Dairy Mart Convenience Stores, Inc.

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Dairy Mart Convenience Stores, Inc.

One Vision Dr.
Enfield, Connecticut 06082
U.S.A.
(203) 741-6808
Fax: (203) 741-2704

Public Company
Incorporated: 1972 as Snow White Dairies Inc.
Employees: 5,100
Sales: $795 million
Stock Exchanges: NASDAQ Over-The-Counter
SICs: 5411 Grocery Stores; 2026 Fluid Milk

Dairy Mart Convenience Stores, Inc. is the third-largest convenience store chain in the United States with approximately 1,100 stores in 11 states.

Dairy Mart’s origins date back to 1949, when Charles Nirenberg began selling ice cream from the back of his truck in the backlot of a Springfield, Massachusetts, gas station. Four years later Nirenberg had more than 60 ice cream trucks in various locations and a winter business that also sold coffee and doughnuts.

The success of these businesses showed Nirenberg there was money to be made by offering consumers convenience. In order to cash in on this opportunity, he opened his first store in 1957 with $1,500. Nirenberg first named the shop Dairy Land, but soon changed it after receiving complaints from another retailer using the same name. To save money, Nirenberg settled on the name Dairy Mart so he would only have to change three of the letters on his sign. Despite saving money on new signage, the store went bankrupt a year later. Nirenberg blamed the failure on the store’s location next to a high-rise apartment building. Initially he reasoned the location would guarantee him plenty of customers, but many of the residents were elderly with smaller budgets for food and impulse items.

Instead of giving up, Nirenberg opened two more stores soon after, and by 1972 he was running a chain of 37 outlets with sales of $6 million. The stores were incorporated under the name Snow White Dairies Inc.

Nirenberg decided the success of the company warranted a public offering, but before any stock could be issued, the company attracted the interest of Giant Stores, Inc., a retail chain based in Chelmsford, Massachusetts, which sought to acquire the company. Nirenberg decided he couldn’t turn the offer down and sold his company for Giant stock. “They made … a deal to give me 86,000 shares of Giant stock, which at the time was selling for $18.60 a share and within a matter of weeks it hit $26 a share,” Nirenberg told New England Business correspondent Gregory Sandier. “[Giant] quickly made me a paper millionaire. Except the problem was the following year, they went bankrupt and I became a paper pauper.” Undaunted, Nirenberg borrowed $250,000, bought back the 37 Dairy Mart outlets from Giant in 1974 and started again.

In 1975 Dairy Mart Convenience Stores, Inc. relocated to En-field, Connecticut. In addition, a $2.6 million milk processing plant was built in order to expand the business. The plant produced ice cream, frozen desserts and other dairy items for Dairy Mart outlets. Milk, orange juice, and fruit drinks were also processed in the facility.

By 1980 Dairy Mart was poised for bigger and better things, and a goal was set to build the company into a 1,000-store chain. In an effort to meet this objective Dairy Mart began an aggressive plan of acquisition. In 1981 the company purchased Sunny-brook Farms and its 66 stores, followed in 1983 by the acquisition of Dutchland Farms’s 32 stores, and IPO with 143 stores. Still far from the goal, Dairy Mart found itself in need of more capital. Spearheading the aggressive growth period was then-Vice President of Real Estate/Corporate Development Frank Colaccino. To help fund its growth, the company went public in 1983. Sales were $60.3 million and net income was $439,000. The stock offering raised $3 million.

Two years later Dairy Mart was ready to expand beyond its stronghold in the Northeast. The company made this bold move with the acquisition of The Lawson Co. from Sara Lee Corp. The 779-outlet chain, based in Ohio, was three times the size of Dairy Mart, and the $45 million deal included a dairy plant and a distribution center. While such competitors as Circle K were buying stores for as much as $350,000, Dairy Mart estimated its cost per Lawson store somewhere between $40,000 and $50,000.

Dairy Mart soon began to feel the effects of its rapid growth. Three months after Dairy Mart bought the company, workers at the Lawson dairy plant went on strike when their demands for higher wages were turned down. Replacement workers were hired to fill the jobs, sparking more controversy. A boycott was organized, some stores were damaged, one security guard was shot, and rumors were spread about poisoned milk. Dairy Mart suffered yet another boycott in 1986, this time by the American Family Association, an anti-pornography group upset with Dairy Mart’s decision to continue selling adult magazines.

The Lawson acquisition still wasn’t enough to put Dairy Mart over the 1,000 store mark, and in 1986 the company bought CONNA Corp., the Louisville, Kentucky, franchisor of the Convenient Food Mart chain with 369 stores. The $25 million purchase gave Dairy Mart a total of 1,207 stores in 11 states. Negotiating the purchase was not an easy task, however.

Convenient Food Mart Inc. (CFMI), a group of Chicago-based franchisors and owners of Convenient Food Marts, also wanted to buy CONNA, though Dairy Mart would be required to pay franchisor’s fees to CFMI if the acquisition went through. After extensive negotiations, the two parties agreed to divide the outlets. CFMI retained the stores in its region, as well as 72 stores in New England, while Dairy Mart received the balance. Now Dairy Mart had three divisions—one in Connecticut, another in Kentucky, representing the former CONNA stores, and the third in Ohio, overseeing the Lawson interest.

Under the terms of the CONNA acquisition, Dairy Mart was paying CFMI a substantial annual fee for its franchise of Convenient Food Marts. However, with the 1987 court ruling that stated “convenient” is a generic name, Dairy Mart took the opportunity to buy its way out of the franchise agreement with CFMI and give the former CONNA stores the Dairy Mart name. Those stores, however, proved to be well worth the trouble it took to get and keep them. That division is considered the most profitable part of the company, due in large part to the stores’ high gasoline sales.

Dairy Mart’s aggressive acquisition and expansion strategy since going public began to take its toll in the late 1980s. Financial performance was shaky, and the company’s stock fluctuated from 15 points to 6 and 1/8. Dairy Mart’s 1,207 stores garnered $482 million in sales in 1987, but the company still posted a $3.5 million loss because of a $3.3 million pension settlement and a slide in store margins. The company also carried a high debt to equity ratio. In fiscal year 1987, the rate was 2.86 to 1 compared to 1.4 to 1 the year before. Dairy Mart began to move forward again in 1988, however, with a leap in sales to $723 million and a net income of $4 million. Though some stores identified as weak performers were closed, and sales dropped to $717 million, this was offset with $3 million from the sale of Dairy Mart’s Midwest distribution center. In all, the company ended the year with a net income of $4.1 million.

In 1989 a team led by Nirenberg, which included four senior managers and the Salomon Brothers Holding Co., formed DCMS Holdings Inc. to attempt a leveraged buyout of Dairy Mart and take it private. The move would put Nirenberg and his managers in control of the firm and give Salomon Bros, a hefty 37.5 percent share. Charlie and Jan Nirenberg, who owned 35 percent of Dairy Mart’s outstanding shares along with 60 percent of the voting power, stood to make a profit of $22 million. They would also have the opportunity to pay just $5 per share of the newly private Dairy Mart. Armed with an $80 million loan commitment from the Bank of Boston, Salomon’s promise to sell $35 million in junk bonds, and another $35 million in bonds that were already in place, DCMS Holdings offered shareholders $14.50 for each of their Dairy Mart shares, which were then trading at $8. The value of the buyout would have been about $150 million.

The deal, however, was challenged by United Acquisitions—a New York company that owns Red Apple supermarkets—when they countered with an offer of $15 a share. DCMS quickly raised its offer to match it. When United tried again with a $16 a share offer, DCMS had already signed a definitive merger agreement, and the offer was ignored.

DCMS still wasn’t in the clear as it turned out. The deal collapsed when the Bank of Boston pulled back its financing support. The bank blamed Dairy Mart’s weak first-quarter earnings, but Nirenberg surmised that the bank was abandoning the risky leveraged buyout business, particularly in light of the federal regulatory pressures on the struggling New England banking system at the time. Rather than increase its reliance on junk bonds or eat into its low buyout price, DCMS Holdings dropped its goal of once again making Dairy Mart a private company.

The failed deal turned out to be a blessing in disguise and helped the firm avoid the heavy debt burdens of its competitors, including Circle K, the Southland Corp., operators of the 7-Eleven chain, and Convenient Food Mart Inc., which filed for bankruptcy in 1989. Without the debt burden, in 1990 Dairy Mart went on to purchase 137 Stop-N-Go stores from the Sun Company, Inc. for $16.2 million. The stores are located in Ohio, Kentucky, and Michigan, rounding out the company’s presence in the Midwest.

Even after buying Stop-N-Go, Dairy Mart retained its strong position. Fiscal year 1991 was the company’s best ever with sales reaching $809 million, up from $742 million the previous year. Net income was $3.8 million versus $682,000 the year before. The 1991 figures were especially healthy in light of the fact that the country was suffering from a recession, and gasoline sales had been hurt by the high prices caused by the Persian Gulf War.

With its acquisition fervor over for the time being, Dairy Mart turned its attention to modernizing its stores. In 1991, the company began testing a point-of-sale system in ten stores, hoping to reduce the paperwork burdens of store managers and increase store margins by half of a percent. The system, scheduled for a company-wide roll-out in 1993, provided an electronic link between each site’s personal computer, cash register, gas consoles and money-order dispenser. The computer tallied all of the day’s transactions, including sales and deposits, deliveries and accounts payable, bundled the information and sent it to Dairy Mart’s headquarters for processing. With little or no paperwork, store managers could then focus more closely on their customers and other needs. The second phase of the project involved installing the technology to give stores price scanning capability.

Dairy Mart also began to focus more on customer relations. In 1991 the company started a new program called MAGIC, or Make A Good Impression on the Customer. Store employees were trained in customer service skills and rewarded for providing good service through a recognition system.

In 1992, Charlie and Jan Nirenberg decided to sell their controlling interest to a limited partnership headed by Frank Colaccino, Dairy Mart’s president. Nirenberg abdicated his position as chief executive officer, but remains chairman of the board. Colaccino, who had long been groomed by Nirenberg for the job, took the title of CEO. In addition to Nirenberg, the limited partnership also included several other members of Dairy Mart’s senior management team. News of the transition came as Dairy Mart entered its fifth consecutive year of profitability. Sales were $795 million, a decline from the year before due to the closing of another 62 low-volume stores and a drop in the price of gasoline. Pre-tax earnings were $7 million and net income was $4 million.

The changing of the guard at Dairy Mart coincided with a major step in ensuring the company’s future growth. Dairy Mart entered into a joint venture agreement with two international firms to establish a network of convenience stores in Mexico. The venture, called Dairy Mart de Mexico, is the company’s new strategy for growth in the 1990s. While the company had consulted with and licensed its name to convenience store operators in Japan, England, France, Australia, Germany, and Korea, it had done so for a one-time fee, payable at the outset of the arrangements. The Mexican deal represented the first time that Dairy Mart, with a one-third stake of the business, would hold equity in a foreign operation. Dairy Mart’s partners in the deal were Grupo Corvi S.A. de C.V., a Mexican food distributor, and Filles S.A. de C.V., a distribution, canning and real estate company. Unlike their U.S. counterparts, Mexican Dairy Marts will not be designed around its driving customers and will be geared, instead, to walk-in traffic.

In 1992 the company unveiled the prototype of a new outlet combining gasoline service and a convenience store. The prototype emphasized the gasoline islands, which are sometimes ignored by consumers more comfortable filling their tanks at a regular gas station where they might also be able to pick up a carton of milk or some snacks. Earmarked for 432 stores, the design called for T-shaped canopies to be placed over extended gas dispensers, more closely linking the area to the convenience store. By placing emphasis on the gas pumps, the company hoped to increase its already significant gasoline volume. In 1990, for example, the 420 Dairy Marts that sold gas contributed 35 percent of the company’s total revenues. The prototype building also served to highlight the company’s food service and beverage programs. In addition to popcorn, pizza, and fried chicken, the site also included a counter for store-made, shrink-wrapped sandwiches.

By 1992, Dairy Mart’s dairy operations also saw some new developments. In addition to the 400,000 gallons of milk the company’s two processing plants produced every week, the Cuyahoga Falls, Ohio, facility began production of a low fat line of frozen yogurt and ice milk. The increased product line, combined with expanded distribution of Dairy Mart brand ice cream to its Southeast stores, helped increase the plant’s distribution by 25 percent.

Dairy Mart is poised for the rest of the decade with an eye toward rolling out its new prototype, modernizing existing facilities with new technologies and more attractive interior designs, the production of new products, and improved training for its more than 5,000 employees. Under Colaccino, who spearheaded Dairy Mart’s overseas franchise agreements, Dairy Mart will also continue to expand its foreign operations. Having recovered from significant financial hardships during its history, the early 1990s have proven to be very healthy years for Dairy Mart Convenience Stores, Inc., placing the company in a strong position for the future.