Wholesaler-Supplier Relationships Continue to Evolve

The low-margin food wholesaling industry, seemingly in a constant state of flux, may be ripe for even more change. Jeff Noddle, chairman and chief executive officer of Minneapolis-based Supervalu, noted in a recent presentation to investors that additional consolidation among wholesalers is possible, and industry sources agreed that looming changes could involve more mergers and new ways of doing

The low-margin food wholesaling industry, seemingly in a constant state of flux, may be ripe for even more change.

Jeff Noddle, chairman and chief executive officer of Minneapolis-based Supervalu, noted in a recent presentation to investors that additional consolidation among wholesalers is possible, and industry sources agreed that looming changes could involve more mergers and new ways of doing business.

For some member-owned cooperatives, it could mean changing the way they interact with suppliers — dealing with them online rather than in person, or taking direct-store-delivery items into their own warehouses, for example — as manufacturers eliminate headquarters or store visits to smaller customers.

For other wholesalers, it could mean buying up smaller companies, acquiring parts of a competitor's business or simply buying volume by acquiring retail chains. For some co-ops, change could involve mergers to increase buying leverage.

For major players like Supervalu and Nash Finch, it could mean divesting parts of their operations to strengthen the remaining core, some observers suggested.

For smaller wholesalers, some observers told SN they believe the long-term outlook appears bleak.

“In today's world, it's kind of a given that wholesalers, whether voluntaries or cooperatives who are doing $750 million a year or less are very vulnerable to being taken over or going out of business,” one observer told SN.

“There are wholesalers whose annual volume is less than that — in the $500 million range — who are doing well enough in very isolated markets where larger companies have no interest in going,” he added, “but there are not that many of those kinds of companies around anymore.

“And some of the larger manufacturers are beginning to tell those kinds of companies they can't afford to call on them anymore because they're so far off the beaten path or they're not doing enough volume to justify an overnight trip to see them.”

That reality has prompted several cooperatives to band together through the Retailer Owned Food Distributors & Associates to buy certain categories as a group to generate sufficient economies of scale to get more competitive prices.

ROFDA, based in Gardenville, Ala., is an umbrella organization for 17 co-ops whose combined volume approaches $25 billion — larger than any conventional chain in the U.S. other than Kroger, Safeway or Supervalu, J. Ferrell Franklin, president and CEO, pointed out.

“Right now, I'm aware of only one manufacturer that has indicated it will not call on one of our members,” he said. “But I would guess that, with everyone facing increasing costs of doing business and looking for ways to take costs out, there will probably be other, similar examples.”

As CPG companies look for ways to cut costs by eliminating sales calls, medium- to small-sized wholesalers are finding new ways to run their businesses.

EVOLVING DSD MODELS
Rich Parkinson, president and CEO of Associated Food Stores, Salt Lake City, said some DSD vendors have set minimum distances for deliveries, “so we're taking more DSD product into our warehouse and distributing it to our retailers, which makes some sense — except in instances where we have to handle the expense of the delivery to the stores.

“We're still negotiating with some DSD companies about that, telling them they should pay those costs, and many companies are willing to work with us.”

Chris Michael, president and CEO of Associated Wholesalers Inc., Robesonia, Pa., said his company has had less success with getting DSD vendors to change.

“It would require a huge paradigm shift for them,” he told SN. “But they continue to favor mass merchandisers and the top five to 10 supermarket chains, and forcing our independent customers to play second fiddle — not just in terms of store deliveries, but also in terms of service calls and promotional support.

“We've asked some DSD vendors if we could provide the logistical services if they would provide more in-store services, but so far we haven't been able to convince any of them to make the change.”

Another challenge for regional co-ops is a cutback in the number of sales calls from CPG companies to their member stores.

URM, a member-owned cooperative based in Spokane, Wash., with a volume just under $1 billion, has been working with Procter & Gamble, Cincinnati, through online-only communications since the manufacturer stopped calling on the company several months ago, Dean Sonenberg, president and CEO, told SN.

“There are no live bodies calling on us anymore, but we have access to their programs 24/7 and to the brokers they use, and it's been working fine,” he said. “We get information that's a lot more timely, and we get feedback quickly to our questions, so it's been a very positive effort — though how it will work in the future, time will tell.

“We realize we're in an isolated market and that we've been a training ground for younger sales reps for years, and we were used to building relationships with individuals while helping them learn the business, and then seeing them be transferred to larger markets. So we're not afraid to change, and we're willing to test whatever programs are offered.”

According to Parkinson, Associated, with a volume estimated at $1.6 billion, is seeing fewer brokers or manufacturer reps, as several manufacturers have shut down regional offices in Salt Lake City and Denver and moved their base of operations elsewhere. “As a result, the ones who do call on us are less sensitive to the specific needs of the Intermountain customer,” he explained.

Some CPG companies have stopped calling on Associated members altogether, particularly at stores in more outlying areas, Parkinson acknowledged, “and they've replaced those visits with telemarketing programs.”

Those work well to a degree, he said, “but nothing can substitute for personal relationships where companies are able to adjust or adapt to specific requests by retailers. With the online efforts, the suppliers are telling our members, ‘Here's the program — use it any way you can.’

“That's better than nothing, but it's not as good as a direct call. But we realize those days are gone.”

RIPE FOR CONSOLIDATION
Noddle of Supervalu told SN he was not referring to any specific companies or developments when he said the wholesale industry was ripe for change. He made his comments in response to a question during a speech to investors late last month at a retailing conference.

Asked whether he saw opportunities for his company to pick up additional wholesale business, Noddle replied, “The wholesale business is ripe for some consolidation.”

When asked specifically whether Supervalu might opt to monetize some of its non-core assets as part of an industrywide move toward consolidation, he replied, “We consider all our businesses as core operations. But our board is diligent in considering all options, and if it feels shareholders would be better served by some action, we will do it.”

Some observers told SN they believe Supervalu will eventually sell off some segment of its business to help finance accelerated remodeling activity at the Albertsons stores it acquired in 2006.

Neil Stern, a consultant with McMillan Doolittle, Chicago, said Supervalu might opt to divest some operations because of the complexity of the Albertsons turnaround. “It's taking them longer to integrate those operations and to reap the benefits than had been originally anticipated, and they're under some pressure,” he explained.

It wasn't for lack of planning that the turnaround has been slower to develop, he pointed out, noting that unforeseen developments, like the weakening of the economy, “are just parts of life. But the former Albertsons-owned stores were starved for capital for a long time, and Supervalu's need for capital for those stores may be greater than they had once anticipated, making a divestiture a reasonable possibility,” he explained.

According to another observer, “A lot of Supervalu's shareholders are asking questions about why they still have an independent wholesale business now that 80% of their volume comes from retail.”

If Supervalu were to decide to spin off that business to fund retail renovations, C&S Wholesale Grocers, Keene, N.H., could be a potential buyer — or at least an interested party — observers pointed out, estimating that the wholesale operation could fetch $1.5 billion.

Other scenarios, different observers suggested, might have Supervalu divesting Shaw's, the Boston-based chain it acquired as part of the Albertsons deal, or possibly selling off some of its lower-volume wholesale divisions, such as the Pacific Northwest.

Some industry observers told SN they believe Nash Finch Co., Minneapolis, may also be considering some sort of divestiture.

“They need to do some consolidating, because they operate so many smaller facilities that are costing them money,” one analyst pointed out.

WEST COAST MERGERS
Wholesale consolidation has been under way on the West Coast for the last few years, as Unified Grocers, Los Angeles, acquired United Grocers, Portland, Ore., in 1999 and Associated Grocers, Seattle, last year.

“Unified members are better off after coming together with the other two wholesalers, because as a single entity they have a higher industry profile, and they're attracting more attention from manufacturers,” one co-op executive pointed out.

“That's the kind of thing that has to take place for co-ops if they are to take their rightful place at the table — because it's in each company's best interests to look forward to being as competitive as possible, and that's getting harder to do for companies individually.”

At one time there was talk of several Western co-ops merging: the three that have already joined under the Unified banner, plus Associated Food Stores, Salt Lake City; URM, Spokane; Affiliated Foods, Amarillo, Texas; and Affiliated Foods Midwest, Norfolk, Neb.

Though each operates primarily in separate regions, they bump up against each other at various geographic points as they have expanded from their home bases.

With Associated generating close to $1.6 billion a year in sales and the other three companies doing about $1 billion each, that combination would create a $4.6 billion entity, which, if it ever joined with Unified's $4 billion, would become about a $8.6 billion business — larger than Wakefern Food Corp., Elizabeth, N.J.

But while United Grocers and AG Seattle were financially troubled operations before they were acquired, the other four are all doing well, the executive pointed out, “and each company still wants to control its own destiny. So unless someone encounters serious financial issues, there's no reason for any of those mergers to move forward — though it could happen someday.”

Two other wholesalers have grown largely by acquiring retail businesses: Associated Wholesale Grocers, Kansas City, Kan., and Grocers Supply Co., Houston.

AWG, a member-owned cooperative, has been acquiring stores since 1998 — including the Falley's and Homeland chains — and spinning them off to independent operators. It's also been growing its volume base with the acquisition of new wholesale business, most recently the Texas stores operated by Albertsons LLC.

GSC, a voluntary wholesaler, has been growing its volume through retail acquisitions: Fiesta Mart in 2004, and the pending acquisition of 37 Minyard Food Stores in the Dallas-Fort Worth area.

While it's unusual for a voluntary wholesaler and a member-owned cooperative to merge, it's happened twice in the last few years — once successfully and once less so.

The successful combination involved the late 2006 acquisition by AWI, a co-op, of White Rose Foods, a voluntary based in Carteret, N.J.

AWI has continued to operate White Rose as a voluntary, with its own management and its own strategy. “Our goal is to do whatever benefits the customer,” CEO Michael told SN, “and if we tried to consolidate the way we go to market, that would hurt customers. The only time we will make a change is when a customer asks us for change.”

The less successful combination involved the purchase in early 2006 of Fresh Brands, a voluntary based in Sheboygan, Wis., by Certified Grocers Midwest, Hodgkins, Ill., a co-op.

While the combination might have worked, any possibilities for success were virtually eliminated when Butera Foods, the combined company's largest member, decided to acquire Fresh Brands in 2007 — a move that weakened Certified to the point that it needed to find a new partner.

In June it voted to merge with Central Grocers, Franklin Park, Ill., which will be the surviving entity.