DATE: Thursday, September 11, 1997          TAG: 9709110736

SECTION: BUSINESS                PAGE: D1   EDITION: FINAL 

SOURCE: BY STEPHANIE STOUGHTON, STAFF WRITER 

                                            LENGTH:   76 lines

WHY RICHFOOD DESIRES FARM FRESH WHILE THE UNION OF THE FOOD WHOLESALER AND THE RETAILER MAY SEEM PUZZLING AT THE OUTSET, ANALYST SAY IT MAKES GOOD STRATEGIC SENSE.

It looks like an odd marriage: food wholesaler Richfood Holdings Inc. and grocery retailer Farm Fresh Inc.

But industry observers say the union, announced Tuesday, isn't so strange if you consider what Richfood could have lost: about 7 percent of its sales and a valuable market that's growing. Norfolk-based Farm Fresh is Richfood's third-largest customer.

``Strategically, (Hampton Roads) is a big market for Richfood,'' said Jeff Omohundro, an analyst with Wheat First Butcher Singer in Richmond. ``I think that was their consideration.''

And Richfood, the largest food wholesaler in the Mid-Atlantic, probably isn't finished, Omohundro said.

Like other wholesalers, the company has become a more significant player in the retail grocery business, industry observers said. As the industry consolidates on both ends, the nation's biggest wholesalers have been anxious to preserve their territory and sniff out new growth opportunities, they said.

``If you're in wholesale, you need to be in retail,'' said Jeffrey W. Metzger, publisher of Food World in Columbia, Md. ``Strategically, the only way you can control your own destiny is to own your own stores.''

For example, Minneapolis-based Supervalu Inc., the nation's largest food wholesaler, purchased a five-store chain called Cub Foods in the '80s. Today, Cub Foods has more than 100 locations, boosting Supervalu's total number of supermarkets to 300.

Supervalu's stake in the retail business continues to grow, company spokeswoman Rita Simmer said. Sales at Supervalu's grocery stores now represent 29 percent of the company's $16.6 billion in annual revenues, she said.

In Richfood's case, company officials once remarked that they had no intention of running supermarkets. That changed in October 1995, when the company bought Super Rite Corp., which operated about 15 METRO and BASICS stores in Maryland and Delaware.

On Tuesday, Richfood took an even bigger leap. It announced plans to buy Farm Fresh and its 47 stores for $250 million or more, plus stock purchase rights. The deal, which does not cover extra debt at the grocer's holding company and some other liabilities, is expected to close in early 1998.

The plan calls for Farm Fresh to file a prepackaged bankruptcy reorganization within the next several months. The filing will help the grocer shed liabilities that Richfood has no intention of absorbing.

Six underperforming or older stores will be closed. Those locations have not been identified. In addition, Farm Fresh's chief executive officer, Ronald Johnson, will resign sometime during the transition.

Research analyst Jeff Middleswart said Richfood bought Farm Fresh merely to keep its wholesale business going. If Farm Fresh had been purchased by another grocer, Richfood might not have been chosen as the distributor. Most big chains, such as Hannaford Brothers Co., bring in their own food.

``It's a Catch-22,'' said Middleswart of W. Tice and Associates in Dallas. ``They either lose the business outright or they have to put money into it.''

Farm Fresh is only one of Richfood's worries, Middleswart and other analysts said. The wholesaler supplies other grocery chains that may soon change hands or begin to distribute their own food, they said.

But John Stokely, Richfood's chief executive officer, said turf wasn't an issue in the Farm Fresh buyout.

He said the company sees growth possibilities in Hampton Roads. Farm Fresh has some of the best real estate locations in the area. And now that the grocer has cash, it will be able to shine, he said.

``We never did this for defensive reasons,'' Stokely said. ``We did it for offensive reasons.''

The buyout makes even more sense because Farm Fresh and Richfood have had a close relationship over the years, company officials said.

``They know this market,'' said Rick Coleman, chief financial officer of Farm Fresh. ``They know these stores as well as we do.'' ILLUSTRATION: Color photo by Nhat Meyer/The Virginian-Pilot

Richfood CEO John Shockley, left, and his counterpart at Farm Fresh,

Ron Johnson..

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