Taking Stock

Wal-Mart Losing Heft: Down To 600 Pound Gorilla 

In case you haven’t been watching that closely, Wal-Mart marketing clout has shrunk considerably over the past two years. I still wouldn’t remove them from the “Behemoth” category, but a series of events has led to their continuing decline.

To wit: last month we learned that two planned new Maryland SuperCenters – one in Oxon Hill (Prince George’s County) and one in the Aspen Hill neighborhood of  Montgomery County are not going to be built.

In the former case, PG County officials denied Wal-Mart’s three year effort to build a 101,000 square foot SuperCenter, citing safety and neighborhood concerns. Things didn’t even get that far in Aspen Hill where the world’s largest retailer said it was pulling the plug on the proposed 118,000 square foot combo unit due to uncertainties about Montgomery County’s development approval process.

These NIMBY-related (Not In My Back Yard) problems have long plagued Wal-Mart and probably won’t abate anytime soon as it expands further in the Northeast. Whether it’s neighborhood concerns, environmental issues, union pressures and the like, Wal-Mart’s general negative perception has certainly hampered its growth.

Now to be fair, perception isn’t always reality, and when it comes to creating new jobs and increasing local tax revenues, Wal-Mart remains “King Of All Retailers.” Nobody’s even close.

However, the “Bentonville Behemoth” has other significant issues that it is finding difficult to remedy. Many retailers have learned over the course of the past decade how to effectively compete against the mass merchant. Extreme value merchants such as Aldi, Save-A-Lot, PriceRite and a host of dollar store retailers all offer cheaper everyday retails than Wal-Mart (when comparing private label items) and many conventional retailers are now within 50 to 80 basis points of the mega-merchant with their every day pricing structures.

It also hasn’t helped that many of Wal-Mart’s core consumers are those who remain greatly impacted by a still challenging economy and questionable government decisions, including an 11 percent reduction in SNAP benefits.

And of course, there are the self-inflicted wounds that the company seemingly can’t escape from. Even though Wal-Mart has improved its scorecard relating to gender and other employee-related problems over the past decade, it only takes one Mexican bribery scandal to reset the clock on Wal-Mart’s negative perception of how it treats its associates.

Throw in what I believe to be the chain’s biggest concern: out-of-stocks/service levels – a “$3 billion missed opportunity,” according to Doug McMillon, who took over as CEO this past February.

The mere fact that Wal-Mart can’t keep its shelves properly stocked despite its state-of-the-art IT and distribution networks is baffling to both suppliers and trade analysts.

So, when you add up this combination of negative factors, throw in six consecutive quarters of flat or declining identical store sales at its U.S. stores and the fact that it’s reducing its earnings forecast (again) for the remainder of fiscal 2015, there rightfully are concerns whether the Behemoth has actually “jumped the shark.”

Case in point, Wal-Mart’s recently released second quarter financial report. The planet’s largest retailer reported flat U.S. comparable store sales and a 2.4 percent decline in U.S. operating income during the period ended July 31. Overall net income was up marginally. The merchant also noted that higher health care costs and further investments to drive e-commerce initiatives would adversely impact earnings during the second half of the year, lowering its anticipated annual earnings per share to a range of $4.90 to $5.15 from previous forecast of $5.10 to $5.45. The Behemoth said comps at its Neighborhood Market stores increased by 5.6 percent during the quarter, but that U.S. SuperCenters and Sam’s Club both had flat non-fuel comparable sales. “We see opportunities to improve in merchandising, pricing and store level service in our SuperCenters, and we are working to close those gaps,” McMillon said. “Our investments in e-commerce and mobile are very important, as the lines between digital and physical retail continue to blur. Our customers expect a seamless experience, and we’re working to deliver that for them around the world.”

McMillon, unlike his predecessor Mike Duke, has a real opportunity to be a change agent. He’s already “retired” Bill Simon, former president of the company’s U.S. stores and replaced him with a confidant, New Zealander Greg Foran. Other changes are certain to come shortly.

Now that Wal-Mart is clearly defensible, it must regain its ability to “walk the talk” – improve its service levels and demonstrate to its audience in a measurable way that it is a good corporate and community citizen while never wavering from its low price image.

In my opinion, the solution to these problems doesn’t lie in an expanded e-commerce presence or the expansion of its Neighborhood Market unit. Those are nice enhancements, but the stability and potential same store growth of its SuperCenters will ultimately shape the company’s perception over the next three years.

And while the SuperCenter problems are certainly fixable, McMillon has an enormously disjointed ship to turn around and not that much time to do it. He has the potential to be this decade’s retail star.  We’re all keeping score.

‘Round The Trade

It’s finally over. After six hellacious weeks of “sick outs,” protests and consumer boycotts which resembled a modern version of “The Scarlet Letter,” the Demoulas family has, at least publicly, settled their differences. The outcome will result in the acquisition of 71 Market Basket stores by recently ousted CEO Arthur T. (“Artie T”) Demoulas for a reported $1.5 billion for the remaining 50.5 percent stake held by the family of (Scarlet Letter wearer) Arthur S. Demoulas, Artie T’s first cousin. Effective August 28, all former Market Basket employees who were fired by the board and its co-CEOs, Felicia Thornton and James Gooch (they also wore Scarlet Letter bearers), returned to work and the supply chain pipeline re-opened. At presstime, service levels had improved significantly and trade reports indicated that all 71 stores were relatively well-stocked and busy. The transaction is expected to be completed over next several months with Artie T working with Thornton and Gooch during the transition. Now will come the next difficult journey – regaining the lost business that primarily Stop & Shop, Shaw’s and Hannaford reaped during the contentiousness. We chatted with about a dozen vendors and retailers in the Boston area, and most believed that Market Basket would be able to recapture most, but not all, of its lost business. Perhaps the great unknown is what have the competitors learned and earned to retain the business that dropped into their laps because of the Demoulas family power battle. Then there’s the issue of retails to consider. No conventional supermarket chain in the area was anywhere near the Tewksbury, MA regional chain when it came to everyday low price. With Artie T reportedly needing to borrow $500 million and possibly cede some equity to a private investment firm, what effect will that have on the regional chain’s pricing strategy? In addition to its everyday low retails, the company was offering a 4 percent discount across the board for calendar year 2014. With infrastructure costs certain to rise, how will this impact Market Basket’s incredible customer loyalty in the long-term? Apart from the sadness that comes from the battlefield, the Market Basket story is an amazing one on many levels. In my 41 years of covering the retail food industry, never have I seen the loyalty and tenacity of the associates in defending their leader and his corporate beliefs. But it extended beyond that to Market Basket’s vendors and its customers, who protested by taping cash register receipts from the retailer’s competitors on the windows of Market Basket stores to display their outrage. As has been said before, this will serve as a business case study on the perseverance, loyalty and power of the people. Or as Artie T stated at his “re-inauguration” speech: “You are simply the best. As I stand before you, I am in awe of what you’ve all accomplished. It is an example you have all set for so many people across the region and across the country. There is very little I can ever add to your brilliant work, your extraordinary display of loyalty and the power of your enduring human spirit over the past six weeks. You taught everybody that Market Basket is a place where respect, honor and dignity is a way of life. You displayed your unwavering dedication and desire to protect the culture of your company. You have demonstrated that at this organization, here at Market Basket, everyone is special. You have demonstrated that everyone has a purpose, everyone has meaning, that no one person is better than another, that no one person holds a position of privilege. We are all equal.”…as one enterprise re-strengthens, another disbands. That latter enterprise is Southeastern Grocers, which nearly a year ago sought to go public by filing a registration statement with the SEC. After all the ground work was nearly completed and an investor road show had begun, the corporate entity that includes Winn-Dixie and Bi-Lo Foods has withdrawn its effort to launch an IPO. That effort was led by grocery entrepreneur Randall Onstead (Randall’s) and current parent Lone Star Funds, a Dallas-based private equity firm. No reason was given for the plug pulling, but one can reasonably guess that even Wall Street couldn’t gather a lot of enthusiasm for a group of medium-sized conventional supermarkets that hadn’t gained substantial market share in years. At some point, it’s probably about the quality of the total enterprise, not just about a few wealthy investors attempting to gain even more wealth by offering a mediocre product… Last month, Supervalu acknowledged that it may have suffered a data breach at its corporately owned regional chains (180 units trading as Shoppers Food & Pharmacy, Farm Fresh, Cub Foods, Shop ‘n Save and Hornbacher’s) during the period June 22-July 17. The Eden Prairie, MN based retailer/wholesaler hasn’t determined if any cardholder data was actually stolen and there’s no current evidence of the data being misused, but admitted that hackers accessed a network that processes store transactions. The company also said that related criminal intrusions may have occurred at sister companies Albertsons LLC and New Albertsons Inc., adding that the possible data breach did not impact corporate or licensed Save-A-Lot stores or any of the independent retailers it supplies. Supervalu also noted it has released the information out of “an abundance of caution,” adding that it believes that the intrusion has been contained and the company remains confident that consumers can safely use their credit and debit cards at its stores. In more positive Supervalu news, we heard from several independent retailers who attended the wholesaler’s first annual national sales expo and all left with a positive impressions of the trade show called “Sales 4 All Seasons” which was held in St. Paul, MN August 12-14. More than 3,900 industry executives (including independent retailers representing about 1,250 stores) attended the premier event which featured more than 20 educational sessions and more than 330 expo booths… Paula Price, former executive VP/CFO of Ahold USA, has been named to the board of directors of Dollar General Corp. Price, who left AUSA last year, is currently a senior lecturer at Harvard Business School and formerly served as senior VP, controller and chief accounting officer at CVS Health (the company’s new name which was created earlier this month when the large drug chain officially stopped selling tobacco products)…the battle to acquire Family Dollar continues as we go to press. The Matthews, NC discount chain agreed to be acquired for $8.5 billion by Chesapeake, VA based Dollar Tree Stores. Shortly after tentatively agreeing to the deal, Dollar General, the largest of all the dollar store operators, countered with a bid of $9.1 billion. At presstime, Family Dollar said it still favors the Dollar Tree bid. However, Rick Dreiling, CEO of Goodlettsville, TN based Dollar General, said his company will continue to pursue the purchase of Family Dollar…regarding Delhaize America’s decision to potentially sell its struggling Bottom Dollar Foods unit, I believe CEO Frans Muller is cutting his losses while he can. Judging by the data that we received about BDF’s stores in eastern PA and southern NJ, sales were not justifying basic overhead costs, especially the large initial investment that Delhaize made in real estate. Most of the leases at its 66 stores run until about 2030 with average rents in the $10-12 per square foot range. While Muller noted that Bottom Dollar was inching closer to break-even status, the realistic possibility of its small format discount division ever sustaining consistent growth and profitability in markets as competitive as the Delaware and Lehigh Valley regions was a long shot at best. In recent months, I’ve frequently written about the pressures and impact of over-storing ultimately forcing a “thinning of the herd” market correction. With a potential sale of BDF, nearly one million square feet of space will become available in a 100 mile
radius ranging from East Windsor, NJ to Reading, PA.

Local Notes 

There’s really nothing surprising about Ahold’s disappointing second quarter earnings, which saw both ID sales and earnings dip yet again. Despite improvement in pricing, many new senior level associates at its Carlisle, PA headquarters and a realignment of store operations, the big retailer hasn’t seen much improvement in terms of measurable metrics. Perhaps with a bump in its Stop & Shop business in New England created by the Market Basket meltdown (which directly affected about 35 of its approximately 215 units), third quarter sales will improve, but long-term it will continue to be challenging for the Northeast’s largest supermarket retailer if there isn’t improvement in staffing levels and training at its nearly 800 stores. The three banners that constitute AUSA also need to shake their vanilla “one size fits all” image and begin to gain faster traction with its private label initiative which the company hopes will comprise 40 percent of total sales. In recently realigning its field support structure, Ahold USA is attempting to provide more store support at the divisional level. In the new field structure, which will be in place at all four AUSA divisions (Stop & Shop-New York Metro, Stop & Shop-New England, Giant/Carlisle and Giant/Landover), new district support teams have been created. These specialists’ objectives will be aligned with their districts’ stores and division objectives as well as the objectives of their functional support areas at AUSA. The retailer noted it will help ensure that everybody from the category teams based in Carlisle, PA to the divisional teams to the department leaders in the stores have the same priorities and objectives. These positions will have dual reporting, both to their district director and their division functions director. Team members include specialists in produce/floral, deli/bakery, meat/seafood, center store and one human resources manager per district. The team will also include a front end specialist and asset protection manager for every two districts. Moreover, there will be realignment within the districts and regions. AUSA will be shifting from three regions to two regions at both Stoppie divisions and at its Giant/Landover unit. At Giant/Carlisle (Martin’s), there will now be three regions (down from four regions). Each regional VP will now expand their oversight from approximately 60-70 stores to about 100 units while each district director will expand their span from about 10-12 stores to 16-18 units. The Northeast’s largest retailer will make some further tweaking of the new structure by the end of August. Related to these divisional changes, Ahold USA is also offering some associates who are at least 58 years of age an opportunity to take early retirement. The VSIP (Voluntary Separation Incentive Payment) agreement is being offered to about 100 associates at all four AUSA divisions. Late last month, AUSA also announced that it acquired the Eastside Marketplace, the trendy, organic and prepared foods store based in Providence, RI. Eastside Marketplace has been owned by industry veteran Scott Laurans since 1981 (Laurans once served on the board of Giant/Landover and his uncle Ray Laurans was CEO of former wholesaler Roger Williams Foods). It’s interesting to note that the new acquisition will not be part of Stop & Shop’s New England division, but seemingly will act as a stand-alone unit that will serve as a learning laboratory for Bhavdeep Singh, newly named EVP of AUSA’s recently created new formats unit, and his team to explore. Incidentally, general manager Brian Pacheco and his staff of 168 associates will remain in place. I recently had the opportunity to visit the Eastside Marketplace and what a little gem it is. In addition to Singh, we understand that AUSA veterans Jodie Daubert and Jim Sylvia have been moved over to the new formats leadership team. Daubert will focus on center store merchandising and merchandising systems while Sylvia will oversee real estate development. Their challenge will be to develop a workable model that incorporates some of the detail and customization that makes the Eastside Market special with a scalable format that can be potentially reproduced throughout the AUSA footprint. While it’s been a challenging year for Ahold as witnessed in its recently released second quarter sales and earnings report, the one shining light has been its Peapod online unit which once again achieved double digit growth. Shortly after the financial statement was released, Peapod customers received an email announcing that a fee of $2.95 will be charged with a minimum $60 pickup order. That service was previously offered at no charge with no minimum. “We kept it as close to free as we possibly could,” the email noted, but it’s true – we now have to start charging a fee for pickup orders.” Peapod users were encouraged to sign up for a Peapod Pod Pass, which charges a fee – $39 for three months, $59 for six months and $99 for one year – for unlimited home delivery or pickup services…one of Ahold’s chief competitors, Weis Markets, posted interesting second quarter results. The regional chain saw earnings decline 47.1 percent to $24.2 million while overall sales grew by a healthy 4.5 percent and comps rose 2.9 percent. Jonathan Weis, president and CEO stated, “This is a year of planned recalibration for our company and one where we are reinvesting in increased sales and market share to better ensure our long-term growth. We have achieved these sales results despite self-imposed grocery department deflation due to our pricing initiatives. Our investments in these price reductions and other sales building programs have resulted in higher sales per customer and an increased customer count.” As I’ve said previously, Weis is taking the proper course to ensure long-term stability and potential success. Driving sales at the expense of short-term profits is sometimes painful in the short run, but much more effective than “chasing the quarterly earnings rabbit,” deployed by too many operators who no longer have the courage to face Wall Street if occasionally there’s a sales shortfall that’s driven by strategic planning and new policies. And once Weis is able to cycle a full-year of its price impact program, earnings will certainly improve, too. Weis also opened the long awaited replacement store in its own backyard – a beautiful new 66,740 square foot unit in Selinsgrove, PA, which was doing brisk business during its initial first two weeks…also cutting the ribbon on its newest store was Whole Foods, which opened its 393rd store (376 in the U.S.) late last month in Columbia, MD. The 50,000 square foot unit is based in the old Rouse Co. corporate office building and is the first WFM in Howard County, Maryland’s most affluent county…surprise of the month (not): Mrs. Green’s has closed its Fairfax, VA store. The Irvington, NY retailer, part of the Natural Markets Food Group (NMFG), opened the organic market last February and, to my knowledge, volume never exceeded $100,000 per week. No word on the status of the Mrs. Green’s Vienna, VA location (the old Magruder’s store) which the company leased and was slated to open later this year. My guess is that store will never see the light of day as new NMFG CEO Pat Brown has got mountains of other challenges to deal with, especially with other new stores in New York, New Jersey, Connecticut and Illinois…kudos to our buddy Larry Weaver, VP-consumer sales for the Dairy Farmers of America, who has retired. Larry’s been in the biz for about 40 years and his professionalism, wit and candor, have long made him one of the best peddlers in the industry. Also, retiring after a 52-year industry career is produce maven George Handley, who is moving to Florida to live closer to his children and grandchildren. George, began his career with A&P in 1962, served six years in the U.S. Army (two years in Vietnam) where he earned two Purple Hearts, a Bronze Star, a Silver Star and a combat infantry badge. His long career in the industry also included stops
at Penn Fruit, Jumbo Foods (now Shoppers), Valu Food, Basics/Metro, Giant/Landover and Stop Shop Save. According to George, “I loved every job I had. I got to meet wonderful people from all kinds of backgrounds. I got to travel the world. The industry gave me things that I would not have gotten in other jobs – a sense of purpose.” Well said my friend and may you and Larry Weaver enjoy nothing but health and fun in all your future endeavors…leaving Safeway after a 17 year career is Greg Ten Eyck, who supervised all media relations and government affairs for Safeway’s Eastern division. Greg has accepted an offer to become director of corporate communications for large specialty chemical and materials company, W.R. Grace, based in Columbia, MD. We’ll miss Greg’s candor, professionalism and smooth style. Grace is getting a real media pro…once again, it is depressing to report that this month’s obituary list is overcrowded. Among those passing on recently was Lauren Bacall. The sultry, husky-voiced actress made her screen debut at age 19 in the great Howard Hawks film “To Have and Have Not” (1944) where she would meet her future husband Humphrey Bogart. In an all-time classic scene (and her only one in the movie) in which she is leaving Steve’s hotel room (Bogart’s character’s nickname), she murmured: You don’t have to say anything, and you don’t have to do anything. Not a thing. Oh, maybe just whistle. You know how to whistle, Steve? You just put your lips together and blow.” In a long career that spanned 70 years, Bacall (born Betty Joan Perske) won two Tony Awards, a special Academy Award and appeared in more than 70 films and TV shows and also starred in six Broadway plays….knocking on heaven’s door, too, is Don Pardo, whose elegant pipes graced hundreds of radio and TV shows in a career that began in 1942. There were many voice-overs and stints as a game show announcer during Pardo’s legacy, but his majestic voice was never better served than as the lead-in announcer for “Saturday Night Live.” And except for one season, it was a gig he held from the show’s debut in 1975 up until his death at the age of 96…I’m still in disbelief about the death of Robin Williams, who hung himself at the age of 63. Despite immense talent, Williams could never rid himself of his personal demons – alcohol, drugs and severe depression – a very sad and heartbreaking situation. His improvisational comedic abilities were unparalleled. Sometimes his antics were so frenetic that they would tire you out, but you’d always laugh (and sometimes cringe, too). As for his acting abilities, they were also terrific (but often underappreciated). From over-the-top comedy roles like “Mrs. Doubtfire” (1993) to intense dramatic roles such as in “Good Will Hunting” (1997) for which he won an Academy Award, Williams’ performances were almost always top-notch, even if his movies didn’t always achieve those levels. Barry Levinson, who directed Williams in the excellent 1987 film “Good Morning, Vietnam,” captured his persona so vividly when he eulogized his friend: “He was amazingly funny. Not the usual tell a joke funny. Some other kind of funny. A funny that defies all imagination. When he was on, he was the human version of a fireworks display. Funny ideas and characters traveling almost at the speed of light. ‘How is that possible?’ More than one person has asked me over the years when Robin would go on a long wild comedic routine off the top of his head, ‘Where does he come up with this? Where does it come from?’ There is no answer to the question. Genius cannot be explained. There are only a few among us who pass through this world with an ability that can’t be described or the process understood. What makes his death so difficult to understand is the question ‘How can someone so funny be so sad?’ We can reflect on it, try to understand it, analyze it, but nothing will truly answer the question. The fragility of the man, his sensitivity, his deep feelings for life….all that allowed for him to carve his comedic sensibilities, were the same feelings that took his life. He felt too much perhaps? There was always a kindness to Robin. An inquisitive man trying to understand the madness of mankind. But when the comedy motors were off, you could sense the vulnerability of the man. There was always a sense that he could easily be hurt. And if he were hurt, how quickly could he heal? A bleeder in a world of sharp edges. There was an innocence to his thoughtful intelligence. If there were an endangered species list for mankind, he would have been first on that list. He was perhaps too delicate for this difficult world. We lost one of a kind. We all lost a friend.”…and just before presstime, we learned of the death of comedienne Joan Rivers, who died a week after she stopped breathing while undergoing vocal cord surgery. While her self-deprecating foul mouthed, politically incorrect style of humor certainly wasn’t everyone’s cup of tea, Rivers (born Joan Alexandra Molinsky to Russian immigrants in Brooklyn in 1933) was truly a pioneer in the world of comedy. She was one of the first female stand-up comics to achieve fame and was beloved by her fellow comics for her kindness and encouragement to them…and from our industry, I’m deeply saddened by the loss of three friends – Denis Zegar, Earl Keeter and Jimmie Wright (see formal obituaries on page 8 of this issue). All three men were very special – kind, kind people who displayed great skills at their jobs, but also served as excellent mentors to younger people who were eager to learn the nuances of our business. To Vickie Henderson-Zegar and her son Zach, to Kara Keeter (Earl’s daughter) and to Lois Rendelman Wright and Jimmie’s son Rich and grandson Jim and all of their collective family members who also mourn, my sincere condolences.