Cornell Makes Difficult, But Correct Move In Orchestrating Target Exit From Canada
When former Pepsi, Sam’s Club and Safeway executive Brian Cornell was named chairman and chief executive of Target Corp. last August, he knew how difficult a challenge the job would be.
After a decade of unparalleled success, the Minneapolis-based mass merchant hit the wall three years ago as the tough economy, stiffer competition and lack of innovation sent the company’s earnings and share price tumbling.
It certainly didn’t help that Target was still reeling from what was then the largest data breach in retail history nine months earlier and that it’s relatively new entry into Canada was failing miserably.
If Cornell wanted a challenge, he signed on for a Herculean one in trying to change the direction of the $73 billion retailer, as well as its culture.
Never let it be said, though, that Cornell lacks cojones. On January 15, he made his boldest move to date in announcing that Target will shutter its entire Canadian operation – 133 stores with sales of approximately $2.6 billion annually. The Canadian operation employed 17,600 associates.
“When I joined Target, I promised our team and shareholders that I would take a hard look at our business and operations in an effort to improve our performance and transform our company. After a thorough review of our Canadian performance and careful consideration of the implications of all options, we were unable to find a realistic scenario that would get Target Canada to profitability until at least 2021. Personally, this was a very difficult decision, but it was the right decision for our company. With the full support of Target Corporation’s board of directors, we have determined that it is in the best interest of our business and our shareholders to exit the Canadian market and focus on driving growth and building further momentum in our U.S. business,” Cornell said.
As a result of the withdrawal, Target expects to report approximately $5.4 billion of pre-tax losses on discontinued operations in the fourth quarter of 2014, driven primarily by the write-down of the corporation’s investment in Target Canada, along with costs associated with exit or disposal activities and quarter-to-date Canadian Segment operating losses prior to today’s filing. The second largest mass merchant in the U.S. also expects to report approximately $275 million of pre-tax losses on discontinued operations in fiscal 2015.
Target said it expects this decision will increase its earnings in fiscal 2015 and beyond, and increase its cash flow in fiscal 2016 and beyond.
When former CEO Gregg Steinhafel and Target’s board announced entry into Canada in 2011, it did so in bold fashion, acquiring 220 former Zeller’s discount stores (many of which were former Kmart locations) and converting them into prototypical Target units, most deploying the company’s p-fresh hybrid grocery offerings. The first stores opened in March of 2013 and, to date, losses from continuing operations have exceeded $2 billion. Sales for its first three quarters in fiscal 2015 were approximately $1.3 billion.
Analysts felt that making Target profitable in Canada might take as long as five years, but the company was never able to gain traction, plagued by a similarly rocky Canadian economy, fierce competition (especially from Wal-Mart, which clearly geared up for Target’s entry) and a puzzling and continuing out-of-stock situation.
One financial analyst, who follows both Target and the retail food and drug industry closely, stated: “This is not dissimilar from what happened to some European retailers such as Tesco, Marks & Spencer, Tengelmann, J. Sainsbury and Carrefour who were unable to figure out how to do business in the U.S. They may have understood the dynamics ‘on paper,’ but they couldn’t separate their foreign roots enough to fully comprehend that retail is always much more local than many people think. Among other factors, Target never really understood how to match the perception it has enjoyed in the U.S.”
In the follow-up conference call related to the Canadian withdrawal announcement, Cornell said that U.S. same store holiday sales would drive same stores sales in its soon-to-be-completed fourth quarter by 3 percent, better than the 2 percent that was predicted.
Without a giant noose around its neck, Cornell can now better concentrate on some other key issues that his company is facing. Such as: can Cornell put the pizzazz back into its product innovation and merchandising? Are groceries just a volume driver or can Cornell figure out how to become more differentiated in food while also increasing grocery margins? Will Target make a real commitment to new formats and smaller stores to keep pace with the diverse competitive landscape it faces? Can Target improve its on-line presence especially compared to direct competitive threats from Wal-Mart and indirect ones from Google and Amazon?
I’m a fan of Cornell’s – I think he’s got one of the sharpest retail minds in the retail industry. But are the problems too complex and, if not, is there enough time to fix them?
Supervalu Knocks It Out Of The Park With Impressive Third Quarter Results
The amazing turnaround for Eden Prairie, MN-based Supervalu continues. This time at an even more impressive rate, as the large wholesaler/retailer posted its best numbers in more than a decade in its recently completed fiscal third quarter ended November 29.
All segments of SVU’s business showed improvement, as overall sales at its Independent Business unit increased 2.4 percent, Save-A-Lot’s ID sales grew 6.9 percent and Retail Food ID revenue (Shoppers, Farm Fresh, Cub, etc.) were a positive 2.3 percent. Adjusted earnings for the third quarter were $49 million (up from an adjusted figure of $33 million last year) on net sales of $4.2 billion, up from $4.01 billion in the corresponding period last year.
“We passed an important milestone this quarter delivering positive sales increases in all three of our business segments for the first time in many years,” said president and CEO Sam Duncan. “I’m very encouraged to see our Independent Business segment post higher sales compared to last year’s third quarter, and I remain pleased with the continued progress we are making in our retail stores. Save-A-Lot had another good quarter from a sales perspective while also delivering a higher operating margin compared to the second quarter. Overall, the third quarter provided many positives for us to build on during the final quarter of our fiscal year.”
A closer look at each of Supervalu’s operating units revealed that its Independent Business net sales were $1.96 billion compared to $1.91 billion last year, an increase of 2.4 percent, primarily due to increased sales to existing customers and new accounts partly offset by lost accounts, including one New Albertson’s, Inc. banner that completed the transition to self-distribution.
Independent Business operating earnings in the third quarter were $60 million, or 3.1 percent of net sales. Last year’s Independent Business operating earnings in the third quarter were $53 million, or 2.8 percent of net sales. Independent Business operating earnings in the third quarter of fiscal 2014 were $57 million, or 3.0 percent of net sales.
Third quarter Save-A-Lot net sales were $1.08 billion compared to $991 million last year, an increase of 8.9 percent, primarily reflecting the impact from network identical store sales of positive 6.9 percent and new store openings. Identical store sales for corporate stores within the Save-A-Lot network were positive 8.5 percent. Save-A-Lot operating earnings in the third quarter were $34 million, or 3.2 percent of net sales. Last year’s Save-A-Lot operating earnings in the third quarter were $40 million, or 4.1 percent of net sales. The decrease in Save-A-Lot operating earnings was primarily due to higher advertising, employee, and occupancy costs.
At its Retail Food banners net sales were $1.12 billion compared to $1.06 billion last year. The increase was primarily due to newly acquired stores and identical store sales of positive 2.3 percent. Retail Food operating earnings in the third quarter were $28 million, or 2.5 percent of net sales. Last year’s Retail Food operating earnings were $25 million, or 2.3 percent of net sales.
All told, it was another outstanding quarter for SVU with virtually all components of its business now operating at a very high level. And with the announcement late last month that it acquired two former Albertsons stores as part of the divestiture arrangement and would supply 64 Haggen units in the Northwest as well as provide transition services to the remaining 82 units in California and Arizona that Haggen acquired as part of the same mandated Safeway/Albertsons store divestitures, increased wholesale revenue is coming as soon as the next quarter.
In less than two years Sam Duncan and his primarily new leadership team have accomplished what many industry observers believed could not be done – he not only saved Supervalu, he reshaped the once formidable company into what it was before Jeff Noddle and Craig Herkert tried very hard to destroy it.
Jeff and Craig who?
Mark Verdi Out As C&S Wholesale President; Rick Cohen To Re-Assume Day-To-Day Control
Just before presstime, several sources divulged that Mark Verdi, who joined C&S Wholesale Grocers as president last March (a newly created post), has left the large wholesaler. According to an internal C&S memo, current CEO and chairman Rick Cohen will re-assume day-to-day control of the country’s largest wholesale grocery company with estimated sales of $26 billion annually. Verdi, 48, joined the Keene, NH distributor from consulting firm Bain Capital, where he was most recently managing director and co-head of the private investment firm’s global portfolio group, which works with the management teams of the businesses it owns to define and execute growth strategies, enhance their operations, and improve organizational effectiveness. He joined Bain in 2004. Prior to that, the Springfield, VT native led the financial services business transformation group at IBM global services, and was a member of the leadership team that spearheaded the acquisition and integration of the consulting arm of PriceWaterhouseCoopers into IBM. From 1996 to 2001, Verdi served as senior VP- finance and operations of Mainspring, Inc., a publicly held strategy consulting firm. He started his career at Price Waterhouse in 1988. According to the internal memo, Cohen said, “Our business is strong and growing, and I see tremendous opportunity ahead of us. In my 40 years here, I have never been more optimistic about our prospects. In looking towards our future, I am particularly excited about taking an active part in the development of our people and organizational capabilities, including a strong internal succession planning process.”
‘Round The Trade
Surprising leadership change at The Fresh Market as CEO Craig Carlock has abruptly left the company. Carlock, who also served as president and a board member of the upscale Greensboro, NC merchant, had been chief executive since 2009. “The company is well positioned, both culturally and financially, for future success, and has significant opportunity, through its unique and differentiated grocery shopping experience, to gain share in existing markets and expand into new markets,” said Ray Berry founder of the 169 store operator, which has frankly struggled in its New Jersey, New York and Pennsylvania stores. Current COO Sean Crane will fill Carlock’s shoes on an interim basis while The Fresh Market searches for a permanent CEO…going, going, gone. January 15th marked the last day of business for Bottom Dollar Foods, the four year Delhaize America retail discount experiment gone horribly wrong. The shuttering of the company’s 66 stores in the DelawareValley and Pittsburgh/Youngstown markets will affect approximately 2,200 associates. Expect new buyer Aldi to begin the conversion process late in the first quarter with possible openings to begin in late summer/early fall. However, don’t be shocked if, due to location conflicts and other issues, only about half of the former BDF locations are reopened as Aldi units.,, the Specialty Food Association has created a Hall of Fame whose mission is to “honor individuals whose accomplishments, impact, contributions, innovations and successes within the specialty food industry deserve praise and recognition.” The inaugural class includes 114 inductees including (these are people I’ve met over the years): David Anderson, Sr. and his dad Harold Anderson, founders of Haddon House; Ann Brody, Sutton Place Gourmet; Gerry Santucci, Santucci Associates; Fred and Bluma Schlossberg, Castle Food Products and brothers Eli, Saul and Stanley Zabar, Zabar’s and Eli’s Markets. Kudos to all who made this prestigious list…and speaking of Halls of Fame, congratulations to Randy Johnson, Pedro Martinez, John Smoltz and Craig Biggio, who earlier this month received notice that they will be entering baseball’s loftiest club. All are deserving. And whether known, or at least highly suspected, steroid users like Barry Bonds or Roger Clemens deserve to be voted in is a personal choice that the baseball writers face every year. But what’s not acceptable are votes for players who shouldn’t even be considered for the hallowed hall. In the last two years, players like Hideki Nomo, Jacques Jones, JT Snow, Armando Benitez and Aaron Boone all received votes, some from baseball writers who have been retired or who no longer follow the day-to-day action. To cast a vote for Nomo, whose career major league record was 123-109 in 12 big league seasons, or JT Snow, whose MLB batting average for 146 years was .268, is a joke a potentially takes away votes from worthy candidates such as Alan Trammel or Fred McGriff, who are at least worthy of consideration. In short, the Hall of Fame needs to expand the ballot to 15 choices (up from the current 10), include media other than current members of the BBWAA (Baseball Writers Association of America) who also follow the game closely, and look to weed out members whose day-to-day connection to baseball is no longer relevant…back to industry news: Randall Onstead, who began his grocery career working for his father at Randall’s Supermarket in Texas (now owned by Albertsons/Safeway), will be leaving his post as president and CEO of Bi-Lo Holdings on March 1. (Just before presstime, published reports said that Mark Prestidge, EVP and COO since January 2013, had resigned from the retailer effective December 31.) Onstead partnered with PE firm Lone Star Funds late last year to attempt to take the 830 Bi-Lo and Winn-Dixie stores public (Southeastern Foods). However, after a “road show” to test the potential funding interests of the financial community was tepid at best, the project was scrapped. Clearly Randall Onstead is not interested in the long-term welfare of 830 mediocre stores in the Carolina, Georgia and Florida.
Local Notes
A&P is expected to remain a tenant at its headquarters building (2 Paragon Drive) in Montvale, NJ, even though the owner of the building (reported to be real estate developer Robert Heller) is putting the unit up for sales. A&P has been an original tenant since the edifice opened in 1974 and currently leases about 200,000 square foot of space. Lots of changes occurring in the tony BergenCounty suburb as Mercedes-Benz announced earlier this month that it will be shifting its USA headquarters from Montvale to Atlanta. Also, Wegmans still plans to go to Montvale and is currently attempting to clear legal hurdles (A&P and several others have filed suit against the borough of Dumont claiming that the municipality engaged in unlawful “spot zoning” intended to benefit the proposed development). Wegmans will be the lead tenant on the property that once was the DePiero farm. In nearby Park Ridge, NJ, Sony Corp. (which may have a few other issues to repair) recently put its 219,000 square foot office on the market and Hertz plans to lease out its 226,000 square foot building as it has moved its headquarters and 550 jobs to Estero, FL…Tom Corcoran is King Kullen’s new director of bakery and Joe Schneider is the new produce coordinator for the Bethpage, NY regional chain. Corcoran replaces Sue Brooks who was with King Kullen for 36 years, and Schneider takes the spot previously held by Guy Savio who was with Long Island merchant for 35 years. Both industry vets recently retired…staying on “The Island,” Wal-Mart will shutter its “division one” store in the Westfield Sunrise Mall in Massapequa on March 6. The Behemoth said its inability to convert the store to a SuperCenter as well as an expiring lease were the reasons for the upcoming closure…as Albertsons prepares to officially acquire Safeway, it continues to realign its leadership teams both corporately and regionally. In addition to Steve Burnham being named Eastern division president of Safeway a few months ago, the Pleasanton, CA and Boise, ID retail chain has named Tom Lofland as VP-marketing and merchandising for the 125 store unit. Lofland, who begin his career with Albertsons in the mid-90s, most recently served as VP-center store for Abingdon, VA-based FoodCity (K-VA-T Foods). He also did a three year tour of duty for Supervalu as corporate director of merchandising, sales and planning. Other corporate changes include a few Safeway veterans who once supervised the Eastern division – Brian Baer, who most recently presided over Eastern, now becomes VP-retail finance/north for the soon to be combined organization and Karl Schroeder – who oversaw the Eastern division from 2002-2004 before being named president of the much larger Northern California division – now becomes senior VP-corporate merchandising. Expect more changes and tweaks to follow at the divisional level in the next few months… in a related development before the Albertsons acquisition is finalized, Safeway announced it has sold its real estate development assets to Terramar Retail Centers, Carlsbad, CA. The real estate assets were controlleed by Safeway’s wholly-owned subsidiary Property Development Centers (PDC). The sales price was approximately $830 million, pending certain final adjustments. Terramar is a neighborhood shopping center owner and developer which currently controls 24 properties mainly in California and other West Coast markets. Among the properties sold to Terramar are 11 completed retail shopping centers, nine retail shopping centers under construction – including a 24-acre retail project and housing complex in Walnut Creek, CA that will be anchored by a 55,000-square-foot Safeway and five projects in “due diligence” and entitlement phases. The proceeds from the deal are valued at $2.45 per share, of which $2.38 is estimated to be paid at the closing of the pending acquisition. Safeway stockholders will also receive a contingent value right at the closing of the merger relating to any additional net cash proceeds from the sale of PDC, including any amounts released from escrow, any additional payments from Terramar and any holdback amounts not spent for potential contingent liabilities. Safeway estimated these amounts total approximately $29 million, or approximately $18 million net of tax, which, if paid, would represent approximately $0.07 per share….Associated Wholesalers, Inc., (AWI), has set a deadline for vendors to file claims against the company. According to a court ruling made last month in U.S. Bankruptcy Court in Wilmington, DE, suppliers have until February 6 to file a reimbursement claim. Now that the busy holiday season is over, it will be interesting to watch how many retailers will align themselves with a new wholesaler. C&S Wholesale Grocers certainly has the upper hand, having purchased AWI’s assets for $288 million, while also gaining co-control of certain leases and a direct link to the front end/IT systems that AWI members and retailers utilize. After talking to several dozen AWI and White Rose independents, our best guess is that approximately 15 merchants have switched from AWI/C&S to Supervalu, Bozzuto’s, Wakefern and MDI, which would represent a small number of changes at this point…Weis announced a new round of price freezes that will run through April 5 affecting more than 2,000 products. This marks the 12th round of price freezes since the program begin in 2009…a couple of thoughts about Ahold’s recently released fourth quarter year end sales – despite some gloom and doom predictions from trade observers, U.S. revenue was pretty solid. ID sales were slightly below other supermarkets in its peer group, but turned positive after a few disappointing quarters. Clearly, the improving economy is helping Ahold (and other retail merchants), and its “Project Thunder” pricing initiative is boosting sales. When the full financials are released next month, we’ll see how much the investment in “Thunder” has impacted earnings. Also, no one should be surprised by the departure of Albert Heijn CEO Sander van der Laan. To me, the handwriting was on the wall earlier last year, when the Sean Connery look-a-like was stripped of his former duties managing all of Ahold-Europe. I enjoyed working with Sander during his brief tour of duty running Giant/Carlisle and I’m sure he’ll be back in the retail fray before too long, perhaps even in the U.S. In addition to naming Wouter Kolk as van der Laan’s successor, Ahold also tabbed Jan Ernest de Groot as its chief legal officer and a member of the international retailer’s executive committee, effective February 1. He will report to CEO Dick Boer and have oversight of legal affairs, governance and compliance. He joins the Dutch retailer from TNT Express and will be based in Zaandam, the Netherlands. MOM’s (My Organic Market) plans to open its second Philadelphia-area store and its 13th overall next spring in a new development at 34 South 11th Street. The New MOM’s unit will be 16,000 square feet in size…sadly, we have several notable obituaries to report this month. From the grocery industry, our condolences to the family of Jim Leonzo, who passed away late last month. Jim was most recently a sales and merchandising specialist for Giant/Martin’s (Ahold USA). He spent 47 years with the Carlisle, PA operator and, just before he retired in November, I had a great conversation with him at the opening of the new Giant replacement store in Hampden Township, PA. Leonzo began his career at Giant in 1967 as a journeyman meat cutter… Elly May is dead. Yes, Donna Douglas, who played tomboy Elly May Clampett on the hit sitcom “The Beverly Hillbillies” (1962-1971) has passed away at the age of 82. A native of Zachary, LA, Douglas actually had milked a cow before she was asked to udderize a goat during the audition for the memorable role. And, when it came to attractive women, Elly May had it all over her cousin Jethrine Bodine (Max Baer Jr., who also played Jethro Bodine). While she became typecast because of her success and exposure as Elly May, Douglas also starred opp
osite Elvis Presley in the movie “Frankie and Johnny” (1966) and appeared in one of the most memorable episodes of Rod Serling’s “The Twilight Zone” – “Eye of the Beholder.”…from the world of sports, entering relief pitcher heaven is Stu Miller, who had a productive 16 year career hurling for the Giants, Cardinals, Phillies, Orioles and Braves. In 1958, he led the National league in ERA and had the most saves in the NL in 1961 and in the AL in 1963. Miller was also part of the Orioles first World Series championship in 1966. However, despite all of those notable achievements, Miller was probably best known for committing a balk in the 1961 All-Star game at windy Candlestick Park, his home field. As he was getting ready to pitch in the ninth inning, a gust of wind came along and literally blew Miller off the mound. His balk ultimately led to the American League tying the game. However, when Hall of Famers Willie Mays and Roberto Clemente knocked in runs in the bottom of the 10th, Miller wound up as the game-winning pitcher. Miller was 87…ascending to goddess heaven earlier this month was Anita Ekberg, 83, the Swedish “bombshell” who made an indelible mark on filmgoers after her portrayal as a hedonistic American actress visiting Rome in Federico Fellini’s “La Dolce Vita” (1960), one of the greatest films of all time in my book. Ekberg was a former Miss Sweden whose film career actually began seven years earlier with a small role in the campy classic “Abbott & Costello Go To Mars” (not to be confused with other A&C masterpieces such as “…Meet Frankenstein,” “… Meet the Mummy,” “… in Hollywood;” “… in the Foreign Legion,” “… Meet the invisible Man,” “… Meet the Keystone Kop;” “… Meet Dr. Jekyll and Mr. Hyde” “… Meet the Killer, Boris Karloff” “… Meet Captain Kidd”). Her last screen appearance was in 2002…also entering another realm was singer Joe Cocker, who passed away late last month at the age of 70. Cocker’s raspy-voiced stylings (mostly covers of big hits from the original artist), provided a career platform for the British-born vocalist. Cocker was particularly fond of Beatles covers, and his 1969 version of Lennon-McCartney’s “With A Little Help From My Friends” was his first big hit. I saw Joe Cocker several times in the 1970s and his gigs when he was backed by the Mad Dogs & Englishmen produced some of the finest performances I’ve ever seen. Which would be logical when you paired a great vocalist with a backing group that was comprised of Leon Russell (piano), Jim Keltner (drums), Carl Radle (bass), Bobby Keys (tenor sax), Chris Stainton (Hammond B-3) and Rita Coolidge (backing vocals).
