On the Move

On the Move

Unified Grocers sees a ‘super opportunity’ in Mexico as it also eyes expansion at home

Out of chaos comes opportunity, according to Unified Grocers [4].

“Very often, when there is chaos in a marketplace — with economic pressures and a lot of merger and acquisition activity — the independent operator has the potential to come out in a stronger position because of his ability to be agile and to expand into real estate opportunities that present themselves,” Bob Ling, president of the Los Angeles-based member-owned cooperative, told SN.

“In meeting with our members, I've been very encouraged by all the talk about seeking opportunities for expansion. Even with all the pressures they face, our members smell blood in the water, and they're pursuing growth opportunities to strengthen their companies.”

According to Al Plamann [5], chief executive officer, independents often have an advantage in selecting sites — the flexibility to move into existing buildings that may be too small for the major chains.

 

“There are recent examples in Portland and Seattle where relatively small spaces became available, and because our members have the flexibility to target their approach if necessary, they have been able to pick up properties in prime locations just two or three blocks away from established chain sites,” he said.

Developers have a higher regard for independent operators than they once did, Ling added. “They see them as prospective tenants more often than they did in the past — even in very competitive locations — as the financial strength of the independent operators has improved,” he explained.

Arranging financing is also less of a challenge for independents than it used to be, Ling added.

Rather than needing Unified's help, as they might have 10 years ago, many independents today are able to arrange their own financing to get leases approved, he said. “The retailers are able to finance inventory out of cash flow, and the landlords are willing to work with them, without Unified having to guarantee the leases,” he explained.

Unified still helps some smaller members, Plamann pointed out, through a credit line the company negotiated last year that enables it to make temporary inventory loans to members too small for a bank to deal with, after which several small loans are aggregated into a pool, with a bank buying up the loans.

The two executives said Unified is moving forward on several fronts:

  • • Making a major effort to expand its wholesale business in Mexico.

  • • Facilitating the conversion of additional members to the IGA banner.

  • • Focusing more on the sell rather than the buy to help members compete better.

  • • Scouting opportunities for acquisitions in specific product categories such as meat or produce.

  • • Seeking partnerships with other member-owned cooperatives to reduce administrative costs.

  • • Exploring potential digital opportunities for its members.


Unified is the nation's second-largest member-owned cooperative, with annual sales of approximately $4 billion. Sales in 2010 fell to $3.9 billion after slightly exceeding $4 billion the year before.

While Unified's 2011 fiscal year ended Sept. 30, Plamann declined to be specific about sales other than to say they were comparable to last year.

The Mexican Market

The company hopes to generate additional volume this fiscal year by expanding its wholesale business in Mexico through direct sales, Plamann told SN.

The cooperative already sells product in Mexico, primarily through third-party distributors who buy American products and redistribute them south of the border.

However, Unified has a two-pronged approach that Plamann believes could generate incremental revenues of $25 million to $50 million this year and up to $100 million to $200 million within three years. “We view Mexico as a super opportunity,” he said.

Unified plans to begin selling controlled-label Springfield and Special Value lines direct to Mexican retailers within the next 60 days, he said. It has already signed a contract with a Mexican-based chain of more than 100 stores — which Unified officials declined to name — that will buy products directly from Unified and give them ample display space at store level.

According to Phil Smith, executive vice president, procurement, and chief merchandising officer, the value-oriented Special Value line is already available in Mexico, “though penetration is not consistent because of the way it's been distributed there. But now that we'll be selling direct, the penetration will be more consistent, and the merchandising will also be more consistent.

“Instead of being an in-and-out or seasonal product, Special Value and Springfield will have consistent shelf placement and displays,” he said.

While other wholesalers also sell private-label products in Mexico, Unified's Special Value line already has established brand recognition and customer loyalty, Smith pointed out, because it has carried a bilingual label for several years.

“It's one of the few brands whose Spanish font is the same size as the English font, which has allowed it to be very well received by Latino shoppers,” Smith pointed out.

According to Plamann, “We broke from the tradition five years ago of using a smaller font for the Spanish words on the labels because we felt it was important to make a statement about the product so it would appeal to Hispanic shoppers north and south of the border.”

“There's nothing unique about the Special Value product that will be sold in Mexico vs. what we sell in the U.S.,” Ling added. “And it's already compliant with the regulations there for being shipped into Mexico.”

Unified sees an even bigger opportunity in Mexico for its specialty product lines, which are distributed through the cooperative's Market Centre specialty division. Smith noted.

“Most Mexican supermarkets have a section for ‘foods from around the world,’ and we want them to consolidate buying for that section through Market Centre,” Smith said.

He expects a distribution deal to be in place by early 2012, beginning with the unnamed 100-plus-store Mexican chain, followed by the addition of another 100 to 200 stores as far south as Mexico City and Vera Cruz, he explained.

Growth in the U.S.

Unified also sees domestic opportunities to increase its volume by expanding its customer base in Hawaii and Alaska, as well as in New Mexico and west Texas, where it services a single member who has expanded into those two states.

“El Paso, which is the market we serve in Texas, is due south of Albuquerque, N.M., so it's not like we're competing in Texas the way we do in Southern California,” Plamann explained. “But we are looking for customers for our meat business, for example, and for other segments of what we supply elsewhere.

“But we're not a full-service wholesaler in New Mexico or Texas like we are in Hawaii.”

 

As it expands, Unified is knocking heads more often with other wholesalers, including Supervalu [6] in the Pacific Northwest, C&S Wholesale Grocers [7] in Arizona, Hawaii, Northern California and a bit in Southern California, plus Associated Grocers of Amarillo — another member-owned cooperative — in New Mexico.

“So there are always other wholesalers in the background, in areas where we're looking to grow our business,” Plamann said.

Plamann said he expects total corporate sales to grow by half again or more over the next five years through additional wholesale business generated by Unified itself and by store expansions among its members, as well as corporate acquisitions.

Acquisitions might not necessarily involve merging one cooperative with another, he pointed out. “It could involve buying a produce company or a meat company or a specialty company, as we did in 1999 [to create Market Centre]. That's an area we intend to look at more.”

He said he believes it also makes sense for cooperatives to think about growth through partnerships with one another “because competition is growing, and we need to be sure we can eliminate as many administrative hurdles as possible.”

Unified is involved in buying consortiums with other cooperatives — 11 others in two groups for meat, three others for its own private label, plus eight others for the Western Family brand. “And we're looking at other joint buying opportunities,” Plamann said.

For the past three years, Unified has been a licensed distribution center for IGA, with approximately 40 members converting their stores to the IGA banner, with additional members committed to making the conversion over the next six months, Ling said. “The pipeline is being replenished every day,” he pointed out.

Most stores that have added IGA's red oval banner have seen sales increase, Plamann noted.

While IGA stores have operated across most of the U.S. for years, IGA was a virtually unknown quantity in California, Plamann said, “so in effect, anyone who adopted the banner was introducing a whole new brand. As a result, we knew introducing IGA on the West Coast would take some time.”

Unified members in the Pacific Northwest were among the first to sign on, Ling said, because IGA stores supplied by Supervalu were already operating there.

Since then, more IGAs have opened in Southern California than in Northern California, he pointed out.

IGA stores carry the IGA private brand, Unified's Special Value line and one of its two top-tier private brands: either Springfield (primarily in Southern California) or Western Family (primarily in Northern California and the Northwest).

Unified added an organic option to its offerings, called Natural Directions, in 2008. The line was developed with the Western Family group of wholesalers and is available exclusively to retailers in that group.

Natural Directions includes more than 300 SKUs of dry, non-perishable products and frozen and chilled varieties.

The line has been successful since its introduction and has represented incremental business, with no impact on sales of other controlled labels, Smith said.

In the last few months, Natural Directions has caught the eye of several regional chains in Unified's distribution area, primarily in California, who have expressed an interest in adding it to their offering, Plamann told SN, “and now we have to decide whether to distribute it exclusively to our independent members or sell it to the chains as well.

“If we keep it exclusive to our members, that gives them an advantage. But if we can increase sales of the products by selling to the chains, then all members benefit.

“We haven't come to a decision yet. If the chains want just a few items, we would probably pass. But if they represent a significant sales opportunity, we'd probably reason that anything that creates awareness for the line helps all our members.”

Membership on the Rise

Unified has about 475 members operating approximately 1,250 stores; it also sells to another 1,250 non-member stores.

 

While the number of member stores varies from year to year, Plamann said the total is up overall for the last three years.

Average weekly store volumes among price-oriented members runs between $750,000 and $1.1 million, he noted, while average weekly volumes among conventional members ranges from $350,000 to $600,000.

Unified's non-member customers are mostly smaller neighborhood markets whose average weekly volumes range from $120,000 to $300,000, Plamann added.

Unified made a smooth leadership transition in June when Plamann gave up the title of president to Ling, 54, who has served as the company's general counsel since April 1996.

Plamann, 69, who joined Unified as chief financial officer in 1989, had been president and CEO since 1996. He gave up the title of president “because it has grown more and more difficult, as we've expanded over the years, for me to keep in direct touch with the members,” he explained.

Giving up one of his titles does not mean Plamann is considering retirement, he told SN. “I'm having such a good time, and I don't see anything else I would enjoy doing as much, so there's no reason for me to plan to give up doing something I enjoy so much.”

Ling said he spends two to four days a week meeting with members, “and the response and feedback I've been getting have been very open and encouraging.”

Unified expanded its historic base beyond Southern California with the acquisitions of two other West Coast cooperatives: United Grocers, Portland, Ore., in 1999 and Associated Grocers, Seattle, in 2007.

Approximately 45% of Unified's sales come from Southern California (which encompasses customers in Nevada, Arizona, New Mexico and Texas); 35% from the Pacific Northwest; and 25% from Northern California (which includes sales in Hawaii and the South Pacific, since most overseas shipments originate from the company's Stockton, Calif., facility).

Plamann said Unified members have been impacted by the economy in different ways in each of the three geographies it serves.

“In Southern California the construction industry has been very hard hit, which means a lot of workers, both documented and undocumented, have been affected — by trading down or getting out of the area.

“The Pacific Northwest was slower to move into the recession, but it's been hurt very badly, though we're seeing some small rebound there, with sales remaining pretty flat.

“Northern California is very spotty. In the San Joaquin Valley farmers are still very depressed, but in urban centers like San Francisco, there's high unemployment but more people are beginning to go back to work.”

Unified operates four full-service distribution centers — in Commerce in Southern California; Stockton in Northern California; and Portland and Seattle — plus a chilled warehouse in Santa Fe Springs in Southern California; a general merchandise-HBC facility in Fresno, Calif.; and a bakery and a deli warehouse, both in Los Angeles.

Ling said Unified is constantly looking for ways to become more cost-efficient and cost-effective at the distribution level. “So we are continuing to install warehouse systems to drive efficiencies, and through collective bargaining, we've achieved greater flexibility in managing our warehouse workforce,” he pointed out.

'Redefine What We Do'

Unified is also working to challenge its own long-held stereotypes, he added.

“For the past several years we've included three non-member directors on our board — people with backgrounds and expertise unrelated to grocery — to challenge policies and practices we take for granted,” Ling explained.

“These are people who see the forest rather than the trees,” Plamann added, “so they often ask questions that we might think are naive. But what we've found, as we've been forced to go down different paths as we try to answer some of those questions, is that we often discover ideas that may have been overlooked.

“As a result — to use an expression I dislike — we're able to think outside the box and attempt to redefine what we do.”

One of the ideas that evolved from this process, he said, is an effort to move Unified's culture more toward one of selling rather than buying — “to determine if we can do a better job of actually selling product instead of the traditional wholesaler's approach of buying it well and then letting retailers order and sell whatever we've bought.

 

“What we're trying to do now is sell a combination of products and services instead of simply taking orders. There's such a huge inventory of products in any given category coming to market, and it's difficult for retailers to select and then market the right ones.

“So rather than rely on brokers to do that job for us, we've set up our own organization to focus on serving that need because we are the ones who best understand the different areas in our marketplace and the customers our retail members cater to, and we're able to help and assist them to understand what they ought to be selling.”

Using its new approach, Unified looks at each category as a whole rather than looking at individual products within a category, Ling explained. “Right now we're in a test of the baby food category, where we believe we have been losing sales. So we're working with members to merchandise and sell the entire product line rather than going SKU by SKU.”

“When you allow a supplier to set up a category, his product lines usually dominate the category,” Plamann added. “But we're looking at the entire category and then offering a combination of traditional lines, natural or organic varieties, literature and whatever else it takes to serve the customer base at each store.

“The idea is for the retailer to let his customers know he cares about them and their needs by reinforcing an entire category and for us in turn to offer him the products he needs.”

Unified is also taking a major look at digital technologies — Facebook, Twitter and the like — to see how involvement with those kinds of media might benefit Unified's members in the next few years.

“We're continuing to examine our role in the digital retail world,” Plamann explained, “to determine what we can do to support our members in reaching out to consumers.

“We see potential new business opportunities in the digital world, but we're not sure what will happen going forward. It might be that online or Internet-based programs become big business for independents, so we're keeping up with those developments to be ready.”

When Plamann took the helm of Unified 17 years ago, the two largest members were conventional chains — Hughes Markets and Boys Markets — that together accounted for about 20% of the company's $1.8 billion volume. Today, with Unified's volume more than double what it was then, the cooperative's top three members control a volume equivalent to what Hughes and Boys did years ago, though the percentage to the total is considerably smaller, he pointed out.

“The biggest difference from then until now,” he said, “is that the business is more complex, which means retailers must differentiate themselves more to be competitive.

“In Los Angeles, for example, the major independents find their biggest competition comes from other independents.

“That puts pressure on us as their wholesaler to provide products and services that allow all the different operators to compete, which means our product selection has expanded.

“As a result, our efforts as a wholesaler are designed to understand the different consumer groups our members must serve, understand how to satisfy those groups and then provide the items the retailers need to be able to meet those needs,” Plamann said.

In terms of services, Unified offers members retail support and technical assistance to the extent they want it, Plamann said. “Some of our larger members — those with 15 or more stores — utilize a wide array of retail services, while quite a few with five stores or less utilize us to assist with shelf pricing in very competitive marketing areas.”