Weis Moving On From Hepfinger, Who Helped Change Culture, Direction
Dave Hepfinger is gone, now it’s time to move on and continue to execute our agenda. While nobody at Weis used those exact words, that chord was very resonant at the retailer’s fourth annual vendor summit held earlier this month in Baltimore.
Interim CEO and vice chairman Jonathan Weis termed Hepfinger “strong willed” and wished him well in his future pursuits; the youthful executive also noted that “more importantly, this opens up for us what is almost a generational shift in continuing leadership.”
Yet the vibe I got at the vendor summit resembled a chapter from a Russian textbook: Hepfinger seemed to have been purged from the historical record at the regional chain, despite a five year run at the retailer as president and COO beginning 2008 in and as CEO and president since 2009.
The backroom chatter had been increasing in volume over the past six months about Hepfinger’s perceived changing behavior and attitude, so when Weis announced on September 23 that it was changing leadership, I wasn’t shocked.
And I’m not disputing the criticisms of current and former associates who claim that during the past 18 months Hepfinger’s sometimes temperamental, sometimes aloof personality adversely impacted his effectiveness as the chief executive. I never worked for Dave, so my perspective is much different.
Although the ending may not have been the way Dave or Jonathan Weis would have scripted it when Dave joined Weis after a 32-year career at a similarly-styled regional chain (Price Chopper), based on his entire body of work at the Sunbury, PA retailer, Dave Hepfinger helped turn around Weis Markets from a middle-of-the pack regional chain with a staid culture, many outdated stores and even more outmoded information technology to a company that has become much more competitive with upgraded talent, vastly improved IT and analytics, and new stores that are fresh and modern.
While Weis’ earnings have remained solid, recent sales numbers haven’t reflected those improvements as Weis has faced many of the same challenges as other supermarket operators – a still lagging economy (creating cautious consumer spending) and fierce and diverse competition.
Beyond that, for the past 18 months Weis has been cycling against some strong numbers achieved in 2010 and 2011. And it’s probably a fair criticism to note that Weis’ attempt to expand into newer, larger markets (Philadelphia, Western New Jersey) with new stores has been disappointing thus far.
But again, let’s analyze the complete body of work. When Hepfinger was first named CEO in January 2009, Weis’ stock was trading at approximately $32 per share; the day he exited, the company’s common stock was valued at $50.38 per share. When Hepfinger arrived at Weis from Price Chopper, the retailer was spending about $80 million annually
on cap-ex, not enough to be competitive in terms of building new stores, significantly remodeling many others and utilizing the depth of technology that its competitors were applying (especially after years of not properly reinvesting in its stores and infrastructure). Each year since, cap-ex has been increased, reaching a record $130 million this year. And while the Weis workforce was loyal and hard-working, there was little vision offered because the retailer seldom brought in younger, more innovative executives who could bring new ideas to the table. Not only did Hepfinger recruit new talent, he emphasized the fundamentals and prioritized Weis’ “fresh” business.
There were intangibles beyond the culture change, too, that were positive. Other retailers for the first time in many years took notice of Weis’ improvements. The regional chain was now being watched much more closely by its primary competitors – Giant/Carlisle and Wal-Mart. And the vendor community recognized that a trip to Sunbury was no longer a mundane pit stop, but an opportunity to introduce new items and have them promoted aggressively. There was truly a sizzle and enthusiasm that sales reps and brokers hadn’t felt in many years.
I chatted briefly with Dave following his departure. Despite the abrupt ending, he left without bitterness, noting that his tenure at Weis was “a good run.” He plans to take it easy for a few months at his North Carolina vacation home and then ponder his future. He certainly has a lot left in his tank, but he is financially comfortable, and at age 55, may not want to venture back into the battlefield that this business has become.
As for Weis’ next permanent chief executive, I think the company may take some time before naming Jonathan Weis’ replacement. Kurt Schertle remains the industry favorite for the CEO post, but it’s logical that you might first see Kurt become COO. At age 42, he is certainly ready for the challenge. Kurt is extremely bright, very talented and despite his young age, has the maturity and leadership skills to be the everyday commander. He is also widely respected and admired by Weis’ associates and the vendor community and his name is certainly on the short list of companies looking for new chief executive officers. While Kurt may be the day-to-day cornerstone of the current leadership team, Jonathan Weis should also be given much credit for helping build the strong management group that’s in place today.
As For The ‘Summit,’ Weis Hosts Best Ever Vendor Meeting
If, as they say, “the third time is a charm,” then the fourth time must be the “ultimate.” As one DSD vendor told me, “this is not only the best vendor meeting Weis has ever staged, it’s one of the best I’ve ever attended and is a giant leap from its first meeting in Hagerstown (MD) four years ago.”
I didn’t attend that initial confab in swingin’ H’town, but I can also attest that this year’s summit was the retailer’s best session that I’ve been to.
Why? The meeting was fact-filled, the speakers were concise and on-topic and the entire Weis executive team was accessible and willing to answer any questions or concerns that were on the minds of the nearly 500 sales reps, brokers and distributors who attended. Perhaps as importantly, Weis conducted its review in four hours (which included an hour for lunch) and its use of three “breakout” sessions focusing individually on center store (Kevin Broe), fresh (Dan Koch) and logistics (Wayne Bailey) was a creative and effective approach to take a deeper dive into those areas with Weis’ vendors.
As for content, after Jonathan Weis welcomed the audience and gave a brief overview of current events and future direction, he then passed the baton to executive VP Kurt Schertle who provided details about four key areas of focus for the retailer: the economy, Weis’ financial results, its future investments and category trends.
When analyzing the still struggling economy, Schertle noted several key areas as negatively impactful, including the continuing 13 year drop in the national labor participation rate (to a current low of 63.2 percent) to a steady decline in household income (a 6.6 percent decline – $3,700 since 2007 and the lowest since 1988). Schertle also detailed the effects of inflation since 2000 when a gallon of gas cost $1.51 (now $3.49); individual monthly health insurance was $49.85 (now $163.87); annual college tuition was $21,856 (now $34,247); and you could buy a Super Bowl ticket for $325 (now $2,600).
Schertle noted significant increases in SNAP (Supplemental Nutritional Assistance Program) spending among its customers which now account for six percent of Weis’ total weekly sales, too. He added that as SNAP usage increases, the number of participating retailers (c-stores, gas stations, dollar stores) that are now participating in the federal program has increased by seven percent over the past year and with Congressional cuts looming, the reduction of SNAP benefits could play a huge role in terms of sales for all retailers.
He also addressed Weis’ private label initiatives, which are an area of priority for the retailer. However, unlike other retailers, including prime rival Ahold, who have set specific sales target for “own brands” (Ahold would like to see private label revenue constitute 40 percent of total sales in the next three years), Schertle explained that there is no specific external goal they are seeking, noting that private label volume will continue to grow because consumers are more value-focused and that, in an arena of intense multi-channel competition, private label creates a clear point of separation for Weis.
As for future growth, Schertle noted that the company’s investments in improving its store base and IT infrastructure over the past five years (10 new stores, 63 major remodels, 20 minor remodels and the addition of 11 fuel centers), have made Weis more competitive and have provided a foundation for future improvements. This year Weis will spend $130 million on capital improvements, a 60 percent increase from five years ago. Other ongoing priorities include Weis becoming more of a sales-driven organization which includes delivering strong customer service and greater focus on in-store execution (Schertle stated that Weis is not laying off associates at store level as are some other retailers and has added a “load the car” program at its 165 units). Key to that initiative is Weis’ $2.9 million budget for development and training associates.
Continuing to improve its fresh departments and developing merchandising programs for “meaningful localization” are also hot button items on Weis’ plate. Schertle declared that over the past year his company’s fresh business has grown in all segments – produce, seafood, foodservice, meat and bakery – adding that growth trend needs to continue, but not at the expense of center store where he asserted that opportunities lie in a number of categories – cake, cereal, canned cat food, laundry, aseptic, mayo, paper, soda and pasta.
In describing his version of “meaningful localization,” Schertle said that each store needs to be assessed on its customer base and then tailored to best fit that base. He noted that sales at Weis’ store in Lebanon, PA have improved once a more Hispanic product mix was implemented as also was the case at the retailer’s State College, PA stores whose expanded Asian product presentation better reflected that college town’s population. Schertle also addressed Weis’ newly upgraded weekly circular (unveiled on October 6) which offers a “lowest price guarantee,” strong fresh image, sharper feature pricing and an overall improved design.
All of these programs, Schertle declared, are intended to increase Weis’ sales, which have flattened out over the past year. And while earnings remain strong, driving revenue both at new units and existing stores is a vital component in determining Weis’ future results.
Part of that sales initiative will be in full view next month when Weis celebrates grand re-openings at its two State College units (November 3) and four other stores on November 17 (Pasadena, MD; Odenton, MD; Danville, PA; and Brodheadsville, PA). Moreover, Weis will open the former Pathmark store in Huntingdon Valley, PA on November 10.
With Schertle’s newly added store operations responsibilities he will be one busy dude.
Following Schertle’s presentation, Weis veteran Wayne Bailey (who seemingly has had just about every job at the chain in his 37 years of tenure – he’s now VP/supply chain and logistics) addressed the vendors about Weis’ changing supply chain objectives.
Bailey admitted that for many years Weis did not prioritize or efficiently execute its supply chain initiatives.
With an annual budget of $7 million, Bailey, who was named to lead supply chain in February, has focused on improving overall service levels (now up to 97.4 percent) while also reducing inventory. Some of those gains have been achieved through Weis’ new computer generated ordering (CGO) system which has aided in inventory management and significantly reduced out-of-stocks and corrected distribution voids (a 34 percent reduction in dairy alone). Bailey said the focus on supply chain has opened his eyes in several areas including the fact the 74 percent of unsalable items are not from damage, but rather from code date expirations, an area that can be readily addressed. He added that because of the increasing importance of supply chain, he would like to schedule annual vendor review meetings in which specific targets are set and evaluated. “Our goal is simple: we want to offer our customers the freshest products possible,” Bailey declared.
Brian Holt, VP-advertising, marketing and public relations, delivered a very professional and engaging message about the Weis “brand,” its “gold” loyalty card and its digital platform.
He noted that Weis’ “brand architecture” revolved around relevant rewards, customer service and “meaningful localization,” which specifically meant more differentiation, better overall service and strong community affiliations.
In focusing on its “gold card,” Weis is hoping to increase the total spend for those customers who represent 13 percent of Weis’ total and reduce cross-shopping.
Individualized enhancements for gold card members include free items, dedicated sweepstakes and personalized deals. Holt noted that since the ramping up of its top-tier loyalty program in 2012, the results have been very good.
He then provided an overview of Weis’ online shopping program (formerly known as iShop). Currently there are 14 stores participating in the program and Holt expects another 20 units to come on board in 2014. He is encouraged that the “basket size” of online ordering is four times greater than conventional shopping and, even in its early stages, has produced a $1.5 million sales gain. Holt also noted that Weis’ mobile application will be expanded next year to include a GPS locator, push notifications for “specials” and a link to easy prescription refills. Much like Schertle, Holt addressed the importance of Weis’ fresh departments in creating big per transaction sales increases (ranging from 50-150 percent over purchases that don’t include perishable items).
“There are three key ways to deliver on our promise – service, selection and solutions,” Holt asserted. “Our goal is to under promise and over deliver.”
After lunch, Broe, Koch and Bailey hosted individual breakout sessions for an hour and then Weis presented its Strategic Achievement Awards to its top suppliers. Winners this year included Catalina Marketing, EMD Sales, Huntsinger Farms, Inmar, McCormick Pepperidge Farm, Samuels Seafood and Sanderson Farms.
Having been to a number of vendor meetings in my 40 year career, this gathering was one of the best I’ve ever attended and the finest presentation that Weis has ever offered.
‘Round The Trade
Just before presstime, Safeway announced that it plans to exit the Chicago market where currently it operates 72 Dominick’s stores early next year. Much like the company’s withdrawal from the Delaware Valley market 18 months ago when it sold what stores remained from its failed Genuardi’s purchase (mainly to Ahold USA’s Giant/Carlisle unit), the real question that should be asked is: why did either of these decisions take more than 10 years to make? Part of the answer could lie in the fact that new Safeway CEO Robert Edwards’ signature was on neither deal (both deals were made by former chief executive Steve Burd) and based on the declining numbers, Edwards was more than ready to cut bait. The Pleasanton, CA based retailer originally acquired Dominick’s 116 stores in 1998 for $1.2 billion plus debt. Sales at the time were approximately $2.6 billion. According to Safeway, Dominick’s incurred a loss of $8.4 million in its third quarter (ended September 7), compared with a loss of $6.2 million a year ago; and a loss of $21.5 million for the year to date, compared with a loss of $16.8 million for the 36-week period a year ago. For fiscal 2012 Dominick’s had a net loss of $31.5 million. The big retailer said it has already seen significant interest in Dominick’s assets and, much like it did with Genuardi’s, plans to sell as many stores as it can. Cerberus/New Albertsons’ Jewel-Osco unit has agreed to acquire four of the stores. Clearly, Edwards isn’t wasting anytime in dumping unproductive or non-aligned assets, having also sold its Canadian operation to Sobeys (the deal is slated to close next quarter). After “vanilla-izing” two once-dominant regional chains in Dominick’s and Genuardi’s, can we expect Safeway to also consider selling off another less than stellar acquisition it made in the same era – Randall’s in Texas?…well as it turns out, the Delhaize Group is actually looking for a U.S. CEO to replace Roland Smith who resigned last month after Frans Muller was named group chief executive. Also resigning, effective October 31, is Stefan Descheemaeker who presided over Delhaize’s European operation. As for the currently vacant Delhaize America (DA) job, whoever gets that post will certainly earn whatever compensation they agree to. With its core Food Lion unit still struggling (yes, there’s been some improvement, but not enough to make a discernible difference) and its Bottom Dollar Foods discount banner still posting red ink, you have to wonder how much shelf life remains at its U.S. stores. One of the better moves that DA made under the short reign of Smith was dumping its Sweetbay, Harveys and Reid’s banners to Bi-Lo Holdings (165 units were sold at the ridiculously discounted price of $265,000). Now Bi-Lo’s parent firm, run by veteran grocery executive Randall Onstead and part of private equity firm Lone Star Funds (which got into the supermarket acquisition game in 2005 with the purchase of Bi-Lo and Bruno’s from Ahold, also acquired Winn-Dixie in 2011 and recently bought 22 Piggly Wiggly units ), has filed with the SEC to go the IPO route (not surprising, based on Lone Star’s history and the increasingly obvious fact that most these PE-driven deals are primarily about sucking out the real estate value of their assets while offering little improvement in the overall shopping experience). The name of the new entity will be Southeastern Grocers and it is looking to raise $500 million for the public offering. Separate, but related to this news is that Bi-Lo will retire the Sweetbay and Reid’s names and convert the former chain to the Winn-Dixie banner and the latter group to the Bi-Lo banner. Harveys Supermarkets, with 73 stores in Georgia, Florida and South Carolina, will retain its name…Harris Teeter’s deal to be acquired by Kroger was overwhelmingly approved by HT’s shareholders. Approximately 98.6 percent of the votes cast at the October 3 meeting were in favor of the agreement. Harris Teeter expects to close the transaction in Q4 of this year when the waiting period for the Hart-Scott-Rodino Act is completed. The FTC most likely will have some input concerning possible store overlaps, particularly in the Tidewater VA, Charlottesville VA and Raleigh-Durham, NC markets…a federal grand jury has named nine Baltimore food retailers, indicting them on charges of stealing nearly $7 million from food assistance programs in a scam known as “food trafficking.” Those retailers are accused of agreeing to debit cash for beneficiaries without selling food and then retaining a cut of the proceeds. Specifically, the indictment alleges that the retailers allowed customers to convert their SNAP debit cards into cash, typically splitting the proceeds. Federal prosecutors allege that, to avoid being detected, the store owners debited the funds from the cards in multiple transactions over a period of hours or days. According the U.S. Department of Agriculture, c-stores and small grocery stores account for 15 percent of all redemptions, but 85 percent of all trafficking, and violations are more likely to occur in higher-poverty neighborhoods. Among those indicted was Abdullah Aljaradi, 51, who prosecutors say owns the Second Obama Express (interesting name) in Charm City. He is accused of defrauding the government of $2 million in benefits over a three-year period. Eight other merchants are charged with bilking the SNAP program of between $348,000 and $1.4 million. Prosecutors say those charged face a maximum sentence of 20 years in prison for each count of wire fraud, and others face additional charges of food stamp fraud…update on the proposed acquisition of most of Tesco’s Fresh & Easy Stores by private equity firm Yucaipa. While Yucaipa remains the clear frontrunner, F&E filed for bankruptcy protection, which certainly will delay the proposed acquisition while, among other things, giving the West Coast retailer some relief from its store leases. (A&P also sought the Chapter 11 route prior to completing its deal with Yucaipa in 2012.) As part of the bankruptcy filing, a Tesco subsidiary would loan a Yucaipa affiliate $120 million to help fund the takeover. Tesco would then be granted warrants to acquire as much as 10 percent of the reorganized company. If pre-bankruptcy highest bidder Yucaipa ultimately wins a court authorized auction, that Tesco subsidiary would retain an equity stake of 22.5 percent of the reorganized chain. If Yucaipa gains control of the majority of the F&E units, we continue to believe that managing partner Ron Burkle will convert those 150 F&E units to the Wild Oats banner, a company in which he was heavily invested until the natural and organics retailer was sold to Whole Foods in 2007…. moving north apiece, the titanic intra-family battle between the two Demoulas families (Market Basket) continues as the company’s board, led by Arthur S. Demoulas, attempts to oust current company CEO Arthur T. Demoulas (they are first cousins). Most recently, a Massachusetts Superior Court Judge Judith Fabricant allowed a $300 million distribution payment to shareholders which Arthur T. Demoulas had sought to block, arguing that the disbursement “a money grab by some of the shareholders and is the very definition of irreparable harm from a business perspective” that would “break Market Basket’s proven business model and forever change how the company operates and grows.” He’s probably right, and while he’s in the midst of a board battle which seeks his ouster, the truth of the matter is that Arthur T. is not only unusually popular with Demoulas’ associates, he has led the company to significant growth over a 15 year period and has helped his company earn the reputation that Market Basket is one of the best regional food chains in America. And just before presstime, one of Market Basket’s three independent directors has resigned effective immediately. Former Harvard Business School faculty member Nabil el-Hage, who was part of the total seven member board at the high-powered Tewksbury, MA regional chain, wrote that his board seat
“had evolved into a very difficult and time-consuming assignment.” He cited 28 board and committee meetings in two-and-a-half months. “The position had grown to require far more time than I had available to devote to it.” What a mess! Sadly, this is another family battle centered on greed.
Local Notes
Ahold USA has postponed its annual vendor meeting which was originally scheduled to be held on October 29. The new date is March 11, 2014 and the location of the meeting will still be the Giant Center in Hershey, PA. According to the company, “We realize that all of us, as suppliers and retailers are extremely busy during the 4th quarter and having the meeting in late October would not be the best time to interrupt our planning and preparation for the busiest time of the year. We apologize if our change in plans causes you any inconvenience. We promise that we will be well prepared to present the type of meeting you have become accustomed to with Ahold USA; one that is informative, interesting and exciting.” The Northeast’s largest retailer has opened its new 163,650 square foot case-ready meat plant in Camp Hill, PA that will service more than 300 Giant/Carlisle and Giant/Landover units. A shout-out to the many fine folks at AUSA’s Giant/Carlisle unit which earlier this month officially marked its 90th anniversary with a special celebration in its hometown. The regional chain culminated 90 days of giving throughout the grocer’s local communities with a $9,000 donation to Project SHARE, an interfaith, non-profit cooperative effort, based in Carlisle, created to meet the needs of the hungry by providing supplementary food and nutritional education on a monthly basis…interesting story in the New York Times about John Catsimatidis, owner of Gristedes, who failed to win the Republican nomination for mayor of New York City last month. According to the Times, “Big John” spent $10.4 million on his campaign and received fewer than 25,000 votes. That works out to $419 per vote, far more than the Joe Lhota who won the Republican primary (Lhota spent $3.8 million – $119 per vote). Democratic primary winner (and probably the next mayor of New York) Bill de Blasio spent $6.8 million or $24 per vote on his campaign…Whole Foods made it official earlier this month: it will be building a 29,000 square foot store in the former Hahne & Co. department store in downtown Newark, NJ. Whole Foods will join ShopRite as retailers who will be debuting brand new stores in what once was one of the most downtrodden cities in the U.S. Credit Newark Mayor Cory Booker (who’s also running for the U.S. Senate) for attracting both retailers to what is now becoming a truly gentrified urban community… staying in New Jersey, Village Super Market Inc., the second largest Wakefern member with 29 stores (two in Maryland), reported that its net income decreased 31 percent in its fourth quarter ended July 27. The Springfield, NJ based high volume retailer said the decline was caused by lower gross profit percentages and higher operating expenses as a percentage of sales. Overall revenue was $376.3 million in the fourth quarter, an increase of 1.7 percent, from the fourth quarter of the prior year. Same store sales also grew by 1.7 percent. The ShopRite merchant said sales continued to be impacted by economic weakness, high gas prices and high unemployment, which has resulted in increased sale item penetration and trading down. The retailer expects same store sales in fiscal 2014 to increase from 1.5 percent to 3.5 percent. For its full fiscal year, net income was $25.8 million compared to $31.4 million in fiscal 2012. Those figures include income from partnership distributions of $840,000 (net of tax); income from the national credit card lawsuit of $693,000 (net of tax); and a charge for the settlement of a landlord dispute of $376,000 (net of tax), while fiscal 2012 includes a favorable settlement of a pension withdrawal liability of $374,000 (net of tax). Excluding these items from both fiscal years, net income in fiscal 2013 declined 21 percent compared to the prior year primarily due to lower gross profit percentages and higher operating expenses as a percentage of sales, partially offset by reduced losses in the two Maryland stores compared to the prior year, which was their initial year of operations. Sales in fiscal 2013 were $1.48 billion, an increase of 3.8 percent from the prior year. Sales increased due to the acquisition of a store in Old Bridge, NJ on January 29, 2012 and a same store sales increase of 2.9 percent…here’s an example of why I believe the view of many Wall Street analysts who cover the grocery industry is misguided. Costco recently released its fourth quarter and year-end financials. For its fourth quarter (ended September 1), the Issaquah, WA-club store retailers posted an overall sales increase of 0.8 percent, a comp store gain of 5 percent (in the U.S.) and its earnings rose 1.3 percent to $617 million. And Costco’s fourth period this year was 16 weeks compared to 17 weeks last year. Additionally, Costco’s CFO Richard Galanti told analysts that 36 new stores are planned to open in fiscal 2014 and the high-volume merchant plans to increase its cap-ex from $2.1 billion to $2.5 billion next year. I’d say those were pretty strong numbers delivered by one of the industry’s best retailers, especially given the state of the economy and the ferocity of the competitive landscape. Apparently, I must be reading from a different hymnal, because the view of many financial analysts was that Costco’s numbers were “disappointing,” “soft,” or “struggling.” You gotta wonder if many of these Wall Street residents have recently gotten off their butts and visited a Costco store…FreshDirect, which is battling Ahold’s Peapod unit and will soon go head-to-head with a ramped-up Amazon in the online grocery segment, continues to broaden its footprint as part of its own expansion plan. The New York City based merchant last month added 15 new zip codes of home delivery in the Wilmington, DE area in addition to more than 100 new zip codes that FreshDirect began servicing in New Jersey, Philadelphia and Rockland County, NY…a couple of deaths to report this month. Passing on was the great American novelist Tom Clancy who died at age 66. Clancy was an insurance salesman working at his father-in-law’s agency when he sold his first novel, “The Hunt For Red October,” for only $5,000 in 1985. His detailed understanding of and skill writing about the Cold War made him an instant celebrity. All told, Clancy published 17 novels that rose to number one on the New York Times bestseller list, including “Patriot Games” and “Clear And Present Danger.” His upcoming book, “Command Authority,” is due to be released December 3. On a personal note, I am deeply saddened to report the death of Bill Speakman, 73, who for the past 35 years served as secretary-treasurer of our company, Best-Met Publishing. Bill was much more than the financial guru of Best-Met, he served as confidant, friend and many times inspiration to me. In fact, when Dick Bestany and I acquired Food World in 1978 (and Food Trade News 18 months later), he not only engineered the deal, he told us where to set up shop and developed our first year budget. Along with being one of the most intellectual people I’ve ever met, Bill also possessed a keen street sense and uncanny ability to read people and quickly assess the situation at hand. He was a person who made a big difference in my life and I’ll miss him dearly.
