Penn Traffic Turns Buying Over to C&S
The definition of what constitutes a self-distributing chain may need some tweaking as the relationship between Penn Traffic and C&S Wholesale Grocers illustrates.
Last year, C&S began buying general merchandise and health and beauty care products that Penn Traffic distributes to stores through its own distribution centers.
Beginning next month, C&S will begin buying an expanded number of product categories including bakery, candy, dairy, deli, floral, fresh and frozen meat, frozen bakery, frozen (mainline), frozen seafood, grocery, ice, ice cream, spices, store supplies and other merchandise as part of an eight-year deal between the parties. Distribution to stores will continue to go through Penn Traffic warehouses.
“We believe that this move will free up cash that would otherwise be tied up in inventory and trade receivables, improving our ability to reinvest in our stores and enhancing the service and value the company delivers to all customers,” said Gregory Young, president and chief executive officer of Penn Traffic, in a press release. “C&S’s expanded services will not change the way Penn Traffic and our associates select, merchandise, inspect, warehouse and deliver product on our trucks to retail stores and wholesale customers.”
Penn Traffic expects it can improve its profitability through the purchasing power of C&S. It also expects to see cash flow improvement through better inventory and trade receivables management.
“This new procurement agreement is right in line with our strategy for rebuilding Penn Traffic, restoring profitability and positioning the company for long-term success, which we began implementing last year,” said Mr. Young. “We plan to continue executing our strategy, which includes focusing on our highest-potential and most-profitable stores, lowering expenses and optimizing our wholesale business.”
C&S, the nation’s second largest grocery wholesaler, distributes food to over 5,000 stores in the U.S. including Ahold (Giant-Carlisle, Giant Food and Stop & Shop), A&P, Bi-Lo, BJ’s, Big Y, Bruno’s, Pathmark, Safeway, Shaw’s and Target.
Discussion Questions: Is the deal between Penn Traffic and C&S Wholesale Grocers the way of the future for regional supermarket chains? What do you see as the benefits and drawbacks of the relationship C&S has with Penn Traffic and other regional and local chains?
The Penn Traffic/C&S arrangement is the future for retailers in trouble. The economic point for self distribution has increased over the years from $400 million in sales to $1 billion today.
Suppliers’ tune has changed in recent years. With a greater percentage of their volume going into Walmart and a few other retailers, they are looking to work more closely with smaller retailers. Having all your eggs in one basket only increases the supplier’s risk. From past analysis, the real deal is somewhat less than the one advertised.
Managing the relationship to ensure that Penn gets the products it wants at a good price will be a challenge. If managed well, it has the potential to be successful for both sides.
If the objective of “Penn Traffic to Further Increase Focus on Its Customers” is actually followed, this should be the perfect strategy for the chain. Let the retailer work on what should be their competitive advantage and the most important part of their business–the customer.
As described in the article, they should experience better buying and better cash flow. The key is, of course, that the selection of products continue to be the retailer’s customer-centric decision.
Sounds much like the arrangement several years back between Fleming and Kmart. Fleming had the buying clout and distribution infrastructure which allowed Kmart to focus more on operational and merchandising areas. It looked great on paper but didn’t work and brought Fleming to its knees.
Wholesaler distribution for retailers has been around forever and works great for some chains when the relationship is run correctly. It does have complexity in how Trade funds get allocated to the retailer from the suppliers which creates dilution of consumer support dollars that are vital to attract shoppers with in store promotions and temporary price reductions.
Penn Traffic has gone bankrupt twice. The C&S deal allows Penn Traffic to reduce its capital tie-up. That’s one of the key reasons retailers use wholesalers. Cash availability is goal #1 for any business operating in bankruptcy. Even though Penn Traffic emerged from Chapter 11 in 2005, they’re ultra-careful about tying up capital.