NORTHWEST PASSAGE

SEATTLE -- There's a new wholesaler in town here -- Associated Grocers.It's really the same company that's been serving independents in the Pacific Northwest since 1934 but with a totally new attitude toward its customers and the business itself."We're thinking and living retail," Robert E. Hoyt, interim president and chief executive officer, told SN. "We're listening to our customers and working

SEATTLE -- There's a new wholesaler in town here -- Associated Grocers.

It's really the same company that's been serving independents in the Pacific Northwest since 1934 but with a totally new attitude toward its customers and the business itself.

"We're thinking and living retail," Robert E. Hoyt, interim president and chief executive officer, told SN. "We're listening to our customers and working with them to create innovative solutions to retail challenges.

"Our goal is to refocus, reenergize and revitalize this company -- to get it back on its game plan by driving out unnecessary costs and delivering products at the best price with the best margins and the best service levels.

"That has our customers on the edge of their seats -- some are excited, others are nervous. But we have made that commitment, and we take it very seriously."

Although AG is a retailer-owned cooperative, Hoyt said he prefers to think of its retail base as customers rather than members, "because we want to help them succeed as customers, and if we do that, their status as member-owners will take care of itself," he explained.

Because its independent retailers are entrepreneurs, AG must be careful to make it clear that driving down costs will not mean reducing services, Hoyt explained. "We need to drive out common costs that all customers share and then let them be individuals. Approximately 85 to 90% of costs deal with things they have in common, and that's where we want to make reductions. It's the other 10 to 15% that makes each customer unique, and we don't want to interfere with that."

Hoyt was appointed on a interim basis on July 1. However, he said it will be awhile before AG names a permanent successor to Art Jones, who retired as president and CEO at the end of June after 25 years with the company and six months as president.

"At the end of the day we will get someone in here to operate the company on a normalized basis, but not until we accomplish the changes that need to be made," Hoyt told SN.

That turnaround may take awhile, he cautioned. "It's possible we can do it in six months, but it's more likely it will take 12-18 months to restore stockholder value and get AG back to operating at a level of profitability that reflects the resources we have."

When Hoyt joined AG, he indicated the company would consider a potential sale or merger. Questioned by SN about that possibility, Hoyt replied, "We are very receptive to exploring opportunities that will yield the most potential to shareholders, and if something comes along, that's great. But I don't see any quick decisions" -- at least not until AG is in better shape, he added.

"It's like a boxer whose fighting weight is 220 pounds. If he goes up to 300, he's not going to schedule any matches until he's back in shape, because if you get too fat and too far off your game plan, you become roadkill. So we need to be strong and successful before we can seriously consider consolidation opportunities that may arise."

However, he said he is receptive to listening to any offers that come AG's way.

Hoyt said AG has a variety of programs already under way or about to begin to drive costs out and improve service to retailers, including the following:

Increasing customers' order size per delivery to eliminate the number of stops.

Reducing the number of stockkeeping units

Eliminating non-value-added costs and charging members only for services used.

Developing new sales initiatives to facilitate seasonal promotions.

Making an effort to improve results at underperforming stores.

Seeking to improve labor costs by attempting to combine seven unions into a single bargaining unit.

AG is a 180-member cooperative serving 340 stores in the Pacific Northwest, with 90% of its customer base in western Washington and Oregon and the balance coming from retailers in Alaska, Hawaii, Guam and the Far East. The company operates two distribution centers: a dry groceries and perishables warehouse here covering 1.2 million square feet, and a 350,000-square-foot general merchandise/health and beauty care facility in Kent, Wash.

In the cooperative's core area here, Hoyt said AG members account for 20% of the market share, compared with 28% for Safeway and approximately 21% for Kroger's tandem of Fred Meyer and Quality Food Centers. "In the Seattle-Tacoma area, every third Snickers bar sold comes from our warehouse," Hoyt said.

Sales for the year ending Sept. 29 will be approximately $1.1 billion -- down about 8% from last year's $1.2 billion. "But if we can achieve anywhere close to our potential on price and service, we can grow our revenue base significantly without adding any new customers," Hoyt declared.

He said the company will report what he believes will be its first-ever loss this year, "but we're getting stronger every day and every week, and I believe we can operate the company on a fast track to get back to the level of profitability we should have," he told SN.

Hoyt said he was hired by AG to put an end to ongoing declines in the cooperative's financial performance over the last few years. "AG's mission for the past 66 years has been to service retailers and think retail. But over the years it lost sight of that mission -- it continued to think retail, but it stopped living retail.

"AG's management became more entrenched and more focused on its own agenda of marketing goods and services to its members, rather than on servicing those members as effectively as possible.

"As management lost sight of the needs of its customer base, those shortcomings eventually began showing up in the financial results," Hoyt said.

He cited three problems for AG's decline:

Imprudent lending programs. "In a struggle to maintain its revenue base, the company loaned money to some customers who were poor operators to begin with or whose stores were in locations where they didn't have a chance to succeed," Hoyt said.

"As a result, the high-performing customers ended up subsidizing the low-performing customers, and you can do that only so long before it catches up to you."

To resolve that problem, AG is initiating what Hoyt called "a cleansing process" that identifies stores with poor operators or those in poor locations and trying to reverse the slide.

"We're taking specialists at AG who are experts in merchandising, training and labor and sending them out to those stores to help retailers who are struggling. They do a diagnostic on the store and then work with the owner to develop steps to follow that are intended to improve their performance and encourage them to adopt programs to help them perform at a higher level and to make their business more viable.

"For those that don't follow the plan or have a location that can't be improved, we're dealing with that aggressively, either by getting out of those locations or rotating poor operators out of the stores and turning them over to better operators."

As for loaning money to members, "we have an exceptionally enlightened lending policy now, and we're making better business decisions," Hoyt said.

Y2K. "The company elected to put in a new information system to comply with Y2K standards," Hoyt said, "but we stubbed our toe earlier this year and ended up with a malfunction that rendered the system inoperable, which hurt our customers. But that situation is now fixed, and we feel we have great capabilities going forward.

"In fact, the pain we experienced may actually pay off for us in the long run because the new system makes it possible for us to offer unparalleled retail services. We have a lot of information available, down to individual products and vendors, and we believe we can use that information to improve the quality of our customers' orders."

For example, he said AG is developing electronic order books "so we can provide on-demand information. But we still need to train our customers about the benefits."

The company also plans to utilize the data to develop more efficient product movement in its warehouses by directing forklift operators in putaways and letdowns, Hoyt pointed out.

Loss of sales. AG lost a large chunk of its revenue base last year when more than 80 QFC stores in western Washington became part of Cincinnati-based Kroger Co. and switched to a Kroger-controlled distribution facility.

According to Hoyt, AG has been able to replace approximately 75% of that revenue as a result of its 1998 joint venture with Dallas-based Fleming, in which it picked up 74 retailers that Fleming had been supplying.

However, many of those new accounts are in eastern Washington -- a greater distance from the bulk of its customer base, Hoyt noted. As a result, it was costing AG more to deliver product to them, he said -- although as a cooperative, the company was charging all members the same rates -- and there was no way to reflect the company's increased operating costs, he explained.

AG's solution, Hoyt said, has been to initiate a companywide program aimed at identifying the costs of various activities and services in an effort to weed out non-value-added costs, then offering economic incentives to members to eliminate those costs.

"We need to eliminate activities that do not add any value, because each activity is a cost, and costs without value waste resources," he explained. "So we've gone through each activity we perform to determine its cost to enable the retailers to be more economical and to drive costs out of our system."

"Each time we do that, people tend to grumble about it for a couple of weeks, but then they catch on and see what costs can be eliminated. One result of this process is that customers are increasing the size of each order by combining perishables and dry groceries in a single load, and that has enabled us to reduce the number of stops by 25 per week, for a 15% reduction, and we're hoping to cut that number back even more."

Since Hoyt's arrival, most of AG's top management team has changed. "We're making a clean sweep," he told SN.

Two months before Hoyt was hired, the board brought in Gene Steffes as chief operating officer. Steffes was formerly president of the Kent, Wash. division of Food Services of America here.

The company already had a new information technology executive, Ken Viafore -- formerly with the Northwest operations of Bank of America -- who had joined AG a few months earlier after his predecessor died in the middle of the Y2K implementation.

Mary Burke was brought in as chief financial officer, the same title she had formerly held at Imperial Sugar, Sugarland, Tex.

AG expects to name a new human resources vice president by the end of the year, pending the retirement of Buzz Ravenscraft, Hoyt noted.

In addition, AG's board, which is comprised of retail members, elected four outside directors: Burke and Viafore, plus a former bank executive and a former judge. The company also hired a new outside general counsel and plans to bring in a new auditing firm, Hoyt indicated.

With the new management team in place, AG is in the process of soliciting member opinions on what kinds of services the cooperative needs to offer.

"Rather than marketing services to our members, as the company used to do, we plan to survey our retailers and ask what they think we need to do to be more efficient and effective," Hoyt said. "Once we have those suggestions, we'll prioritize them and try to become successful at the top three or four.

"We don't want to do anything that we can't be the best at, and we can't be the best at 29 different things."

He said AG expects to have its list of priorities ready before the end of the year. "Obviously, we expect the retailers will tell us they want an efficient supply chain that's competitive," Hoyt said. "We're already trying to beef up our pricing by bringing more resources to bear."

AG is also soliciting member input through another forum -- a series of retail advisory committee meetings. "We've had three sessions so far, and the retailers who have participated have been able to break down some barriers in the course of conducting a wonderful exchange of ideas," Hoyt said.

The meetings, which have included a rotating group of about 15 retailers, began informally about a month before Hoyt joined AG "to give members a chance to talk about why certain AG programs were not meeting their needs. However, they've evolved into an opportunity for members to offer some of their own ideas to management."

One initiative that grew out of the meetings, he said, is Adventures in Merchandising, or AIM -- a program designed to generate aggressive seasonal promotions featuring price-image merchandising that focuses on 40 to 50 items, cross-docked and shipped in pallet loads.

An effort to reduce the cooperative's inventory has also evolved from the meetings, Hoyt said. "With our large base of independent customers, we probably warehouse 37,000 SKU's , which is more than we can afford. But the members have geared up to tackle that issue and reduce the total by about 15%, which would save us a lot of money."

AG also hopes to lower its costs by working more closely with vendors, Hoyt said. "We've diffused our buying power over the years, but now we need to make AG a one-stop sell for vendors. We need vendors to partner with us and get reinvolved with the new AG as we become a more aggressive force.

"In the past they may have taken us too much for granted, but it's no longer business as usual."

Hoyt said the company hopes it can do more outsourcing to reduce costs. "We've had our own meat-cutting operation the past two and a half years, but it was an idea before its time and there wasn't enough retail demand to make it successful. So we plan to outsource that."

In addition, AG operates its own pallet yard, he noted, "and we're looking at going outside for that as well."

Labor is another area in which AG hopes to drive costs out, Hoyt said. "We've got a very antiquated, fragmented system of labor relations where we deal with multiple Teamster locals and other unions in seven different bargaining units. So we need to find ways to break down the barriers between those units and get down to a single bargaining unit."

He said the company has already started talking with the unions, explaining the competitive disadvantages the company must deal with and asking for relief.