Albertsons Has Compelling Story To Tell And As Public Company Will Have To Reveal More Of It
I’m a big believer in Albertsons’ go-to-market strategy. Clearly, when you focus on driving sales, increasing associate engagement, improving price image and enhancing the physical condition of your stores to augment consumer perception, you’re going to create forward momentum. And if you can execute those functions at a high level, you’re most likely going to have success, too.
The fact that majority owner Cerberus Capital management allowed CEO Bob Miller and his talented team the flexibility to put that formula into play was significantly beneficial to the whole Albertsons turnaround success story. The strategy also helped the Manhattan-based private equity firm by creating increased cash flow (along with real estate control of a nearly 2,400 store network).
The nine-year relationship between one of the most successful PE firms in the country and a group of old school grocers might seem unlikely, or even strange, but the fit has been great thus far. Cerberus has proved to be one of the best private equity stewards ever by allowing Albertsons’ senior management team to do what they do best: create a store environment that would serve as a catalyst to sell more stuff. And even though I thought the IPO filing would occur about 12-18 months after the Safeway deal was finalized, Cerberus has been a patient caretaker, and the foundation of the company’s business model has been cemented.
That business model which Miller and most of his team have perfected from their many years together at the old Albertsons organization has served them well. These guys don’t need much spring training and detest process (anybody listening?), a formula that has yielded very impressive turnaround results since its AB Acquisition subsidiary acquired 877 stores from Supervalu 18 months ago and has continued in the seven months since it purchased Safeway.
But going public brings a whole new set of rules that will test the leadership team as it deals with shareholders and financial analysts.
Jim Perkins, Albertsons’ executive VP who oversees the east for the company, told vendors at the initial Safeway-Eastern meeting in March that the “new” Safeway not only has the benefit of having a skilled and motivated leadership team, it has the advantage of not providing earnings guidance and discussing results with the financial community.
That advantage will soon disappear. When the Albertsons IPO announcement was released earlier this month, a number of our readers wondered how the second largest pure-play supermarket retailer in the country could turn a $385 million (pro-forma) loss into becoming a profitable enterprise.
First of all, the $385 million figure is misleading. Included in that total is part of the acquisition cost of Safeway (which was approximately $9.4 billion, most of which was borrowed) and other merger-related charges. Additionally, there was significant “one-time” money spent to clean up the mess left by Supervalu during its seven years of inert ownership of the Acme, Shaw’s, Jewel-Osco and Albertsons’ banners. And that investment went further than to upgrade the generally miserable conditions of the stores – it extended to marketing, advertising, pricing and hiring additional labor to be able to better compete in the many markets where the retailer operates stores.
Yes, there will be more revealed about the new Albertsons Companies entity. And yes, there will be increased pressure to not only maintain current sales trends (comps were up 4.6 percent in 2014), but also to reduce the red ink and find a path toward profitability within the next two years. Logically, it would be safe to assume there will be a bit of margin tweaking in the near future to achieve those profit goals.
But I wouldn’t expect too much of that. Miller and his other seasoned and talented amigos have a system they believe in and have executed effectively in the past. People are important and culture counts. Retail, particularly food retail, is a local enterprise, so do whatever can be done to send that message to the associates and especially to the customer. Speed counts – the first one to the finish line by implementing and effectively executing at store level has an advantage. Too much process is deadly. It creates indifference or negativity. Communications are most productive when delivered by a person, not an inter-office memo.
It’s not going to be easy for Albertsons, especially when you measure some of the recent failures or struggles of others that have gone the IPO route such as Fairway Market (which launched at about $17 per share, spiked to more than $28 per share and is currently trading at a woeful $3.31 per share), or The Fresh Market (which launched at about $33 per share, spiraled to more than $63 per share and is currently back in the $33 per share range).
However, this situation is unique, I believe. The company has a $58 billion sales base as a foundation, its leadership team all have experience working for publicly-traded firms and most importantly, they have the talent and the passion to make the new Albertsons Companies a successful enterprise under virtually any scenario.
Ahold Delhaize Merger Analysis: Synergies Are Meaningful, But What About The Customer?Â
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 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 Keeps Growing, Set To Open Distribution Center, Regional Office In North CarolinaÂ
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 AlamanceCounty 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 AlamanceCounty, 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 SpotsylvaniaCounty 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.
Local NotesÂ
According to a recent 8-K filing, effective July 9, Weis Markets has named Dennis G. Hatchell to its board of directors. He replaces Dr. Glenn D. Steele Jr., who resigned. Steele had served the Sunbury-PA regional chain as independent director and was a member of the company’s audit and compensation committees. Dennis Hatchell was formerly the president of Lowes Foods and COO of its parent company, Alex Lee, Inc., the privately-held wholesale and retail organization based in Hickory, NC. More recently, Hatchell was chief executive of The Pantry, the Cary, NC-based c-store chain which was acquired by Canadian convenience store chain Alimentation Couche-Tard in March 2015. Hatchell will succeed Steele on Weis’ audit and compensation committees…at Ahold USA: 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 is 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…more Albertsons news: the Boise, ID-based merchant 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. Former Acme president Dan Sanders has resurfaced as executive VP-store operations for Sprout’s, the fast growing organic retailer based in Phoenix. Dan’s a good man and we wish him well in his new endeavor at one of the fastest growing operators in the grocery business…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….several suppliers called to tell us about Wal-Mart’s “U.S. Manufacturing Summit” held on July 7-8s month at the Behemoth’s headquarters in Bentonville, AR. In addition to an opportunity to present new U.S. made products, attendees also had the opportunity to learn a variety of relevant topics during the supplier academy sessions. Presentations were made by Wal-MartU.S. president and CEO, Greg Foran, as well as Arkansas Governor, Asa Hutchinson who discussed how today’s trends and tomorrow’s innovations impact the American jobs initiative. More than 500 vendors and 2,000 people reportedly attended…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. Named to replace Philbin is Mike Witynski, who was previously senior VP of store operations for Dollar Tree. You might remember Mike – he had been an executive with Supervalu starting in 1990 and in 2009 was named president of its Shaw’s division in New England (during the catastrophic regime of Craig Herkert). After leaving SVU he joined Dollar Tree in 2010. In making the announcement, Sasser said: “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.” 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…Hostess Brands LLC, which was acquired out of bankruptcy by PE firm Apollo Global Management and private investor C. Dean Metropoulos for $410 million in 2013, is reportedly leaning toward going the IPO route. Earlier this year, Hostess’ investors reportedly sought to sell the company for $2.5 billion, including debt. Regardless of what path it takes, it looks like the Twinkies shortage of two years ago will not occur again…a few of deaths to report from the past month, all 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 WilliamMorrisAgency. 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…Omar Sharif, the most famous Egyptian actor of all time, died earlier this month at the age of 83. Sharif gained instant fame as Sherif Ali in David Lean’s great film “Lawrence of Arabia” in 1962. Three years later, he became an international film superstar as Dr. Zhivago. In addition to more than 100 movie credits, Sharif was one of the world’s greatest bridge players and for many years wrote a syndicated newspaper column about the intricacies of the card game.
