Taking Stock

K-VA-T Takes Bold Leap With Acquisition Of 29 Bi-Lo Units 

One of the most successful (and most unsung) regional chains in the country (K-VA-T Food Stores/Food City) is arguably making the boldest move in its history. The Abingdon, VA merchant, whose roots go back to 1918, has agreed to acquire 29 Bi-Lo stores located in the greater Chattanooga, TN market (including eight stores in adjacent Northwest Georgia) from Southeastern Grocers, LLC (formerly known as Bi-Lo Holdings).

K-VA-T intends to operate all of these stores under the FoodCity banner and hire the vast majority of their store associates, retaining their years of service. This will be K-VA-T’s first entry into the state of Georgia.

“We are extremely excited to have this opportunity to expand our operation into the Chattanooga and Northwest Georgia markets. We certainly look forward to welcoming the Bi-Lo associates to our FoodCity family and serving the region,” says Steven C. Smith, FoodCity president and chief executive officer. “Our consumers can rest assured that we plan to complete the conversion process as quickly as possible, with the least interruption to the normal flow of business. It’s our intention to enhance the overall variety and selection and further develop the services and conveniences provided to our shoppers.”

“We are pleased to enter into this transaction with K-VA-T, which we believe is the right decision not only for Southeastern Grocers, but also for our stores and associates in Chattanooga and Northwest Georgia,” said Ian McLeod, president and CEO of Southeastern Grocers. “This was not an easy decision for us, as we have the utmost respect for our associates who serve our customers in these stores so well. In the approach by K-VA-T, we believe we have identified a strong partner to ensure these 29 stores and our associates are positioned for continued success under another reputable regional brand. On behalf of the management team, I want to thank all of our hardworking Bi-Lo associates for their dedication and support over many years.”

Southeastern Grocers and K-VA-T said they anticipate that the transfer and handoff dates of the 29 Bi-Lo stores will begin August 30, 2015, with all stores fully transitioned by October 5, 2015, subject to the satisfaction of customary closing conditions.

The locations of the stores are: 342 Blue Ridge Street, Blairsville, GA; 502 G. I. Maddox Parkway, Chatsworth, GA ; 1287 N. Glenwood Avenue, Dalton, GA; 7804 East Brainerd Road, Chattanooga, TN; 5604 Hixson Pike, Hixson, TN; 255 Ocoee Crossing North, Cleveland, TN; 8530 Hixson Pike, Hixson, TN; 6723 Ringgold Road, East Ridge, TN; 8634 Highway 58, Harrison, TN; 6951 Lee Highway, Chattanooga, TN; 2310 McGrady Drive, Cleveland, TN; 841 U.S. 411 North, Etowah, TN; 1667 Ooltewah-Ringgold, Ooltewah, TN; 9213 Lee Highway, Ooltewah, TN; 319 Chickamauga Avenue, Rossville, GA; 820 Mission Ridge Road, Rossville, GA; 112 Crimson Drive, Trenton, GA; 531 Battlefield Parkway, Fort Oglethorpe, GA; 311 North Main Street, LaFayette, GA; 1600 East 23rd Street, Chattanooga, TN; 4510 Highway 58, Chattanooga, TN; 3715 Ringgold Road, East Ridge, TN; 703 Signal Mountain Road, Chattanooga, TN; 3801 Tennessee Avenue, Chattanooga, TN; 420 Market Street, Dayton, TN; 3600 Hixson Pike, Chattanooga, TN; 3901 Dayton Boulevard, Red Bank, TN; 10161 Old Dayton Pike, Soddy Daisy, TN; and 4011 Brainerd Road, Chattanooga, TN.

K-VA-T Food Stores currently has stores in Virginia, Tennessee and Kentucky. The privately held, family-owned company has grown its 104-store entity primarily by organic expansion. The regional chain operates 15 units in Southeastern Kentucky, 27 units in Southwest Virginia and 62 units in East Tennessee consisting of 93 Food City locations (with 79 pharmacies and 84 fuel/convenience stores), 10 Super Dollar Discount Foods limited assortment stores and one wine and spirits store. It also operates a 1.2 million square-foot distribution center, located in Abingdon, VA.

Southeastern Grocers, LLC, which unveiled its new corporate name in May 2015, is the parent company of Bi-Lo, Harveys and Winn-Dixie grocery stores, and is the fifth-largest conventional supermarket chain in the U.S. based on store count. The Jacksonville, FL-based merchant employs nearly 72,000 associates who serve customers in approximately 790 grocery stores, 143 liquor stores and 527 in-store pharmacies throughout the eight southeastern states of North Carolina, South Carolina, Tennessee, Alabama, Florida, Georgia, Louisiana and Mississippi. Southeastern Grocers, which is controlled by Dallas, TX-based private equity firm Lone Star Funds, unsuccessfully attempted to launch an IPO last year spearheaded by industry veteran Randall Onstead. After the IPO failure, Onstead left Southeastern Grocers as CEO and was subsequently replaced by McLeod, who previously served as chief executive of the Coles Group, the large Australian retail conglomerate.

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 though 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?) which 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 alone 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 retail 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 (approximately $9.4 billion) 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 who 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.

And just before presstime, we learned that another Cerberus controlled company, Supervalu (Cerberus owns about 20 percent of SVU, which gives it operational control), is going to explore separating its Save-A-Lot discount store unit and taking it public.

“Save-A-Lot is a leading national hard discount retailer with over 1,300 total stores, comprised of approximately 430 corporate stores and approximately 900 stores operated by licensee owners, and we believe Save-A-Lot has significant growth potential. Over the last two and a half years, Save-A-Lot has repositioned its brand, refocused its efforts on fresh produce and meat, and re-merchandised its stores and product offerings to better appeal to a broader group of customers,” said president and CEO Sam Duncan. “Today’s announcement reflects our commitment to continuing to explore ways to maximize value for our shareholders. We believe a separation of our Save-A-Lot business could allow Save-A-Lot, our Independent Business and our Retail Food banners to better focus on their respective operations, and pursue strategies specific to their business characteristics and growth potentials, for the benefit of our shareholders, customers, licensees and employees.”

A couple of things to consider here. First of all, Cerberus clearly wants to get its money out of these two large investments as it can, and taking Albertsons and Save-A-Lot public would accomplish that task.

Secondly, if Save-A-Lot can successfully launch an IPO, you’ve got to wonder if Supervalu would remain a publicly-traded company, especially if you believe that that the Eden Prairie, MN based firm wants to ultimately dump its marginal corporate store unit (Shoppers, Farm Fresh, Cub, Hornbacher’s and Shop ‘n Save).

If that were to occur, it would take SVU back to its roots as a wholesale grocer and it could focus on national growth (organically and through acquisition). It would also mean that, aside from several strong regional players (AWG, Bozzuto’s, Burris, Unified, SpartanNash, Affiliated Foods, MDI, Associated Foods), Supervalu and C&S will likely be battling for dominance among all wholesalers.

‘Round The Trade 

A few observations about the unsurprising A&P bankruptcy filing. 1) With only 120 stores out of 296 total units spoken for at this point, look for some aggressive bidding at next month’s auction. I also expect to see a significant number of stores (either individually or in small lots) sold post-auction. 2) I’m kind of surprised that Wakefern (ShopRite) didn’t bid for a significant package of stores, especially units on Long Island where it needs more stores. Instead, Long Island market share leader Stop & Shop aggressively bid on nine “Island” units, which will increase Stoppie’s dominance (nothing is final until the auction, however). 3) Landlords will have a big say in the ultimate sales/disposition of many A&P stores. 4) Because of the poor condition of the physical plants (despite some good locations), expect a significant number of A&P supermarkets to remain dark. 5) Not only is the long-term welfare of A&P’s 30,000 clerks and meatcutters (who got totally screwed in the first post-bankruptcy deal) in question, so is the state of several underfunded pension plans that A&P was part of. If A&P ultimately converts to Chapter 7 (liquidation), as many trade observers believe, the burden to continue to fund those multi-employer plans will fall to other retailers who are members of those specific pension funds. All told, it’s an incredibly bad ending for what people once considered the most iconic supermarket chain in American history. The near death scenario leaves a bitter taste in people’s mouths, except for Ron Burkle, Greg Mays, Paul Hertz and a few more greedy and insensitive Yucaipa executives. I’m convinced they have achieved the final outcome they sought when they gained control of A&P in 2012…a tip of the hat to Ahold, Redner’s and Weis Markets, which all held their annual golf outings recently, raising millions for local charities. Especially notable was Ahold USA’s effort, which featured nearly 2,000 golfers and raised a record $10.2 million in contributions. Kudos to the vendors, too, for serving as the foundation for those levels of fundraising. More Weis news: the company confirmed that it will acquire the Nell’s Family Market in Hanover, PA which will replace its older and smaller unit there. The store is one of four Nell’s units that are owned by C&S, which acquired the independent market as part of the AWI bankruptcy acquisition (the other three Nell’s corporate units are located in Carlis, East Berlin and York, PA). The deal should be finalized later this month and Weis said it plans to interview current Nell’s associates for positions at the store. Additionally, 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. 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…it’s been a busy month for Albertsons. Along with its announcement that it will attempt to launch an IPO, and its plan to open eight new stores and remodel 115 others in 2015, the Boise, ID-based operator also found time to sue Haggen, accusing the Bellingham, WA-based grocer of fraud for failing to pay more than $36 million as part of the agreement when it acquired 146 grocery stores, from Albertsons as part of the divestiture ruling when Albertsons acquired Safeway earlier this year. The lawsuit filed in California federal court alleges that Haggen refused to pay for $36 million worth of inventory at 32 of the stores it acquired. Albertsons also says Haggen owes it nearly $5 million in inventory at another six stores, which it says are also now past-due. That brings the total to more than $41 million, the suit said. Additionally, Albertsons says Haggen waited until deals closed on all 146 stores before notifying Albertsons that it would not pay for the inventory. In a statement, Haggen, which is now led by former Save-A-Lot CEO Bill Shaner, said Albertsons failed to live up to its end of the bargain in the companies’ purchase agreement. Haggen said it notified Albertsons of those violations before the Albertsons filed the suit last month. The Haggen statement went on to accuse Albertsons of mounting a “strike suit to avoid addressing its wrongful conduct.” In its counterclaim, Haggen said it “will mount a vigorous defense and aggressively prosecute its counterclaims.. Haggen has struggled since it expanded into Southern California and Arizona, new markets for the former 18 store independent. Albertsons also announced that it has terminated its contract with specialty food distributor UNFI, effective September 15. The original agreement was set to expire on July 31, 2016. Kehe Distributors has been named to fill the specialty food distribution role at Albertsons. UNFI said the business loss represents approximately 5 percent of its $8.2 billion annual revenue…Wal-Mart late last month opened its new e-commerce fulfillment center in Bethlehem, PA. The facility, one of two Wal-Mart centers in the Lehigh Valley dedicated to filling online orders, is part of a next-generation network to support the company’s rapidly growing e-commerce business. The new 1.2 million square foot facility in the Majestic Bethlehem Center, which features state-of-the-art automation and warehousing systems, created nearly 400 full-time jobs in the Lehigh Valley. Roughly 200 additional jobs were created at the second Wal-Mart fulfillment center in the Lehigh Valley Industrial Park VII. “We are grateful to the Lehigh Valley for welcoming us with open arms, and we’re proud of the role we’ve played in strengthening this community with the jobs and community support we’re bringing to the area,” said Mike McGraw, general manager of the Bethlehem fulfillment center. The new facility is part of a network – Wal-Mart distribution centers, existing e-commerce facilities, 4,500 Wal-Mart stores and its huge transportation fleet – that will allow customers more choices for how they want to receive their online orders. “This Bethlehem facility is part of a dense, multi-faceted network that combines new buildings, existing fulfillment assets, and our portfolio of stores to create thousands of points of distribution,” said Neil Ashe, CEO, Wal-Mart Global e-commerce. “All of these elements working together enhance our ability to get more products to customers faster, at a lower cost, and provide more choices for shoppers.” While The Bentonville Behemoth still significantly lags behind Amazon in the e-commerce race, it is gaining more traction and still has an advantage by offering consumers more flexibility with its huge bricks and mortar foundation. Perhaps that was the motivation for Amazon.com, which is reportedly developing a new drive-up store concept in which consumers can order groceries online and schedule a pickup at a dedicated Amazon facility. According to industry sources, Amazon has submitted plans for an 11,6000 square foot building and grocery pickup area in Sunnyvale, CA in the heart of Silicon Valley. Of course, many traditional supermarket operators have a “bricks and clicks” model already in place. What makes this news interesting is that Amazon is attempting to reverse engineer the process and of course, anything “Amazon” bears watching. Also at Wal-Mart, the planet’s largest retailer last month held a “U.S. Manufacturing Summit” 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-Mart U.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…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…Mike Witynski has been named president and COO of Dollar Tree Stores, filling the previously held by Gary Philbin. After the FTC cleared Dollar Tree’s acquisition of Family Dollar last month, it named former COO Philbin as president and chief operating officer of its newest entity. Witynski, who has been with the Chesapeake, VA discounter since 2010, spent most of his industry career with Supervalu, including a short stint as president of its then-ailing Shaw’s unit in New England…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. Omar Sharif, the most famous Egyptian actor of all time, died last 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…also passing on was Theodore Bikel, best known for performing the role of Tevye (“Fiddler on the Roof” ) more than 2,200 times. The internationally renowned actor appeared in more than 150 movie and TV roles and created the role of Captain Georg Von Trapp in the original Broadway production of “The Sound of Music” (1959). Bikel, 91, was born in Vienna and fled with his family to Palestine (Israel) after the Nazis took control of Austria in the 1930s. He also recorded 37 albums and spent much of his life as a civil rights activist…entering author heaven was novelist E.L. Doctorow at age 84. The great American writer, who penned such classics as “Ragtime” and “Billy Bathgate,” had a unique and entertaining style in which he interspersed real life characters and events into fictional settings. He was among the most honored authors of the past 40 years, winning the National Humanities medal, the National Book Critic Circle award and several National Book awards…Moe Greene is dead. I am sad to report the death of actor Alex Rocco who the portrayed gangster in the original “The Godfather” (1972). The Boston born actor, who appeared in nearly 170 movie and television roles, was best known as the smug mobster, (based on the real life Bugsy Siegel) who is pressured to sell his Las Vegas casinos by Michael Corleone (Al Pacino). When Corleone tells Greene, “I leave for New York tomorrow. Think about a price,” Greene responds: “Do you know who I am? I’m Moe Greene! I made my bones when you were going out with cheerleaders.” Later, Greene, while getting a massage, is murdered by a shot through his eye during the dramatic ending of the first Godfather film. In a recent interview, Rocco said, “I had no idea what Moe Greene was gonna do for me. There was an off-Broadway play called ‘Who Shot Moe Greene?’ There was a Moe Greene’s Bakery. Alec Baldwin did Moe Green on ‘Saturday Night Live.’ Billy Crystal opened up the Academy awards once saying, ‘I just ran into Moe Greene outside.’ It just doesn’t die down.” Rocco was 79.