Cumberland Farms, Inc. Business Information, Profile, and History

History of Cumberland Farms, Inc.

Founded in 1938 as a one-cow dairy farm, Cumberland Farms, Inc. grew to become a billion-dollar-a-year corporation. In the early 1990s it ranked third among the nation's convenience store chains and was also a leader in both the retail and wholesale distribution of petroleum products. A closely held private company since its inception, it was still fully owned in the 1990s by members of the founding Haseotes family.

From Dairying to Convenience Stores

Vasilios and Aphrodite Haseotes were Greek immigrants who bought a Cumberland, Rhode Island, farm in 1938, reportedly for $84. Eventually the company they formed grew to become the largest dairy farm operation in Massachusetts, with herds of more than 3,000 cows, heifers, and calves. In 1956 the company opened a jug-milk store in Bellingham, Massachusetts.

Few convenience food stores, offering dawn-to-midnight service every day of the week, existed in the 1950s, and most of them were limited to the South. By 1967, however, there were some 8,000, with more than $1 billion per year in sales. The typical convenience food store concentrated on selling milk, soft drinks, dairy products, snack items, tobacco, and, where legal, beer, also providing a parking lot with space for up to 15 automobiles. Their profit margins averaged 2.3 percent, compared with only 1.3 percent for the higher-volume supermarkets. With some 400 stores, Cumberland Farms Dairy, Inc. was among the industry leaders. Most of the stores were in rural and suburban areas, where land was cheaper and crime rates lower than in the cities.

In its early years as a convenience store chain, Cumberland Farms relied heavily on sales of gallon and half-gallon jugs of milk to draw in customers. These were often loss leaders, compensated for by prices on other grocery items higher than those charged by supermarkets. In 1962, when Cumberland Farms had 32 stores in four New Jersey counties, it was described as the greatest threat to the status quo in New Jersey's milk industry, which relied on state-mandated price floors. Cumberland Farms wanted to lower the price of milk by four cents a quart and contended that the reduced price would save consumers $34 million annually. To focus attention on its campaign to eliminate milk price controls in the state, it announced that it was issuing refund coupons good for 18 cents on each gallon and nine cents on each half gallon.

Cumberland Farms tried, but failed, to overturn New Jersey's milk-support law in court. It also brought suits against various New England milk-pricing boards on behalf of what it called the public's right to buy low-priced milk. In Massachusetts, however, the attorney general's office ordered Cumberland Farms in October 1973 to return at least $17,500 to customers to compensate for the alleged sale of short measured half-gallon milk containers.

Expanding into Gasoline Sales in the 1970s

In 1970 Cumberland Farms added, for the first time, a gas station to one of its stores. When major gasoline dealers abandoned their service stations in the wake of the 1973-1974 Arab oil embargo, Cumberland Farms was quick to snap up choice locations in the Northeast and Florida, although the company itself had been badly hurt by the cutoff of gasoline supplies. In 1975 Cumberland Farms opened its thousandth store. The following year it also opened a 550,000-square-foot bakery and warehouse in Westborough, Massachusetts.

Cumberland Farms, in 1985, purchased 550 Gulf and Chevron service stations and related assets in ten Northeastern states for $250 million. The transaction included 25 marketing terminals and contracts to supply gasoline to about 1,700 Gulf dealers and 2,000 stations supplied by jobbers, making Cumberland Farms the largest independent seller of gasoline in the United States and also a supplier of heating oil and aviation fuel. By this time Cumberland Farms had about 1,200 stores, of which about half were selling gas.

Cumberland Farms had tried since the 1970s to build petroleum refineries in Rhode Island and Massachusetts to protect itself from any future foreign oil embargo but had been stopped by local opponents. In 1986 it purchased a mothballed oil refinery in Come-by-Chance, Newfoundland, for $1 Canadian. The purchaser of record was Newfoundland Processing Ltd., a wholly owned subsidiary of Newfoundland Energy, Ltd., a Bermuda holding company. Demetrios B. (Jim) Haseotes, chairman and chief executive officer of Cumberland Farms, was the sole owner of Newfoundland Energy and also of Cumberland Crude Processing, Inc., which supplied crude oil to the refinery and sold its refined petroleum products, receiving funds from Cumberland Farms. Newfoundland Processing and Cumberland Crude Processing were subsequently deemed unable to repay Cumberland Farms for $47 million in cash advances. The sale of the refinery in 1994 raised about $22.1 million in funds repaid to Cumberland Farms.

Legal Challenges in the 1980s

Cumberland Farms received unwelcome publicity when the U.S. Environmental Protection Agency charged it, in 1985, with selling gasoline adulterated with alcohol beyond legal limits at 24 of its service stations. The company also was in trouble with environmentalists on a number of fronts. For example, it had for years drained a swamp in Plymouth County, Massachusetts for corn planting, despite state and federal efforts to stop the action. In 1987 the U.S. Supreme Court rejected its appeal of a federal court order to pay a $540,000 fine or restore 600 acres of the swamp to its original wetlands state. Cumberland Farms won a round in 1992, however, when a federal appeals court upheld a ruling clearing the company of responsibility for the pollution of water wells serving 40,000 people in Dedham and Westwood, Massachusetts.

Cumberland Farms withdrew from agriculture in 1986, selling 5,000 acres of Cape Cod land, along with a cranberry processing plant and freezer facilities, for $30 million. At about the same time it closed down its 400-acre dairy farm in Bridgewater, Massachusetts, pocketing $2.7 million from the federal government to slaughter the herd under a program designed to cut the nation's chronic oversupply of milk. The company next proposed to establish a $150 million waste-to-energy incinerator on 400 acres of its Bridgewater farm. The site, however, was found to contain hazardous waste substances in water and soil samples.

A full-fledged scandal struck Cumberland Farms in 1990, when two former company officials said the company had a longstanding policy of coercing confessions of theft from employees, often without corroborating evidence. Some 275 former company cashiers, several of whom filed lawsuits, said they had been falsely accused of stealing, intimidated by company officials into signing false confessions, and forced to pay the company money as restitution. The story made headlines in many newspapers and Newsweek and was also featured on the television program "60 Minutes."

Growing Sales and Debt

Bad publicity did not seem to be hurting the company's bottom line, however. Annual sales for its 1,150 stores was estimated as high as $3 billion in 1990. The company, while closing more than 300 of its less profitable stores, refurbished other ones. Fast foods, including sandwiches heated in microwave ovens, had been added to the 3,000 to 3,500 items sold in its stores, which included goods from the company's own bakery. Some stores also rented videotapes. To cut labor costs and increase reporting efficiency, Cumberland Farms introduced a personal computer sales and ordering system in its outlets, uploading the data nightly to the mainframe at corporate headquarters in Canton, Massachusetts. A more advanced system was introduced in 1995, supporting back-office functions, point-of-sale transactions, and scanning.

The fuel business, however, was proving more contentious. In 1991 Cumberland Farms decided to cut off supplies to gasoline jobbers in favor of the company's own service stations. As a result breach-of-contract suits were filed in several states, and about 100 distributors simply dropped the Gulf brand. In early 1992 Cumberland Farms agreed to sell one-third of its fuel marketing business, including day-to-day control, to Catamount Petroleum Corp. for more than $125 million. A limited partnership, Gulf Oil L.P., was to be formed, with Cumberland Farms holding the majority interest, while Catamount marketed the gasoline and other light petroleum products as the minority partner.

The creation of this limited partnership was delayed because, on May 1, 1992, Cumberland Farms, which had been buffeted by the recession of the early 1990s, unexpectedly filed for Chapter 11 bankruptcy protection. It placed responsibility for the action on the Industrial Bank of Japan Trust Co., which replied that the company had defaulted on a $175 million loan that the bank had renegotiated several times since 1988 and owed $65 million to a banking syndicate it led.

Cumberland Farms reportedly had a long history of slow payments to creditors. In addition, the company's "revolving-door" management was reported to have "given creditors the jitters," according to a 1992 Boston Globe story. Francis Alger became the first nonfamily executive to serve as president of Cumberland Farms, in 1986. Peter G. Pantazelos, brother-in-law of Jim Haseotes, succeeded Haseotes as chairman and chief executive officer of the company in March 1989 but resigned just six months after assuming the job. He was succeeded as chief executive by Richard A. Jensen, not a family member. Lily Haseotes Bentas, sister of Jim Haseotes, was appointed chairman and president of the company at the same time. According to a court document, Bentas, George Haseotes, and Byron Haseotes owned three-quarters of the company's stock in 1992.

In October 1993, a federal judge approved a reorganization plan that proposed paying Cumberland Farms' creditors in full. The plan allowed the company to stretch payments over ten years to secured creditors owed more than $300 million, including International Bank of Japan and Chevron Corp. Unsecured creditors, who held about $35 million in debt, were to be paid over five years, without interest. An outsider-controlled board was established to oversee plans to close stores and reduce staff as well as to pay the creditors. Company lawyers said Cumberland Farms had earned $13 million on revenue of $1.2 billion in 1992.

Reemergence from Bankruptcy in the 1990s

Cumberland Farms emerged from 18 months of bankruptcy in December 1993 under this reorganization plan. The Gulf Oil L.P. joint venture went into effect in 1994, selling primarily to the convenience stores and service stations owned by Cumberland. A fiscal 1995 disclosure filing to the Securities and Exchange Commission, however, listed $11.9 million in payments of debt at less than face value and forgiveness of debt. The outsider-directed company also charged breach of fiduciary duties and violations of the reorganization plan in connection with acquisitions by an affiliate of Jim Haseotes of certain of the company's certificates. Following a court order unfavorable to Haseotes, the company purchased the certificates from this affiliate. The company also instituted legal proceedings to seek, in its words, "an accounting and possible disgorgement of funds received by Mr. Haseotes in connection with the sale of the refinery and an accounting of funds distributed to Mr. Haseotes to pay certain tax liabilities."

At the end of fiscal 1995, Cumberland Farms consisted of three divisions. The Cumberland Farms division included the convenience store, retail gasoline, and manufacturing operations. The Gulf Oil division marketed refined petroleum products on a wholesale basis to lessee dealers as well as to company-operated locations. The VSH Realty division acquired and constructed real property for lease to the other divisions of the company and others for use as retail and wholesale sales locations.

In late 1993 Cumberland Farms had about 900 convenience stores and about 2,000 Gulf gasoline stations operating in New England, the mid-Atlantic states, and Florida. Its revenues rose from $1.1 billion in fiscal 1993 (the fiscal year ending September 30, 1993) to $1.19 billion in fiscal 1994 and $1.32 billion in fiscal 1995. Net income was $7.7 million in fiscal 1993, followed by a loss of $1.7 million in fiscal 1994 and a net profit of $34.8 million in fiscal 1995. The long-term debt was $236.7 million at the end of fiscal 1995.

These figures did not include Gulf Oil L.P., whose assets included a 5.5-billion-barrel gasoline storage system made up of 14 terminals in the eastern United States, including a massive "tank farm" on Neville Island, Pennsylvania. Gulf Oil's revenues were in excess of those of Cumberland Farms itself. It had sales of $1.34 billion in fiscal 1994 and $1.82 billion in fiscal 1995. Net income came to $15.1 million and $20.7 million, respectively.

Principal Operating Units: Cumberland Farms; Gulf Oil; VSH Realty.