With Deal Now Final, Heavy Lifting Begins For Albertsons’ Transformation Of Safeway
One advantage of the FTC’s lengthy review process of Albertsons’ (A/B Acquisition-Cerberus) $9.2 billion acquisition of Safeway was that that the privately-owned retailer could assemble its leadership team (both locally and nationally) and plan its future integration strategy.
With the deal finally approved on January 30, the most relevant question now becomes: how much will Albertsons transform Safeway?
“I think the changes will be significant and noticeable, both to the trade and to Safeway’s consumers,” said a former industry executive who at one time worked for both companies during his long industry career.
I have to agree, especially as it relates to Safeway’s eastern division based in Lanham, MD. The new local management team at Safeway eastern has been in place for several months and now that Albertsons officially has officially taken possession of its new prize, expect to see some discernible changes within the next few months.
Albertsons has already said it would create a more decentralized model for the Safeway stores it acquired, much like what the company did when it acquired nearly 900 stores from Supervalu in 2013. That’s good news for the eastern division, which for years operated like Safeway’s red-headed stepchild based 3,000 miles from its home base. And it wasn’t just the eastern division that suffered from lack of autonomy, Safeway was the most process-oriented grocery retailer in the country, which led many trade observers to believe its stores were way too vanilla and its local staff was often frustrated by their inability to make decisions that could impact Safeway’s perception (and market share) in its local markets.
But to think that the new organization will not utilize some of the benefits of process would also be a mistake. Remember, Safeway CEO Robert Edwards, who was the catalyst to put Safeway on the sales block, will remain CEO of the new company. No, there won’t be several hundred vice presidents as with the old Safeway, but the Pleasanton, CA retailer’s IT and marketing acumen will almost certainly be utilized by a retailer that will have more than 2,000 stores covering 34 states and Washington, DC.
Albertsons will also benefit from having a large (too large?) headquarters building that can better handle such “corporate” issues as digital marketing/e-commerce and private label versus their smallish (too small?) headquarters facility in Boise, ID (which will remain as a co-headquarters facility along with another administrative base in Phoenix).
But the guts of the new Safeway model will be local and that means local buying and local advertising with greater flexibility when it comes to making decisions in the stores. Expect more aggressive retail pricing and, with a new category management team about to be unveiled, more regional items to be offered. And with the focus on “local,” I predict morale to improve in the stores.
In another words, in several months vendors and consumers will most likely see an operating model that resembles Acme or Shaw’s. In fact, when Acme president Jim Perkins was asked what he predicted would be the biggest adjustment that Safeway’s local division presidents would have to make, he bluntly stated it would be their ability to make quick, well-informed decisions about their markets, adding, “There’s not much process here (at Albertsons).”
The Acme model has clearly worked in the nearly two years it’s been controlled by Albertsons and its subsidiary New Albertsons, Inc. (which will have oversight of Safeway eastern, too). Vendors are happy that they can go-face-to-face with a “live” body, one who knows the nuances of the DelawareValley market and can make relatively speedy and informed decisions. Consumers have responded, too, noticing the friendlier store staffs, improved pricing and cleaner supermarkets. All of this has led to double digit sales improvements over the moribund days when Supervalu tried to manage Acme without a clue.
Safeway’s corporate management certainly wasn’t clueless; however they were rigid and unimaginative, a leadership team that seemed more concerned about next quarter’s financial guidance rather than offering their consumers a difference-making proposition.
I’m betting on the “new” Safeway to slowly but solidly build market share and gain greater customer loyalty. At least for the next few years.
Beyond that it could all change, as one of my industry friends noted: “With private equity stirring the pot, the end game is always about getting out. And also exiting with a healthy profit. Once Cerberus makes the necessary changes that will improve sales and enhance its financial perception, couldn’t you envision a scenario where it would seek a public offering? A profitable organization spinning lots of cash with more than 2,000 stores and a healthy bottom line would certainly be an attractive proposition to Wall Street.”
Logical for sure, but in the meantime I’m looking forward to observing and analyzing how Albertsons is going to transform Safeway into a more vibrant and relevant supermarket chain.
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 his 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 the 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?
‘Round The Trade
Locally, Target will be making some interesting news as noted by its 2015 U.S. growth plans. This year, the beleaguered mass merchant will open 15 new stores which will utilize three different formats – conventional (general merchandise), TargetExpress and CityTarget. None of those stores will open in the Mid-Atlantic, but Target acknowledged future plans to build two “Express” units in the Washington, DC area and numerous sources have reported that the Minneapolis-based retailer has been eyeing a location in Rosslyn, VA (ArlingtonCounty). TargetExpress units average about 20,000 square feet in size and include many of the departments found in a conventional Target on a much smaller scale. The company is also scouting out a TargetExpress location in the Philadelphia area. Currently, the only TargetExpress can be found in Minneapolis. It opened in July 2014. Worth noting, too, are two CityTargets that will open soon. Later this year, a new CityTarget will open near FenwayPark in Boston and in 2016, another will cut the ribbon at the new City Point development in downtown Brooklyn, NY. CityTargets range in size from 80,000-160,000 square feet, slightly smaller than conventional Target units, and are located in urban, high traffic areas. There are eight current “City” locations – three in Los Angeles, two in San Francisco, as well as single units in Seattle; Portland, OR and Chicago…food and drug retailers were disappointed to learn that the U.S. Supreme Court last month denied a petition by several industry trade groups (FMI, NGA, NACS) which sought to lower debit card swipe fees from 21 cents back to the original Federal Reserve proposal of 7-12 per cents per transaction. “We are disheartened that the court rejected our case, reflecting utter failure to recognize the significance the ‘swipe fee’ issue holds for consumers and American businesses,” said FMI president and CEO Leslie Sarasin. “The food retail industry, on average, operates at a 1-to-2 percent profit margin, so every penny matters. When transaction fees are arbitrarily set by the big banks and the card companies they service, this becomes a matter of justice that threatens the economic survival of community grocery stores, businesses, charities, schools and every institution utilizing a debit and credit cards payment system. We now look to the Fed to improve this rule and carry out both the clear language of the statute and the intent of Congress.” While many industry analysts believe that The Fed misinterpreted the intent of Congress when they passed the “Durbin” amendment in 2010, I’m not so sure it was an error in judgment, but rather the sway and clout of the banking and credit card lobby, which almost always seems to get its way…surprising leadership change at The Fresh Market as CEO Craig Carlock was terminated without cause last month. 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. Don’t feel too bad for Carlock, though. As part of his severance package he’ll receive his $561,000 a year salary for the next two years as well as being eligible for a pro-rated portion of his cash bonus for last year. Carlock also gets medical benefits and vesting of his stock options for the next 24 months….staying in the southeast, Bi-Lo Holdings, whose former CEO Randall Onstead departed in December after a failed attempt to launch an IPO earlier in 2014, has named Ian McLeod as its new chief executive. McLeod is best known for turning around Australian retailer Coles during his six year tenure. His 20 year food industry career also includes a stint at Asda. The Scottish native also had a successful soccer-affiliated career having served as CEO of club Celtic and as a director of professional clubs in England and Australia. This will be McLeod’s first tour of duty in the U.S. and he’ll have his work cut out for him…a couple of takeaways from last month’s FMI Midwinter conference. As many in the industry are discovering by the growth of the annual meeting, “Midwinter” remains the best top-to-top networking confab in the business. However, I continue to be dismayed by the number of slick speakers whose primary message to the retailers in attendance is that the “sky is falling and falling fast,” without giving supermarket merchants any credit for their prolonged successes. Yes, we all get it – e-commerce/digital marketing/social media are growing rapidly, but even the boldest industry predictions note that online purchases for grocery products are unlikely to exceed 10 percent of all food sales over the next decade. Defending against the likes of Amazon/Amazon Fresh will be a challenge, but at least some of these presenters could acknowledge that many retailers are already well entrenched in Internet commerce and marketing. And if these futurists, pollsters and new age mind readers (“…mugs, pugs, thugs, nitwits, halfwits, dimwits, vipers, snipers, con men, Indian agents, Mexican bandits, muggers, buggers, bushwackers, hornswogglers, horse thieves…” – oh pardon me, I got carried away comparing some of these speakers to characters from Mel Brooks’ “Blazing Saddles”) could also offer some constructive suggestions on how traditional retailers can blend the best of “bricks and clicks,” then their glib presentations might be perceived as more meaningful. And one more comment that was somewhat beyond the control of FMI. Holding the show at The Fontainebleau in Miami Beach was a poor choice. I know the industry’s largest trade group faces pressure from East Coast retailers to hold the show on the Eastern Seaboard and, since it will always be held in a warm weather climate, that leaves Florida as virtually the only option. On paper, The Fontainebleau was a solid choice – a venue large and modern enough to accommodate all needs in a tropical setting. Maybe I’ve lost all touch with modern reality, but the hotel was loud and impersonal and all it needed was an appearance by Pitbull to make the hotel experience even worse. Holding the conference in the Phoenix area (the Phoenician or Arizona Biltmore were ideal settings) would certainly add more charm and warmth while also reinforcing the fact that the Midwinter Conference should be the center of the hotel’s attention. Unfortunately, FMI signed a two year deal with The Fontainebleau and “Midwinter” will return there next January. For whatever it’s worth, I live on the East Coast and attend every year and would have no objections to having the show permanently situated in Arizona….Costco, which continues to impress everyone with its tremendous earnings and growth, will make its shareholders very happy in the next few weeks. The nation’s largest club store merchant plans on issuing a one-time special dividend to its holders because of its success. The Issaquah, WA retailer will distribute about $2.2 billion ($5 per share) funded from existing cash and some borrowing…another Seattle area company, Amazon.com, beat analysts’ earnings projections, but still performed below its potential in its recently completed fourth quarter. Revenue increased 15 percent to $29.3 billion in the quarter while operating income rose 16 percent to $591 million. During the follow-up analysts earnings call, Amazon said its first quarter earnings could take a hit primarily because of the unfavorable impact of foreign exchange rates. While shareholders continue to believe in Amazon’s long-term philosophy of building sales over quarterly profits, the company’s supporters can’t be happy
about Amazon’s decision to (at least temporarily) withdraw its new diaper line – Amazon Elements – which was introduced about two months ago and was only available to its Prime members. In an email to its top level customers, the online mega-merchant said that “based on early customer feedback, we are making some design improvements to the diaper.” In a recent survey I conducted with 10 babies (yes, I understand baby talk), several infants said “ga-ga-goo-gee” (the diaper’s fabric was too scratchy), while several others stated “goo-goo-ga-ga” (the adhesive tabs weren’t sticky enough).
Local Notes
Not many industry insiders were surprised that Mars would be shuttering some of its stores (speculation about the future of Riviera Beach and Dogwood has lingered for months), but with four closings, the Rosedale, MD independent will have depleted more than 20 percent of its fleet. I’ve been in almost every Mars unit over the past four months and, while the family-owned firm runs clean, well-staffed and fairly priced units, they just haven’t kept up with the changing competitive landscape all retailers face. Mars’ general footprint is too small and it really hasn’t separated itself from the challenges that other conventional supermarkets face by expanding and improving its perishables (prepared foods, adding produce items, etc.), which could be key differentiators when competing against alternate channel retailers. CEO Chris D’Anna cited competition as the primary reason for the closings. That may be true, but unless the D’Anna family wants to be “all in” on spending earnest money to modernize and improve the organization founded by his grandfather in 1943, it might be better off attempting to sell the company as it reportedly did in 2007 before the family pulled it off the sales block due to potential buyers’ unwillingness to offer the asking price the family had in mind…one of those interested parties was Weis Markets, which 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. Also, Rick Bhandari has joined the Sunbury, PA regional chain as director of pharmacy operations. He will oversee the day-to-day management and operation of the company’s 134 in-store pharmacies. Bhandari reports to Rick Seipp, VP of pharmacy. Bhandari has more than 20 years of pharmacy management experience. Prior to joining Weis Markets, he worked as a regional pharmacy manager for Bi-Lo Holdings and earlier in his career, Bhandari worked in management positions at CVS and Rite Aid. Also joining the Weis team is Adam Edwards, who will serve as the company’s director of information security with oversight of the development, implementation and compliance of information security practices for the retailer. He will report to Shirl Stroeing, VP and chief information officer….the quest to acquire troubled dollar store merchant Family Dollar is over, with Dollar Tree prevailing over larger rival Dollar General, despite a substantially lower offer ($8.5 billion vs. $9.1 billion). Family Dollar’s management and board urged shareholders to accept the lower offer, fearing that the FTC would force the divestiture of approximately 1,500 stores. However, after predicting that fewer than 300 stores would have to be closed for geographic overlap, it now appears that the FTC could demand that about 500 units be sold or closed… Wegmans ranked first in the 16th annual Harris Poll Reputation Quotient study which ranks U.S. companies perceived by their reputation. The Rochester, NY-based uber retailer accrued an overall score of 84.36, barely beating Amazon.com. Other grocery-related retailers to make the Top 100 were: Costco, ranked 4th with a score of 81.98; Publix ranked eighth with a score of 80.73; Whole Foods, 21st place with a 78.47 overall score; and Kroger, whose 76.29 score placed them 32nd among U.S. companies. Ratings above 75 percent are considered very good to excellent…some obits of note to report this month. Paul Santoni, one-time co-owner (with his brother Bob) of Santoni’s Supermarkets, has died at the age of 76. Paul and Bob were two of the first people we met when we acquired Food World in 1978 and he really helped me understand the Baltimore market (particularly independent retailing) in the early years of our business. I’ll remember him for his kindness and humility…Melvin Gordon has also passed on. The longtime chairman and CEO of Tootsie Roll Industries, Melvin and his wife Ellen led the Chicago-based confectioner for more than 50 years. At age 95, he was believed to be the oldest chief executive in U.S. business In a classic P.T. Barnum-esque quote when Tootsie Roll celebrated its 100th anniversary in 1996, Gordon said, “Nothing can happen to a Tootsie Roll. We have some that were made in 1938 that we still eat. If you can’t bite it when it’s that old, you certainly can lick it.”…another famous Chicagoan has also left us. Ernie Banks, the Hall of Fame shortstop and first baseman who played his entire 19 year baseball career with the Cubs will not only be remembered for his Hall of Fame career (512 home runs and two-time National League MVP), but also for his optimism (“It’s a great day for baseball. Let’s play two!”). On a personal note, I’ll always remember Ernie signing baseballs for my two children at the 1993 All-Star Game at Camden Yards. Each ball had a different personalized message. What a wonderful, classy gentleman Ernie Banks was…ascending to goddess heaven last 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), in my book, one of the greatest films of all time. 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 recently entering another realm were two singers, Joe Cocker and Don Covay. Cocker was a native of Sheffield, England whose raspy-voiced stylings (mostly covers of big hits from the original artists), provided a career platform for the singer. 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, especially 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). Don Covay was an underrated R&B singer who hit the charts with such songs as “Mercy, Mercy” (covered by the Rolling Stones on their “Out of Our Heads” album in 1965) and “See Saw” (covered by Aretha Franklin on her “Aretha Now” album in 1968). A native of WashingtonDC, Covay passed away late last month at the age of 76. As his career progressed, Covay became primarily a songwriter. He penned songs such as “You Can Run (But You Can’t Hide)” covered by Jerry Butler, “Letter Full of Tears” covered by Gladys Knight & the Pips and “Sookie Sookie,” which Steppenwolf later recorded. However his most memorable song was written in 15 minutes when Aretha Franklin needed one more song to complete a recording session at the famous Muscle Shoals sound studios in Alabama. That song, you ask? “Chain of Fools”…and finally, what do SkyMall and Radio Shack have in common? They’re both publicly-traded retailers who have or will likely file for bankruptcy protection. Beyond that, both retailers seemed to have no clue about customer relevancy. At Radio Shack, despite efforts from current CEO Joe Magnacca to revitalize the company, the Fort Worth, TX-based electronics retailer seemed forever stuck in the 1970s (even its name cries out “obsolete”). With its expected Chapter 11 filing this month (it has already been delisted from the New York Stock Exchange), Radio Shack will most likely cease to exist after 94 years in business and
more than 4,000 stores. About half of those stores may become Sprint wireless units as yet another once-iconic name bites the dust. At SkyMall, parent firm Xhibit, said it would sell off the assets of its catalog business. As overpriced and weird as SkyMall’s offerings were, the company certainly was capable of grabbing your attention when looking for a reading option during a long, boring cross-country flight. Who could forgot one-of-a-kind items like the “Bed Bug Thwarting Sleeping Cocoon;” “A Portrait Of Your Pet As 17th Century Nobility;” “The Star Of David Ornament” (for your Christmas tree); and my favorite, “The Watch That Tells You When You’re Going To Die.”
