Retailers Find A Little More Breathing Room, But Markets Still Overstored, Competition Fierce
You want the optimistic view? Comparable store sales increases over the past 12 months for many retailers averaged a solid three percent. Deflation wasn’t a huge factor, either (except in meat) and no new retailers of significance entered the Mid-Atlantic market during the past 12 months. So, it must have been a pretty good year for many operators, right?
That’s accurate, if you’re comparing scorecards over the last eight years. So why aren’t retailers feeling all that bullish about their relative recent progress? The primary reason is that market conditions really haven’t changed much in the past decade and the windows of opportunity for most operators (even including the most successful ones) remain narrow and somewhat cloudy
From a consumer perspective, it’s a great time to be shopper: so many stores in every market, tremendous retail style diversity and expanding e-commerce options. Of course, those market realities have made food retailing more challenging than ever and in a business that operates on one percent margins and is extremely labor and capital intensive, things can turn south quickly.
So, for small victories and a general respite from the woes of the recent recession, retailers as a whole tell us that they feel relieved (but not satisfied) that they were able to move the sales needle forward in the last year. But they remain cautious about the future.
Specifically in the Baltimore-Washington market, progress for some was harder to define.
I’ll try to measure that progress (or lack of it) with my annual analysis of the key retailers in the market.
Giant Food – Internally, progress was made with talented leader Gordon Reid generating improved energy and focus. Some of that inspiration carried to its 164 supermarkets – but still not enough. Giant’s visceral problems remain in the stores where there’s too little labor, not enough training and still too much apathy (although that’s improved a bit). But perhaps even a larger issue is that the 80-year-old retailer’s overall consumer perception has devolved to one of a very middle-of-the-road operator, an image that’s been declining since Ahold purchased the Landover, MD operator in 1998. The truth is that Giant’s post-Ahold image is more deeply imprinted in today’s consumer than any memory from the glory days of Izzy Cohen. With overall sales declining for the fifth consecutive year, perhaps AUSA COO James McCann ought to modify his “good to great” mantra to “mediocre but trying to improve.” Let’s see if the Ahold Delhaize merger has any tangible impact on Giant’s future revenues and its customer perception.
Safeway – While forward progress is very difficult to achieve in a crowded field, Safeway proved it could be done. With a full year to measure Safeway decentralized operating model (which includes sharper pricing, more local product and greater empowerment to store level associates) the results were very noticeable. Sales and market share both increased. And for maybe the only period in the company’s history in the B-W market, new parent firm Albertsons made Safeway-Eastern feel relevant and important. In any competitive battle you’ve got to have the players to succeed (and certainly people like Steve Burnham, Tom Lofland and Dean Willhite have the ability), but you’ve also got to have a system that works, as is the case in Safeway’s impressive turnaround. Still, there’s one big corporate challenge that lies ahead: after Albertson’s IPO is launched (likely later this year) and with significant debt to manage, can the company continue to operate in the same non-bureaucratic manner that it has since 2013 when it began its buying spree of banners – Acme, Shaw’s, Jewel and – ultimately – Safeway?
Shoppers Food & Pharmacy – As my colleague Duke Winston wrote about sister firm Farm Fresh, “Can parent Supervalu provide some help?” If there’s one channel that’s exploded in the past decade it’s been the “extreme value” portal where Shoppers once thrived. Wal-Mart, Aldi, PriceRite – and soon Lidl – occupy that space, and Shoppers is almost nowhere to be found. That’s really sad, because Supervalu decided the fate of what once was one its best corporate properties by not feeding the kitty and ignoring the fact that it was once gaining market share at the expense of leaders Safeway and Giant. Now in fourth place with sales and share diminishing, the bigger question remains: Does Supervalu even have Shoppers survival, much less its prosperity, in its future plans?
Wal-Mart – An improved year for the Behemoth. Three new SuperCenters aided sales, but its ID revenue also increased and some of the new in-store merchandising plans implemented by top execs Doug McMillon (CEO) and Greg Foran (head of U.S. operations) have begun to pay dividends (although the company still has a long ways to go to get to sea level in the areas of in-stock conditions and associate empowerment). While Wal-Mart is spending a ton of money to upgrade its e-commerce platform (to try to stay within hailing distance of Amazon – the Godzilla of that universe), I believe the world’s largest retailer should have allocated more capital toward improvements in its existing stores. After all, before all the lawsuits and the declining service levels, what made Wal-Mart so feared was its raw ability to “sell more stuff.” If it can clean up its store-related issues, the Behemoth’s 100 mph fastball will become even more powerful. And that’s a scary thought.
Harris Teeter – Now under the skilled leadership of Rod Antolock, Harris Teeter didn’t miss a beat this year and continued to amass healthy volumes and deliver an excellent overall store presentation to its customers. The still mostly-segregated division of Kroger produced solid ID sales and continued with its aggressive new store program (two new units in the past year). Harris Teeter has now fully assumed the spot that Giant used to occupy with extremely well run stores and an enlightened management team.
Wegmans – When you average about $1.5 million a week, consumers praise you as one of the best retailers in America (in any retail industry) and your own associates acknowledge their happiness, what else do you need? Not much. But one of the secrets of Wegmans’ success is that it never loses focus or intensity. They’ve got talented management who are great teachers who are able to lead by example. Now with nearly 90 stores, the Wegmans model is almost impossible to replicate or even accurately describe. And the beat goes on with seven new units expected to open in the Mid-Atlantic market over the next two years, not counting likely new (but not confirmed) stores in Newport News, VA and in Washington, DC (Walter Reed project). It’s hard to find fault with the market’s most dynamic operator, but a question worth asking is whether current leadership can continue to maintain its white hot pace as it opens new stores in an expanding geographic territory.
A few more points to note as it relates to the future. With approximately 70 Food Lion and Giant/Landover stores about to be sold in the Mid-Atlantic, the market makeup is sure to change by this time next year. Weis, Safeway and Publix? They could all be increasing factors in the region if they acquire a sizeable number of those divested stores.
And the following year, Lidl will make its market entry. We’ve researched that in Maryland, Delaware, Pennsylvania and Virginia alone, Lidl has acquired land to build approximately 70 stores, with that list expanding monthly. Mars Super Markets is exiting the market after 73 years and the number of independent retailers (except for the ethnic merchants) continues to decline. For all the challenges that retailers have faced over the past decade and all the market tumult that has subsequently resulted, the next 12 months promise to be one of the most active periods in the recent history of the Mid-Atlantic region.
For A Change, There’s Something To Cheer About At Wal-Mart Annual Meeting
The past few years have marked a pretty glum period in the 54-year history of Wal-Mart. Identical store sales were consistently flat (or slightly negative), earnings were impacted and the Behemoth was still defending its self from a range of seemingly age-old issues, from service levels in its stores to the morale of its associates. What might have been worse is that Wall Street perceived the Bentonville, AR retailer as losing relevance both in the bricks and mortar world and with its digital platform.
While significant issues remain, that perception is changing in large part due to the efforts of Doug McMillon, the Wal-Mart lifer who was named chief executive 28 months ago. At its annual shareholders’ meeting held earlier this month – again at the University of Walton, er, I mean Arkansas – McMillon noted, “There is momentum in this business. It’s real. I can feel it.”
The festivities began with the company’s usual barrage of entertainment, which included pop singers Katy Perry, Maxwell and Nick Jonas along with late-night comedian James Corden. A sellout crowd of 14,000 people, including 5,700 associates, packed Bud Walton arena.
Most of McMillon’s focus was on the enhancement and utilization of technology that goes beyond e-commerce. Wal-Mart is testing the use of drones in its warehouse to track inventory and has vastly improved its data information mining. It is also using more sophisticated technology to improve what were huge out-of-stock problems in the stores (which is still a big issue).
On the bricks and mortar side, the big merchant has upgraded its perishables presentation (particularly in produce) and is expanding its curbside pickup service to 14 new markets this summer (54 markets in all). It is also testing home delivery in Denver and Phoenix and is using Uber and Lyft as its partners. It also intends to expand its Wal-Mart Pay mobile payment system to all U.S. stores.
However, McMillon was particularly excited about his company’s $2 billion e-commerce investment. With $13 billion in online sales last year, Wal-Mart still significantly trails America’s current “800-pound gorilla” – Amazon (which generates about six times more dollars than Wal-Mart). But progress is being made and Wal-Mart’s website drew 87 million unique visitors in April. The retailer’s board (now reduced to 12 members) features Kevin System and Marissa Mayer, CEOs of Facebook and Yahoo respectively.
“We have the opportunity to re-imagine retail again, McMillon told shareholders. “That’s what we’re out to do.
‘Round The Trade
Some food retailers are finding that launching an IPO is more difficult than they hoped. Perhaps the trend began in late 2014 when Southeastern Grocers (Winn-Dixie/Bi-Lo), controlled by Dallas, TX-based private equity firm Lone Star Fund, pulled its bid to go public after Wall Street determined that their package was inadequate. Albertsons, whose offering is likely to go through later this year, has already delayed its expected launch from last fall (you can blame the collateral effects of Wal-Mart’s “Black Wednesday” on October 14 for that) and now we learn that Supervalu’s Save-A-Lot division, which is also attempting an IPO, has filed an amendment with the SEC in which it will restructure that deal (both Albertsons and Supervalu are controlled by PE firm Cerberus Capital Management). In the filing, Supervalu noted that it will retain a 40 percent stake in its discount division, doubling the previous projected value. Supervalu has maintained that by separating Save-A-Lot from its parent it could build stronger relationships with its licensees and would no longer have to compete with the Eden Prairie, MN company’s corporate store and wholesaling divisions for investment capital. What they didn’t mention is that Cerberus really wants to cash out of its grocery-related investments. Save-A-Lot is consolidating its private label brand structure and will be utilizing its newly acquired (from A&P) America’s Choice label as its primary “own brand.” Former Tea Company president Eric Claus, who recently was named Save-A-Lot CEO, is very familiar with the America’s Choice name… At the recent RBC Capital Markets Consumer and Retail Conference in Boston, new Supervalu CEO Mark Gross said his primary focus will as the company’s top executive is to remain on being a wholesale grocery firm. However, as he has stated earlier, the former C&S senior executive also intends to unlock the value it sees in deploying its assets in a more effective manner. “We can ship more than a case of bananas,” Gross noted, adding that one area of deployment would be in marketing its own label 300 SKU Wild Harvest natural and organic line to non-customers. “Our customers have been enjoying the benefits of the brand, but we believe there’s a broader audience of customers to be had, once they see what Wild Harvest is and what it can do,” he noted. Another way the wholesaler intends to unlock value, Gross said, is to offer back office and technology services, based on “the amazing depth and sophistication” the company developed providing those services for Albertsons as part of its Transition Services Agreement with the big retailer. “We offer a bewildering choice of a la carte opportunities to help a small operator address these issues,” he pointed out, “and he doesn’t have to be a customer. We have a number of here-and-now opportunities, and going forward, we are looking for strategic relationships where we can function as a service provider.” As for its Save-A-lot division, which is in the process of attempting an initial public offering, Gross said that going forward S-A-L stores would carry more national brands. “A lot of people want to save money and are happy to buy a private brand, but some customers want a particular brand of cereal or soda,” he explained. “So we will still offer six facings of soda, for example, but one will be Coke and one will be Pepsi and the customer can choose. “If a national brand adjacent to a private brand sells, then it will keep its spot, and if it doesn’t, we will change the assortment. We’ll use that feedback loop to test some national brands and see how it works out.” Even though the diversity of Supervalu presents unique challenges, don’t bet against Mark Gross. He’s a very smart man…kudos to Bryan Silbermann, another very bright man, who will be retiring from his post as CEO of the Produce Marketing Association (PMA) on January 31, 2017 (he will be replaced by the very capable Cathy Burns, who our readers might remember as the former president of Food Lion). Silbermann recently received the Key Award from the American Society of Association Executives (ASAE), the industry’s top honor. The Key Award is especially prestigious and noteworthy because it was voted upon by his peers among all associations in the country. Silbermann is only the 67th person to be so honored by the ASAE. PMA board chair Russell Mounce of Sam’s Wholesale Club, said of Silbermann’s recognition: “During his career here at PMA, not only has Bryan given back to the association community and profession at large, he has also grown association leaders within PMA, stressing staff education and excellence in association management. PMA continually has a significant number of CAEs among its staff. This dedication to the association profession is the foundation of PMA’s service to its members.” Silbermann will be honored during ASAE’s Annual Meeting & Exposition in August in Salt Lake City, where he will receive the award. Burns, who now serves as president of the PMA said: “This is a significant and well-deserved honor for Bryan, highlighting his leadership at PMA. We are proud beyond words.”…come to think of it, maybe it was Fairway Market that really raised the hackles of financial analysts when evaluating the success potential of current public offerings. Fairway certainly would be the poster child for over-exuberance (by Wall Street) and overreach (by the retailer). After a rousing IPO launch in April 2014, the “like no other market” merchant (be careful what you wish for) filed for Chapter 11 protection last month, having never earned a dime in the 11 quarters it existed as a publicly-traded company. Fairway will exit bankruptcy very soon in a pre-packaged deal and will operate with a reduced debt of $140 million and $50 cash on hand. Hard to make that math work long-term for a company with so many issues. And didn’t we hear right after the bankruptcy filing in early May that the company’s current management structure would remain in place? I guess CFO and co-president Ed Arditte was in the “cone of silence” at the time. He officially “left the business” on June 5…dumbest (and most unfair) new tax of the millennium: the 1.5 cent per ounce tax on sugar-sweetened and artificially sweetened drinks in Philadelphia. I don’t care how Mayor Jim Kenney and his elves at the City Council frame it, this insulting piece of legislation is nothing more than a money grab that will have far greater impact on the residents of the city who can least likely afford it. When a 12-pack of my favorite soda is on sale for $3 in a supermarket in Philadelphia, the final cost including sales tax and the new sugar tax will be nearly double that. Unfair and I say illegal. With its passage, you can expect two things to occur rather quickly: a vigorous legal challenge and a noticeable increase in the sales of carbonated beverages in the counties that surround the city of Philadelphia…Wegmans is one step closer to opening its first “City of New York” unit in Brooklyn’s new Navy Yard project. Developers earlier this month filed building plans with NYC. The 74,000 square foot store is slated for a 2017 ribbon cutting…it’s been 12 years since the United Food and Commercial Workers and organized Southern California grocery chains butted heads in one of the worst strikes in the recent supermarket history (141-day labor stoppage). Now, the two largest chains in SoCal – Kroger and Albertsons – are facing a similar proposition after six UFCW Locals authorized a strike against the two chains, whose contracts with 50,000 clerks and meatcutters expired in March. Hopefully, a compromise can be found in the ensuing weeks and cooler heads will prevail…speaking of SoCal, there’s an interesting lawsuit against Ron Burkle, the multi-billionaire founder of PE firm Yucaipa Cos. (based in Los Angeles), whose influence in the retail grocery industry is greater than any hedge fund manager ever. It seems that some unsecured creditors from Yucaipa’s failed attempt to reviv
e Fresh & Easy (which initially failed under Tesco ownership) are accusing him of plundering 19 stores that F&E creditors say belong to them. Just because Burkle and his team drove the final nails in A&P’s coffin, it’s not fair to call him a plunderer. Why can’t we just stick with selfish and greedy?…and speaking about battles, how about those fightin’ Demoulas cousins? According to the Boston Globe, Arthur S. Demoulas (the loser in the fight to retain control of the company’s tremendous Market Basket business) is suing (in civil court) his old company, claiming that he and his sister–in-law have been blocked by the high-volume merchant from gaining information about a current IRS audit of the supermarket chain. Arthur T. Demoulas (the winner in the family tussle), who remains CEO, called the suit “ridiculous,” adding that that IRS audit was only recently announced and is being managed by the same accounting firm that was hired when Arthur S. had control of the company. While this is interesting stuff on a certain visceral level, I still miss the days of the courtroom fisticuffs.
Local Notes
Still awaiting word on the disposition of more than 80 stores that Ahold USA and Delhaize America are trying to sell per FTC mandate. Sources are telling us that the two European retailers have submitted what was required of them to the bloated federal agency, but the FTC has not yet made its final ruling. We still believe that Albertsons, Publix and Weis Markets will be the big winners, and don’t be surprised if more stores than were on the original divestiture list are ultimately sold. More tangibly, Ahold released its first quarter numbers and they were solid, not spectacular. In the U.S., identical store revenue grew 0.8 percent, bettering its 0.1 percent gain of a year before, but still below the industry average of about 2.5 percent. Overall sales increased 3 percent (at constant exchange rates) with much of those gains coming from the additional revenue gained with the acquisition of 25 former A&P stores last fall. The Amsterdam-based retailer said that the timing of the New Year, fewer winter storms and retail price deflation in dairy and meat had an adverse impact on sales. AUSA’s underlying operating margin was 4 percent, a gain of 0.3 percentage points from the Q1 in 2015…meanwhile for one of AUSA’s peers (and rivals in Richmond, for the time being), Kroger, the news was slightly better. ID sales increased 2.4 percent for its fiscal Q1, marking the 50th consecutive period that the nation’s largest supermarket operator has posted increased identical store revenue. Net earnings grew 2 percent to $680 million for the period ended May 21. “We are very pleased with a solid quarter during which we continued to strengthen our connection with customers and expanded our ‘ClickList’ offering to more customers in more markets,” said CEO Rodney McMullen. “Fifty consecutive quarters of positive identical supermarket sales growth, excluding fuel, is extraordinary. Our associates work tirelessly to produce these consistently remarkable results. We’ve been through all kinds of business cycles during the last 50 quarters, and we’ve demonstrated time and again that regardless of the environment, you can count on Kroger to continue executing our strategy, investing in growth and creating value for our customers and shareholders.”…more regionally, not only has Kroger zoomed to the top of the leaderboard among all supermarkets in Richmond (and second to overall food and drug leader Wal-Mart), the big chain’s Mid-Atlantic division, based in Roanoke has inked a new labor agreement with UFCW Local 400 covering 5,100 associates at 41 stores in Virginia, Tennessee and West Virginia. The new pact provides wage hikes and continued investment in the employees’ pension funds…good news for our long-time friend, Wayne Bailey, who has been promoted to the new position of senior VP-supply chain and logistics at Weis Markets. Wayne is currently celebrating his 74th year with the Sunbury, PA-based regional chain (well, it just seems that way). In his new role, Bailey will oversee inventory management (sourcing and procurement of product along with distribution operations and transportation) as well as merchandising technologies, reverse logistics and manufacturing facilities. He will report to COO Kurt Schertle. Also promoted at Weis was Bob Cline, who becomes VP of talent and associate relations. Cline will supervise talent and organization development, succession management, associate relations and engagement, career development programs, human resources policies and practices and potential third party risk intervention. He can also play the guitar left-handed and whistle without opening his mouth. Cline reports to another man of multiple skills and talent – Jim Marcil, senior VP of HR…Safeway has teamed with Quest Diagnostics, the large diagnostic information services company, to offer diagnostic testing at 12 of its stores nationally, including the Safeway Eastern division units in Bowie, MD and Fairfax, VA. The testing services will be performed in a 400-500 square foot Patient Services Center (PSC) adjacent to the chain’s in-store pharmacies… and one more word on the recent FMIConnect and United Fresh shows which took place earlier this month in Chicago. As it has been in recent years, the United Fresh pavilion was crowded and vibrant as exhibitors provided retailers with innovative and creative insights into the rapidly evolving (and booming) produce and floral business. As for FMIConnect, educational sessions aside, I think that ship has now sailed. CEO Leslie Sarasin and her team have tried valiantly to resurrect some of the halcyon days of what once was the greatest show of all time, while also offering a fresh perspective of food retailing today. And as a whole, the resurrection of FMI has worked – the Midwinter confab is great, the topic-specific smaller conferences are very effective, and the work that the organization does with important subjects such as health/wellness/nutrition are excellent. FMI also remains the industry gold standard for lobbying and legislative affairs. But it’s time to draw the curtain on the June exhibit show. Today, there are many target-specific trade shows that offer a better bang for the vendors’ buck. This year’s show, much like last year’s show, offered an amalgam of equipment manufacturers, IT vendors, large CPG companies (but fewer of those from my perspective) and some international participation, all commingled in a venue that seemed much too big for its contents. When I asked one senior retail executive, who many in the industry know, to assess his view of the exhibit floor experience, he stated, “I thought the pizza was pretty good this year.” I have tremendous respect and admiration for Leslie, Mark Baum and the important and valuable work they offer, but guys – the show’s gotta go. Maybe it can find a home as an educational-only forum again or maybe they can partner with other trade groups to offer a more complete and meaningful package, but, please, no more exhibits… this month’s obits are largely centered around two of the greatest names in their respective sports. But first, a tribute to a food industry pioneer, Ralph Ketner. As the founder of Food Lion (then Food Town), along with Wilson Smith and his brother Brown – the gentlemanly, humble North Carolinian created a discount grocery model that provided the foundation for what other “extreme value” merchants emulated and refined in recent years. He had a full life – volunteering for the U.S. Army after the Pearl Harbor attack, creating a grocery chain which became an iconic model and becoming one of the largest philanthropists in the Tar Heel state. Many people have forgotten about the important role that Ketner played in the history of the grocery business. That may be because after he left the company in 1991 (he first sold a stake of his firm to Delhaize in 1974), the Belgian firm began to change the foundation of Ketner’s model. Prices weren’t eye popping any longer. The esprit de corps that Ketner and later Tom Smith created had dissipated, and frankly the long reign of Pierre-Olivier Beckers as Delhaize CEO seemed to disconnect from virtually every component that Ketner created in 1957. A truly great man, Ralph Ketner was 95 when he passed. Passing away was arguably the greatest hockey player of all time – Gordie Howe, 88. Howe grew up in Saskatchewan, tried out for the New York Rangers when he was 15 (they didn’t sign him) and signed his first pro contract with the Detroit Red Wings when he was 17 in 1946. He would remain a Red Wing until 1971, being selected an All-Star 23 times, retiring with league records for most points, goals, assists and games played (some of those records were since eclipsed by his idol Wayne Gretzky). When he retired at the age of 43, he was immediately inducted into the NHL Hall of Fame. But then he unretired and joined the fledgling World Hockey Association’s Houston Aeros, where he had the opportunity to play with his sons, Mark and Marty. He continued playing with the Aeros and another old WHA team, the Hartford Whalers, which were
asked to join the NHL in 1979, Howe’s final season. Gordie Howe was truly hockey’s John Wayne, as illustrated by the term a “Gordie Howe Hat Trick” – a goal, an assist and a fight. And finally, it’s tough to say or write much more than what’s already been voiced or scribed about “The Greatest” – Muhammad Ali, who died earlier this month at age 74 after a long battle with Parkinson’s disease. Whether you agreed with Ali’s religious or political views or not, his message was a powerful one and his personal charisma was unlike any I’ve ever witnessed in my life. And if you were even a small fan of the “the sweet science,” you had to admire his sheer physical ability and his tactical genius. Because this is still fresh in my mind, I must note a part of Billy Crystal’s eulogy during the memorial service held for the “Champ” in his native Louisville June 10. As he told it, Crystal and Ali were attending legendary sportscaster Howard Cossell’s funeral in 1995 (Cossell was a constant foil and good friend of Ali’s) when Crystal recalled (in a perfect Ali imitation) Ali asking him if Howard was wearing his toupee as he lay in the closed casket. Crystal said he didn’t think so. “That could be a problem,” Ali responded. “Why?” Crystal wondered. “Because if he’s not wearing it, how will God recognize him?”