Associated Grocers, Incorporated History

Address:

3301 South Norfolk Street
Seattle, Washington 98118
U.S.A.

Telephone: (206) 7622100
Fax: (206) 7647731

Private Company
Incorporated: 1934 as Associated Grocers Cooperative
Employees: 1,300
Sales: $1.09 billion (1998)
NAIC: 42241 General Line Grocery Wholesalers; 42242 Packaged Frozen Food Wholesalers; 42247 Meat and Meat Product Wholesalers; 42243 Dairy Product (Except Dried or Canned) Wholesalers; 42221 Drugs and Druggists' Sundries Wholesalers; 42248 Fresh Fruit and Vegetable Wholesalers.

Company Perspectives:

We will provide whatever products or services necessary to keep our customers competitive in every phase of the food business at the most competitive prices possible. Key Dates:

Key Dates:

1934:: Eleven independent grocers form Associated Grocers Co-operative.
1938:: Associated Grocers extends its reach with a warehouse in Yakima, Washington.
1952:: Cooperative builds a new Seattle warehouse complex.
1955:: Associated Grocers establishes subsidiary Market Finance Co.
1985:: Cooperative acquires 25 Washington stores from Lucky Food Stores.
1990:: Sales surpass the $1 billion mark.
1998:: Associated Grocers forms joint venture with Fleming Companies Inc.

Company History:

Headquartered in Seattle, Washington, Associated Grocers, Incorporated, is a retailer-owned cooperative that distributes food products and general merchandise to about 350 independent grocery retailers in Alaska, Hawaii, Oregon, and Washington. The privately held company also serves grocers in Guam and the Pacific Rim. In addition to food and nonfood goods, Associated Grocers provides support and retail services, such as site development, electronic payment, and store decor. Included in the more than 12,000 items distributed by Associated Grocers are its own private-label brands, including Western Family, Javaworks, and Ovenworks.

Grocers Band Together in the 1930s

After the stock market crashed in 1929 and sent the U.S. economy spiraling downward, businesses that had managed to survive the tumultuous economic conditions still faced years of difficult recovery. The economic climate had still not improved by 1934 when 11 independent grocers in Seattle, Washington, banded together to form the Associated Grocers Cooperative. Although it was not the first time businesses with similar interests had created a cooperative to help stave off the harmful effects of the Depression, the formation of Associated Grocers did mark one of the first instances in which grocers united to share resources and to create an organizational structure to oversee their well-being. The eleven grocery stores, mostly smaller, street corner operations, commonly known as 'mom and pop' stores, joined together through the assistance of Harry Henke, Jr., a corporate lawyer in Seattle. The stores also solicited the help of J.B. Rhodes, a supermarket executive working in San Francisco, to lead the newly formed cooperative.

With a starting capital of $8,325, Associated Grocers initially provided grocery products to the individual, independent stores, enabling them to compete with the larger chain stores that relied on centralized distribution centers and possessed larger reservoirs of cash. Accordingly, the cooperative provided a buffer for the independent grocers against their better-financed competition and, in effect, enabled them to pool their resources in order to survive the debilitating times. Since the cooperative was owned by the grocers, a portion of the profits earned by Associated Grocers from the sales to the grocers were returned to the grocers in the form of patronage dividends.

In its first year of operation, Associated Grocers fared well. Revenues totaled $1.27 million for the year, and the cooperative was becoming stronger as more grocery stores joined and it became better able to keep the independent grocer competitive in an industry increasingly dominated by large chain stores. Four years after its inception, in 1938, Associated Grocers constructed a 41,800-square-foot warehouse in Yakima, Washington, to complement the cooperative's warehouse in Seattle and accommodate its burgeoning clientele. The facility in Yakima, a community east of Seattle in central Washington, was established as a branch warehouse to fulfill the needs of member grocery stores near the facility. By establishing branch warehouses, Associated Grocers reduced transportation costs to stores located outside the immediate service area of its Seattle warehouse and was able to transport the merchandise in a shorter time, particularly important for the perishable products that member stores required.

When the United States entered World War II in 1941, a scarcity of some grocery products resulted, but the effects of the shortage were mitigated by Associated Grocers' ability to provide competitively priced merchandise to its customers. In addition to supplying its member stores with merchandise, the cooperative also began offering services intended to help the independent grocer's position in the marketplace. For example, Associated Grocers became one of the first wholesalers in the nation to offer retailers a complete pricing service, allowing member stores access to the prices other stores charged for products and keeping member stores apprised of competitive pricing in their market. By 1942, the cooperative had outgrown its main warehouse in Seattle, and a new warehouse was built to accommodate the cooperative's members, which by this time had increased from the original 11 stores to 260 independent grocers.

Postwar Growth and Expansion

After World War II, business accelerated, fueled by a postwar boom that increased Associated Grocers' customer base considerably. By 1952 the cooperative had 600 members, operating stores in Washington, Oregon, Alaska, and the Hawaiian islands. In addition to the warehouse in Seattle and the branch warehouse in Yakima, which had been enlarged by 11,000 square feet in 1948, the cooperative also opened nine 'cash and carry' branches to supply both member and nonmember stores. Independent stores that did not belong to Associated Grocers could buy merchandise at these cash and carry outlets but did not receive the cooperative's patronage dividends. Since Associated Grocers opened for business 18 years earlier, the cooperative had returned an average of nearly $155,000 per year in patronage dividends for a total of $2.7 million. Sales now stood at $33 million, and Associated Grocers once again found itself in need of additional warehouse space as well as more modern equipment and facilities to effectively service its members.

In a much heralded event in the local press, Associated Grocers completed construction in 1952 on a $2.2 million warehouse that at once answered the increasing needs of the cooperative. Located on a 26 acre plot, the site was comprised of four buildings, including the warehouse. The warehouse featured a large loading dock to receive and dispatch merchandise to and from its fleet of trucks and 235,000 square feet of space sheltered by a nine-acre roof. Included in this large area were a series of curing rooms, to store fruit until ripened, and a separate area for frozen foods. The complex also included a building used to service and repair warehouse equipment and the cooperative's fleet of trucks, which by this time consisted of 100 trucks and trailers. Another building was devoted solely to the repair and maintenance of the tires used on the cooperative's vehicles. This distribution complex provided more than ample space to service Associated Grocers increasing membership, and additional land surrounding the new buildings offered the opportunity for the cooperative to further expand.

While the cooperative continued to expand its operations, store membership did not dramatically increase beyond the 600 stores belonging to the cooperative in 1952. Rather, growth came from an increase of services to members and in the size of the stores they operated, which in turn helped Associated Grocers realize future gains in revenues. Following the completion of the warehouse complex, a new department was created to manage drugs and sundries, and in 1953 the cooperative recorded nearly $39.5 million in sales and returned $455,417 in patronage dividends. Two years later, Associated Grocers management began looking for a way to assist its members in financing major remodeling projects and new store construction. Many wholesale grocery concerns had been assisting their members in financing new store construction recently, approximately 25 percent of the wholesale industry engaged in this activity, and Associated Grocers sought to extend the service to its members. With an initial investment of $50,000, the cooperative formed a wholly owned subsidiary named Market Finance Co. that enabled member stores to borrow the requisite funds to relocate their stores, construct new stores, or complete pre-approved remodeling projects. The amount of the loans was generally limited to $50,000, for which the retailers were charged six percent simple interest. Market Finance was advanced the money from banks at a lower interest rate than charged to the retailer, with the difference between the two rates financing the subsidiary's operating expenses. Not designed to earn a profit, the subsidiary was, nevertheless, a financial success. Within two years, roughly 25 percent of the cooperative's members had applied for financing through Market Finance, amounting to over $1 million in loans.

Growing Pains Beginning in the 1960s

The addition of these services would figure prominently in the company's business strategy during the 1960s. By this time, competition from the larger, better-financed retail chains had intensified, as large supermarkets began to dominate the markets in which Associated Grocer member stores operated. Consequently, a large number of mom and pop stores were forced out of business, giving way to new stores that occupied sites as large as a city block. During this era of decline for small grocery stores, Associated Grocers increased the services it provided to its members, helping them with store decor, establishing electronic ordering systems, and supplying them with innovative packaging methods. However, these efforts were not enough to keep some of the smaller stores in business, and the cooperative's membership dwindled. By the end of the decade, the effect of these losses impelled Associated Grocers to seek new leadership.

The cooperative's new president, Bert Hambleton, was elected in 1971. Hambleton, who had spent 21 years with grocery and retailing chains in Ohio and Illinois before joining Associated Grocers, accepted the position with some reluctance. As he later recalled, 'The operation was in deep trouble when I came. ... When the board first offered me the job I turned them down because I didn't think the company was going to survive.' However, under Hambleton's leadership, lasting changes were made that reinvigorated Associated Grocers' position in the wholesale industry. Throughout the cooperative's offices, computers were brought in to improve the efficiency and accuracy of all facets of operations, from the management of the warehouses to market research. Cooperative-owned dairy and egg farms were established, creating a stable supply of dairy products for the independent grocers, and the organizational structure of the company was revamped to give its operations a configuration more characteristic of a corporation rather than a cooperative. The changes implemented by Hambleton were successful. When he assumed control of Associated Grocers, revenues were $150 million and earnings were less than $1 million. By the end of the decade, revenues had climbed to $625 million, and the dividends paid to the cooperative's members totaled $8 million.

The mounting pressure put on independent grocers continued into the 1980s, as such giants in the industry as Safeway Stores competed for customers with Associated Grocers member stores. While the cooperative had increased its market share from below 20 percent to greater than 25 percent during the 1970s, it needed to further penetrate the markets in which it operated. A supermarket development subsidiary was formed in 1981 to manage the financing and development of stores for Associated Grocers members, tasks that had clogged the cooperative's administration operations, consuming as much as 60 percent of its time. Utilizing the cooperative's computers, the subsidiary conducted site analyses and demographic studies that enabled independent stores to enter markets before other commercial and residential development. Although riskier in nature, this method proved successful in allowing Associated and its members to compete for sites with the chain store operators.

In 1985 Associated Grocers purchased 25 stores located in Washington from Lucky Food Stores, a retail chain operating in 30 states. Lucky had been unable to efficiently operate the stores from its distribution and manufacturing centers in California, so the cooperative purchased the 23 supermarkets and two discount outlets and sold the stores to independent grocers in an effort to increase the number of stores under its purview. The addition of the Lucky stores, as well as an agreement with Pacific Gamble Robinson to supply 88 grocery stores, gave Associated Grocers 406 stores. Largely due to the association with Pacific Gamble, revenues had increased by 20 percent since 1984 to reach approximately $900 million.

Later that year Associated Grocers initiated negotiations with United Retail Merchants Stores Inc., a wholesale grocery distributor operating in eastern Washington, to effect a merger. The proposed merger would join United Retail's distributing facilities with those of Associated Grocers to lend greater efficiency to the two wholesalers' purchasing and distribution operations and enable Associated Grocers to more fully utilize its warehouse space. Associated Grocers' board of directors approved the proposal, voting unanimously in favor of uniting United Retail's approximately $400 million in revenues with the cooperative's $900 million. However, United Retail backed out in early 1986. Aggressively seeking the merger, Hambleton at one point had offered to step aside if his departure would facilitate the union, but his efforts were to no avail. One month after United Retail made their announcement, Hambleton, who had been stunned by the decision, opted for early retirement and was succeeded by Donald Benson, Associated Grocers' executive vice-president of finance.

Although the collapse of the deal with United Retail in 1986 was discouraging, the year was generally good for Associated Grocers' management. Through the assistance of the cooperative, independent grocers experienced a resurgence during this time due to their new focus on customer service. Stores were now being remodeled much more frequently, the merchandise was becoming more diverse, and the stores' management began orienting their marketing and products to the residents living in proximity to the particular store. These adjustments enabled Associated Grocers to match Safeway's market share for the first time, which was a combined 72 percent for the two companies. By attempting to appeal to as many different types of customers as possible and generating more sales per square foot, Associated Grocers members increased their profits, and the cooperative, in turn, collected the rewards of a revitalized business. By 1990, Associated Grocers was the largest privately held company in Washington, and revenues surpassed the $1 billion mark.

Competition Heats Up in the 1990s

As Associated Grocers entered the 1990s, a two-month strike was effected by its workers. Increased costs resulting from the strike cut into the cooperative's earnings, which dropped from $4.2 million to $3.5 million, and the cooperative's patronage dividends fell from $14.7 million to $10.7 million. Nevertheless, Associated Grocers' performance rebounded in 1991, as the dividends climbed back up to $13.5 million, and earnings jumped to $5.2 million on revenues of $1.1 billion.

Also in the early 1990s Associated Grocers began to face increasing competition. Large supermarket chains, mini-mart stores, and discount giants such as Costco and Drug Emporium expanded into regions serviced by Associated Grocers, creating a battle for precious market share in an industry with nominal profit margins. To compete against its formidable new rivals, Associated Grocers took proactive measures; the company helped member stores remodel and modernize, expanded the product lines of its well-selling private-label brands, Western Family and Market Choice, and streamlined its delivery operations. Between early 1993 and mid-1994 Associated Grocers decreased its work force by 100 employees through attrition, and in the first half of 1994 overhead costs were reduced 0.52 percent.

Associated Grocers also planned to implement cutting-edge technology in stores to stay competitive, including electronic product pricing, which displayed prices on LCD screens attached to supermarket shelves. Associated Grocers also continued to push electronic funds transfer (EFT) services; in 1994 the company, which was the first wholesaler to adopt EFT in 1989, when the technology was still new, provided more than 180 member retailers with EFT services that covered check approval, debit card, and credit card operations. The company planned to expand its network to support 220 customers by the end of 1995 and was already providing the service to non-member retailers.

In 1995 Associated Grocers had sales of about $1.2 billion and, based on sales, it was the largest private company in Washington. It was the sixth consecutive year Associated Grocers had attained the top ranking in Washington CEO, which listed the largest 150 nonpublic companies in the state annually. Despite its size, however, Associated Grocers sensed the need to take additional measures to protect the market share of its member stores. Indeed, a 1996 research project conducted by Exvere Inc. found that though the Northwest held the highest concentration of independent retailers, the figure was on the decline. The study found that 40 percent of retail grocers in Oregon, Washington, Idaho, and parts of Montana were independently owned stores, compared to a national average of 25 percent. In the western part of Washington, however, the percentage was dropping, nearing 35 percent by early 1998. The decline was attributed to expansion by large supermarket chains and a flurry of consolidation and acquisitions. For instance, Fred Meyer, Inc., became larger with its purchase of Quality Food Centers, Inc. (QFC) in 1998. The acquisition provided the chain with the top market share in the Puget Sound region and put into question Associated Grocers' role as supplier to QFC. Some industry experts estimated that Associated Grocers' sales could drop as much as 20 percent if QFC chose to stop using Associated Grocers' services.

Associated Grocers entered merger discussions with United Grocers Inc. of Milwaukee, Oregon, in spring 1997. United Grocers was also a distributor of wholesale groceries to its member retailers, serving about 390 grocers in Oregon, Washington, and California. By combining their businesses, Associated Grocers and United Grocers could gain size and clout, which would prove valuable in the fight against larger companies. Strengthening operations was especially important to United, which had suffered from declining net income since 1992. By November 1997 the two companies had agreed to establish a joint venture rather than a merger. The joint venture would provide information and distribution services to member retailers of both companies, shipping goods from the nearest warehouse to speed up delivery service. The new company was given the temporary name of Newco, and Associated Grocers' CEO and president, Donald Benson, was appointed to run the new company.

The joint venture never materialized, however, and much to United's surprise, Associated Grocers announced a joint venture with Fleming Companies Inc. in September 1998. Oklahoma City-based Fleming, the second-largest food marketing and distribution wholesaler in the United States, teamed with Associated Grocers to form AG/Fleming Northwest LLC The new company would join purchasing and distribution systems to better serve retailers in the Northwest. As part of the deal, Associated Grocers purchased Fleming's warehouse operations in Portland, which supplied 74 grocers, and two Oregon stores. Though Associated Grocers maintained that it still planned to pursue the joint venture with United, it never happened, and in the spring of 1999 United announced it would merge with Certified Grocers of California to form Unified Western Grocers.

As Associated Grocers neared the end of the 20th century, it looked toward strategic alliances and acquisitions to remain competitive in a climate increasingly filled with large, nationwide chains. In 1998 the company purchased four Stock Market grocery stores in the Puget Sound area from Fred Meyer. Also that year the cooperative signed an agreement with Jreck Subs Group, Inc. to market Georgio's Subs throughout its member group. The agreement boosted Associated Grocers offerings in the growing category of meal replacement. In October 1999 Associated Grocers extended its presence in Alaska by forming Northwest Retail Ventures, LLC with Bristol Bay Native Corporation and several Associated Grocers' members. The new venture was formed to operate six grocery stores in Alaska, three located in Anchorage, purchased from Safeway Inc. The new stores adopted the name Alaska Marketplace and combined the best that Associated Grocers had to offer--excellent customer service, pleasant shopping environments, and the finest food and nonfood goods available.

Principal Subsidiaries: Market Food Service; Market Advertising; Northwest Retail Ventures, LLC (49%); AG/Fleming Northwest LLC (50%).

Principal Competitors: Services Group of America; SUPERVALU INC.; Unified Western Grocers; The Kroger Co.; Safeway Inc.

Associated Grocers, Incorporated History

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Company History:

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