convenient for Fleming to supply them based on the distance of a group of stores from a chain's distribution centers, an inability to supply certain categories, or as a way of resolving capacity issues," he explained.
"Buying from a wholesaler also helps some companies operate more efficiently by lowering their supply chain costs," the spokesman said.
Save Mart operates 97 stores, encompassing 74 conventional Save Mart Supermarkets, eight conventional S-Mart stores and 15 price-impact Food Maxx units, with a combined volume of $1.65 billion. The addition of the Food 4 Less stores will boost volume to more than $2 billion.
Save Mart said it plans to convert the Food 4 Less price-impact stores to the Food Maxx banner. According to Piccinini, there is almost no overlap between existing Food Maxx and Food 4 Less locations.
"Our Food Maxx division has made a strong impact on our company and is an overall asset to our business strategy," Piccinini said. Fleming said the price Save Mart will pay for the stores -- up to $165 million, subject to adjustments based on store sales through the closing -- will include up to $130 million in cash, inclusive of inventory, and a $35 million reduction of long-term liabilities in the form of capital leases.
Fleming said it expects to apply the cash proceeds to reduce the balance on its $2.4 billion debt.
According to Mark Hansen, Fleming chairman and CEO, "Save Mart is a successful and growing retailer, and we expect the Food 4 Less stores will prosper under Save Mart's ownership. We look forward to working with Save Mart in affecting a smooth transition and beginning a new and sizeable long-term supply relationship."