GRAND RAPIDS, Mich. — Spartan Stores last week said it would consolidate all of its distribution to a single warehouse here as part of an ongoing supply chain optimization effort that also included corporate staff reductions as the company battles a weak Michigan economy and worsening sales projections.
The strategy would likely result in the closing of Spartan's 415,000-square-foot dry grocery warehouse in Plymouth, Mich., but officials said they would first negotiate with the center's union employees before making a decision to close. Spartan's contract with the union, Teamsters Local 337, is to expire in April. Its lease on the Plymouth facility is to expire in October.
Spartan's 1.4 million-square-foot Grand Rapids facility, which includes fresh, frozen, dry grocery and general merchandise items, has undergone extensive upgrades over the last two years as part of the supply chain initiative that has improved its inventory turns, scheduling and space utilization. These changes will allow it to absorb the volume from the Plymouth facility, officials said.
In conjunction with the warehouse optimization, Spartan has eliminated 25 positions at its corporate office, according to spokeswoman Jeanne Norcross.
The changes — presuming they include a decision to close the Plymouth warehouse — are projected to save Spartan between $2 million and $3 million annually. The company expects to incur an after-tax charge of between $1.5 million and $2 million during the current quarter to cover severance, warehouse and impairment costs.
“This is another important step in our ongoing strategy of continuously improving efficiency and lowering costs in our operations,” Dennis Eidson, Spartan's president and chief executive officer, said in a statement.
The move comes as the weak economy in Michigan continues to pressure sales and earnings at Spartan and its retailers. The company last week said it expected sales would decline “in the mid-single digits” during the fiscal third and fourth quarters — a higher drop than the negative low-single-digit comps Spartan had previously forecast. Profitability would also be affected, with third-quarter earnings per share expected to be between 21 and 25 cents per share — well below analyst expectations of 31 cents.
Spartan will report third-quarter results early next month.
The market reacted strongly to the news, sending Spartan's stock down by nearly 10% on the day of the announcement. It was trading near 52-week lows late last week.
However, one analyst, Chuck Cerankosky of North Coast Research, Cleveland, said the warehousing move would be a positive one over the long term. Michigan's economic challenges were more daunting.
“With their size difference, and the distance between them, it seemed a natural progression to move the volume into the Grand Rapids facility, especially after the re-racking project there,” Cerankosky said. “There is no easier way to gain efficiencies in the distribution and logistics business than to pump more volume through fewer square feet.”
With regard to the economy, Cerankosky said, “Michigan explains 99% of Spartan's challenges, simply because of the economic downturn magnified by all the challenges in the state.”
Beset by job losses in the manufacturing and auto industry, Michigan is suffering an unemployment rate of about 15% — the highest in the nation, according to Eidson.
“As previously disclosed, we expected the near-term economic climate in Michigan to continue weakening and pressure our sales and earnings performance as the year progressed,” Eidson said. “Based on our current view of market trends and Michigan's nation-leading unemployment rate of nearly 15%, these expectations are materializing. The economic climate in Michigan remains challenging due to the persistent high unemployment rate and tightening consumer spending patterns.
“In addition, we continue to experience price deflation in some high-volume product categories, pricing pressure in fuel and heightened competition in certain markets due to new store openings.”