Richfood Holdings, Inc.
Richfood Holdings, Inc.
2000 Richfood Rd.
P.O. Box 26967
Richmond, Virginia 23261-6967
Fax: (804) 746-6144
Incorporated: 1937 as Richfood, Inc.
Sales: $1.06 billion
Stock Exchanges: NASDAQ
SICs: 5141 Groceries—General Line; 5147 Meats & Meat Products; 5143 Dairy Products Except Dried or Canned; 6719 Holding Companies Nec
Richfood Holdings, Inc. is the largest food wholesaler and distributor in the mid-Atlantic area and the 15th-largest such company in the United States. The company was run as a not-for-profit grocers’ cooperative until the late 1980s, and although it had achieved over a billion dollars in annual revenues by that time, it was poorly managed, debt-heavy, and floundering. After the cooperative went public, the situation only worsened and soon Richfood was on the auction block. When no buyers could be found, veteran grocery distributor Donald Bennett agreed to become CEO and attempt the prodigious task of turning the company around. Since Bennett’s entry in 1990, the company has improved dramatically, attracting the attention of investors as well as its competitors. Although overshadowed by industry giants Super Valu Stores and Fleming Companies, Richfood is now an aggressive regional market leader whose health has been restored.
The company began in 1937 as Richfood, Inc., a Virginia-based cooperative wholesaler formed and managed by its retailer members. The goal of the company was to ensure the survival of the small independent stores that were beginning to feel the pressures of competition from large supermarket chains. The supermarket concept—with its emphasis on service, name brands, and deep discounts—had gradually taken hold since the 1920s and was becoming the standard form of retailing even in rural areas. Unfortunately, at Richfood there was little need for .accountability. Patronage rebates and guaranteed price controls on stock were the chief indices by which the company and its members operated, and even thrived, for decades. Richfood’s mission, according to Seth Lubove, “was simple: buy groceries from manufacturers, take a standard markup to cover costs and move the goods on to the retail grocers whenever they wanted them, and damn the costs.”
Over the next several decades this cooperative system showed signs of failing. Its members began to realize that other, more efficient wholesalers provided better services, including capital loans which were necessary for expansion and renewed vitality. Fleming Foods of Virginia, a subsidiary of Fleming (which, through acquisition, was fast becoming the nation’s largest wholesaler) was one company that contrasted sharply with Richfood. Asset rich and profit oriented, Fleming Foods was supported by a public company capable of offering its customers several advantages over the competition.
Finally, in 1987, to satisfy Richfood’s disgruntled members, CEO W. C. Taliaferro and the board decided to bring the company public. Richfood Holdings was formed in order to subsume the business, which was accomplished in May 1988. The company’s last full year as a cooperative was abysmal in terms of income versus sales. Although it had tallied revenues of $956 million, its overall margin was little more than a tenth of one percent, far below the traditional food industry target of 1 percent. The company was, in actuality, losing money, a trend that continued during its first year as a public corporation. After decades of operating as a cooperative, Richfood was ill-prepared to turn a profit and was still ruled by a board of grocery retailers interested primarily in their own businesses’ welfare rather than Richfood’s.
In July 1989, after the company lost an account with A & P Super Fresh, which had come to represent ten percent of its annual sales, the board decided to put Richfood up for sale. Because of a poor balance sheet and a declining reputation, no acceptable bids came. Taliaferro left the company at this crossroads in early 1990. Claude B. Owen, Jr., a board member since 1988, was elected chairperson, and Edward Villanueva was chosen to serve as acting president. However, Richfood faced several predicaments—most notably its technical default on a $39.5 million loan with Prudential—and it was felt that new management was needed to make the company profitable. Consequently, in May 1990 Donald Bennett was brought in as CEO. Bennett, former head of Wetterau’s food distribution business, had studied Richfood as a possible acquisition and so was familiar with the company’s numerous problems.
One of the few factors working in Bennett’s favor was Rich-food’s distinction as the largest food distributor in its operating region. It had established a customer base, but this had suffered from neglect during the management upheaval. In several cases, Richfood pricing policies had caused its retail clients to lose market share to such aggressive, lower-priced competitors as Food Lion. Largely at fault were Richfood’s existing contracts with food manufacturers; they had been poorly negotiated by former management and often resulted in stark pricing discrepancies on the supermarket end. Aggravating matters was the state of the company’s giant Richmond warehouse, allegedly so disorganized that workers had difficulty locating items. According to Elicia Brown, Bennett “swung into action immediately, booting out most of the top management, slashing inventories almost in half, revising trucking routes and schedules and enhancing advisory and financial programs for Richfood’s retailers.” His most important single move was facing down food manufacturers by unilaterally imposing pricing discounts. “There was an arena that raised holy hell about it,” remembered Bennett, “but when we invited the manufacturers to sit down and talk with us, in the end we paid back less than ten percent of the deductions made.”
The negotiations led to more sensible gross margins for Richfood and to greater credibility among its customer base, approximately 650 supermarkets in Virginia, West Virginia, Maryland, the District of Columbia, Delaware, and North Carolina. Bennett followed up by establishing a cost-plus pricing system tied to various incentive programs that make it enticing for clients to increase their dependency on Richfood as a distributor. Other early moves that improved Richfood’s viability included the sale of a nonfood subsidiary, Garner Wholesale Merchandising, and the acquisition of Fleming’s distribution center in Waynesboro, Virginia. The former provided proceeds for paying down the company’s sizable debt and the latter added more than $100 million to the company’s annual volume and, more importantly, made Richfood a distributor to numerous Independent Grocers Alliance (IGA) outlets. IGA is now Richfood’s second-largest customer.
During Bennett’s first year earnings shot skyward, increasing some 160 percent. Richfood’s stock, likewise, appreciated dramatically. In February 1992, Brown stated, “analysts are now predicting that earnings will grow 30 percent a year over the next five years.” A few months later, at the end of fiscal 1992, Richfood was still outperforming itself. Profits had risen 46 percent to $13.8 million on relatively flat sales. Richfood was proving that it could compete even as deflation hampered the entire industry. Better delivery service, automated on-line buying, joint marketing programs, and an expanded private label inventory all contributed to the bottom line. In addition, operating costs that two years earlier had sliced away eight percent of revenues were decreased to 5.77 percent, near Bennett’s ultimate goal of 5.4 percent. Another goal of Bennett’s, attaining a net profit margin of 1.3 percent, was also close to being realized in 1992.
Only a few doubts about Richfood have arisen since Bennett’s arrival. One, voiced by Elliot Zwiebach of Supermarket News, was that the company had 37 percent of its sales concentrated in just two retail chains, Farm Fresh and Ukrop. Another, ventured in Financial World by Ryan Matthews, was the potentially short lifespan of “wholesale distributors whose bottom line depends on pressuring food manufacturers.” Both doubts would seem to be quelled by Richfood’s increasing customer base and continuing profitability. In March 1991 the company, hoping to fortify its presence in the Baltimore-Washington area, entered into a principal supplier agreement with a Leedmark hyperstore. Further growth in the area is planned. The company also hopes to bolster its stake in North Carolina through its warehouse format Pack’N Save stores, first introduced in August 1991. The stores, embodying an emerging trend in retailing, offer savings similar to those of a membership club without demanding bulk purchases or membership fees.
Richfood has also begun to play a major role in financing and buying arrangements. In 1992, Nick’s Market, a 34-store chain, was sold through the aid of Richfood to interested independent retailers. Such deals are clearly in the company’s interest; because of its financing and brokerage services, all of the stores remained Richfood customers under new management. Ongoing improvements for the company include expanding and updating its product line, which includes more than 20,000 items, 1,600 of which are private label products. The irony underlying all of Richfood’s recent developments and successes is that the company is becoming a likely target for acquisition by the larger food distributors. In 1989 Richfood wanted and couldn’t find a buyer. Since that time, with Bennett in charge, the situation has been completely reversed.
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Turcsik, Richard, “Richfood Sale Offer Withdrawn,” Supermarket News, January 8, 1990; Turcsik, Richard, “Bennett to Join Richfood as Its President and CEO,” Supermarket News, May 14, 1990; Zwiebach, Elliot, “Richfood: Turning the Corner,” Supermarket News, November 12, 1990; Byrne, Harlan S., “Richfood Holdings: Cost-Paring Puts Supplier on Solid Footing,” Barron’s, July 1, 1991; Brown, Elicia, “Squeezing the Turnip,” Financial World, February 4, 1992; Zwiebach, Elliot, “Richfood Sales Rise, Profit Soars,” Supermarket News, August 24, 1992; Zwiebach, Elliot, “Richfood CEO: Price Deflation Places Emphasis on Efficiency,” Supermarket News, September 7, 1992; Lubove, Seth, “ ‘A’ is for Accountability,” Forbes, December 21, 1992.
—Jay P. Pederson