Seriously, has there ever been a better “spinmeister” in the food industry than Supervalu’s Craig Herkert? As the Eden Prairie, MN based retail/wholesaler completed another dismal quarter, its glib chief executive seemingly only wanted to deliver positive news during his earnings call with the financial analysts earlier this month.
It’s been six full quarters since the former Wal-Mart executive took the helm at Supervalu, and all have been poor. Granted, former CEO Jeff Noddle didn’t leave Herkert with a bouquet of roses, but improving the company’s flagging corporate supermarket sales (by far, the largest component of the SVU organization) was priority one.
What we’ve seen in those six operating periods are overall retail store sales declines of 6.9 percent, 7.7 percent, 15.3 percent, 9.6 percent, 9.7 percent and 6.6 percent successively and ID sales decreases of 4.8 percent, 4.9 percent, 6.8 percent, 7.2 percent, 5.9 percent and 4.9 percent successively.
Awful numbers by any standard. When you add in the fact that customer counts and average transactions have dipped significantly, you’ve got to wonder exactly what the game plan is.
If you’ve listened to each earnings call as I have, starting with Herkert’s first in September 2009, you, too, would be hard-pressed to figure out the long-term strategy, other than it continues to be long-term.
SKU rationalization, which was such a (misguided) hot topic last year, has been apparently purged into the same annals as some 20th century Russian history.
Steve Jungmann, who joined the company only a year earlier as executive VP-merchandising, was at the time praised by Herkert as the “right person to lead Supervalu’s merchandising teams. His track record of understanding and leveraging consumer behavior will be invaluable as we continue our focus on becoming America’s Neighborhood Grocer, and I’m excited to have him join our team.”
Apparently, the excitement was more underwhelming than first thought as Jungmann’s tenure lasted exactly 365 days. And as much a stretch as some of us thought it was to hire Jungmann, whose entire career was spent on the vendor side of the table, it’s an even bigger stretch, in my opinion, to believe that Janel Haugarth can successfully add retail merchandising to her already crowded plate.
While it’s true Janel has done a fine job leading SVU’s supply chain (wholesale) unit and there’s an advantage to already being part of the new Supervalu culture, the idea that somebody with virtually no merchandising experience can oversee that function for 1,140 supermarkets and establish/enhance the company’s sinking relationship with its vendors doesn’t make a lot of sense. Of course, it would make Haugarth’s job a lot easier if she could demonstrate to Supervalu’s suppliers that it can actually move more boxes.
So, other than the happy spin and unfulfilled promises that are staples of every Herkert earnings call, let’s look at the real numbers.
When Herkert took the reins on May 6, 2009, Supervalu’s stock, which had already been in a steady six month decline, was $16.71 per share. As of January 14, Supervalu’s stock price was $7.39 – close to its 25 year nadir, achieved two days before when the stock plummeted to $7.34 per share.
In that 20 month period, Supervalu’s retail sales will have decreased by more than $1.5 billion; some of that loss can be attributed to market exits, a lot of the decline can been blamed on steep identical sales drops at virtually every banner.
While continuing to tout the virtues of its Save-A-Lot unit, which accounts for only less than 10 percent of SVU’s overall sales, Herkert had to admit (when responding to an analyst’s question) that S-A-L’s comps for its recently completed third quarter are also down. And as for the projected five year plan to open abut 1,250 new Save-A-Lot units, fiscal 2011 should see only about 100 new extreme value stores added to the fold.
As I listened to the conference call (and re-listened two other times), I continued to be both frustrated and strangely mesmerized by Herkert’s ability to not offer real solutions to Supervalu’s many problems.
While on three occasions he praised individual analysts for asking “great questions,” he wouldn’t answer one of those inquires in a direct manner.
Here’s an example: Scott Mushkin of Jeffries & Co. asked Herkert to illustrate how Supervalu’s new hyper local effort works (hyper local – for you keeping score, that’s not an acronym – is another Supervalu “new” program where decisions at the regional level, including input from store managers, will supposedly help the banners better merchandise and market its offerings). Mushkin continued: “Are there stores you can point to? Can we see these as analysts? I’m in a lot of your stores and I haven’t seen anything, so I’m just kind of curious where we can maybe see some of this working?”
Herkert’s response: “Yeah, it’s a great question, Scott, and let me say that first of all in May (when SVU will hold its “investor’s day”), we’ll talk about that; but it’s a good challenge for me and Sherry (Smith, the company’s new CFO) to think about how we help you with that transparency. I do see it—as you guys know, I travel every week to the stores and I actually see a lot of good things that are going on out there. Clearly, not at the level that we need to or we would have better results right now, but I’m very pleased with the progress we’re making. The engagement we get at store level, Scott, right now from our store directors and our department managers with this newfound authority to do things locally that matter, it’s really powerful and I look forward to sharing that with you when we get together in May.”
Huh?
Gee, in today’s Supervalu world, does anybody believe the store managers, let alone the division presidents, hold a lot of key decision making power?
Of course, the biggest reason (and there are many) that the Supervalu train has been off its track since it acquired five of Albertson’s biggest divisions in June 2006 has been its inflated retail pricing, which has been so far out of line from its competition, it’s resembled a bad industry joke.
Now, Herkert is addressing the issue by noting that “a core tenet of our vision is that pricing at Supervalu’s traditional stores to be fair and no longer serve as a disincentive for customers to shop our banners.”
Disincentive? Let’s see, you took over as CEO 20 months ago and you’re just recognizing and/or addressing that SVU’s supermarket banners have been offering retails that aren’t competitive? And after checking about two dozen Acme, Shaw’s and Shoppers stores over the past two months, yes, there is some hotter feature pricing and a lowering of some everyday retails, but especially at Acme and Shaw’s, everyday pricing is still not even close to being in line with many competitors in those markets.
And then the “spinmeister” threw more pookie dust into the mix, noting that a new consulting firm (scorecard alert – the fine fellows from Boston Consulting Group are out and Oliver Wyman is reportedly in), is set to help track “key work streams that we’ve identified.” The new consulting firm is also helping SVU with its promotional analytics and planning tools. If I’ve said it once, I’ve said it a thousand times, “you just can’t have enough consultants guiding your business. It’s the next best thing to actually visiting stores.”
The shame of this whole debacle is that Supervalu’s associates and its shareholders are getting screwed. What kind of leadership allows a company that three years ago saw its share price at above $40 (but has since has lost $2 billion in its market capitalization) continue to sing the same off-key song quarter after quarter?
And where’s Supervalu’s board on this?
Yeah, it may be tough to attract talent to Eden Prairie, MN, especially with a company that’s staggering, but don’t you have a fiduciary responsibility to offer the shareholders a better proposition? I’m addressing you, non-executive chairman Wayne Sales and fellow board members Irwin Cohen, Ronald Daly, Susan Engel, Phil Francis, “Skip” Gage, Charles Lillis, Steven Rogers, Matthew Rubel and Kathi Seifert.
And how many times can we continue to hear the “spinmeister” say results “are not indicative of the earning power you should expect from our company,” or words to that effect?
Perhaps Herkert provided a clue to the answer.
Zero. Nada. Zilch. Zippo. Diddly.
On The Regional SVU Scene, Things Are Actually Worse
If you’re looking at Supervalu’s Northeast business as a possible savior, fuhgettaboutit. While Acme has gotten a bit more aggressive in its pricing and has begun to broaden its variety to a limited degree, there are no meaningful returns to speak of.
As Herkert noted in his earnings call, the number of “ineffective” price promotions and some margin reductions have not enhanced the bottom line and, frankly, Acme (and other SVU banners) are at least 18 months late in “correcting” retails (I would also argue that Acme’s “correction” is minimal at best).
With the economy still rocky and overstoring with a diversity of retailing styles a major factor in the Delaware Valley, getting the “traditional” Acme shop of old to return to the big “A” is going to be nearly impossible. The “Gen X” and “Gen Y” customer that all retailers crave is content to cross-shop at a variety of retail channels and with Acme’s price image, the mediocre conditions of its stores, indifferent attitudes from the store associates and not much overall sizzle to offer, other than convenience and cherry-picking specials, what are the compelling reasons for consumers to make Acme their number one shopping choice today?
The numbers don’t lie – Acme’s market share has been declining for almost a decade, while conventional supermarket competitors Giant/Carlisle and ShopRite continue to gain at Acme’s expense. And who else has benefitted by drawing business from Acme? Wegmans, Wal-Mart, Target, Whole Foods, Trader Joe’s, McCaffrey’s, to name a handful. Even Wawa, CVS and Walgreens and the three club operators are taking business from the Malvern, PA based chain (or has Acme made it too easy for them to gain share?)
If you look at the five stores that are slated to be closed next month, each unit’s failure is due either to an inability to compete with better run competitors or Acme’s failure to upgrade its stores in those locales, which ultimately made them obsolete.
The Limerick, PA store, which is only a few years old, should have never been built, especially with the knowledge that Giant was going to open at a better site in that same Montgomery County berg and Wegmans would be building a 140,000 square foot in nearby Collegeville.
The Wayne, PA store was simply too small and inefficient (Acme has milked its Main Line stores for generations) and was crushed when Wegmans opened last summer in Malvern.
Moorestown, NJ should have incurred a better fate especially after the company sank millions into a remodel in that upscale south Jersey locale. But the store was bookended by two competitors’ units each doing more than a $1 million a week – a Ravitz ShopRite and a 125,000 square foot Wegmans unit which opened in 2006. When Wegmans debuted, Acme was simply overmatched.
At Cinnaminson, NJ, Acme was stung by its own strategy. The retailer departed from its original site in the same town for a new, larger replacement unit. At the site of the original store now stands an Eickhoff ShopRite (with liquor store) that ultimately hastened Acme’s departure.
In Millville, NJ, an older physical plant, an economy that’s been worse than the national average and tough competition from ShopRite provided the knockout punch.
And then there’s the sadder case of Shaw’s in New England. Non-disclosure agreements aside, I was interested to read a recent The Wall Street Journal story about Supervalu’s attempt to sell its ailing Shaw’s unit for more than $1 billion, only to find no takers at that price.
According to my sources, the Shaw’s “book” has been on the street for several months and there are several factors why SVU’s New England operation seems to be currently unsalable.
First, the asking price is reportedly way too high (the fact that former CEO Jeff Noddle and his team significantly overpaid for the five Albertsons it acquired in 2006 is of little or no concern to any prospective buyer today). With a very challenging economy remaining in New England and competition as fierce and diverse as it’s ever been, Shaw’s continues to post poor identical store sales (even cycling off poor numbers), its store conditions are eroding and the morale of its work force, as is the case in all East Coast SVU units, is deteriorating. Add to that the expansion of power players Wal-Mart, Market Basket (Demoulas), PriceRite (Wakefern), the conversion of many Target stores to its P-fresh perishables hybrid, and the dominance of Stop & Shop, Shaw’s is the clearly the low man on the totem pole and continues to slide down further in every successive quarter.
The WSJ story notes that whatever interest there is in Shaw’s is emanating from the private-equity community, but not at SVU’s current asking price. There is no doubt that the private equity channel has been squirreling away capital for several years, but it, too, has long-term concerns about the once fertile supermarket sector. The “buy and flip” scenario that was so popular in the 1980s and ‘90s is tougher to execute today because of the diverse overstoring and pressure to equate value primarily with retail pricing. Additionally, in the past private equity could always look to a strategic operator to sell to several years after making a strategic purchase. When you look at today’s playing field, there are few healthy and viable players remaining that can afford the risk and price of getting into that game.
But of course, it still gets back to the properties and the operators. If Wegmans, Harris Teeter, Publix or H-E-B ever became available, you’d see a significant number of suitors (both financial and strategic) lined up at the door.
For Supervalu, the inertia that been occurring for the past three years has made most of their core properties far less valuable in an environment where sellers, in general, have a lot less leverage.
Tastykake Sales Woes, Debt Threaten Company’s Future
On one hand it’s difficult to report that an iconic Philadelphia company like Tasty Baking might have to sell or be broken up. However, on the other hand, the decision making of management at Tastykake has been suspect for years.
Earlier this month, the 97 year old company acknowledged it had skipped a debt payment and is trying to negotiate new financial options to address its current liquidity needs. It has hired Philadelphia-based Montgomery Janney Scott LLC as a financial adviser, which will consider a sale of the company as a possibility.
Clearly, Grupo Bimbo and Flowers Foods stand out as Tasty’s most logical buyers if it were to sell. It could also opt to sell its spanking new manufacturing plant (cost: $78 million, $32 million of which came from publicly-subsidized loans) on Delaware Avenue and essentially remain a marketing company with the Tastykake brand as its staple.
Similar to Supervalu, you’ve got wonder where Tasty’s board’s focus was during the eight year run of current CEO Charlie Pizzi. Certainly Pizzi, the former president of the Philadelphia Chamber of Commerce, deserves credit for strategically and financially executing the relocation of Tasty’s headquarters from the Draconian facilities on Hunting Park Avenue in Nicetown where the snackpacker operated since 1922 to its new home at the site of the old Philadelphia Navy Yard last year.
However, on several other levels, Pizzi’s run has been largely underwhelming. When he took the helm from Carl Watts as chief executive in August 2002, Tasty Baking was trading at more than $14 per share. Virtually every year since, the value of the company has diminished to the point that on January 14, Tasty’s shares were trading at $3.87.
The company’s overall balance sheet isn’t very healthy and overall sales have declined over the years. Pizzi has also been criticized for his inability to put together a solid and stable management team.
“Charlie Pizzi is a great front man for the company and a good guy personally,” said one Delaware Valley retailer who’s dealt with Pizzi on several occasions, “But those are secondary to being a successful chief executive. When Vince Melchiorre (marketing) and David Marberger (finance) left, he never really replaced that caliber of talent or chemistry. And letting Chris Rahey (VP-sales) and George Latella (director of key accounts) go left Tastykake with virtually no presence in the trade. However, at the end of the day, it’s all about performance and Tasty’s hasn’t been good in a very long time. Where’s the strategic vision, the growth in other retail channels and the geographic expansion of the brand? And as for the building, yes, they needed to get out of that rathole, but if you’re now concerned about potentially paying the light bill, then what’s the upside to having a new, shiny edifice.”
To be fair, Tasty and Pizzi have faced some unanticipated challenges beyond their control. Commodity pricing, particularly in flour and sugar, have spiked and the economy obviously has been a factor in the company’s slump. Add to that being part of a category where overall sales have been slipping for years and you’ve got a recipe for problems.
On a related note, I found it very strange that in its press release, Tasty cited A&P’s recent bankruptcy as a key reason for its tight liquidity. I’ve written hundreds of stories about manufacturers facing financial pressures, but have never seen one where an actual customer was cited. And was A&P/Pathmark among Tasty’s five largest accounts? Curious.
‘Round The Trade
Target plans to open 21 stores in 13 states in 2011 including three in Pennsylvania (Hanover and Pittsburgh on July 24 and Warwick Township on October 9). All will feature expanded groceries and produce. Additionally, the Minneapolis based mass merchant will remodel/convert about 400 existing stores to its very successful P-fresh hybrid grocery model. In 2010, Target converted approximately 350 units to P-freshes and about 15 months ago it converted almost all of its 35 stores in the Delaware Valley area to the concept, which added about 40 percent more grocery SKUs to Target’s mix (that’s called anti-SKU rationalization). Target’s chief rival, Wal-Mart really wants to enter New York City, despite vehement objections from the City Council for the five boroughs The City Council has scheduled a meeting for February 3 to review the Behemoth’s application to open a store. Wal-Mart officials have notified council speaker Christine Quinn that they will not attend and have begun an aggressive multi-faceted public relations campaign, including heavy direct mailings targeting potential consumers in Brooklyn, Bronx and Queens (the areas where a potential Wal-Mart would be built), which touts the benefits Wal-Mart can have on the surrounding community. The planet’s largest retailer has also launched its own website – www.WalmartNYC.com – as well as TV/radio commercials aimed at detailing the advantages of having a Wal-Mart in the City. “We know that job creation and access to affordable food are significant needs in the city and we think our stores can be part of the solution,” said Steven Restivo, director of community affairs for Wal-Mart. “New Yorkers overwhelmingly support Wal-Mart, so we’re using social media to listen to the conversation, tell our story and give our supporters a voice.” Another retailer (of a totally different ilk) also trying to gain share in NYC is 7-Eleven. The world’s biggest c-store chain, said it hopes to open 15-20 units in Manhattan in the next two years (it currently operates 10 stores in the borough) and is targeting as many as 100 new stores in the next five years…and according to several published reports, another “grocer” that cuts its teeth in New York, Fresh Direct, the dominant online grocer in the city, is seeking to raise $200 million to expand its base into the Baltimore-Washington market. While it has been mainly unprofitable in its 10 years of operation, Fresh Direct is a significant factor in the borough of Manhattan and operates in New York City’s four other boroughs as well as in other suburban counties in New York and New Jersey, The company is led by Rick Braddock, who replaced veteran grocery industry executive Steve Michaelson. Michaelson recently left Supervalu to become CEO of vegetable processor GreenLine Foods…more Supervalu news: the company’s Jewel-Osco unit will reportedly pay $3.1 million to settle a federal discrimination lawsuit involving the alleged practice of firing employees with disabilities at the end of a medical leave of absence. The U.S Equal Opportunity Commission noted that about 1,000 employees had been terminated under this policy over the past eight years. That Melrose Park, IL unit of Supervalu continued to deny guilt, adding that it settled the suit to avoid continued litigation costs. Also at Jewel, headquarters associates are being offered unpaid time off between now and the end of February (when SVU’s fiscal year ends) in an effort to cut expenses. The program is voluntary. Also, the January 27 AMR/MAFTO meeting which traditionally features Acme as the guest has been cancelled. New Acme president Dan Sanders was slated to speak.
Local Notes
How smart is Ron Burkle? After (sand) bagging a tidy profit on the Pathmark sale to A&P in 2007, the principal partner in Yucaipa Cos. and major secured shareholder in the Tea Company is in line to gain even more green once the bankrupt retailer is broken up (think real estate assets). Now, according to the attorney representing A&P’s bondholders, who are worried they are being de-emphasized, Yucaipa is also an investor in the $800 million court-approved DIP financing that the company has at its disposal. As attorney Ed Weisfelder told the court about his clients’ potential dilemma: “We think they’re (Yucaipa) all over the capital structure. The debtor (A&P) told us to talk to Yucaipa, and Yucaipa told us to ‘talk to the wall.’” Moral of the story: Burkle ain’t waiting in no lines. And for those of you who are industry history buffs like myself, inhale these A&P store count figures: as recently as 1978, the Tea Company operated 3,500 stores, by 1990 that number had decreased to 1,000 and in 2000, A&P was down to 600 units. At the time of its bankruptcy filing on December 12, the oldest grocery chain in America was down to 395 stores…BJ’s, which has been linked to being taken private by equity firm Leonard Green (which already owns 9.5 percent of the company), is closing five under performing stores – three in the Atlanta area, one in Sunrise, FL and another in Charlotte, NC. About 440 store level associates will be impacted as well as another 60 at the club merchant’s Natick, MA headquarters…Steve Bokser, who until late 2009 served as president (when Joe Fantozzi was named to that job) of Secaucus, NJ based White Rose (a unit of AWI), is leaving the company this month. There are few, if any, who know the metro New York grocery scene better than Steve, and we wish him well in his future endeavors…Weis Markets has announced that it has lowered prices on 2,400 staple items and it will freeze those prices for 90 days until April 2. This marks the sixth round of price freezes the Sunbury, PA retailer has initiated over the past two years. “Our 90 day price freeze program continues to make sense in a slow growth economy impacted by high unemployment in most markets we serve,” said Dave Hepfinger, CEO and president. “It’s been a great program for our customers. Over the past two years, our price freeze program has helped our customers save more than $6 million and we hope to save them more money in 201l.” Also at Weis, the regional retailer has named company veteran Mike Mignola as its new VP-merchandising. In this post, he will oversee the development and execution of Weis’ sales programs and initiatives. Mignola has more than 30 years of merchandising and operations experience. Prior to his new role, he was a regional VP with oversight of 66 Weis stores in Pennsylvania, Maryland and West Virginia. He will report to Kurt Schertle, senior VP -sales and merchandising…two familiar faces from the past – Frank Eckstein (Acme) and Dan Portnoy (Kings) – will be leaving Winn-Dixie, which is led by another familiar face – Peter Lynch, formerly of Acme/Albertsons. Eckstein will be retiring as senior VP-operations and Portnoy, who was senior VP-chief merchandising and marketing officer, has resigned…the two largest brokerage firms in the country – Advantage Sales & Marketing (ASM) and Acosta – have new private equity owners. Irvine, CA-based ASM recently announced that its former equity partners, J.W. Childs Associates and BAML Capital Partners (Merrill Lynch Global Private Equity) have agreed to sell their majority interest in the brokerage firm to Apax Partners, an international equity company, which controls approximately $40 billion in funds. The deal is reported to be worth about $1.8 billion. This is the third private equity firm to control ASM, beginning with Allied Capital in 2004. At Acosta, Thomas H. Lee Partners agreed to purchase the Jacksonville, FL firm from AEA Investors in a deal reported to be valued at $2.3 billion. This is also the third private equity firm to take a controlling stake in Acosta, beginning with Berkshire Partners in 2003. It would seem that the next logical next step for these two selling giants would be to go public…obituaries this month include a poultry tycoon, an unsung gridiron great and a patriarch and a matriarch of the supermarket industry. Passing away earlier this month was Don Tyson, second generation CEO of Tyson Foods, the world’s largest chicken processor. Tyson, 80, was lauded by the company with this candid overview of his life: “Don Tyson should be recognized for his no bad days outlook and was known by all to work hard, but also to play hard” (what a great epitaph). Moving into football heaven was “Cookie” Gilchrist, 75, one of the best running backs I ever saw play. Gilchrist made his mark in the 1960s as a 250 pound fullback for the Buffalo Bills in the old American Football League. His relentless “run you over” style reminded many of Jim Brown, the greatest running back of all time. What might not have been commonly known about Gilchrist was that he spent six years in the Canadian Football League (after failing to make the Cleveland Browns roster after high school) and was an early leader among black players. He and a group of other African-American players boycotted the 1965 AFL All-Star game in New Orleans after they weren’t allowed in a bar and were shunned by local taxi drivers. The game would be eventually moved to Houston. Also passing on early this year was Albert Heijn, former CEO and grandson of the founder of what is now Ahold. Heijn, 83, joined the retailer in 1949 in Amsterdam, was appointed CEO in 1962 and retired in 1989. “Albert Heijn was a remarkable man. He was a spirited entrepreneur, whose vision has helped chang the global food industry,” said John Rishton, Ahold’s current CEO. “He was a warm and charismatic leader who was passionate about people – both those who worked for the company and all who shopped at our stores.” It is with sadness that I also report that Janet Weis, widow of former company chairman Sig Weis, has died at the age of 91. One of the most philanthropic individuals in the entire state of Pennsylvania, Weis was a particularly generous benefactor to Bucknell University, Geisinger Medical Center and the Children’s Miracle Network. Robert Weis, who for many years worked with his first cousin Sig (who died in 1995), and now serves as Weis Markets’ chairman said, “We extend our deepest sympathies and condolences to Janet Weis’ family. She will always be remembered as a leader in our community and a generous supporter of many good causes.”