The Curdling Of Dairy Mart

It may not have been a sure thing, but it looked promising enough. At least that's what executives in Dairy Mart Convenience Stores Inc. believed when they joined a management buyout led by then-President Frank Colaccino in 1992. The nation's third-largest convenience-store chain, after 7-Eleven Stores and Circle K, Dairy Mart looked healthy. There was even talk that it would someday top $1 billion in sales. That proved a powerful lure. Philip Morris Cos. invested $8 million in the deal, and the state of Connecticut lent Dairy Mart $7 million.

Two years later, the Dairy Mart buyout has curdled. After a profit of $4.8 million in 1992, the Enfield (Conn.)-based company lost $6.8 million in 1993. It earned a meager $866,000 in fiscal 1994, which ended Jan. 31, as sales fell 1.8%, to $761 million. Worse yet: Its stock has tumbled 60% since January, to 3.

SOURING. And as the company's financial condition has soured, so have relations among Dairy Mart's executives. Mn Aug. 25, the board fired Colaccino, 44, and changed the locks at the company headquarters. In turn, Colaccino, who owns 3% of the company, filed suit against Dairy Mart, trying to unseat his opponents on the board. On Sept. 18, the board agreed to pay Colaccino $1.8 million to drop his legal challenge. On top of all this, the Connecticut Development Authority says Dairy Mart violated one of its loan covenants by firing Colaccino without notifying officials. If so, Connecticut could lay claim to 40% of Dairy Mart's voting stock.

Founded in 1957 by Charles Nirenberg, Dairy Mart was an entrepreneurial success story. Starting out selling milk and ice cream, the chain grew steadily. By the late 1980s, it had over 1,000 stores, from Massachusetts to Tennessee. And its sales were growing by an average ef 100% a year. But in the 1990s, the chain faced new rivals: cash-rich oil companies, such as Amoco Corp. and British Petroleum Co., which are adding minimarts to their gas stations.

Dairy Mart needed bigger stores and more shelf space to compete. But by 1992, insiders say Nirenberg, then 68, was more interested in selling off some of his shares than in revitalizing the chain. So Colaccino, along with CFO Gregory G. Landry and Executive Vice-Presidents Robert B. Stein Jr. and Mitchell J. Kupperman, suggested a buyout. Nirenberg agreed.

Before long, HNB Investment Corp., a unit of Philip Morris, invested in the deal. Analysts say the tobacco giant, which won't comment on its investment, wanted to make sure that its products, from beer to cigarettes, would have lots of shelf space in the chain. Then, after Dairy Mart warned that it might move its headquarters out of state, Connecticut offered a loan to help finance the buyout. Nirenberg, who had 67% of the voting shares in the publicly traded company, received $22.3 million for his stake.

OFF THE PACE. Colaccino appeared to move quickly to revamp the chain, opening big Super Pumper stores that had gas pumps and deli counters. But Colaccino's fellow managers felt he wasn't moving fast enough. As sales worsened, the board fired Colaccino.

In his suit against Dairy Mart and its directors, Colaccino argued that his dismissal violated his partnership agreement with Landry, Stein, and Kupperman because management decisions had to be unanimous. He dropped the suit after negotiating a lump-sum payment of $1.8 million, six times his base salary. Both Dairy Mart and Colaccino won't talk about the settlement. But Colaccino says he's not bitter. "Could I have done things differently? Maybe so," he says.

Now it's up to Dairy Mart's remaining managers to salvage the chain. They invited Nirenberg back to lend advice. Although Dairy Mart's founder won't comment, insiders say he was also upset with Colaccino's management. Meanwhile, more Super Pumper stores are planned. The chain will also start selling fast-food items from Taco Bell, Subway, and Little Caesar. As for the state loan, Landry says he's confident he can reach a settlement. State officials won't comment. But analysts believe a deal is possible because Connecticut has little interest in owning a piece of Dairy Mart.

Still, the convenience-store business is tough these days. And Dairy Mart has lost valuable time. "You have to blame the whole company," not just Colaccino, says James Wilen, whose Wilen Management Corp. owns 9.1% of Dairy Mart's stock. If there's any promise left in Dairy Mart, executives had better start showing results.

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