Taking Stock

Except For A Select Few, It Was Tough Sledding For Supermarket Retailers In The Mid-Atlantic

If you took Whole Foods, Costco, Wegmans and Trader Joe’s out of the mix, it would be an even more depressing story. And I’m not just talking about same store sales and earnings – in that regard several other retailers performed at or above expectations. This is about building incremental sales through customer loyalty.

And in that regard, this was the most challenging year that most retailers faced since “The Great Recession” arose in 2008 and there’s not too much light in the tunnel that would indicate that the outlook is going to be much sunnier anytime soon.

Forget the economy for a moment (it remains a significant factor, but one that none of us can control). The fact is that there are simply too many stores in virtually any given marketing area/neighborhood, making it harder than it’s ever been to dominate a consumer’s shopping list.

Millennials and those in the “Gen Y” portal have made multi-retailer shopping part of their lifestyle, and unfortunately for the traditional supermarket operator, they are getting less and less of that shift than ever before.

Of those four retailers mentioned in the opening paragraph (along with a few other merchants), each has a connection to its customers that separates them from the rest of the pack. And even though their operating models are differentiated from each other, all get high marks in operational consistency, strong customer service perception (although there really isn’t all that much customer interaction at either Costco or Trader Joe’s), strong perishables presentations and a creative and likeable product mix.

So, while conventional operator Giant/Landover remains the dominant retailer in the market and Wal-Mart (the second biggest operator in the region) is still recording “telephone book” sales on a per-store basis, neither chain has moved the needle significantly forward in attracting new, younger customers or offering anything that the current younger generation of shoppers is that excited about. That’s not to say that either company isn’t successful – both retailers had solid years by financial measures and Giant has done a strong job of protecting its many premium locations, while Wal-Mart continues to build new SuperCenters or expand existing “Division One” units to combo stores and create even more competitive issues for traditional supermarket merchants.

Whether it’s great locations or relentless discount pricing, at least Giant and Wal-Mart have something dominant in their arsenals. Imagine if you were Food Lion, fumblin’, bumblin’ and stumblin’ for the past decade before it finally looked into a mirror and recognized it offered very little of value (convenience aside) to the consumer. So, parent company Delhaize decided to blow up the stale old model, bring in a new CEO (both in the U.S. and at its headquarters in Brussels) and tried to re-invent themselves by lowering prices, putting a few coats of paint on its stores and rolling out a new private label. Good luck with that strategy in the long term.

In a nutshell, it’s been a very tough year for most involved in food retailing (vendors included), and as long as market conditions remain as they are, I don’t see much reason for a lot of flag waving in the near future.

That said, here’s my up close and non-personal view of the major operators in the Baltimore-Washington market with a closing rhetorical question for each retailer.

Giant/Landover -A solid year sales-wise, but Giant really failed to take advantage of all the tools in its shed. After spending more than $300 million on its store revitalization program over the past few years, the chain’s physical plants are in good shape and, as mentioned earlier, who can compete with the great upscale locations in which the company operates stores? But there’s something still missing. The stores seem more “vanilla” than ever; it’s as though the corporate mandate is shifting to a “one size fits all” approach, rather than offering more creative and diversified plan-o-grams or upgrading its perishables departments. The result of that strategy was particularly noticeable when Wegmans debuted in Columbia, MD a year ago. Giant, which has long dominated Howard County with seven high-volume stores, did little to offset the explosive force that Wegmans offered. Certainly, Giant has the resources (parent company Ahold is highly successful), and it’s got the local talent, but there could still be more improvement between all of Ahold USA’s divisions and its administrative support headquarters in Carlisle, PA, especially when it comes to flexibility and communications. Rhetorical question: Can Giant/Landover and Ahold USA improve on its solid base and take the chain to the next level to achieve its potential?

Safeway – Safeway’s sales were flat for a lot of the reasons mentioned earlier in this piece. What are the points of separation that will draw more customers into its stores? One can argue that the new and creative programs the big Pleasanton, CA chain unveiled this year – “Just For U” and its marketing tie-in program with Exxon/Mobil – should be a difference maker to produce better sales, but that’s not enough. Perhaps those program would yield bigger dividends (and maybe they ultimately will) if Safeway’s stores were perceived in a better light by consumers. Or, if it offered sharper retails. Or, if it wasn’t so private-label happy (another criticism I could level at Giant, as well). It’s not any one thing that hampers Safeway; it’s the chain’s inability to make one particular area of its operation stand out. Maybe the company’s locations aren’t quite in the class of Giant (except in DC proper), but they’re very good. Safeway’s marketing is solid and its stores are well-balanced, departmentally. However, there’s clearly a need for some store makeovers (many of the Lifestyle units resemble a format whose time has passed) and I’d like to see more labor in the stores. As I’ve said many times, Safeway’s presence in the Baltimore-Washington market is safe and secure, but the needle isn’t really moving forward enough. Rhetorical question: Now that Steve Burd has retired after a 20 year run as CEO, will new chief executive Robert Edwards allow the Eastern division more freedom and local-decision making, or will we continue to see a company with a lot of potential be hindered by an ongoing process-like approach?

Shoppers Food & Pharmacy – The good news: Shoppers managed to reduce its market share shrinkage this year and is showing renewed signs of life as its attempts to regain its image as an aggressive discounter. More good news: Craig Herkert was fired as CEO of parent company Supervalu to ultimately be replaced by solid grocery executives Sam Duncan (chief executive) and Bob Miller (chairman) who now are part of an expanded Cerberus Capital Management supermarket organization. Now the sobering news: the old Supervalu leadership team of Herkert and his predecessor Jeff Noddle damaged the company so severely that a ripple effect will be felt for a long time. That’s a tough break for relatively new Shoppers’ president Bob Bly, a very capable industry veteran, and his re-energized local team led by Bob Gleeson (merchandising) and Micky Nye (operations). In the first three months of the “new” Supervalu, Shoppers has lowered prices across the board and initiated a “Hot Prices” advertising campaign. But without some earnest money being dumped into building new stores and significantly remodeling existing ones, it will be tough to move the pile in a fiercely competitive market. I give Shoppers credit for stepping on the accelerator but have to ask this rhetorical question: Will the new Supervalu organization (controlled by a private equity company) provide the necessary financial resources to make Shoppers a viable player in a market where it has slipped so sharply in recent years, or will we ultimately see not much more than a rearranging of the furniture?

Food Lion – A train wreck. Food Lion (Delhaize America) is yet another example of a company that has been poorly run now trying to reinvent itself without a lot of capital commitment. New CEO Roland Smith wasted no time before commencing the whackin’ and hackin’. There wasn’t a lot of new talent added, the survivors were just asked to do more. And if Mr. Smith thinks Food Lion’s brand “repositioning” effort is going to pay long-term dividends, he needs to buy a funhouse mirror. Still, it’s early in the tenure of the former Arby’s CEO and one of his recent ”whackin’” moves was a good one – the selling of secondary banners Sweetbay, Harvey’s and Reid’s. Although that deal (with Lone Star Funds) didn’t fetch much money ($265 million in cash for 82 stores), it’s a step in the right direction in dumping perennially unprofitable units and hopefully deploying those resources into improving the remainder of Delhaize America’s properties where Food Lion is the dominant banner. Rhetorical question: Will Roland Smith put earnest capital back into Food Lion, or will the retailer continue to veer into no man’s land?

Harris Teeter – Very solid year on every level for a quality retailer who still cares about the fundamentals of retailing – clean stores, superior training, quality perishables, strong customer service. Harris Teeter also continued to be in the upper percentile of performance when measuring financial metrics, but of more long-term importance is the fact that the Matthews, NC based retailer operates the type of upscale store that is supported in Baltimore and Washington. That’s the hallowed ground that used to be “owned” by Giant, but “The Teeter,” (along with Wegmans and Whole Foods, too) has supplanted the market leader in upscale, service-oriented perception. Not every new store in its now 15 year presence in B-W has been a success for the regional merchant, but its overall expansion into the market has been a winner. Of course, there’s a bigger issue pending, which is our rhetorical question: Will Harris Teeter’s current “sales exploration” lead to a new owner of the 211 store regional chain, and if so, who might that buyer be?

Wal-Mart – A big year for the Behemoth in terms of new SuperCenters in the B-W market (six expansions and one new combo store). And by any measure, a new SuperCenter creates havoc for all retailers in a local marketplace. The boys from Bentonville know how to operate SuperCenters and there are at least two dozen more expansion opportunities and probably 25 more viable sites that could be open as SuperCenters in this region alone. Still, Wal-Mart has its flaws, including stores whose out-of stock levels are pronouncedly increasing (something acknowledged by U.S. CEO Bill Simon, but later denied by Wal-Mart’s PR machine) and an inability to expand its renewed Neighborhood Market and smaller format initiative at the pace it originally projected. Wal-Mart will always be a formidable player because of its sheer scale and relentless pursuit of low everyday prices. Rhetorical question: Will Wal-Mart ever get beyond its high skill level as a SuperCenter operator and actually make its new smaller formats an effective weapon in its arsenal, particularly in urban areas?

Wegmans – An outstanding year for another company that “gets” it and executes the basics. In the case of Wegmans, the “basics” are executed in a more complex and detailed manner, making it truly a one-of-a-kind company. There are certainly benefits to operating a private, family-owned enterprise, but in the end, Wegmans is a success not only because of the uniqueness of its presentation, but in the human factor, where well trained associates interface with their customers and the passion exuded by a true merchant makes differentiation an obvious major advantage. Its two new stores that opened in the past 12 months in Columbia, MD and Gambrills, MD are both big winners and you can expect the next new unit in Germantown, MD this fall to also deliver sales in the $1.5-$2 million weekly range. Rhetorical question: Can Colleen and Nicole Wegman (Danny Wegman’s daughters who represent the next generation) successfully maintain the pace of growth and high standards created by their father and grandfather? And a bonus question: With expanded geographical boundaries and tremendous new store growth achieved in the past 15 years, is Wegmans in danger of stretching its infrastructure too thinly in the next few years?

‘Round the Trade

Big national news of the moment is Safeway’s decision to sell its Canadian operation to Sobey’s (a unit of Empire Capital Ltd) for $5.7 billion. This long-rumored deal includes 213 supermarkets, 10 liquor stores, 12 manufacturing facilities and four distribution centers. It will also strengthen the Nova Scotia based retailer’s position in Western Canada and will close the gap between Canadian market leader Loblaw (approximately $32 billion in annual sales and roughly 1,050 units) and the newly larger Sobey’s operation, which will have slightly more than 1,500 stores and annual revenue of about $24 million. For Safeway, it’s an opportunity to deploy a healthy return into its infrastructure. New CEO Robert Edwards said the proceeds will be used to pay down $2 billion in debt and repurchase Safeway stock. Some of the proceeds may also be used to invest in other growth opportunities. As I’ve said before, there’s no better growth opportunity for the Pleasanton, CA chain than increasing its cap-ex to significantly upgrade its store base (at least in the Eastern Division) where significant major remodelings could be a game changer. Speaking of the Eastern Division, a tip of the hat to president Steve Neibergall, VP- Rick Stein and the rest of the Safeway team for raising a record amount at this year’s annual Easter Seals golf outing. Despite torrential rain, several hundred golfers persevered the soggy Turf Valley CC course and helped raise $530,000 to sustain Easter Seals programs that support children and adults with disabilities and special needs as well as military veterans and their families…moving assets is Smithfield Foods, the largest pork processor in the U.S., which has agreed to be acquired by China’s Shangui International Holding for $4.72 billion in cash. The deal represents a premium of more than 30 percent over the Smithfield, VA firm’s closing share price when the deal was announced on May 29, and CEO Larry Pope called it “a great transaction for all Smithfield stakeholders, as well as for American farmers and U.S. agriculture,” Based on the emails and phone calls I’ve received in the past three weeks, not everybody is feeling as warm and fuzzy as is Larry. The deal would mark the largest Chinese takeover of a U.S. company to date…. a little farther south, Bi-Lo Holdings, owners of Winn-Dixie and Bi-Lo Foods, has agreed to acquire from Delhaize America 72 Sweetbay stores (plus 10 leases for now closed units), 72 Harveys units and 11 Reid’s Supermarkets for $265 million in cash. For Bi-Lo Holdings, which is controlled by Texas private equity firm Lone Star Funs, the “on paper” opportunity is to expand its market share in Florida to better compete against market leader Publix and the growing presence of Wal-Mart. For parent company Delhaize America, the deal provides an opportunity to dump perennially losing stores and potentially utilize the proceeds to reinvest in its ailing store base. However, what it represents to this reporter is an opportunity for Bi-Lo Holdings/Lone Star to squeeze more cash out of the deal and maximize the value of the real estate. Don’t forget that under Lone Star’s watch, it bankrupted both Bi-Lo and Bruno’s after it bought those southeastern chains from Ahold. As one of our readers noted, “From an operational impact perspective, it’s like trading a deal involving a couple of .220 hitters¸.”…and it was the usual “Happyfest” earlier this month at Wal-Mart’s annual meeting held again this year at the Bud Walton arena at the University of Arkansas in Fayetteville. Musicians Kelly Clarkson, Jennifer Hudson and John Legend performed in front of 14,000 associates, shareholders and other interested parties and even actors Hugh Jackman and Tom Cruise were trotted out to convey a message (trust me, it wasn’t about next quarter’s earnings guidance). Among the business highlights of the meeting was the announcement that the Behemoth has approved a $15 billion buyback of its own stock over the next two years. CEO Mike Duke also addressed the crowd on the subject of the ongoing investigation into its 2004 bribery scandal and the recent garment factory collapse in Bangladesh. Duke noted that integrity has long been a company hallmark and vowed to “do the right thing.” Not all shareholders seemed to believe that Duke’s performance has been of the integrity caliber that he spoke of (Duke was part of the management team that was in the loop on the bribery allegations in Mexico), casting 12.11 percent “against” votes for the chief executive, the lowest number since 1995 when electronic filings for the company were made available by the SEC.

Local Notes

Ahold reported strong first quarter earnings with worldwide sales up 4.4 percent (at constant exchange rates) for the period ended April 21. In the U.S., where it operates 774 stores, net sales were $8.1 billion, up 3.4 percent due to solid identical growth and benefiting from the inclusion of 15 former Genuardi stores acquired last year. The Amsterdam based retailer noted that its U.S. identical sales growth of 1.8 percent (1.9 percent excluding gasoline) was driven by more effective promotions and the strong performance in its Stop & Shop divisions during adverse weather events. The move to selling more generic drugs had a negative effect on sales growth; however this was offset by the positive effect from the timing of New Year’s Eve sales. Ahold USA gained market share in all four divisions, Ahold stated. Underlying operating margin was 4.1 percent compared to 4.2 percent last year. Locally, Ahold USA is building its third grocery Pick-up Point (PUP) for its Peapod business in Chevy Chase, MD. The new depot should open later this summer and will also house a Giant/Landover gas station. Current Peapod dedicated PUPs are located in Clarksville, MD and Columbia, MD (both in Howard County) and other PUP depots are expected to open in the next 18 months…Costco, a true master of depot, could open as many as 150 new stores by 2018, according to CFO Richard Galanti. The Issaquah, WA sales machine has already opened 19 new club locations through the first nine months of its fiscal year and nine more are expected to debut over the next couple of months. Galanti, speaking during Costco’s quarterly conference call, said half of the warehouses would be built in existing markets and the remainder in new markets, both in the U.S. and overseas. And by the way, the nation’s largest club merchant once again posted some stellar numbers: earnings rose 18 percent to $459 million, overall revenue increased 7.8 to $23.6 billion and comp store sales (excluding fuel and foreign exchange rates) grew a mighty impressive 7 percent…on a smaller scale, but impressive in its own right, is the new store opened by Scott Karns and his family last month in Carlisle, PA. The 40,000 square foot former Nell’s unit is the eighth Karns store and a shining example of the entrepreneurial skills and passion for the business of an excellent independent grocer. Best of luck in your new digs…also in Central PA comes word that Quintin Frey, president of Turkey Hill Dairy, will be retiring on August 4. As the third generation leader of the family-owned dairy (which is now owned by Kroger), Frey did a superior job of leading the Turkey Hill brand to new heights (in his 22 years as president, he was tripled the size of the company – sales are now $325 million annually). Beyond his business acumen, Quintin Frey is one of the good guys in our business – humble, accessible and easy to talk to. He’ll be staying on for a while as “brand ambassador,” but his leadership skills and his high level of ethics will be tough to replace…Happy birthday Jay Thomas! The founder and now retired former CEO of Towson, MD-based Superior Food Brokerage just turned 90 and I’m glad to hear that he‘s still got game. Jay is one of the first people I met when I arrived from Boston in 1978, and I have always valued his business acumen and admired his graceful manner. May you have many, many more happy birthdays…also a tip of the hat to Benjy Green and his team at B. Green & Co. where they are are utilizing an innovative approach to improve the health of citizens located near its Food Depot store on Frederick Avenue in Baltimore City. B. Green has hired a dietitian (Sheryl Hoehner) to help educate residents of that area about healthier food choices and is working with Mayor Stephanie Rawlings-Blake in the city’s “Food Desert Retail strategy.”…in another food desert – southeast DC – BrightFarms will build a 100,000 square foot hydroponic greenhouse in impoverished Ward 8 (Anacostia) that will grow up to one million pounds of food annually (tomatoes, lettuces and herbs) capable of serving 5,000 area residents. The initiative will add 2.5 acres of new cultivatable land in the District… I must have blinked and missed it. I’m talking about the completion of Food Lion’s “repositioning” of its 178 stores in Maryland, Pennsylvania, Delaware, West Virginia and Northern Virginia. Yes, Food Lion did noticeably lower prices, but other than some other tweaks that I’d regard as secondary, I’m pretty unimpressed – let’s just say it bears no resemblance to Giant/Landover’s “Project Refresh”. It’s going to take a lot more visceral improvement before the company can substantially increase market share and improve its consumer perception…I’m sad to report several deaths of note over the past month. Now playing first-string organ in heaven is Ray Manzarek, the great keyboard player from The Doors, who passed away at the age of 76. While outrageous Doors singer Jim Morrison attracted most of the spotlight for the band’s still timely music (they haven’t played together since Morrison’s passing in 1970), Manzarek’s keyboard playing clearly provided the group’s foundation, so much so, that the four man ensemble didn’t utilize a bass player (Manzarek handled those duties with his left hand). Also leaving the planet was Jean Stapleton, who will be forever linked to her role as Edith Bunker, Archie’s somewhat dimwitted (but uncannily street smart) wife in the iconic TV show “All In The Family.” In reality, Stapleton was more than the malaprop portraying “Dingbat” who became the butt of many of her bigoted husband’s comments. Stapleton was an accomplished stage actress who also appeared in dozens of films and other television roles. She was 90…one of my favorite football players of all time has also left us. David “Deacon” Jones,” arguably the best defensive tackle in the history of the NFL, died at age 74 at his home near Los Angeles. In his day, there was no player feared more than Jones, who had the quickness of a linebacker and the strength of a nose tackle. His patented “head slap” move (now illegal) allowed him to beat offensive lineman (and knock them silly, to boot) and record an unofficial 173.5 sacks (a term he also coined) in his 14 year career which was mostly spent with the LA Rams. However, the NFL did not count quarterback sacks as an official stat until 1982, long after Jones retired.