NOURISHING INDEPENDENTS

Independent supermarket operators face increasingly formidable competition from many directions, but especially from supercenters and the newly consolidated megachains. But to Mark S. Hansen, Fleming's chairman and chief executive officer, there's still ample room in the competitive landscape for independents to flourish. ant so we don't get outclassed.But that's an industrywide problem."But is Hansen

Independent supermarket operators face increasingly formidable competition from many directions, but especially from supercenters and the newly consolidated megachains. But to Mark S. Hansen, Fleming's chairman and chief executive officer, there's still ample room in the competitive landscape for independents to flourish.

ant so we don't get outclassed.

But that's an industrywide problem."

But is Hansen really sanguine in the face of, say, the massive new square footage represented by supercenters that are now being flung into America's rural markets, independents' prime territory?

Well, here's how he looks at the prime supercenter competition posed by his previous employer, Wal-Mart Stores: "Think about the fact that we operate in a $1.4 trillion [retail] economy in the United States. Wal-Mart, with everything they sell -- from garden tools, to health and beauty care, to food, to towels, to greeting cards -- has about a 7% national share. That means there's a 93% rejection rate of Wal-Mart. And they have pretty good geographic coverage of stores throughout the Unites States.

"Now, Wal-Mart is a wonderful company and I have great friends there. Wal-Mart will continue to do well, but the point is there are plenty of other dollars out there to get by having a counterpoint to the consumer. This is what we stand for. You can compete very successfully whether on the discount-store side, on the food side, on the club side or whatever. There are plenty of instances of life after supercenters. Supercenters have been around for years, and Wal-Mart didn't invent them. There's plenty of opportunity.

"The question is the point of view to the consumer and to find what the consumer will reward you for. Then, that must be executed against. This industry is 20% strategy and 80% execution," he concluded. Hansen maintained that independents have nothing out of the ordinary to fear from the newly consolidated chain retailers such as Kroger Co. and Albertson's, which are changing the magnitude of scale in food retailing.

And, he said of consolidation without reference to any specific deal, " We'll see if these acquisitions work as it's predicted they will. The failure rate is high enough to be worried about. Valuations are nosebleed and the investment community has high expectations for payoffs on those things. Management teams will be heavily focused on getting quick returns for their decision to push these businesses together, and I can say from Fleming's own experience, it doesn't always work as well as hoped."

Meanwhile, he said, many independents flourish.

"There are many examples of regional chains and even owner-operated independents that are among the finest.

"They will be successful if they have a partner that can overcome the scale issues. Going it alone is difficult. If Fleming can help give access to technology, a value proposition, speed and those kinds of things, clearly this will not only make them competitive but it looks to us like they can thrive."

Asked if that implies Fleming must step up with investment capital, Hansen said that's indeed the case. "We've dramatically expanded our capital commitments for retail-space growth for both remodeling and new stores. That's a tremendous step."

Asked if sponsoring independent development doesn't hand Fleming all the risk and minimal rewards, Hansen said independent operators must be willing to accept some of the risks of investment too.

"There's not just one way to do this, but the reality is that years ago a retailer would expect the wholesaler to accept 95% of the risk. But, as we've learned through the bank debacles of the late 1980s, overleveraging is a bad idea and a bad business proposition. But we are willing to be partners and to help through our balance sheet and through our access to capital those people who want to grow profitably."

Profitability for Fleming also means a continued commitment to corporately owned retailing, Hansen said.

"For Fleming to be vital, the corporate segment has to grow. We're absolutely committed to corporate stores," he vowed. "But we're anxious to use our corporate stores in ways we haven't before. There has been thinking in our industry, at times, that corporate stores are at odds with an independent customer. The reality is it helps us develop companywide market share within a trading area, but the more important thing than that, we're beginning to use our corporate stores as a training ground for our independent customers who want to see other approaches. We give them a look under the hood."

One aspect of supply that will change, though, involves supply to retail chains. That business is expected to decline, Hansen said.

"Fleming did a terrific job through the 1970s and 1980s by doing a lot of business with a lot of chains. One of the challenges of the last few years has been the flight of that very business. The best way for us to grow is to concentrate on who brought us to the dance, and that's the owner-operators -- those with one, 10, 12 or 15 stores that are extraordinarily good merchants and who are close to their customers. And who are willing to grow and innovate. They are good business people. "This doesn't mean we'll walk away from the commitments we have to large chains, but as a percent of our business it will fade."

And, he said, the number of independent banners supplied by Fleming is also destined to decline. He specified that Fleming is a big supporter of big banners such as Piggly Wiggly, IGA and Festival, but, at the same time, Fleming supports more than 30 banners, a number that's simply too large.

"We operate too many banners, and we know that over time we have to streamline that because there are redundant costs."

How many would be optimal? "I don't know, but we need fewer of them," Hansen concluded.