Outlook 2016: ‘Speed Of Game’ Dictates More Change On Horizon
If the number of industry changes in 2015 didn’t grab your attention, tighten your seat belts, because the next 12 months promise more disruption and enlightenment.
Just in the Mid-Atlantic alone, by the time 2016 ends the Ahold-Delhaize merger will have been completed, Lidl will likely have about 70 leases signed, two distribution centers nearly completed (and a possible third warehouse in Aberdeen, MD announced) and Albertsons (Safeway, Acme, et al) should be a publicly-traded company. Also going the IPO route is another Cerberus-linked enterprise, Save-A-Lot (S-A-L), which would then become separated from its current parent Supervalu. Relatedly, with brilliant CEO Sam Duncan stepping down as SVU’s CEO next month, will the company become a pure play wholesaler and look to sell its corporately-owned retail division (Shoppers, Farm Fresh, etc.)? And could it sustain itself as a publicly-held company if it’s only a grocery wholesaler?
You want some more possible changes? How many stores will the FTC mandate that Walgreens sell as it attempts to complete its purchase of rival drug chain Rite Aid? Similarly, how many stores will the FTC force Ahold USA and Delhaize America to divest to complete their $28 billion deal, which is headed for a mid-2016 completion date. By this time next year, we expect about 60-70 former A&P stores to remain dark. However, as the new year begins, approximately 20 retail organizations have acquired about 175 of the available 296 A&P stores. The volume increases we’ve already seen from those refurbished stores that have reopened has been fairly significant and we expect at least another 35 deals to be made between landlords and prospective interested food retailers who will shortly be able to negotiate more freely without bankruptcy court or union barriers.
How about a few more to consider? Can Fairway Market survive? Can The Fresh Market regain its mojo (especially in the Mid-Atlantic) now that CEO Rick Anicetti and CMO Pamela Kohn have joined the upscale merchant? How much of a disrupter will Wegmans be in the Richmond market when its two new stores open later in 2016? Will Whole Foods rebound from what was arguably the worst year in its history? And then there’s Wal-Mart. Can the Behemoth become a game changer again? Or, will the still powerful retailer continue to be its own worst enemy by not significantly improving service levels or associate morale? And what about family-owned regional chains operating in the Northeast such as Weis Markets, Price Chopper, Big Y and Giant Eagle? Would they consider selling or listening to offers from the likes of Kroger, Ahold (where there’s no or limited market overlap), Albertsons or private equity organizations?
Lots to ponder. The last five years have shown us that just surviving the obstacle course is challenging enough, not even counting those independents or regional chains that no longer have the same passion for the business that they or their elders once had. There’s no shame in selling out given the emotional and financial pressures created by the current landscape.
The retail food business has never been one for the meek. Now the odds against success are even greater. Expect more change.
Save-A-Lot Makes It Official: Files With SEC For IPO Plan
On January 7, Supervalu announced that it has filed an initial Form 10 Registration Statement with the U.S. Securities and Exchange Commission in connection with the possible spin-off of its Save-A-Lot business into a separate, publicly traded company.
Upon completion of the separation, Supervalu stockholders will own at least 80.1 percent of the outstanding shares of common stock of Save-A-Lot.
“We believe that separating Save-A-Lot from Supervalu so that it can operate as an independent, publicly traded company is in the best interests of both Supervalu and Save-A-Lot. As two distinct publicly traded companies, Supervalu and Save-A-Lot will be better positioned to focus on its respective businesses, customers and strategic priorities and to capitalize on growth opportunities. After the separation, Supervalu and Save-A-Lot will each strive to be an industry leader in terms of both products and services in their respective businesses. We believe Supervalu will be able to focus on providing wholesale distribution services to independent retail customers and operating its five regionally based traditional-format grocery banners. Save-A-Lot will continue to be a leader in hard discount grocery retailing in the United States,” CEO Sam Duncan wrote in a letter to shareholders. After three years at the helm, Duncan will be retiring as Supervalu’s chief executive next month.
In December, industry veteran and former A&P CEO Eric Claus was named chief executive for Save-A-Lot. He replaced Ritchie Casteel, who will be staying on as president of the soon-to-be publicly-traded discount chain.
“Our vision is to be the hard discount retailer of choice for value-seeking shoppers,” said Claus. “Each store’s merchandising mix is tailored for local preferences through the use of demographic and ethnic specific product offerings. Our private-label program, which is a key driver of our value offering and our Save-A-Lot brand awareness, is responsible for a significant portion of our sales.”
In describing some of the details of issuing the IPO, Supervalu stated that the separation will be completed by way of a pro rata distribution of shares of Save-A-Lot common stock to Supervalu stockholders of record as of the close of business when the IPO is officially launched.
Each Supervalu stockholder will receive one share of Save-A-Lot common stock for every share of Supervalu common stock held by such stockholder on the record date. The distribution of these shares will be made in book-entry form, which means that no physical share certificates will be issued. Following the separation, stockholders may request that their shares of Save-A-Lot common stock be transferred to a brokerage or other account at any time. No fractional shares of Save-A-Lot common stock will be issued. Fractional shares of Save-A-Lot common stock that Supervalu stockholders of record would otherwise be entitled to receive in the distribution will be aggregated and sold in the public market by the distribution agent. The aggregate net cash proceeds of such sales will be distributed ratably to those stockholders who would otherwise have received fractional shares of Save-A-Lot common stock.
The distribution of Save-A-Lot common stock is intended to be tax-free, for U.S. federal income tax purposes, to stockholders except with respect to cash received in lieu of fractional shares. The prospectus said that share distribution does not require stockholder approval, nor do holders need to take any action to receive their shares of Save-A-Lot common stock. Immediately following the separation, shareholders will own common stock in Supervalu and Save-A-Lot. Supervalu’s common stock will continue to trade on the New York Stock Exchange under the symbol “SVU.” It is expected that Save-A-Lot common stock will be also listed on the NYSE under a yet-undisclosed new symbol.
Supervalu first announced in July 2015 that it was exploring a separation of its Save-A-Lot business, and that as part of that process it had begun preparations to allow for a possible spin-off of Save-A-Lot into a stand-alone public company. With the filing of the Form 10, Supervalu is continuing preparations to separate Save-A-Lot.
As of September 12, 2015, Save-A- Lot operated 441 corporately-owned stores and provided wholesale distribution to 901 licensed (franchised) stores. Save-A-Lot’s network spans 38 stores as well as units in the Caribbean and Central America. Fiscal 2015 sales were $4.6 billion with approximately 57 percent of company revenue derived from its licensed stores. Earnings were $84 million for the 12 months ended February 28, 2015.
‘Round The Trade
Whole Foods agreed to pay the piper last month when it said it would cough up $500K to resolve its overpricing problem with some bulk and pre-packaged items at its nine New York City stores. As part of the settlement agreement (the city of New York was originally seeking $1.5 million), WFM is now mandated to conduct quarterly in-store audits at all of its Big Apple units. The Austin, TX merchant also announced that it is seeking to raise $1 billion in a debt offering designed to repurchase $1 billion of its own stock. Credit ratings firm Standard & Poor’s clearly wasn’t doing back flips over the announcement when it said, “Our ratings and the negative outlook on the corporate credit rating reflect our view that Whole Foods remains the leader in the natural and organic sub segment of the highly fragmented food retail industry, yet its overall share of the food retail industry is still relatively small and under pressure. Moreover, in a strategic shift in response to increased penetration of grocer peers into the natural and organics space, Whole Foods has noted that it expects to be more price competitive going forward, and could face earnings pressure in the near term as it faces more competition than it has previously experienced,” S&P said in a release. It then gave the offering a “BBB” rating, the bottom rung of the investment grade credit ladder… not surprisingly the Federal Trade Commission (FTC) has made a “second request” for more information from Walgreens and Rite Aid concerning Walgreens’ attempted $9.4 billion acquisition of Rite Aid which was announced in late October. While this procedure is fairly standard, there certainly will be some red flags raised when it comes to store overlaps and market concentration. Those concerns were also noted by Scott Mushkin, analyst for Wolfe Research in New York, who stated in a recent report that the deal “seems to go against the spirit of antitrust laws in the U.S.” He cited four reasons why the planned deal might be in trouble: “it appears to create significant market concentration; it unilaterally reduces competition; it would create a reduction of choices for both drug plans and consumers; and (it would create) the potential for a significant transfer of wealth from drug makers to the combined company.” Walgreens already stated that it might have to divest as many as 1,000 stores, but still expects the deal to be completed in the second half of next year… we learned that Christopher Baldwin will become CEO of BJ’s Wholesale Club, effective February 1. Baldwin, who just joined the Natick, MA-based club retailer in August, will succeed Laura Sen, who will become the company’s non-executive chairman on that same date. Sen has been with BJ’s for more than 25 years and was named chief executive in 2009. Baldwin, who previously toiled for P&G, Hershey and Nabisco, joined BJ’s from Hess Retail where he was CEO. The large club merchant is owed by private equity firms CVC Capital Partners and Leonard Green & Associates… we’re hearing that Wegmans is close to finalizing a deal to build its first Washington, DC store in the Walter Reed Hospital redevelopment and is continuing its New England expansion. The uber-retailer will build a new supermarket in the Boston suburb of Medford, MA, joining its four existing stores in Northborough, Newton, Burlington and Westwood. Another new Wegmans is slated for Natick, MA and the big regional chain is close to inking a deal near Fenway Park and has been reportedly eyeing sights as far south as Raleigh, NC. In the past two months, the company has opened a new store in Concordville, PA and announced it will be building another new store in Lancaster, PA. Next year, Wegmans plans to open four new units – in Owings Mills, MD and in three new Virginia locales, two in the Richmond area and another in the college city of Charlottesville…it’s been pretty impressive to watch the “before and after” versions of many of the former A&P stores that were closed and subsequently reopened by new operators. Although I haven’t toured all of the acquiring retailers’ revamped units, I can attest that all of stores I have visited are in significantly better condition than the craphouses they had been before they were purchased. Companies whose upgrades were particularly notable included Acme Markets (71 stores, all of which were converted in seven weeks); Stop & Shop (25 stores – all converted within a month); Key Food (25 stores, also converted within a month) and Foodtown (five stores). Other multiple-store A&P buyers such as Wakefern (13 stores), Best Yet (nine stores) and Bogopa (five stores) are currently working on their remodelings and will open their stores later this year.
Local Notes
C&S Wholesale Grocers has agreed to sell its Nell’s Shurfine Market in Carlisle, PA to Ahold USA, which will convert the 51,800 square foot unit to a Giant store by late March. The former Nell’s unit will be the second Giant store in Carlisle, where the company also maintains its U.S. corporate headquarters. This is the second Nell’s stores that C&S has sold since it acquired former parent firm AWI in late 2014 – Weis Markets acquired the Nell’s store in Hanover, PA last year. Unrelated to the Nell’s acquisition was an earlier announcement noting that Ahold USA would be closing three Martin’s Food Markets (Giant/Carlisle) in the Richmond market – Mechanicsville, Petersburg and Richmond – next summer. According to Ahold USA, all three leases were set to expire, “and a business decision was made not to extend the leases.” Martin’s has struggled in the Richmond market ever since acquiring 28 Ukrop’s stores in 2010. A bigger impact than closing three underperforming stores will be the FTC’s decision concerning store overlaps between Martin’s and Food Lion. The Richmond area is the most concentrated of all markets for the soon-to-be-merged Ahold and Delhaize organizations, as they await a ruling from the FTC on all store conflicts, which could come early next year. As for C&S, the nation’s largest grocery wholesaler will add Shaw’s/Star Markets’ frozen food business to its portfolio effective March 7. According to the West Bridgewater, MA-based retailer, “This new business venture will allow the expansion of Shaw’s and Star Market dry grocery warehouse capacity at our Wells, ME facility to meet the company’s needs now and in the future. This change will not result in any job losses or layoffs in the distribution center or our transportation division, Clifford W. Perham Transportation, Inc.”… I haven’t written too much recently about the pending debut of Lidl in the U.S. in 2018. That’s kind of by design, because the company is still in the process of signing leases and adding personnel to its new U.S. division, which will be based in Arlington, VA, and plans to operate several hundred stores from New York to Georgia when it opens its first batch of stores under the guidance of Brendan Proctor, former president of Lidl’s Irish division. What I can report is that we believe that Lidl has completed about 40 lease signings including its most recent one (to our knowledge), a 4.85 acre site in Chesterfield County, VA near the Chesterfield Towne Center. Lidl paid $3.23 million for that tract and plans to build a 36,170 square foot store there. It’s clear that Lidl is not skimping on any aspect of its U.S. investment. The majority of its stores are going to be built from the ground up and should be about twice as large as current Aldi units in the U.S. (the competitor it’s most compared to). There will be a significant perishable presence in all stores, and much like its highly successful European operation, price will still serve as the prime differential component. I’ve spoken to about a dozen vendors who have recently called on Lidl and most said that offering top-notch product quality is a priority. Several added that Lidl is positioning itself to occupy the space between Trader Joe’s and Whole Foods. That’s a pretty ambitious goal. We will continue to compile more research and hard data and hope to have a more detailed story about Lidl in a couple of months…John Boyle has joined Natural Markets Food Group (NMFG), the Canadian firm which owns Mrs. Green’s, as its new chief merchandising officer (CMO). The former Haggen, Supervalu and Albertsons exec was most recently with New Seasons Market, Portland OR, which was also the last pit stop for CEO Pat Brown before he was recruited to lead the struggling Mrs. Green’s operation about 18 months ago. Additionally, parent firm Natural Markets Food Group (owned by Canadian hedge fund Catalyst Capital Management) opened two new stores last week – a Mrs. Green’s store in Winnetka, IL and a relocated larger unit in Edmonton, Alberta under the Planet Organic banner. Although I think NMFG has a long way to go to produce the volumes necessary to successfully operate fresh and organic (and high shrink) stores, new CEO Brown has done a good job of regaining associate loyalty while also restoring company focus…another CMO has joined another struggling operation. The Fresh Market has hired Pamela Kohn as its new executive VP and chief merchant. Kohn comes to the Greensboro, NC merchant from Wal-Mart where she spent 12 years and also has conventional supermarket experience with Food Lion and Stop & Shop…the city of Baltimore opened its seventh “virtual supermarket” last month serving the N.M. Carroll Manor senior apartments in the Harlem Park section of the city. The online-driven initiative allows residents of underserved area in the city access to affordable healthy food. Klein’s ShopRite is spearheading the “virtual supermarket” effort and will deliver groceries once a week to Carroll Manor, where residents can pick them up…another Wakefern member, Village Super Markets, reported an earnings increase of 14.3 percent while both total and comp store sales rose 2.6 percent in its first quarter ended October 24. The Springfield, NJ-based operator of 29 stores (including two in Maryland) attributed the revenue increase to larger replacement stores in Morristown and Union, NJ and the expansion of its Sterling, NJ ShopRite. However, when earnings were adjusted for charges a year ago, profits declined 21 percent due to higher operating and administrative expense the publicly-traded merchant disclosed…last month, we learned that private equity firm Arbor Investments has acquired a majority equity stake in DPI Specialty Foods, Inc. from Dublin, Ireland-based Ornua Co-Operative Limited. DPI is based in Ontario, CA and operates a large Mid-Atlantic distribution center in Upper Marlboro, MD. It currently employs approximately 1,800 employees and had annual revenues in excess of $1 billion. Ornua will retain a minority equity interest in the company and DPI’s existing senior management will continue to lead the organization. “The sale of DPI is consistent with Ornua’s strategy of reallocating capital and assets to support our continuing investments in enhanced routes to market for Irish dairy products through our businesses across global markets,” commented John Jordan, Ornua Foods CEO for Europe and Latin America. “As we evaluated potential acquirers, Arbor and its exclusive focus and stellar reputation in the food and beverage industry stood out. We believe that Arbor is the optimal equity partner to drive continued growth at DPI.” Founded in 1999 and headquartered in Chicago, Arbor Investments focuses exclusively on acquiring companies in the food, beverage and related industries. The firm has acquired or invested in more than 40 food, beverage and related companies in North America including Concord Foods, Fieldbrook Foods and Hudson Baking…we have a few obituaries to report this month. Just before presstime, we learned of the passing of Pete Manos, former CEO of Giant/Landover, at the age of 79. I could fill a
small library with memories from the relationship he had with Dick Bestany and me. He, along with his mentor Izzy Cohen, not only accelerated our credibility and visibility in the early years of Food World, Pete was also a dear friend with whom I shared so many interesting and hilarious times. Pete captured his own persona accurately when, upon
his retirement in 1999, he said, “While there is much I will miss about our great company, I will miss the daily companionship of the people in the Giant family most of all. They have been an inspiration to me and have made my job easier.” I can attest many Giant associates felt the same way. Pete, I love ya and I’ll miss you dearly…Natalie Cole, Grammy winning singer and daughter of the late and great Nat King Cole, died late last month at the too-young age of 65. She received two Grammy awards in 1976 for best new artist and best R&B artist for her song “This Will Be (An Everlasting Love),” which was later revived as the theme for a years’ long eHarmony ad campaign. Cole possessed a beautiful voice and her music was marked by its versatility, combining the influences of rock, jazz and soul. In the early 1990s, after emerging from what she described as a painful and destructive drug addiction, she released my favorite of her albums, “Unforgettable: With Love,” which featured a technology-assisted duet with her father of one his biggest hits. Also passing on last month was Wayne Rogers. While his acting career spanned 44 years, he will certainly be best remembered for his role as wisecracking Army surgeon “Trapper” John McIntyre in the first three seasons on the iconic TV series “M*A*S*H.” Rogers continued acting full-time until the early 1990s, but then scaled back much of work and put his Princeton education to good use as a money manager, investor and advisor. He was 82… entering basketball heaven last month was “Meadowlark” Lemon, the “Clown Prince of Basketball” who played for the Harlem Globetrotters for more than 30 years. Known for his amazing trick shot wizardry and his hilarious court jester antics, Lemon was first a college basketball star at Florida A&M before joining the Globetrotters in 1954. Wilt Chamberlain called Lemon the greatest basketball player of all-time (Chamberlain had a short stint with the Globetrotters, and like Lemon, is a member of the Naismith Basketball Hall of Fame). A man who brought a lot of smiles to the faces of many children, he was 83…I’m also very sad to report the death of Mike Keba, a friend, mentor and – simply said – wonderful person. Mike passed away late last month at the age of 87. When Mike joined Best-Met Publishing as a sales rep in 1993, it was immediately clear that he was much more than just another salesman. His unbelievable knowledge of the business from his days at A&P and Wetterau was impressive by itself, but his wisdom, professionalism and kind manner were what made Mike stand apart from most others. Even as he got older and endured the pain of losing his beloved wife Rosemary in 2003, as well as other physical maladies, Mike Keba still seemed young at heart to me. He always talked about the future and importance of doing the right thing. May you rest in peace, my friend…and before I close this editorial, I want to give a tip of the hat to my retired partner, Dick Bestany, who officially penned his last column for this issue (page 38). Dick’s health remains good, but as he said “there comes a time when all things have to end.” That time has come for Dick’s In & Around Food World column, and I want to thank Dick for continuing to write his “social diary” for nearly a decade after he left the day-to-day business.