With A&P Acquisitions, Fast Growing Key Food Is Taking It To Another Level
These are heady times for Key Food Stores Co-Operative, Inc., the Staten Island, NY-based member-owned retail cooperative. The past five years have seen the organization triple its revenue and almost double its retail membership, and is projecting a nearly 50 percent increase in net sales this year alone (its fiscal year ends in April 2016).
Helping fuel that growth even more is Key Food’s recent acquisition of 24 former A&P stores in the metro New York market. The details surrounding those purchases provided much of the interest and energy at the co-op’s annual vendor meeting held on October 29. Approximately 600 suppliers, brokers and distributors packed the Hilton Garden Inn on Staten Island to hear CEO Dean Janeway, COO George Knobloch and interactive marketing and PR manager Michele Gissi update the selling trade on events of the past year while providing a vision of the future.
Knobloch illustrated Key’s dramatic growth while emphasizing that the company’s primary goal remains unchanged – “To maximize sales and profits for its members.” He noted Key Food’s strong same store growth (2.5 percent in 2014 and 3.5 percent for the first six months of this year) was better than national competitors (who do business in the Metro NY market) such as Wal-Mart, CVS, Target and local competitor Fairway.
One thing we like about the entire Key Food leadership team is their candor and confidence. Knobloch wasn’t afraid to name the vendor organizations that he believes are not showing enough trade support to keep pace with co-op’s aggressive expansion plans. “All of our departments have achieved significant growth this year – even center store is running 2 percent positive,” the industry veteran proclaimed. “I urge you to invest in us and judge us by our progress.” He informed the vendors that IRI will soon be rolling out a syndicated RMA (retail market area) for only the five boroughs of New York City. This measurement is more reflective of the New York metro marketplace and its 8.4 million consumers. This will make it much easier to measure share, distribution and volume in the five boroughs as well as identifying ROI when spending in this market.
“We are a leader in that territory and I don’t think our story has been clearly understood,” Knobloch stated. “By population ranking alone, Brooklyn is the third largest market in the country, Queens is the fourth, Manhattan is the sixth, the Bronx ranks ninth and Staten Island ranks 36th. You need to figure this market out and invest.”
Chief executive Dean Janeway gave the audience a fascinating overview of the A&P auction process while also offering a prediction on how the Metro NY market may look like in the near future. Janeway said he
and his team viewed the A&P bankruptcy and subsequent sales of its stores as an opportunity that comes along “maybe once every 25 years.”
The process to pursue A&P’s underachieving stores actually began two years earlier when Key Food was negotiating to acquire a Waldbaums location in Brooklyn which was part of a larger parcel of land owned by the landlord (that deal was never completed and that store remains on A&P’s unsold store list). Fast forward, and when A&P filed for Chapter 11 protection on July 19, Key Food was determined to be a major player at the subsequent auction.
From that point on, the experience became a “bi-polar roller coaster ride” involving investment bankers, attorneys, unions and the Federal Trade Commission. “We learned the rules quickly,” Janeway revealed in an entertaining and sometimes hilarious analysis. “In fact, there were no rules. Things seemed to change on a daily basis without explanation. You were bidding in the dark and possibly against yourself.”
Initially, Key Food and its member-owners sought to acquire 52 stores, but other bidders (primarily Acme and Stop & Shop) were given “stalking horse” status for some of the units that Key Food had targeted.
Ultimately, Key Food was given “stalking horse” rights for 19 stores, which was reduced to 17 supermarkets after being informed of significant environmental issues.
At presstime, Key Food was able to acquire seven additional stores at auction which will bring the company’s total store count to 213 and add about $400 million in additional revenue. Moreover, about 1,800 union jobs were preserved.
In developing its “all in” strategy, Key Food secured bank financing of $101 million from TD Bank and Citizens Bank. In the end, co-op members directly funded a direct portion of their acquisitions, so Key Food will ultimately borrow approximately $40 million on its facility. The final cost of acquiring 24 stores will be approximately $90 million. Twenty-two of the supermarkets will be owned and operated by existing members under the Key Food and Food Universe banners and two additional stores will become corporately-owned Food Universe units.
Janeway disclosed that after much consternation his company decided they would test the waters on corporate store ownership. “We felt that owning a few stores would create an infrastructure for us. We could also deploy this philosophy to provide member-owners a potential exit strategy and a generational stop-gap; it would also simplify future acquisitions while creating another revenue stream for Key Food. Additionally, owning corporate stores would enable us to directly showcase our best practices,” he affirmed.
The company also has a $1.75 million pending bid with the court to acquire the rights to the Food Emporium name and is a “backup” bidder on several more A&P units.
In assessing Key Food’s future, Janeway reviewed the recent past. In his view, the metro NY market began to significantly change when AWI (White Rose) declared bankruptcy 14 months ago. That Chapter 11 action (and subsequent sale to C&S, which serves as the co-op’s primary distributor) gave Key an opportunity to recruit and eventually sign new members to its roster. Now, with the new A&P stores in the fold (all stores will be converted by the end of this month), the co-op is poised to grow exponentially over the next five years, and Janeway predicts sales will reach $3 billion annually.
“We want to collapse the marketplace underneath us,” he added, noting that more of Key’s competitors are vulnerable (he cited recently published news stories that put D’Agostino’s and Fairway on that list).
Janeway strongly believes the ability of his company to execute at a high level while delivering strong annual rebates to its members and potential members puts the co-op in a very enviable position for the future.
Michele Gissi, the company’s enthusiastic and talented marketing manager, provided a timeline of the organization which was founded in Brooklyn in 1937. She outlined Key’s new initiatives which include its objective to “become the premier market people choose in every community we serve.” She also detailed and emphasized the mission statements and differences between the primary company banners (Key Food/Fresh, Food Universe and Food Dynasty).
Gissi also revealed Key Food’s store brand platform, its millennial-oriented marketing strategy and updated the sell-out crowd on the co-op’s digital and social media upgrades as well as a multitude of collaborative marketing opportunities for vendors and manufacturers.
Overall, the 2015 Key Food annual meeting was one of the best of its type I’ve ever attended (and I’ve been doing this since 1973). The confab was filled with facts, devoid of process and even included a few laughs. And it was all done in two hours. Long live entrepreneurialism!
Acquisition Of Rite Aid By Walgreens Will Create 12,800 Unit Drug Chain, But FTC Role Will Loom Large
Walgreens Boots Alliance, Inc. (WBA) and Rite Aid Corporation announced October 27 that they have entered into a definitive agreement under which Walgreens Boots Alliance will acquire all outstanding shares of U.S. retail pharmacy chain Rite Aid for $9.00 per share in cash, for a total enterprise value of approximately $17.2 billion ($9.4 billion in cash), including acquired net debt. The purchase price represents a premium of 48 percent to the closing price per share on October 26, 2015, the day before the agreement was signed. The deal is expected to close in the second half of 2016.
The deal would bring together the nation’s largest and third largest drug chains and create a network of approximately 12,800 stores in the U.S. and nearly 18,000 units globally. In the Mid-Atlantic region, the newly combined enterprise (before potential FTC overlap rulings) would operate about 2,240 stores with sales of nearly $10.4 billion. By comparison, CVS Health runs about 7,800 stores nationally and almost 1,500 in the Mid-Atlantic.
The FTC will not only scrutinize the store overlap issues (in about a dozen states, store counts would increase 100-200 percent), but are also likely to examine whether the huge size of the new company would give it unfair clout with pharmacy-benefits managers. Walgreen acknowledged that it could be forced to divest up to 1,000 stores, but added that a figure of “less than half this number” would be more likely.
However, there are different issues surrounding this deal than say the Albertsons acquisition of Safeway (about 170 stores were divested) or even the pending Ahold-Delhaize merger (which the FTC has yet to rule on store overlaps). While it’s almost certain that the FTC will approve the deal (after the ExxonMobil deal was sanctioned in 1999, there seems to be little that’s anti-competitive in the FTC’s view), this transaction will certainly draw more government scrutiny than usual, simply because we’re dealing with people’s access to a key component of health care – prescription medications. Additionally, in the case of store proximities, we’re not comparing locations that are 1.5-2 miles apart, we’re literally talking about stores that are across the street from each other.
In a filing with the SEC, WBA CEO Stefano Pessina said his company has performed a thorough analysis of antitrust considerations, but regulators could come up with a different conclusion. The Italian-born Pessina, who took the helm of the company in July of this year, said he believes the U.S. market is ripe for consolidation, especially since the government is more involved in paying for health care (primarily through the Affordable Care Act).
However, the pharmacy industry continues to be squeezed for profits due to lower reimbursement rates from health insurers and the federal government over the past the past three years. Walgreens’s margins in its U.S. pharmacy business dipped to 26.9 percent for its most recent fiscal year ended August 31. In fiscal 2014, that margin was 28.2 percent. Walgreens Boots Alliance was created through the combination of Walgreens and Alliance Boots in December 2014. The company employs more than 370,000 people and has a presence in more than 25 countries.
In making the Rite Aid acquisition announcement, WBA said it is highly focused on building a differentiated in-store experience for health, wellness and beauty, and this combination will help accelerate Rite Aid’s own efforts toward that end. Once the acquisition closes, the Deerfield, IL-based drug and health/wellness chain plans to further transform Rite Aid’s stores to better meet consumer needs.
“Today’s announcement is another step in Walgreens Boots Alliance’s global development and continues our profitable growth strategy. In both mature and newer markets across the world, our approach is to advance and broaden the delivery of retail health, wellbeing and beauty products and services,” said CEO Pessina. “This combination will further strengthen our commitment to making quality healthcare accessible to more customers and patients. Our complementary retail pharmacy footprints in the U.S. will create an even better network, with more health and wellness solutions available in stores and online. Walgreens Boots Alliance will provide to Rite Aid its global expertise and resources to accelerate the delivery of integrated frontline care, and to offer innovative solutions for providers, payers and other entities in the U.S. healthcare system. Finally, this combination will generate a stronger base for sustainable growth and investment into Rite Aid stores, while realizing synergies over time.”
“Joining together with Walgreens Boots Alliance will enhance our ability to meet the health and wellness needs of Rite Aid’s customers while also delivering significant value to our shareholders,” said John Standley, chairman and CEO of Camp Hill, PA based Rite Aid. “This transaction is a testament to the hard work of all our associates to deliver a higher level of care to the patients and communities we serve. Together with Walgreens Boots Alliance, the Rite Aid team can continue to build upon this great work through access to increased capital that will enhance our store base and expand opportunities as part of the first global pharmacy-led, health and wellbeing enterprise.”
The transaction is expected to be accretive to Walgreens Boots Alliance’s adjusted earnings per share in its first full year after completion. Additionally, Walgreens Boots Alliance expects to realize synergies in excess of $1 billion. Upon completion of the merger, Rite Aid will be a wholly owned subsidiary of Walgreens Boots Alliance, and is expected to initially operate under its existing brand name. Working together, decisions will be made over time regarding the integration of the two companies, ultimately creating a fully harmonized portfolio of stores and infrastructure.
Round The Trade
Kroger’s $800 million acquisition of Roundy’s is an interesting deal, primarily because the nation’s largest pure-play supermarket operator is acquiring a “project” in the Milwaukee-based retailer. The retailer suffered a $9 million loss for the period ended October 3. Overall sales were flat, even when accounting for a 15.9 percent increase in its new Chicago-area new Mariano’s stores. Its other banners in Wisconsin – Pick ‘n Save, Metro Market and Copps – produced a 7.5 percent revenue decrease and comp store sales were down 3.4 percent. Clearly, this is an opportunity for Kroger to leverage and learn from Roundy’s CEO Bob Mariano’s (who will remain chief executive of that division) visionary entrepreneurial urban market skills while also creating significant penetration into the nation’s second largest market (Kroger currently operates about 15 Food 4 Less discount stores in the Chicagoland market). As for Roundy’s, the Kroger deal amounts to finding a bailout partner and an excellent one at that. The selling price of $3.60 per share for the 151-store regional chain represents a 65 percent increase. And with the struggles of its Wisconsin units and the large cap-ex investment needed to expand its Mariano’s banner in Chicago, Roundy’s long-term profit potential and stability were questionable…a few months ago, we reported that Wal-Mart has been pressuring suppliers to deliver lower costs. Several vendors we talked to at the time deemed this tactic unfair and designed to offset the cost of the retailer’s recent wage increase to a minimum of $9/hour for its associates and to fund its future e-commerce initiatives. On October 15, the mega mass merchant sent a letter to many suppliers stating it is rescinding previous trade agreements as part of a reemphasis on its everyday low price strategy. If Wal-Mart were as strong as it was a decade ago, this bullying tactic might have worked, but not today because of the changing market landscape and Wal-Mart’s still large but declining share of market. Some suppliers will certainly buckle to the pressure, but the dozen or so that I’ve talked to have told us they will hold their current ground. And, remember when Neighborhood Markets were going to be the key to Wal-Mart’s “go-to” growth plan? Reportedly, the Behemoth plans to reduce the number of NMs it will open during the next two years, citing its focus on e-commerce and its more profitable Super-Center operation…The Fresh Market, yet another company that’s had a recent rough go of it, is reportedly considering going private again. Founder and board chairman Ray Berry, who led the company’s effort to go public in 2010 and still owns a 4.1 percent stake in the upscale merchant, has reportedly reached out to several private equity firms to see if the upscale merchant can leave the tight scrutiny and pressure that are part of the publicly-trade world. The Greensboro, NC based retailer has struggled with same-store sales and earnings and has failed or is struggling in its attempts to enter new markets such as California (where it has already pulled out) and Texas. Additionally, the company recently named former Food Lion president Rick Anicetti as CEO. He replaced Craig Carlock, who was terminated last January…according to Frans Muller, CEO of Delhaize (and future deputy chief executive and chief integration officer of Ahold Delhaize), both companies are making good progress as they work toward a mid-2016 completion of their merger agreement, which was announced this past June. Muller made his remarks during a conference call with analysts following the release of Delhaize earnings late last month, adding that he and Ahold CEO Dick Boer are planning several road shows this month into early December. In the meantime, Muller is focusing on Food Lion’s “Easy, Fresh & Affordable (EF&A)” rebranding initiative. The Salisbury, NC unit recently completed the revampment of its 162 units in the Raleigh, NC market, which cost the retailer approximately $250 million for store remodels, price reductions and associate training. Muller indicated that he is pleased with the early progress of EF&A and plans to expand those efforts into other Food Lion markets next year…Wegmans confirmed that it will open a new 120,000 square foot store in Lancaster, PA, most likely in 2018. The new unit will be the anchor of a mixed use large shopping project (The Crossings at Conestoga Creek) that is being developed by The High Real Estate Group. The new store will be the company’s second Central Pennsylvania location (it Mechanicsburg, PA store opened in 2007) and 17th overall in the Keystone State (its newest store opened on November 8 in Concordville)…it didn’t take long for private equity firms 3G and Berkshire Hathaway to make radical changes to its recent Kraft acquisition. Over the next two years, the company, now known as Kraft Heinz, will close seven manufacturing plants in the U.S. and Canada, eliminating 2,600 jobs. That’s in addition to the whacking of another 2,500 non-factory jobs that the new ownership group announced in August. An ancillary ripple from these dramatic moves is the shifting of Heinz’s sales responsibilities from food broker Acosta to Kraft’s direct sales force. 3G/ Berkshire Hathaway acquired Heinz in 2013.
Local Notes
I was very saddened to hear of the passing of Robert Weis, former chairman of Weis Markets, the Sunbury, PA-based retailer that was started by his father and uncle in 1912. Bob Weis was really a mountain of a man who led his company and his life with great dignity. He was an old school gentleman, treating people with respect while going about his daily life with selflessness and great humility. If you met Bob on the street you’d never suspect his business acumen, his generosity or his deep love of his family – his wife of 57 years, Pat; his three children, Jonathan (currently Weis’ chairman and CEO), Colleen and Jennifer (Monsky). Bob Weis spent nearly 70 years with the company and since being named chairman of the 163 store regional chain in 1995, Weis has continued to add stores while remodeling more than 100 units. Perhaps his shining moment came in 2001, when heirs of his first cousin (and former CEO) Sig Weis attempted to force a sale of the company. Bob Weis stood his ground and ultimately purchased the stock of the “Janet Weis faction,” effectively removing them from adversely impacting the organization. “Mr. Weis was an exceptional leader who helped build and grow an extremely successful company from the ground up,” said Kurt Schertle, Weis’ chief operating officer. “His career was one of sustained accomplishment and quiet excellence. He was also a loyal man who was devoted and proud of his family and associates. Here at the company that bears his name, we will remember him with fondness and respect for his decency and achievements.” Couldn’t have said it any better. Also at Weis, the regional chain reported strong third quarter sales for the period ended September 26. Overall sales rose 4.1 percent to $711.9 million while comparable store revenue increased by a healthy 4.0 percent compared to the third quarter in 2014. However, Weis announced it would delay its third quarter earnings data “in order to complete a review and analysis of self-insurance reserves to determine if any adjustments to its historical financial statements are necessary.” The retailer said it expects to file its Q3 report on Form 10-Q prior to December 1. “Because the review is ongoing, no assurances can be given as to the definitive date on which the Form 10-Q will be filed,” Weis stated. Specifically, it added that while researching alternative methods to calculate retained claim liability for the company’s self-insured workers’ compensation and general liability insurance programs, it was determined that adjustments would be necessary to the prior application of actuarial methods used to estimate the obligation of future payments resulting from claims due to past events. “Although we are not yet in a position to estimate the amount of any required adjustments, our current expectation is that the principal line items impacted in the company’s consolidated financial statements are accrued self-insurance, deferred tax liabilities, retained earnings, and operating, general, and administrative expenses.”…down the road apiece from Sunbury, Ahold USA’s third quarter financials were released and the numbers remained only slightly positive. Corporately, Ahold was helped by currency conversions as the dollar remained very strong against the euro. Excluding fuel, AUSA’s identical store sales increased 0.4 percent and underlying operating income in was up by 6.8 percent to $227 million. “As part of our program to improve our customer proposition, we are continuing the roll-out of our new produce department format, launching it to another 149 stores during the quarter, bringing the total to 316 stores. We are encouraged by the volume uplift that we see in the converted produce departments. With the exception of Stop & Shop New England, volume market share grew in comparison to last year. Our online business Peapod improved the capacity usage at its newest distribution facility and achieved double-digit sales growth,” Ahold stated in its earnings release. However, there was one curious paragraph in that announcement in which Ahold acknowledged its sales trends continued to improve in part due to an “adjustment made as a result of a business disruption at one of Stop & Shop’s New England division main competitors.” The earnings announcement failed to elaborate on the “adjustment,” but when reading the agate type in one of its financial tables (Ahold USA net sales in dollars), the disruption factor created by Demoulas Market Basket’s rapid recovery from its work stoppage of last summer could be clearly seen – Ahold USA’s sales declined $81 million this period against its short-term windfall gains of last summer. In the post-release earnings call with financial analysts, CEO Dick Boer said that the company would open a couple smaller format “bfresh” units over the next year while it evaluates the overall concept as a potential expansion format in metropolitan areas. A second bfresh recently opened in Fairfield, CT…the news at Fairway Market continues to worsen. Earnings for its third quarter ended September 27 were poor, with the Manhattan-based upscale merchant losing $12 million in the period (this follows a loss of $13.9 million last quarter). Other metrics were weak, too, with overall sales plummeting 7.3 percent to $178.9 million, comp store revenue decreasing 6.5 percent, traffic declining 9.2 percent which was offset slightly by a 3 percent increase in average basket size. With only $30 million in cash on hand, not surprisingly the regional merchant is seeking new and alternative financing. In the follow up conference call, CEO Jack Murphy reaffirmed that Fairway would open a former 40,000 square feet Waldbaums on Ralph Avenue in the Georgetown section of Brooklyn next spring, however that store still appears on A&P’s auction list as being unsold. He added that his company would continue to pursue other new sites in the 22,000 square foot range but acknowledged further expansion would require permanent financing. And, just before we went to press, we learned that Fairway won’t be inhabiting its planned new store on Greenwich Street in the Tribeca section of Manhattan at all. In the past year, Fairway officials pushed back the store’s opening and downsized it from 52,000 square feet to 40,000 square feet. Now Target has confirmed that it will develop a two level, 45,000 square foot store at that location. At this point, unless it can find new investors, Fairway is a prime candidate to be sold or broken up, because by this time next year (based on recent trends) the “like no other market” retailer will truly be like no market at all…don’t be surprised if Acme picks up a handful of other A&P units once the store closing process evolves in the month…Target is expanding its “Curbside” service program to all its Philadelphia stores and select units in the Metro New York market, too. The “Curbside” program was created through a partnership between the big mass merchant and an Internet startup firm (shopcurbside.com). The model is essentially a “bricks and clicks” one that allows customers to create web-driven orders that can be picked up without ever leaving their vehicles…kudos to Leslie Sarasin, president of the Food Marketing Institute, who gave an enlightening talk to food marketing students at St. Joseph’s University last month as part of the annual Pat McCarthy speaker series. Sarasin provided an excellent overview of the importance of FMI to junior and senior students while urging them to pursue their futures with passion and dedication. However, there was one obvious negative to report: the poor student turnout, which was surprising because the previous 20 McCarthy lectures were always well attended. As our Maria Maggio reported last month, there’s a noticeable disconnect occurring with the food marketing program at the country’ biggest and best academic training ground for future grocery industry professionals. The new (dare I say, younger) breed of “academics” now teaching the kids appear, from my view, as either indifferent or
“anti” promoting the university to the business communities that their students will ultimately migrate to. I get the impression that “it’s not in my job description” to make it mandatory to attend functions like the McCarthy lecture or effectively promote other Academy of Food marketing events like last month’s Food Summit (where the attendance was 60 as compared to packed houses in previous years). The food marketing program decline seemed to coincide with the great Dr. Richard George’s retirement from SJU in 2012. The “academics” need to realize that not only do their own students need to create a visceral connection with food companies they might be working for someday, they also need to realize that it’s the funding from these very same retailers and manufacturers that pay their salaries…BrightFarms will exclusively supply Ahold USA’s Giant/Landover and Martin’s stores and the retailer’s Peapod delivery unit, with fresh produce from the company’s new greenhouse in Culpeper County, VA. The 150,000 square foot facility, which will be completed next month, will service Ahold USA stores in Virginia, Maryland, Delaware and Washington, DC with spinach, arugula, Asian greens, spring mix, kale, tomatoes and baby green blends…a few obits of note to report this month. Tom Stemberg, co-founder (with the late, great Leo Kahn) of Staples, has passed away at the age of 66. Tom, who began his career in the grocery business with Star Markets in Boston and was also president of First National Stores before he and Kahn (who had sold his grocery store chain, Purity Supreme), hit pay dirt by applying the warehouse style grocery store model to the office supply business. I spent a lot of time with Tom in the mid to late 70s and knew his fierce competitive spirit and great intellect would ultimately lead to future business success…also leaving us was legendary actress Maureen O’Hara. Born Maureen FitzSimons in 1920 near Dublin, Ireland, the actress began her screen career in 1937, a career that continued until 2006. Among her most notable roles were as the daughter of a Welsh miner in “How Green Was My Valley” (1941), the mother of young Natalie Wood in the Christmas classic “Miracle On 34th Street” (1947) and – in what I consider her best role – as the feisty Irish dancer in “The Quiet Man” (1952)…also finding “Happy Days” was Al Molinaro, the actor best known for playing diner owner Al Delvecchio on the iconic sitcom which aired from 1974-1984. Molinaro passed away last month at the age of 96. He didn’t start acting until his mid-forties and his first major role prior to “Happy Days” was as Murray the Cop on TV’s “Odd Couple.”…it is with great personal sadness that I report the death of Allen Toussaint, the legendary New Orleans songwriter and singer who passed away on November 9 after suffering a heart attack following a concert in Madrid, Spain. I had the pleasure of seeing Toussaint many times, including his annual performance at Jazzfest in New Orleans. His skill (as a singer and piano player) and recognition of his native culture made him a unique entertainer. Primarily a songwriter, Toussaint wrote hundreds of tunes, including many that helped define the New Orleans rock, jazz and funk style of the 1950s, 60s and 70s that were made famous by other artists. Those included “Working in a Coal Mine” (Lee Dorsey); “Mother-in-Law” (Ernie K. Doe); “Get Out of My Life Woman” (Paul Butterfield); “Fortune Teller” (Rolling Stones); and “Southern Nights” (Glen Campbell). Toussaint, 77, was inducted into the Rock and Roll Hall of Fame in 1998 and was scheduled to perform a benefit concert on December 8 in New Orleans with Paul Simon. I’ll miss his gentlemanly manner and his awesome talent.