Affiliated Foods flexes muscles.

Grocery Cooperative's CEO Controlled Prices in Harvest Foods Deal

The power that affiliated foods Southwest Inc. wields in the Arkansas grocery industry - and the amazing diversity of the member-owned cooperative's business units are vastly underestimated.

Consider, for example, Affiliated's role in the bankruptcy-inspired sale of Harvest Foods Inc. in 1997. Few people realize that Affiliated President and Chief Executive Officer Jerry Davis personally brokered the deal, willfully driving up the bids from Affiliated competitors Kroger Co. and Brookshire Grocery Co. so his own Little Rock company could buy 13 handpicked stores for a song.

"We were the player that could put the whole thing together," says Davis.

A little more than a year after Affiliated relaunched the stores (and opened a few new ones) under the old Harvest Foods name, Davis says Affiliated is headed for a record, shattering 17 percent increase in annual sales, which would imply a total of about $674 million. Much of the increase, Davis says, comes Jerry Davis from the new, close-in customer base the Harvest stores provide for Affiliated subsidiaries.

Davis, a plain-talking, golf-shirt-wearing CEO, says he ultimately convinced Kroger to increase its initial bid of $6 million for the equipment at 11 Harvest stores to $8.7 million, or 1.6 times the calculated value of the equipment. He pulled off this feat by telling Kroger he would bring other grocery operations into the negotiations if the price wasn't right.

Brookshire, Davis says, paid $8 million for nine stores, or 1.7 times calculated value. Then, with the $16.7 million in hand, Davis stepped in to capture 13 of the stores for a mere $4.8 million, or only 0.7 times calculated value. All the former Harvest Foods building are leased, and the inventory was bought at market values.

Warehouse Interest the Key

What put Affiliated in the driver's seat, Davis says, was its interest in buying Harvest's warehouse near Little Rock National Airport. Other companies weren't interested in the warehouse, which Affiliated ultimately used for its new convenience store supply subsidiary. Harvest only wanted to deal with one company, Davis says, so it made Davis the man in charge.

"Kroger wanted 13 [stores] and ended up with 11," Davis says. "We wanted Jacksonville real bad. Kroger wanted the Malvern Avenue store in Hot Springs real bad. They wanted Tanglewood [in Little Rock at Mississippi Street and Cantrell Road] and we just said, 'No, there's no way.'"

Davis says Kroger's real estate buyer in Cincinnati called the dispute over the Tanglewood store a "deal breaker."

"I said, 'Fine, I'll get me another player,'" Davis says, and the deal went on without the Tanglewood store.

The 13 Harvest stores weren't the only steals Affiliated made in the deal.

Davis says that early in the morning of the day of Harvest Foods' bankruptcy hearing, he made a last-minute deal to buy all of the equipment at the Harvest Foods corporate office for $15,000. "It probably was worth $500,000," he says.

Then, Affiliated bought all the equipment for the Harvest warehouse for $1 million, though Davis says it probably was worth $25 million-$30 million. Affiliated turned around and sold $1.5 million in equipment, he says, including tractors, trailers and office furniture, and still had a fully operational warehouse.

Affiliated, which Arkansas Business ranks as the fourth-largest private company in the state by revenue, now has upward of 2,300 employees (including about 1,000 with Harvest Foods) and an annual payroll of about $34 million.

Cows and Fuel Pumps 

New Harvest Foods stores are on the horizon, including one on Kiehl Avenue in Sherwood, another in the Riverdale area of Little Rock (a former Harvest Foods that was unoccupied for the past year) and one in Bryant. But Affiliated also plans to open five to seven other new stores in the coming year, some of which will be purchased from other companies.

"Harvest Foods is probably the greatest opportunity that ever came about for this company," Davis says. But it's not the only opportunity on the horizon.

By November, Affiliated plans to open a huge new high-tech dairy farm on Wolver-ton Mountain, roughly 20 miles north of Plumerville, which will start off with 1,200 milking cows and possibly increase to 5,000 cows during the next two years.

Affiliated will own 45 percent of the dairy, Turner Dairy will own another 45 percent, and Damascus dairy farmer John Stacks will own the remaining 10 percent.

If the project comes off as planned, Davis says, it will be "the most modern dairy farm in the whole world."

The partners will raise their own feed on 850 acres at the dairy site, and each cow will have a little "scan tag" around its neck that will allow workers to keep track of each cow's health and production. Davis says he knows of only two dairies in the country larger than the one Affiliated is planning.

But the biggest projected growth area for Affiliated over the next year is in Petro Pete, a fuel division that now operates four ultra-competitive gas stations in Clinton, Mau-melle, De Queen and Pocahontas. The one-man stores, which have no walk-in area for customers, also sell cigarettes and motor oil. More importantly, Davis says, the gasoline is always priced at least 2 cents per gallon cheaper than that of any competitor in town.

Davis says the idea came from Brookshire, which has had success with the concept in Texas. Brookshire executives told Davis that the key to success with the fuel stations is an unflinching commitment to undercut the competition, no matter what.

"We hope to put in 20-40 of them," Davis says, many of those in the next year. One of the reasons for the haste is that a new federal law will effect much more stringent standards on underground fuel storage tanks at the end of the year.

"That's going to close up thousands and thousands" of gas stations, Davis says.

The Rest of the Story

Affiliated's recent concentration on Harvest has drawn public attention away from the company's true role as a cooperative for member grocery stores across the state and the Mid-South.

Affiliated supplies food, equipment, insurance, financing and many other products and services to 280 member stores throughout Arkansas, and another 100 stores in neighboring states.

According to Food People, a trade journal of the grocery business, Affiliated member stores and Harvest Foods stores account for 42.3 percent of all the grocery store sales in the state. Kroger, which is dominant in the central Arkansas area, has a relatively small 15.9 percent market share statewide.

Then there are the subsidiaries.

Affiliated started Little Rock-based Gold Star Dairy in 1980 to provide milk to its member stores and to other customers, including direct competitors. Before the Safeway stores in Arkansas were sold to Harvest Foods, Safeway actually bought milk from Gold Star.

Now the dairy is one of the biggest revenue-producing subsidiaries, with about $60 million in sales per year, and provides milk products for stores as far away as Tampa, Fla.

The cooperative also runs Mountain Pure Water Co., a $20 million-a-year subsidiary located right next door to Gold Star. The plant produces purified, spring and distilled water for the grocery business. "Wal-Mart is our biggest customer," Davis says.

Produce Pre-Pak Inc. ships, grades and packs potatoes, tomatoes and onions at a plant on Roosevelt Road for member stores. Convenience Store Suppliers Inc., operated out of the old Harvest Foods warehouse, stocks 600 convenience stores in Arkansas, Texas, Memphis and the Oklahoma border area. This subsidiary took flight about four years ago, Davis says, when Rand's Inc. was purchased by Harvest Foods and many convenience stores thought Harvest wasn't properly serving their interests.

"We're the only co-op in the country that has got as many subsidiary companies," Davis says. "There is only one other co-op that has a dairy. We do it to better service our stores. We went into the potato business to supply our retailers with a better quality potato. Same with milk."

Affiliated also has subsidiaries that offer equipment, nationwide wholesale product deals, insurance, wholesale florist services, real estate development and Shur-Valu trading stamps to the grocery industry.