Wholesale distributors and independents are becoming more dependent on each other for continued growth, if not future survival, according to industry analysts.
As larger chains continue to consolidate, wholesalers are exploring other revenue streams while forging stronger relationships with independent retailers. Meanwhile, independents must not only find points of difference against larger chains, but also work with their suppliers to cut costs throughout their businesses, analysts said.
Wholesalers such as Fleming Cos., Dallas, have continued to stress the importance of adding new retail channels to its distribution network. Mark Hansen, Fleming chairman and chief executive officer, said earlier this year that customers other than supermarkets would be a major driver of sales.
Supervalu, Minneapolis, is also dedicated to alternate channels, making good on that with the acquisition of the St. Louis-based general merchandise chain Deal$, and a depot. That will give Supervalu access to general merchandise to integrate into its Save-A-Lot price-impact format.
Steve Chick, analyst with JP Morgan Chase, New York, told SN, "The simple fact is that all wholesalers need to increase their customer base, either through acquisition or new-account capture. And alternate channels like convenience stores and supercenters are growing as a format, so it makes a lot of sense to jump into that game."
Andrew Wolf, analyst with BBT Capital Markets, Richmond, Va., echoed that: "The core strategy has to continue to be the pursuit of other channels for growth. Wholesalers have the very obvious challenge of generating growth, while the traditional pool of retail customers remains virtually stagnant. Acquiring smaller distributors has not been very accretive to earnings in past cases, thus it makes the most sense to identify new areas to win business."
Another possible revenue stream that analysts said wholesalers can utilize is to become a third-party logistics provider, outsourcing distribution duties to otherwise self-distributing chains.
Fleming grabbed a large amount of outsourcing business from Albertson's, Boise, Idaho, in March as the chain decided to exit several markets in Texas and Oklahoma, thus selling a distribution facility in Tulsa, Okla., to Fleming. Fleming now handles distribution duties for Albertson's stores in Oklahoma and Nebraska.
Jonathan Ziegler, San Francisco-based managing director of Deutsche Banc Alex. Brown, said, "I could envision other opportunities like this for Fleming or other wholesalers. As consolidation increases, distributors may be able to pick up some business where there is not a dense enough store base for the retailer to build a distribution center."
But analysts said wholesalers grabbing substantial distribution business for otherwise self-distributing chains will be rare. Rather, they said wholesalers should work on making deals for niche products or other products that chains might not realize economies of scale in purchasing.
Logistically, analysts said wholesalers can lend management expertise and distribution infrastructure support to any business that manages a delivery fleet. Wolf noted that this type of new business has little overhead and increases profitability, and said that wholesalers could provide additional expertise in dealing with teamsters based on years of experience.
Chick said, "Wholesalers have the expertise and experience for this type of business, but I don't think they have the infrastructure in place to start going out and making deals at this point. But it is definitely a possibility for the future."
In recent years, some wholesalers such as Fleming have shed corporate-owned stores to focus more on the distribution side of business. But analysts said retailers making a focused commitment to retail could turn out to be the winners in the wholesale arena.
Supervalu has been aggressive with its Save-A-Lot format, with some 1,000 stores in operation. The stores target households with annual incomes below $35,000, which Supervalu President and Chief Executive Officer Jeff Noddle said is about 40% of the U.S. population.
Ziegler called the format the "gem of the business," and noted that other wholesalers can learn a lot from Supervalu's retail execution.
"Attacking a target customer on the retail side the way Supervalu has is a good way to pick up share in an otherwise declining market," Ziegler said.
Chick said that Supervalu's aggressive retail strategy makes sense considering it has lost distribution recently, such as when the Genuardi's Family Markets chain was absorbed by Safeway, Pleasanton, Calif.
"The core distribution business took a few hits," Chick said. "My guess is that Save-A-Lot and Supervalu's other retail banners will continue to be the biggest growth areas, as the company is still determining how to grow its distribution sector."
Chuck Cerankosky, analyst with McDonald Investments, Cleveland, said, "The trend of owning corporate retail continues to make sense as the return on capital remains positive. When wholesalers buy out their retail customers who are exiting the business, they retain distribution revenue and also add retail sales."
Companies like Spartan Stores, Grand Rapids, Mich., is one distributor that has said recently it will look to acquire former retail customers in an attempt to increase its retail store base.
Some industry observers have all but predicted the end of the independent supermarket operator; the analysts polled agreed that independents are facing competition from supercenters as well as chains, but all said independent retail will remain an important sector.
Differentiation and cost-effective operations are the main strategies analysts identified for independents to retain, if not gain, market share in the coming years.
Wolf believes there are a lot of regional independents like Ukrop's, Richmond, Va., who provide a unique level of service with competitive price points.
"Like many of the better independents out there, Ukrop's has expanded special departments like natural foods, and diversified its product assortment throughout the store," Wolf said. "Combined with its high level of service and competitive pricing, it obviously has a bright future."
Chick said that independents need to "think smaller," pointing out their points of difference with larger chains and supercenters. "Some of the smaller guys are doing well by finding ways to fill the void left by consolidation." This may mean adding ethnic sections or running promotions specific to the neighborhoods in which they operate, Chick said.
But the best way for independents to survive, analysts said, is by cutting costs from the system as much as possible.
Cerankosky noted that as wholesalers have consolidated, independents can work closely with their suppliers to achieve economies of scale.
Ziegler added, "Independents have to focus on costs. There are a lot of independents out there that possess decent market share, and if they take advantage of some buying opportunities that come with wholesale consolidation, they have a chance to gain even more share.
According to Chick, independents should work out systems of "activity-based buying" to get the best volume deals on popular products.
Wolf pointed out independent retailers also are different because they are privately held. "Independents can take margin hits without angering investors or shareholders," he said.
"As long as they are making money, they can price more aggressively and promote with a flexibility the larger, publicly held chains inherently lack."
The Big Two
Fleming and Supervalu have been making waves of late. Here is a quick look at how their businesses are growing in unique directions.
In spite of securing the Kmart contract from Supervalu in 2001, Kmart's bankruptcy could mean less revenue in 2002 and beyond. Chief Executive Officer Mark Hansen has said that Fleming's dedication to snagging business from other channels, such as convenience stores and supercenters, will more than make up for any revenue lost due to Kmart's woes.
Though it has lost the Kmart contract and has consolidated several distribution centers across the country, its commitment to retail will buoy the company's revenues and earnings. With the recent opening of the 1,000th Save-A-Lot, President and Chief Executive Officer Jeff Noddle has promised even more development of retail, noting that in the next few years, the retail and wholesale sectors of Supervalu will each contribute 50% of total sales.