Taking Stock

AWI: Making The Best Of A Difficult Situation 

There’s not a happy ending to this story. While many people weren’t completely aware of the depth of AWI’s financial challenges, the fact that the Robesonia, PA-based wholesaler could put together the type of deal that it did is certainly notable, given how dire the situation really was.

However, there’s no sugar coating this: many of AWI’s members will walk away with very little or nothing. Their equity as shareholders in a co-op is most likely gone and the era of grocery co-ops dedicated to small and medium-sized retailers in the Mid-Atlantic has ended.

Yes, there were bad decisions made in recent years by former CEO Chris Michael, but AWI’s board must also bear some responsibility. Were they kept in the dark about the rising level of

challenges or were they content to serve as Michael’s puppets, having trusted him and his style of business for many years?

Even though it’s a very costly road to travel, AWI members (and to a lesser extent White Rose customers), and the employees at both companies owe a debt of gratitude for the services of top flight professionals (Lazard Middle Management, Carl Marks Advisors, Saul Ewing, Rhoads & Sinon and Joele Frank) that helped salvage the enterprise. Also deserving credit are the AWI/White Rose members/retailers who served on the restructuring committee and worked tirelessly to get a deal done, as well as to new CEO Matt Saunders, who helped guide the company through the most difficult period in its 95 year history.

There’s still a lot of heavy lifting to be done but until the auction is completed (probably in late October), the final outcome of what were once two great wholesaling organizations won’t be fully known.

What we do know is that C&S is in an excellent position to gain significant new business in the Mid-Atlantic. As the stalking horse bidder with the approval of AWI’s board and with an $18 million debtor-in-possession contribution, the Keene, NH wholesaler already has a lot of skin in the game. Others such as Supervalu or Bozzuto’s will likely show up at the auction, but you wonder why they wouldn’t have already submitted their best offers during the initial bidding process. And if it does truly boil down to a real “auction,” how many would bet against C&S feeding the “pot” until they emerged as the winner?

The “winner” will get three warehouses and AWI’s equity in many leases that were co-signed with their member-owners (the leasehold equity situation is not as big a factor with White Rose’s independent customers, who for the most part fully control their leaseholds). For those members who think C&S might not be the best fit for them, but have leasehold attachments to the parent firm, they would have that reality to consider. Also, many front end systems are tied directly to AWI, making changing suppliers that much more difficult.

However, the truth is that whoever wins the derby will provide the members and customers with stability. For the time being, all associates remain in place and all three warehouses will soon be back operating at full capacity. The concept that the retailers who are serviced by AWI and White Rose might have had to switch wholesalers at this critical time of the year has now been alleviated.

During the past few days, we’ve fielded a lot of questions including: Will the new buyer keep the three unionized distribution centers open in the long-term? Will there ultimately be a consolidation of AWI’s and White Rose’s offices and warehouses to existing facilities that the new buyer already operates? Other questions about the long-term security of associates’ jobs and ongoing relationships with vendors have also been posed.

At this point, there are no firm answers. The auction will determine the future buyer of AWI/White Rose. Intertwined with that is the ongoing Chapter 11 process which could take a year to run its course.

On a personal note, I feel very badly for the hundreds of AWI members who thought their equity and devotion to the co-op would at the least provide a healthy retirement nest egg. That’s not going to happen now, but at least they won’t be saddled by debt, either.

A lot more will unfold in the next few months. We’ll keep you posted.

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, Prince George’s 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.

Ahold Sales, Earnings Struggles Continue 

There’s really nothing surprising about Ahold’s disappointing second quarter earnings, which saw both ID sales and earnings dip yet again. At its U.S stores, 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. Here are the recent second quarter numbers affecting 767 U.S. supermarkets: overall sales declined 6.2 percent to $4.4 billion; underlying operating income dipped 18.6 percent to $162.2 million; underlying operating margin decreased to 3.7 percent from 4.2 percent last year; and identical store sales (excluding gasoline) declined 1.8 percent compared to a positive 0.3 percent ID sales gain in the corresponding quarter last year.

Company-wide sales (the Netherlands, Czech Republic and the United States) for the 12 week period were $9.7 billion, a dip of 1.1 percent.

Ahold CEO Dick Boer said: “In a challenging competitive environment, we remain focused on executing our ‘Reshaping Retail’ strategy and continue to make investments in our customer and value offering, making our stores a better place to shop. In the United States, the roll-out of our program to improve our customer proposition is progressing well, bringing better quality, service and value to our customers. By the end of this quarter, the program was active in 320 stores and will be rolled out to more than half of our stores by the end of this year. The accelerated roll out of the program together with our decision to absorb commodity price increases resulted in an investment in margin that was partly offset by cost savings from our Simplicity program.”

The company noted that its overall market share was slightly down, particularly in New England and at Giant/Landover.

In summarizing its overall second quarter results, the large retailer stated: “We remain encouraged by the results of our program to improve our customer proposition. As part of this program, we improved our ‘fresh’ offering across our four U.S. divisions, enhanced the customer experience through more engaged store associates and introduced targeted price reductions. We are on track with the accelerated rollout of the program, expanding to an additional 130 stores this quarter, with 320 stores participating by the end of the quarter. We still expect to have the program implemented in over 50 percent of our stores by the end of 2014, largely funded by Simplicity cost savings in the U.S. Our underlying operating margin of 3.7 percent was 0.5 percent lower than last year as the consequence of the accelerated rollout of the program, together with commodity price increases in meat and dairy that we chose to partly absorb, to the benefit of our customers.”

In regards to its outlook for the remainder of 2014, Ahold asserted: “We expect that ongoing investments in our customer proposition and further development of our product range across multiple categories will result in improving sales trends. For the year we still expect to deliver close to $394 million in cost savings from our Simplicity program, in line with last year, which will be reinvested to improve our competitiveness. We remain focused on executing our ‘Reshaping Retail’ strategy, to take advantage of our strong brands, leading market positions, solid balance sheet, and fast-growing online business.”

Perhaps with a temporary bump in its Stop & Shop business in New England created by the Market Basket mess (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.

On a more positive note, I recently had the opportunity to visit the Eastside Marketplace, the Providence, RI-based specialty store that AUSA acquired recently and plans to uses as a learning laboratory at its newly created “new formats” division. The unit is headed by Bhavdeep Singh, who most recently supervised all store operations and certainly knows the specialty retailing business from his days of spearheading Food Emporium for A&P. Joining Singh will be Ahold USA vets Jodie Daubert and Jim Sylvia who have also shifted 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. Oh, about Eastside Market – what a little gem of a store it is – beautifully merchandised with a well-trained passionate store team.

The one strong and growing segment of Ahold’s business is its Peapod, online grocery operation, which achieved double-digit sales growth in the quarter. In late July, Peapod also opened a new warehouse in Jersey City, NJ which will almost double Peapod’s capacity and will consolidate its position as the leading online grocer in the United States. Shortly after second quarter earnings were announced, 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.

‘Round The Trade 

New store of the month: ShopRite’s Yardley, PA unit owned by Wakefern chairman and CEO Joe Colallilo. Even though the new unit (which began life as a Super Fresh supermarket) isn’t in a great location and is a bit smallish for a ShopRite (57,000 square feet), Colalillo and his team built a beautiful store with an outstanding fresh presentation. It will be quite interesting to see how he fares long-term against one of the best fresh merchants in the Northeast – McCaffrey’s Markets. Also located a few miles away on Route 1 in nearby Fairless Hills, PA is Jeff Brown’s ShopRite unit, which recently underwent a facelift of its own. Even though Brown’s and Colalillo’s stores serve different demographics, Jeff Brown can’t be too pleased that another ShopRite has opened so close to one of his stores. As for Colalillo, he will be cutting the ribbon early next year on a 68,000 square foot unit in Bethlehem, PA in the new Madison Farms development…Weis Markets last month opened the long awaited replacement store in its own backyard – a dandy 66,740 square foot unit in Selinsgrove, PA, which was doing brisk business during its initial four weeks…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…Bottom Dollar Foods sale update: what we’ve heard is that the initial round of bidding has been completed and there are reportedly two bidders who made the final round. We’re guessing that Supervalu might have made the cut, but we’re told that Aldi and future new U.S. entry Lidl have also expressed interest. We were also informed that parent firm Delhaize America is considering offers that would only include all of the nearly 70 BDF stores in the Delaware and Lehigh Valleys and in the Pittsburgh-Youngstown area…Southeastern Grocers, which a year ago announced that it would seek to go public, won’t be launching an initial public offering anytime soon. After all the ground work was nearly completed and an investor roadshow 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… CVS Health is the corporate name of the large drug store merchant pharmacy benefits management company. The Woonsocket, RI firm chose the new moniker to better reflect the company’s image after it stopped selling tobacco products earlier this month. …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 an offer of $9.1 billion which it is now considering to make a hostile one. 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. At $9.1 billion, Family Dollar, a dollar store operator that has struggled in recent years, would fetch nearly as much as Safeway ($9.4 billion) did. There’s more to come on this story…John Moritz, former senior VP-marketing for A&P, was sentenced to three years in prison for his role in a $1.2 million ticket fraud scheme. While at A&P in 2010 and 2011, Moritz bought thousands of tickets that were supposedly intended as rewards for associates and business partners, but instead Moritz sold the ducats over the Internet for his personal gain. In May, he pled guilty to wire fraud and could have received a 20 year sentence. He will still be on three years of probation after he leaves the slammer and will have to repay $3.2 million…there were several deaths of note this month: Joan Rivers, 81, passed away on September 4, 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. Also passing on was Richard Kiel, one of the scariest villains in movie history. As the character “Jaws” in the James Bond films, “The Spy Who Loved Me” (1977) and “Moonraker” (1979), the presence of the 7-foot-2-inch steel-toothed Kiel was among the most menacing figures ever seen on the big screen. Not surprisingly, off screen he was considered one of the nicest guys in the business. Kiel was 74…and from our industry, I’m deeply saddened by the loss of three friends – Denis Zegar, Jimmie Wright and Hugh Gilmore. 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 Lois Rendelman Wright and Jimmie’s son Rich and grandson Jim; and to Tom Gilmore, and all of their collective family members who also mourn, my sincere condolences.