Growth Vehicles

Nash Finch hasn't survived for 125 years by burying its head in the sand.

The company, founded as a small candy and tobacco store in Devils Lake, N.D., in 1885, has learned to evolve with the changing times. The current leadership regime, headed by president and chief executive officer Alec Covington, has sought to instill a culture of dedication at the company, re-engineered the wholesale supply operations and made an aggressive push to expand the company's military-distribution business, even as the weak economy has taken its toll.

The recent recession — which hit two years into Covington's tenure as CEO — has actually been a boon to Nash Finch in some ways, Covington told SN, as it has enabled the company to capitalize on the weakened commercial real estate market to expand the footprint of its military commissary-supply division, or MDV.

“[The economic downturn] really has caused us to accelerate some of things we might have done more slowly,” he said. “I believe in any economy there are opportunities; you just have to settle down and ask, ‘Where is the silver lining in this environment?’”

The first instinct of many companies in an economic downturn, he explained, might be to “hunker down and hang on for dear life.”

“My belief is, if that is all you do, you could be playing a dangerous game.”

So Nash Finch decided to take the opportunity to quickly ramp up its highly regarded military commissary supply business by acquiring distribution facilities in areas where it wanted to expand into anyway.

That led the company to the acquisition early last year of three military wholesale food distribution centers in San Antonio; Pensacola, Fla.; and Junction City, Kan; from GSC Enterprises, and the subsequent purchase of additional facilities in Columbus, Ga.; Bloomington, Ind.; and Oklahoma City.

The latter facility, a former perishables depot operated by failed wholesaler Fleming Cos., will be expanded with dry-grocery capabilities over the course of the next year and could be augmented to serve both the military supply business and the traditional wholesaling operations, Covington said (See Page 19.)

Such investments are allowing the company to expand its military-services business — in which it contracts with food suppliers to deliver their products to military bases — for half the price, in some cases, that it would cost the company to build new facilities from the ground up.

Analysts said they believe the company is on the right track with its investments in military distribution.

“We think management is making appropriate investments to increase the profitability of its military supply infrastructure over the long-term,” said Ajay Jain, an analyst with Hapoalim Securities in New York, in a recent report. “Nash Finch has developed a strong competitive advantage in the military commissary business over many years.”

Covington, who joined Nash Finch from natural and organics wholesaler Tree of Life in 2006, laid out a plan for Nash Finch that includes a focus on it two core divisions: military commissary supply, which comprised about 38% of sales in 2009, and traditional wholesaling, which comprised just over 50%. Corporate retail, at about 11% of volume, has been shifted into more of a supporting role for the traditional wholesale side of the business.

While the military business is expected to grow largely organically through the addition of new facilities, Covington said he hopes to grow the traditional wholesale side of the business serving independents both through acquisition of existing customers — something Covington said the company has been successful at doing, although it has also lost a few customers — and through the acquisition of existing wholesale businesses.

“On the food distribution side, we believe that growth will be more inclined to come through acquisitions, because today we are probably on the threshold, I believe, of some imminent consolidation that will occur in the wholesale food business in the next couple of years,” Covington said.

“It's a tough world out there for independent retailers, and the economy has only exacerbated that. Now what you are seeing as a result of competition and a difficult economy is too much capacity, so it is my belief that over the next several years we are likely to see some wholesalers exit entirely or exit in certain markets.

“At Nash Finch, we believe if that is going to happen, we want to be positioned to take advantage of that. We want to be positioned with a good balance sheet, which we are, in order to take advantage of those opportunities if and when they arrive.”

In the past four years, the company has improved its debt leverage ratios and closed in on its goal of generating 4% consolidated EBITDA margins.

Covington said the company has prepared for what he anticipates will be an era of wholesale consolidation in coming years by getting its balance sheet in order, so that it is ready to invest when opportunities arise.

Nash Finch had recently completed a large acquisition that added two new warehouses to its traditional wholesaling operations when Covington came on board in 2006, but has not made any significant acquisitions on that side of the business since then.

Independent Strength

Covington said the independent food-retailing sector served by Nash Finch has been surprisingly resilient in the weakened economic environment.

“We thought that it would be a real challenge for some of our customers, but overall we are pleased that our customers and our retailers fared better than we thought they might have, given the length and depth of this economic downturn,” he said.

Independent operators, particularly in the Midwest, have run their businesses “very conservatively,” which has helped them cope with the economic situation.

“You don't find a lot of independent retailers living on the edge with way too much debt,” he said. “They went into this recession with a lot of headroom and a strong balance sheet, so they have been able to survive and fare very well in comparison to businesses that may have been more highly leveraged.”

Still, independents around the country have been impacted by weak consumer spending and deflation, Covington pointed out.

“We want this economy to get some legs back under it again and start growing,” he said. “We are concerned that if these conditions drag on, we are going to see more and more fatigue with some of our operators, because it has been going on so long, and they need to see some relief.”

Nash Finch itself was well-prepared for the downturn, Covington explained.

“Thank God it came in 2009, after we had gone through our own recovery and gone through all of our internal issues, because if this company had been faced in 2006 with what it was faced with in 2009, it really would have been a very different outcome,” he said. “We had the opportunity between 2006 and 2009 to get our house in order, get our debt paid down, and really get the company growing again. It could have been catastrophic.”

Culture Shock

One of the main things Covington has focused on in his time at Nash Finch has been an effort to change the organization's culture.

When he joined Nash Finch in 2006, he said, the company had an “environment of fear and intimidation.”

The wholesaler was struggling to integrate an acquisition it had made in 2005, and the previous chief executive officer had been gone for several months.

“Alec inherited a pretty bad situation when he came on board,” said one industry observer, who asked not to be identified. “I think they made a lot of important steps to improve their position.”

With financial results deteriorating, “there was concern among the management team and the board that we were a company that could be facing a financial crisis,” Covington said.

What he found instead was not a financial crisis, but what he described as a “culture crisis.”

“That had to be the No. 1 thing that we had to focus on changing at Nash Finch in order to generate improved results,” he said. “There was an environment of fear and intimidation, and when there is that kind of environment people just go into their bunkers and rarely stick their head up. So, we had to really work on trying to change the culture of the company and allow people to become more engaged and have more impact on their environment.”

The company set about doing that by crafting a new culture statement, which reads, “We are a purpose-driven, team-centered organization that respects individuality, demands integrity, encourages innovation, and celebrates success.”

In order to ensure that its senior management team is driving the culture it is professing to aspire to, Nash Finch uses a third-party firm to poll all of its employees about how well management is promoting the company's core values, listed as integrity, respect, innovation, accountability, sense of urgency, and celebration and fun.

Management's scores have “improved dramatically” from where they were in 2006, Covington noted.

“Creating the right culture and getting people engaged is something we have moved the needle on in a big way, but we still have a lot to do in order to overcome some of the culture that we had here,” he said.

He said Nash Finch uses a slogan, “I have a hand in this,” that reflects the company's effort to engage its people and drive that culture in the organization.

One of the keys to such engagement, he said, is to get employees to strive for a mission that goes beyond the revenue and profit figures.

“I believe that businesses that see themselves as having a defined purpose will always outlive and outperform businesses that are seeking to aspire to certain revenue targets and bottom-line targets,” he said.

In the military-distribution business, for example, workers — many of whom are former members of the military themselves — take pride in the fact that they play an important role in helping those who serve the country.

“If you ask Ed Brunot [president and chief operating officer of MDV] about his job, he would tell you that his business serves military families who protect our freedom, and he would tell you that he gets up every day feeling like he has the best job in America because he gets to do that,” Covington said. “If you visit MDV, you couldn't be there more than 15 minutes before you realized there is a culture driving this business.

“The folks at MDV see first and foremost their purpose as serving military families, and second to that is driving revenues and profits — so these people see a purpose to their business, a specific calling, and they take that very, very seriously.”

That in part has helped the military division to become one of the largest such distributors in the country, Covington said, describing MDV as “the gold standard of military food distribution.”

Similarly, on the traditional wholesaling side of the business, which is run by Chris Brown, executive vice president of Nash Finch Co. and president and chief operating officer, Nash Finch Wholesale, Covington sees the company as having a similar mission in helping grow independent businesses.

“When we looked at re-engineering that business, it started with a purpose: To support the independent business that we believe is the backbone of this economy and that we further believe is the segment of the economy that gets the least amount of support from everywhere you turn,” he said.

Those independent companies supplied by Nash Finch — about 1,700 locations in 28 states — could play a key role in the nation's economic recovery, he explained, once they become confident that consumer spending is returning and become more comfortable making investments in their business.

“Being a part of helping them survive and grow is worth doing,” Covington said. “We take that very seriously, and we designed a complete company around it.”

Nash Finch in 2007 undertook a comprehensive effort to streamline its wholesale business, dubbed Operation Fresh Start, which Covington said has been successful in reducing costs and adding services to help its independent customers.

Among the initiatives were new systems supporting category management to assist in assortment and pricing, and additional technology on the distribution side to help reduce costs. It has also introduced an EDLP program for Center Store items.

Nash Finch now has what it calls a complete “store core” program for its independent customers that includes such offerings as store-design and other services. It has an imaging center in Cincinnati that is capable of a range of services, from web design to marketing and ad support.

In addition, service levels from the company's distribution centers, as measured by order-fill rates and other metrics, have improved in the last few years, Covington said, especially in the Great Lakes region, where the company has invested heavily.

“We really focused on taking out cost, improving our service levels, and offering more support programs — programs that were identified by customers as most important to them,” he said.

Retail Operations

Nash Finch's retail division, which has been shrinking a percentage of the overall business, is now being run more as a support system for the wholesale side of the business as well, Covington explained.

The company currently operates 54 retail stores in eight states under a variety of banners, including Econofoods, Sun Mart, Avanza, and Family Fresh Market.

“Our retail stores that we have today are very important for a variety of reasons,” Covington said. “One is that we are gradually repositioning our stores into what we think are pretty exciting formats, which are pretty exciting to us in terms of making those formats available to our independent operators.”

In 2006 the company decided that it would seek to avoid competing with its independent customers, and would operate its portfolio of retail banners, most of which are located near its distribution centers, as test labs for programs that could be rolled out to retail customers of its wholesale business.

“If you are a wholesaler who has too much retail, you are viewed as a competitor,” Covington said. “On the other hand, if you have no retail, then you might not be viewed as being very competent in how the industry works.

“So, there's a very thin tightrope you walk as a wholesaler between having too much and not enough on the corporate retail side.”

Covington said Nash Finch was investing a lot of capital into its small number of stores, however, exemplified by the 2008 conversion of a 55,000-square-foot Econofoods location in Hudson, Wis., to the Family Fresh Market format featuring expanded fresh departments and more organics. That store has been “very successful,” Covington said, and has been showing positive comparable-store sales growth.

Another store in New Richmond, Wis., also has been converted to the new format, and a third such reformatting is set to begin in the next few months at another 55,000-square-foot location in River Falls, Wis.

Additional experiments are under way with a discount format that is slated to open later this year.

The Avanza banner, numbering five locations in the Denver market, targeting Hispanic consumers, has been “doing a great job catering to the needs of those consumers with the right product portfolio, and the right shopping experience,,” Covington said.

“We will continue to reposition those stores, and will gradually use those formats to help our independents grow and thrive as well,” he said.

AT A GLANCE

NASH FINCH CO.

Headquarters: Minneapolis

2009 Sales: $5.2 billion

Employees: 7,563

Wholesale distribution centers: 15 totaling 5.92 million square feet, serving 1,700 retail locations in 28 states.

Military distribution centers: 6, totaling 2.28 million sq. feet.

Retail stores: 54 locations under various banners: Sun Mart, Econofoods, Avanza, Family Thrift Center, Family Fresh Market, Pick 'n Save, Prairie Food Market, and Wholesale Food Outlet.

SOURCE: Nash Finch 2009 annual report.

MILITARY BUILD-UP

Nash Finch has been growing its military business as a percent of sales.

SOURCE: Nash Finch financial filings.