Ahold Delhaize Merger Analysis: Synergies Are Meaningful, But What About The Customer?
The news late last month that Ahold and Delhaize had joined forces seemed almost anti-climatic. The two large international merchants needed a shot in the arm to help their mediocre performance, in the U.S. and particularly in Europe. Without the hubris of previous years when efforts to combine the two companies failed, this time there was a much clearer pathway for the $29 billion mega-deal to finally be consummated.
But now the heavy lifting starts for real. And, despite the accolades thrown by each camp (mostly to each other) about the greatness of this union, real questions remain in terms of execution.
Late last month, shortly after the announcement was first issued, I addressed (via teleconference) a group of European financial analysts about my take on the deal. It was quickly clear that most of the analysts on the call had less than praiseworthy opinions about the merger.
Their general negativity stemmed mainly from the financial aspects of the deal in which Ahold will hold about 61 percent of the new company’s equity. Analysts noted the price was too expensive while also questioning the new organization’s ability to actually gain $560 million in annual savings synergies that would potentially be realized in year three. They questioned the one-time $391 million transition charge as being excessive, and they cast doubt about the company’s need to retain so much senior management going forward (a CEO, a deputy CEO, two chief operating officers in the U.S. along with a two-tier board of directors). But most of all they wondered how Ahold Delhaize would improve its customer proposition.
I wonder about that, too. During to the post-merger conference call on June 24, CEO Dick Boer and new deputy CEO Frans Muller praised the alliance, but failed to give any specifics about what remains the biggest challenge for both retailers – creating a positive perception with their customers, especially in the U.S. where both operators face overstoring, retail format diversity and frankly, competitors that execute at higher levels.
“We see tremendous opportunities to leverage the resources and expertise of both companies and accelerate innovation to meet and exceed the expectations of customers through delivering better value, choice, service and ways to shop,” said Boer.
Muller added: “As you know, the industry continues to change and evolve as customer preferences also change and evolve with the changing customer taste and the adoption of new technologies and expectations around convenience. The proposed combination of Ahold Delhaize will have a wide variety of store formats and ways to shop to meet those needs of virtually any customer profile. We intend to maintain this variety of banners and formats as this is the reason why we are so strongly anchored in our local communities. And we believe there are limited benefits to come from consolidating banner names or formats.”
Store formats, improved IT/e-commerce, private label expansion, upgraded fresh offerings – that’s wonderful, but it doesn’t address how both firms will enhance their relationship with their customers.
“Instead of job cuts to reduce redundancy, how about adding jobs at store level, as Safeway just announced it would, and improve training in the stores?,” said one former Ahold USA executive. “How about working harder to create a better cultural climate at both headquarters and in the stores? That’s what this deal should also be about.”
But, as we all know, rarely are these deals about people or chemistry. They’re about shareholder financial value (which is important) and adding more corporate control/process to the equation. To wit: management consultants McKinsey (Ahold) and Bain (Delhaize), advised both parties about the deal. Don’t get me wrong, McKinsey and Bain employ some brilliant people, but when was the last time they visited a store and gained a sense of about the attitudes of the rank and file?
Unlike other recent deals such as Kroger-Harris Teeter where Kroger placed a strong value on HT’s culture, and most recently Cerberus/Albertsons’ acquisition of Safeway, where team building and store improvement became the primary focus, I’m not sensing much of that is going to occur with this deal.
Boer and Muller could have easily said that one of the keys to the deal was improving store perception and associate morale. Instead we heard about synergies, heritage and common values. Yes, the associates were mentioned by both Boer and Muller, but only in a general way.
To this reporter, it’s all lip service until a tangible commitment is made to improve the retailer’s relationship with its employees, and more importantly, its overall customer perception.
To be fair, Muller and his new team have improved the customer proposition at Food Lion (Hannaford’s image has been consistently good for many years), but we’re talking about baby steps after former Delhaize chief executive Pierre-Olivier Beckers let the chain fade to near oblivion over a 15 year period.
At Ahold USA, it’s a different story. As has been stated several times in this column in recent months, with the exception of Giant/Carlisle, all three of the other AUSA operating divisions remain basically flat or negative in terms of ID sales (and significantly below its publicly-traded industry peers on average). In terms of intangibles, the decline of what was once a great organization – both in the stores and at corporate headquarters in Carlisle, PA – has been damaged. Too many people dislike their jobs, or even worse, are just going through the motions. That kind of stuff tends to happen when individual hours continue to be reduced at store level and there’s a declining feeling of chemistry, teamwork or camaraderie at headquarters.
That’s not to say that this deal can’t, or won’t, act as a springboard to improve the areas that many in the trade see as severely lacking. There’s certainly enough time in the next 12 months to improve the customer propositions of both companies.
If that were to happen, then one plus one could actually equal three. But, am I in the minority, based on recent past behaviors, in thinking that the odds makers aren’t rushing to the $50 betting window?
Lidl Set To Open Regional Office, Build Distribution Center in Alamance County, NC
Lidl, the large European limited assortment retailer which plans to enter the U.S. market by 2018, announced earlier this month that it will open a regional headquarters and distribution center facility in Alamance County, NC. The move is part of Lidl’s early preparations to expand into the United States and follows last month’s news that Lidl had selected Arlington, VA as its U.S. corporate headquarters and Spotsylvania County, VA as the location of its first regional distribution center.
In North Carolina, the German discount grocer is expected to invest $125 million and create 200 jobs in Alamance County during the next three years.
“We are thrilled to open new facilities in North Carolina and look forward to introducing American consumers to a different type of shopping experience,” said Brendan Proctor, the veteran Lidl executive who most recently supervised the discount retailer’s Irish division before being named president and CEO of Lidl US last month. “Our philosophy is simple: we are focused on offering customers top quality products at the most competitive pricing in convenient locations. We plan to build on the foundation that has made Lidl so successful in Europe, while creating a unique experience for American consumers that will be unlike anything else in the market.”
“We thank (North Carolina) Governor Pat McCrory and leaders in Alamance County, who worked with us to bring Lidl to the region. We are honored to work with them to lay the groundwork for Lidl’s success in the United States,” added Proctor.
In return for bringing the jobs and investment, government agencies have promised a One North Carolina Fund grant of up to $250,000, according to published reports. Grant funds are dependent on local matches.
McCrory said, “North Carolina will play a key role as the company begins its plans to enter the U.S. market.”
Last month, in its first public disclosure, Lidl announced it had secured the majority of the space in a nine-story office building in Arlington through its U.S. operating arm, MGP Retail Consulting LLC. The property, called National Gateway I, located at Clark Street (near Potomac Yards), is reportedly 217,000 square feet in size and includes a food lab and test kitchen. According to Virginia Governor Terry McAuliffe, Lidl’s Arlington headquarters will represent a $77 million investment and create 500 new jobs.
During that same press conference held at Lidl’s corporate headquarters in Neckarslum, Germany, the company confirmed reports that it plans to invest $125 million in a Spotsylvania County distribution center that state officials expect to create 200 jobs. At this time, no specific location has been identified for the facility, but a Lidl spokesperson confirmed the retailer’s commitment to being located in the county. Proctor said the chain chose Virginia because of “the market opportunities, depth of the talented job force and strategic location that Virginia provides.”
Additionally, Lidl has been aggressively scouting real estate sites in an area ranging from southern New Jersey to Raleigh, NC. Real estate brokers and developers have reported that over the past nine months, MGP has visited dozens of sites, looking to sign leases for stores in a wide-ranging area from the DelawareValley through North Carolina.
Sources have told us that Lidl is looking at sites in the 25,000-35,000 square foot range (larger than European rival Aldi’s typical 18,000 square foot U.S. model). Lidl has also begun to look for headquarters and store personnel utilizing the Internet site “LinkedIn” as a primary job search tool.
One of the largest retailers in the world, Lidl operates nearly 10,000 stores in 26 countries throughout Europe and will open its first Australian stores later this year. Last year, the discount merchant amassed approximately $100 billion in sales. Lidl offerings include fresh meat, produce and bakery items, as well as a wide selection of household goods.
Is The End Finally Near For Clueless A&P?
I’ve been sitting on this story from almost the day The (not so) Great Atlantic & Pacific Tea Company exited Chapter 11 bankruptcy in February 2012 with new owners Yucaipa Cos. pleading to its unionized associates that it needed financial and benefits concessions to survive and ultimately prosper. Similarly, it was looking for discounts from its primary supplier C&S and from many of its CPG vendors. Yucaipa pledged it would spend money on its once-storied brand, upgrade stores, empower its associates and make the company successful once again.
I would have turned on my laugh track machine if the situation hadn’t been so sad and absurd.
I got my first clue early on when the chain announced a significant refurbishing of its Weehawken, NJ Pathmark unit. Expecting to see a remodeling of major proportions, I viewed a store with a few new fixtures, a revamped product mix and several coats of fresh paint. There were a few other “remodelings” that followed the same formula, and then everything related to store ops improvement seemed to abruptly end.
That a private equity company should be primarily interested in cash flow and real estate shouldn’t surprise anyone. That Yucaipa, which at one time reinvested in its grocery properties including Fred Meyer and Dominick’s, should virtually ignore its stores and mislead its associates and vendors is unconscionable.
You reap what you sow, and for the past 30 months A&P has sowed a pile of crap. As poorly as the company was run under Tengelmann Group management, it’s far worse with Yucaipa pulling the strings. From a selfish perspective, it probably doesn’t matter to Yucaipa. The PE firm most likely has sucked enough cash out of its investment that at this point the failure of A&P will just become an accounting matter.
But to many of the 35,000 clerks and meatcutters who work in its 300 remaining stores, A&P has been their career, their lifeblood. It’s particularly sad when many of the associates exude more passion and sensitivity about the company than the owners do.
Since Yucaipa took full control in early 2012 after the exodus from Chapter 11, it reaffirmed its faith in Sam Martin who was named CEO in 2010 shortly after Yucaipa gained a stake in A&P (he previously worked with Yucaipa’s managing partner and founder Ron Burkle).
“Our vision is not to build out one brand, but to operate the best store in the neighborhood whether it’s a Pathmark in Bergenfield or The Food Emporium on the Upper East Side. The idea is to be the best store in the neighborhood and we will do this by becoming more relevant to customers in each specific neighborhood.” Martin told Bergen.com in an interview about his vision for the “new” A&P.
In referring to the aforementioned Weehawken grand re-opening, Martin noted in that same interview in late 2012, “This store and other stores illustrate our steadfast commitment to serving our customers through a neighborhood store that continually offers shoppers products that match their needs and cultural preferences.”
A little more than a year later, Martin was shown the gate. I’m not sure if it was for pure underperformance or for smoking too many Tea (Company) leaves. He was replaced by Burkle acolyte Greg Mays, who was named interim CEO and still remains chairman of the train wreck that A&P has become. After several months of searching, the retailer settled on one of its own – Paul Hertz – another Burkle sycophant who still serves as chief executive of the grocery chain.
“I look forward to working with the board of directors and the talented associates of A&P in this new capacity,” Hertz said at the time of his promotion. “A&P is a valuable franchise and a cornerstone in the communities in which we operate. We will work hard to meet the needs of our customers today and in the future.”
Cue the laugh track. Or the crying track.
While some will argue that A&P never really stood much of a chance to make a successful comeback even after given a clean slate, many industry observers clearly believe it was Burkle, Mays and Hertz who helped accelerate the 157 year old supermarket chain to its near end-stage status.
Whether the final result becomes a massive store sell-off or Chapter 7 liquidation, it seems obvious to this writer that Yucaipa never really did have a resurrection plan and was fully prepared to let the S.S. A&P sink once its booty was plundered.
Compared to this group of cunning and greedy clowns, Christian Haub would look like a savior.
Local Notes
More Ahold news: a closer analysis of possible store overlaps in the Ahold USA and Delhaize indicates that approximately 260 stores might be viewed as conflicting, including a combined 90 units in the Richmond-Central Virginia area (Martin’s and Food Lion), 26 in the Baltimore market (Giant/Landover, Martin’s and Food Lion), 60 in the Washington area (Giant/Landover, Martin’s and Food Lion), 20 on the Eastern Shore (Giant/Landover and Food Lion), four in Southern Pennsylvania (Giant/Carlisle, Martin’s and Food Lion), four in West Virginia (Martin’s and Food Lion) and four in the Wilmington, DE area (Giant/Landover and Food Lion). Additionally, about 30 Hannaford and Stop & Shop stores potentially conflict in the Greater Boston area and about 10 more Hannaford and Stop & Shop units could be viewed as overlaps in the LowerHudsonValley region of New York. In recent years, the Federal Trade Commission (FTC), the final arbiter on overlaps and potential divestitures, has softened its view on store conflicts as competition has become more fierce and diverse. Overall, this is a pretty clean deal on paper and, given the recent FTC rulings on the Kroger acquisition of Harris Teeter (where more than 30 stores might have been viewed as overlapping but none were forced to be divested), and the Cerberus/Albertsons purchase of Safeway (where more than 350 could have been targeted for conflict but only 160 supermarkets ultimately were forced to be sold), I expect fewer than 100 stores to be affected by an FTC ruling which could come early next year. Also at the Northeast’s largest supermarket retailer, Bhavdeep Singh, executive VP of the company’s new Fresh Formats division, has resigned. Singh, who formerly served as a senior executive at A&P’s Food Emporium and Super Fresh divisions, first joined AUSA in 2011 as EVP-human resources before becoming EVP-store operations a year later. Bhav’s a good man – he highly intelligent, has a strong work ethic and is an excellent team player. Replacing Singh on an interim basis is Scott Miller, who recently joined the Fresh Formats unit after career stints at Wal-Mart and Delhaize. The new division is slated to open its first “regulation” unit in Allston, MA in late August. That 10,000 square foot specialty store will supplement the company’s 3,000 square foot Everything Fresh “laboratory” unit which opened on Walnut Street in Center City Philadelphia last December. At its Giant/Landover division, the B-W market’s leading retailer is offering Voluntary Separation Incentive Program (VSIP) packages to associates with 30 or more years of service who are covered by the chain’s collective bargaining agreements with UFCW Locals 27 and 400. The buyout is limited to 250 associates (more than 25 percent of the eligible employees) “so we can maintain sufficient expertise and experience in the stores.” The Landover, MD-based division opened its newest unit on June 19, a 50,000 square foot store in Springfield, VA, which replaced an older and smaller unit located about 1.3 miles away. Particularly impressive at the new supermarket was its produce department. Also on June 19, Landover’s sister division in Carlisle opened a new 57,000 square foot replacement Martin’s supermarket in Waynesboro, PA, a community in which Martin’s (Giant/Carlisle) has long fared well…that Albertsons announced its intention to launch an IPO shouldn’t be surprising to most, other than the timing. Most observers who track the big retailer and its parent firm Cerberus felt that it would take a full year of Safeway integration before it would seek to go public. However, with one of the biggest (and most successful) private equity firms at the financial helm, the clout is certainly there to launch, and Albertsons really does have a compelling story to tell. And, while there will be lots more financial disclosure (and pressure to produce better earnings) once it acquires shareholders, I don’t think the mindset of the Albertsons leadership team will change. Selling more stuff, keeping it local and preserving the cultural integrity of its associates will remain key priorities, not just synergy savings and increased process. On a related note, Albertsons announced that it will open eight new stores and remodel an additional 150 others in 2015. In the Mid-Atlantic market, one of those new stores, the Acme on Long Beach Island, NJ, has already opened and the Malvern, PA division of Albertsons has targeted existing units in Doylestown, PA; Newtown, PA; Eagle, PA; Clayton, NJ; Saint Michael’s, MD; and two stores in Wilmington, DC for major upgrades…Whole Foods should have just offered a mea culpa after the New York City Department of Consumer Affairs came down hard on the “good for you foods” merchant for overcharging its customers for pre-packaged food items. “Our inspectors tell me this is the worst case of this labeling they have seen in their careers,” said Commissioner Julie Menin. The agency found that 80 varieties of pre-packaged goods had mislabeled weights and that 89 percent of those did not meet the federal standard for the maximum amount that an individual can deviate from its actual weight. While acknowledging inadvertent weighing errors did occur, Whole Foods said that the charge it had systemically overcharging customers was completely “inaccurate.” It blamed human error for the discrepancies. Initially, the Austin, TX based health merchant said, “We disagree with the DCA’s overreaching allegations and we are vigorously defending ourselves. We cooperated fully with the DCA in the beginning until we disagreed with their grossly excessive monetary demands. Despite our request to the DCA, they have not provided evidence to back up their demands, nor have they requested any additional information from us, but instead have taken this to the media to coerce us.” In the two weeks since that statement, cooler heads apparently are prevailing with WFM noting that it will increase training at its stores as well as implementing a third-party auditing process for all stores company-wide. Whole Foods currently operates eight stores in Manhattan and one in Brooklyn…on July 16, Aldi opened the first four former Bottom Dollar Foods stores in the Philadelphia area. Those units are located in Cherry Hill, NJ; Lumberton, NJ; Coatesville, PA; and Willow Grove, PA. The German owned discounter, which maintains its U.S. headquarters in Batavia, IL, is expected to open an additional 21 former BDF units in the Delaware Valley area by the end of the year….on July 6, champagne glasses were hoisted in Chesapeake, VA as Dollar Tree officially completed the acquisition of Family Dollar Stores. Additionally, Dollar Tree named Gary Philbin president and COO of Family Dollar. Philbin most recently served as president and COO of Dollar Tree. He will continue to report to Bob Sasser, CEO of the successful discount merchant. Philbin’s successor at Dollar Tree has not yet been named. “This is a transformational opportunity for our business to offer broader, more compelling merchandise assortments, with greater values, to a wider array of customers. This acquisition will extend our reach to low income customers while strengthening and diversifying our footprint,” said Sasser. A week after the FTC sanctioned the Dollar Tree/Family Dollar deal, the company said it would sell 330 Family Dollar locations in 35 states to New York private equity firm Sycamore Partners. That move comes as a result of the FTC forcing Dollar Tree to divest overlapping Family Dollar units…JOH, the Billerica, MA based food brokerage organization with regional offices in the Northeast and Midwest, recently made a great hire in naming Steve Fanion its newest VP. Steve’s one of the hardest working and sharpest executives in the food business, having spent the last 25 years of his career with Ahold USA. In his first role from the other side of the desk, Steve will lead the JOH Ahold USA team…mystery of the month? The sudden resignation and departure of Mike Ellis, former COO and president of Kroger. Ellis, 56,
who worked for Kroger and its related companies for 40 years, was front and center on Kroger’s first quarter analysts’ conference call on June 18. Twelve days later he was gone. Ellis was promoted to his current post in January 2014, after Dave Dillon retired as CEO and former COO Rodney McMullen was named to replace him. According to an SEC filing, Kroger said it had entered into an agreement in which, with Ellis’ “fulfillment of certain confidentiality, cooperation and other restrictions” all of his granted, but unvested, stock options will be deemed vested and will become exercisable on June 29, 2018. The filing also noted that McMullen will now be considered the Kroger principal operating officer and president effective immediately…Amazon is reportedly ready to jump headfirst into the private label grocery business and will shortly begin selling items such as cereal, milk, cookies, household products and baby food. Published reports have indicated that the Seattle-based online mega-merchant has filed for trademark rights in a host of additional categories, too, among them pasta, soup, water, pet foods and coffee, which it would market under its own Elements brand… a couple of deaths to report from the past two weeks, both from the world of show biz. Jerry Weintraub, one of the most successful Hollywood producers of this generation, passed away earlier this month at the age of 77. The Brooklyn-born Weintraub began his career in the mailroom at the William Morris Agency. His first big break came in 1970 when he persuaded Elvis Presley’s manager, Colonel Tom Parker, to let him promote Presley’s live concerts. He then moved to Hollywood, where he produced such movie hits as “Nashville” (1975) and “Oh, God!” (1977). He also continued to produce live events, which included concert tours with John Denver, Bob Dylan, Neil Diamond and The Beach Boys. Always the wise cracking New Yorker, Weintraub titled his 2011 autobiography “When I Stop Talking, You’ll Know I’m Dead,” adding that he might title a sequel “Dead, But Still Talking.” Entering the gates of comedy heaven was Jack Carter, the caustic, wisecracking comedian who first became a star in the early days of television (1948) and later became one of the most popular comedians of the 1950s, 60s and 70s. He appeared in nearly three dozen movies, including one of my campy favorites, “Viva Las Vegas” (1964) starring Elvis. Carter also made the rounds on the most popular variety shows of the day – making appearances with Ed Sullivan, Alan King, Dean Martin and Bob Hope. All told, he appeared in 180 film and TV roles in a career that spanned 75 years. The diverse entertainer also worked as a director and a Broadway performer. Carter was 93 when he died.