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MINNEAPOLIS -- Nash Finch isn't the biggest food wholesaler in the industry -- in fact, it isn't even the biggest food wholesaler in this city -- but it is determined to be the most focused.After refinancing its debt and exiting some underperforming retail locations, the company is redoubling its efforts to help what it views as a resurgent independent food-retailing segment compete by keeping costs

MINNEAPOLIS -- Nash Finch isn't the biggest food wholesaler in the industry -- in fact, it isn't even the biggest food wholesaler in this city -- but it is determined to be the most focused.

After refinancing its debt and exiting some underperforming retail locations, the company is redoubling its efforts to help what it views as a resurgent independent food-retailing segment compete by keeping costs down and promoting differentiation. It also sees opportunity to grow through the ongoing rationalization of the food-distribution industry.

Executives from Nash Finch recently sat down with SN at the wholesaler's headquarters here to explain how the company plans to succeed in helping its customers grow their business, and how it plans to expand its own distribution operations.

Despite the rapidly increasing presence of supercenters operated by Wal-Mart Stores, Bentonville, Ark., Ron Marshall, Nash Finch's chief executive officer, sees opportunity for the strongest independent retailers to expand as the large supermarket chains rationalize their holdings and shed stores in various markets around the country. In addition, the exit from grocery distribution of Dallas-based Fleming Cos., previously one of the nation's largest wholesalers, has allowed Nash Finch to add new independent customers.

Marshall sees that event as the beginning of a trend toward consolidation among wholesalers.

"We all believed for a long time that the consolidation I saw in the drug store industry and in retail grocery in the late 1990s would eventually come to the distributors," he said. "Today, we're seeing that consolidation occur, precipitated by what happened with Fleming. That was the cue ball that started all the other balls rolling.

"We are at the happy confluence of a tremendous opportunity in the wholesale business, and we're prepared to take advantage of it," he said. "We think there is a profound business opportunity within this sector for consolidation, and we think we can be a consolidator."

To prepare to take advantage of the opportunity, Marshall said the company undertook a strategic review beginning in September 2003 to determine how to best position the company for long-term growth. As a result of that review, the company has decided to concentrate most of its resources going forward on growing and becoming more efficient as a retail supplier and as a third-party distribution company to military installations.

The company continues to operate more than 80 retail stores, but Marshall said the company will not seek to grow that business any further.

"While we are committed to the retail business we are in, we don't feel that's where the opportunity is for our company," he said. "We want to focus on retail distribution and on the military."

Nash Finch's retail business had been sliding through several quarters of double-digit same-store sales declines before the company decided to close 18 underperforming stores last year. Profitability in the retail segment, which generated sales of $996.3 million in 2003, has improved as a result, the company said.

Nash Finch's much-publicized Avanza concept targeting Hispanics did not survive an expansion into Chicago, although the company is retaining a limited presence in Denver that it plans to use as a test vehicle for rolling out Hispanic programs to its independent customers.

"We believe it reaches a segment of the population that is underserved," said Marshall, who added that the remaining Avanza stores in Denver are "very profitable."

"The additional capital that would be required to grow that concept is just not worth it in the long run," he said. "But strategically, that segment of the population is very important to us. Our customers often ask us how they can improve their Hispanic marketing."

He said the company continues to implement marketing and merchandising plans in the Avanza stores.

"We will continue to use it as a lab," he said.

Retail overall has made up a declining proportion of the company's revenues during the past several years, falling from 26% of sales in 2001 to 24.3% in 2003 to an estimated 18% to 19% in 2004. Marshall said he sees that percentage getting down to about 15% of total sales this year.

Although the company does not plan to aggressively expand its retail operations, it could occasionally add stores through the acquisition of its customers' operations, executives said.

That will leave the company with two primary divisions: wholesaling and military supply. The wholesaling business, with revenues of about $1.9 billion in 2003, operates from 4.76 million square feet of warehouse space in 15 different distribution centers, stretching from the Dakotas through the Midwest and down to Georgia.

The military supply division, which generated about $1.1 billion in revenues in 2003, distributes grocery products to commissaries in the U.S. and overseas from five DCs.

Deleveraging the company

The disappearance of Fleming, which previously had been one of the nation's top suppliers to independent wholesalers, has created opportunities for the surviving wholesalers to pick up new independent customers, but it has also made the surviving independent retailers more wary.

"One of the things we heard from independents was how badly Fleming's demise affected their business," said LeeAnne Stewart, chief financial officer. "That's why we're deleveraging, paying down debt, and we replaced our bonds with bank financing. Going forward, we will have the benefits of both lower debt and lower interest payments."

Last month, Nash Finch redeemed its $165 million in 8-1/2% notes on which it had been paying interest for several years. It replaced that debt with a new $300 million credit facility, including a five-year $125 million revolving facility and a $175 million term loan, which it used to redeem the notes.

The move not only helped its balance sheet but also gave it more flexibility to invest in its operations and, the company said, will make it attractive to potential independent customers.

David J. Bersie, corporate senior vice president, food distribution, said Fleming changed the way Nash Finch must present itself when seeking new business from independents.

"Prior to Fleming going out of business, seldom did financial strength come up in any discussions," he said.

Now, he said, it is one of the first things prospective customers are concerned about.

Marshall said Nash Finch's balance sheet is among "the two best in the industry," giving the nod to hometown rival Supervalu's balance sheet as being "excellent."

Having a better debt position isn't the only way Nash Finch is seeking to distinguish itself from Fleming and other wholesalers. The company also is determined to offer a more focused, simplified program for its customers to buy into.

"We are increasingly providing simple solutions to our customers," Marshall said. "Wholesalers have historically provided complicated pricing structures, but we offer a very simple pricing program.

"We are focused on the basics, on the real ins and outs of being a wholesaler. Fleming was all over the place with what it was doing," he added, noting Fleming's efforts to expand into other areas of distribution and retailing before it filed bankruptcy in 2003.

Resilient Independents

Although the expansion of Wal-Mart has taken its toll on weaker independent food retailers, Marshall said he has seen a marked improvement in the position of the independents to whom he has tied Nash Finch's fortunes.

"If you went to a [National Grocers Association] meeting five years ago, they were pretty glum," he said. "Today, the tenor is incredibly upbeat."

One of the reasons for that, he said, is that many of the weakest players have been weeded out and those that remain have figured out how to compete.

"We've searched high and low, and we can't find a single area where Wal-Mart is the only food provider," he said. "These independents that are our customers focus on differentiation through convenience, perishables and service.

"About 90% of customers compete with a supercenter," he said. "People who are around today have proved they can take a punch. They don't have a glass jaw. We think the customer is in the process of being revitalized, and we think there's an opportunity for us to be there as a distributor."

Although one analyst, who asked not to be identified, pointed out that the independent supermarket operators "remain under tremendous pressure," investors seem to believe that Nash Finch is well positioned to grow in today's independent marketplace. The company's stock has increased more than 60% in the past year, and last week was trading at near its 52-week high of $40.25.

That's nearly 10 times the lows it reached in 2003 as the company underwent an investigation by the Securities and Exchange Commission into the way it accounted for so-called "count-recount" charges to vendors. The SEC eventually approved the company's accounting method, and the shareholder lawsuits that followed were dismissed, Marshall pointed out.

Marshall said now the company "hasn't heard from the SEC in several months," although the company assumes the SEC is continuing to investigate Nash Finch's accounting.

Facilitating Customer Growth

With its underperforming retail stores out of the picture and its debt restructured, Nash Finch hopes to grow the company's business both through the acquisition of new customers and the growth of existing customers.

Chains like Winn-Dixie Stores, Jacksonville, Fla., that are closing stores present opportunities for Nash Finch's customers to expand by opening new stores or moving to better locations.

Such was the case last year with several of Nash Finch's customers, such as Bag N' Save and No Frills, two Omaha, Neb.-based customers who acquired some of the Albertsons stores in that market when the Boise, Idaho-based company decided to exit.

"We are assisting independents in taking advantage of chain rationalization," said Bersie. "Last year was really a good year for that."

Nash Finch also has rationalized its own customer base, shifting some of its weaker customers to other distributors but retaining their volume by setting up third-party redistribution.

One customer that some analysts have regarded as a liability, however, has thus far been only a benefit. Troy, Mich.-based Kmart, whose bankruptcy shortly preceded that of Fleming, has been a model customer for Nash Finch, executives said.

"They are a very good customer," said Marshall. "Whenever you talk about Kmart, there's danger that you are overextended, but I assure you that we are not."

Nash Finch supplies groceries, frozens, dairy and packaged meats to 22 of Kmart's SuperK stores. The business does not represent a significant share of Nash Finch's volume at any of its distribution centers, Marshall said.

"Kmart has snapped pretty seamlessly into our network," Bersie said. "We had heard horror stories about Kmart, but none of that has happened. It's just 180 degrees from what we had heard before."


Nash Finch also is concentrating on enhancing its wholesale offerings through new marketing and merchandising programs and on minimizing costs by making its distribution operations more efficient.

Maintaining competitive delivery metrics is a key goal for all employees, executives said. They speak with pride about the company's 96.1% fill rate and its 97.7% on-time delivery record.

Differentiation is also one of the key elements in the company's effort to help its customers compete, executives said. That manifests itself through Nash Finch's proprietary Our Family private-label brand and through promotional programs that individual stores tailor to meet the needs of their individual markets.

In private label, the company said it is expanding its offering and seeking to roll out new products throughout the store, in both the center store aisles and in the perimeter departments.

Beginning in the second quarter of this year, the company plans to begin rolling out a new line of premium products called Our Family Pride, an extension of the company's proprietary Our Family label.

"These items will be unique and differentiated product groups, and will clearly exceed the national-brand level," said James Patitucci, executive vice president, corporate procurement, merchandising and marketing.

The company is adding a test kitchen at its headquarters to help formulate the products, which could include both center store and perimeter items. In addition, Nash Finch plans to begin expanding its value-oriented private-label line, Value Choice, from its current level of 139 stockkeeping units to between 250 and 300 by the end of 2006, beginning in the second quarter of this year.

"We will encompass the entire store with either the Value Choice or the Our Family label," Patitucci said.

Last year, the company conducted a systemwide promotion for the 100th anniversary of the Our Family label, which some retailers said performed well.

Other programs that the company offers its retailers include turnkey dollar store general merchandise sections, which include more than 1,000 items that can be merchandised in sections ranging from 8 feet long to 80 feet. "Everything for $1" signs are used to label the departments.

Patitucci said Nash Finch is also working on expanding its periodic merchandising programs for retailers.

Last year, the company revived its "Summer Circus of Sales" event, a two-week promotion in which it encouraged store personnel to dress in circus costumes to call attention to bargains that Nash Finch had negotiated with vendors on products throughout the store. The first week of the promotion, in August, turned out to be the second-busiest week of the year for the company, Patitucci said.

This year, the company is preparing to launch a "Race Days" promotion on Feb. 13 that will tie into NASCAR and will also allow individual retailers to customize the promotion for their individual markets.

"The stores get very enthusiastic about this," Patitucci said. "This is what distinguishes us from the big guys. They can't do this. They just can't match the enthusiasm of the independent retailers on this."

Suppliers also have been supportive of the program, and in fact there is a list of vendors waiting to participate, Patitucci said.


In addition to rolling out these programs to help retailers build their sales, the company also is seeking to take costs out of the system and make its distribution more efficient.

For example, Patitucci said the company has been discussing with the Asian vendors who supply its dollar store merchandise about the possibility of pre-loading that merchandise on store-ready pallets before they are shipped to the United States, cutting down on the labor that is currently required once the merchandise arrives in this country.

"Those are the kinds of things we work on to help us in our efficiency," he said.

Technology also is helping make the company more efficient. It has rolled out NashNet, a Web-based system for distributing product and merchandising information to its customers as well as its own retail stores.

In the second quarter, the company will begin rolling out handheld scanners from Dolphin Technology to its customers that it says will speed order receiving and can also be used for other functions in the store, such as checking out customers.

"It will be like having a [personal computer] on a handheld device," said Bruce Cross, senior vice president, business transformation.

He said the company will roll out the devices in a "tiered" level of service, so that smaller customers can better afford to buy into the program at lower levels of investment.

"This is an exponentially more advanced tool than what we see out there today," said Marshall. "Nobody else has Dolphin yet, but we believe this is the right time for this."

The company introduced it to customers last spring, and it was well received, Bersie said.

Marshall -- a former retail executive, as are several other members of his staff -- said he knows Nash Finch's future is linked to the success of its retail operators.

"We know we are a good logistics company," he said. "But our focus is on the retail customer, and using that as a lever to drive our business."