Taking Stock

Ahold, Delhaize Should Use Synergies To Reinvest In Store Labor, Training

It took slightly longer than expected, but after intense scrutiny from the over officious Federal Trade Commission (I guess they didn’t want to screw up again after last year’s Haggen debacle), the Ahold Delhaize “merger” is now completed.

I reluctantly use the word “merger” because when one party (Ahold) controls 69 percent of the equity, that party really controls the throttle and will almost certainly make most of the critical decisions going forward.

So what might we see going forward? With claims of synergy savings of more than $500 million per year for three years are made, you’re talking about massive consolidation. Sure, that means greater efficiencies in procurement and backroom functions, but what it mostly means is whackin’ and hackin’. You simply can’t attain that level of savings without significant staff reduction.

In the U.S. that might mean consolidating headquarter offices. Consider a scenario where Hannaford’s Scarborough, ME HQ moves into Ahold’s Quincy, MA facility. The store alignment already fits almost like a glove with Hannaford’s retail clout coming in Maine, New Hampshire, Vermont and upstate New York, and Stop & Shop being the dominant retailer in Massachusetts, Rhode Island and Connecticut.

As for Food Lion, will the newly combined company really need a separate headquarters function in Salisbury, NC? Ultimately, I don’t think so. A shift from Salisbury to Carlisle, PA (where I think most of the total U.S. merchandising will be centered) is certainly do-able and would provide huge savings for process-oriented Ahold. After all, if the Dutch retailer believes it can create synergies that in the U.S. alone would be close to $400 million annually (for the first three years), it’s going to have to dig deep to achieve those levels.

Then there’s the future of Food Lion itself. Under the leadership of Kevin Holt (Delhaize America’s chief executive) and Frans Muller, who was CEO of Delhaize and now becomes deputy CEO of Ahold Delhaize, the company has made solid progress over the past 18 months and continues to post positive IDs and solid earnings. But where is this all headed?

At the end of the day, the Food Lion model remains antiquated with little long-term upside for real growth. Ahold isn’t going to “skinny” them down much more because there’s already next to no labor at store level, the stores offer little excitement in perishables and have no pharmacies. And while Food Lion is price competitive, it certainly isn’t a discounter, which translates to continuing difficulties in competing with Wal-Mart and Aldi. And wait until Lidl debuts in 18 months; based on locations that the German discounter has secured in the U.S., Food Lion is clearly in its crosshairs. With Ahold management controlling most of the decision making, you’ve got to wonder what “Le Lion” will look like in three years, or if it will even survive.

Once the synergy engine is humming and major infrastructure changes are made, hopefully senior management will use some of the savings towards improving customer perception at its Ahold USA stores.

I hate to keep beating the same horse, but this is clearly a great opportunity to improve the combined company’s customer image. That may be harder than it might seem given the amount of money that will be available. For the short-term, Ahold needs to think a little less about shareholder return and stock price while also becoming a bit less risk adverse.

Staff the stores properly. Train the associates more intensively. Keep working on improving morale. Nobody is close to Ahold USA in quality of locations in the Northeast. Leverage that advantage.

You’ll sell more stuff (and make the vendors a much happier lot) and also make the associates proud to be working for Giant/Landover, Giant/Carlisle and Stop & Shop again. Those banners all have great legacies. Ahold Delhaize has a clear path to make them great again.

Ahold Delhaize Store Divestitures: And The Winners Are…

Well, clearly there was one big winner in the protracted sell-off of overlapping Food Lion, Stop & Shop, Giant/Landover, Martin’s and Hannaford stores – Weis Markets. The Sunbury, PA regional chain, which some in the trade thought might be looking to sell after the passing of former chairman Robert Weis last year, is clearly in “go” mode.

Prior to its 38-store prize in the “divestiture derby,” Weis had acquired five Mars units in Baltimore (to be opened in early August) and another former Nell’s store in East Berlin, PA. Now it faces one of the biggest challenges in its 104-year history, not only in the sheer quantity of new stores to remodel and re-open (all stores should be converted by the end of October), but in adapting to new marketing areas (Eastern Shore, Southern Maryland and Central Virginia), but also in maximizing its opportunities in 35,000 square foot stores with no pharmacies and little emphasis on perishables. Several readers have chimed in, noting that Weis still operates a number of smallish footprints throughout Central and Northeast Pennsylvania. That’s true, but that’s not the direction that the closely-controlled operator is seeking. Still, this is a great opportunity for Weis, which will have more than 200 stores when all these deals are complete and should reach the $3.5 billion sales mark next year.

Of course, one of the incentives that spurred a lot of interest in the Ahold Delhaize sell-off was price. Multiple sources told us that, in an effort to move the process quickly, Ahold and Delhaize accepted bids that in many cases averaged less than $1 million per store. They were also flexible in adding some stores not on the original divestiture list to close deals (Supervalu, Big Y). And, they even changed course in mid-stream when they quickly realized that the six unionized Giant/Landover stores up for sale in the Fredericksburg, VA area were attracting little interest, reportedly deciding to instead offer the 11 non-union Food Lion units in the area, which Weis ultimately acquired.

You can’t blame Ahold and Delhaize for their “sell cheap” mindset. They had bigger fish to fry in completing their union and felt compelled to move as quickly as they could knowing that each week of delay could potentially cost $10 million (if you factor in their anticipated synergy savings). Unfortunately, the FTC was not as expedient, dragging out the process much longer than it should have (what else is new for one of the most unpredictable and illogical of all the federal agencies?).

As for the other players who came away with stores, I’m optimistic that Big Y will do well with its eight-store Hannaford purchase in Greater Boston; and I think Bill Shaner and Tom Jamieson will do well with their Food Lion units once Supervalu (Shop ‘n Save) hands them the reins. Both men know how to operate independent stores and have a proven record of success in acquiring smaller sized units. I’m less optimistic about Tops Markets, which is entering two new very competitive markets – the Lower Hudson Valley on New York and Central New England. It’s not as though Tops is hitting it out of the park in its core Western New York base and the stores that it acquired are all unionized. Still, the deal would make more sense if the Williamsville, NY regional chain was successful in acquiring Price Chopper.

While the Publix deal in Richmond was the least surprising of all the divestiture activity, the structure of the 10-store acquisition was interesting. Publix may be the last of all the buyers to take possession of the stores and will re-open them on a rolling basis. That process should begin within 180-360 days from the completion of the merger and the stores will be extensively improved.

With Publix only interested in 10 Richmond area stores (it’s curious how they didn’t bite at any Southside locations, including the newest Martin’s on Midlothian Turnpike), Ahold USA is now left with 10 lame duck units (including Williamsburg) that they plan to re-market and hopefully sell once the FTC allows them more flexibility. Still, how strange must it be for the associates at any of those 10 remaining stores knowing that their jobs could – and probably will – disappear on short notice?

And I’m not convinced that even with significantly remodeled stores and Publix’s vaunted customer service that the Lakeland, FL-based chain is going to “knock ‘em dead” in Richmond. The competition will be fiercer there than any other market in which they currently operate (Publix has never competed with Wegmans and Kroger is very strong and growing in Richmond) and this will truly be a long-distance road game for the much admired merchant. The closest Publix distribution center is in Lawrenceville, GA, about 500 miles for the capital of the Old Dominion and the market is already significantly overstored (with Lidl also entering Richmond in the early 2018). I think Publix will ultimately succeed, but this will be no layup.

Supervalu’s Gross Off To Fast Start, But SVU Sales, Earning Dip;

Critical Challenges Still Lie Ahead

New Supervalu CEO Mark Gross commanded his first annual shareholder’s meeting in Minneapolis on July 20. The former C&S executive reiterated his vision for the wholesaler/retailer of becoming the leading distributor of consumable products while also providing services to its independent retailers and corporately-owned stores.

He listed three priorities to perpetuate the growth of the Eden Prairie, MN-based firm: retain customers and properly serve them; create more business with current customers; and develop new customers. Gross cited that creating a “selling culture” was critical to the company’s growth and pointed to produce as an area of major opportunity, adding that SVU’s current customers have been “under represented” by the company in produce and, in the past few months, improvements have led to Supervalu shipping more produce than it ever has before (except when it owned the 877 corporate store that it sold to Albertsons in 2013).

In the area of new customer development, the Massachusetts native told shareholders about the recent “win” in gaining primary distribution for Marsh’s 70 stores in Indiana and Ohio. Gross said that Supervalu competed with SpartanNash, AWG and incumbent C&S to gain the business and added that the deciding factors were price, service and the strength of Supervalu’s private label offerings. We hear that another large retailer (one that was recently acquired by a private equity firm) could be joining SVU’s roster. Gross also noted the recent addition of the 22 stores it acquired in the Ahold Delhaize sell-off, explaining that the strength of Supervalu allowed it to move forward to complete the deal (which will be doled out to independent retailers who will trade under the Shop ‘n Save banner).

Gross talked briefly about his company’s corporately-owned stores (the need to invest in price and promotions and to implement merchandising initiatives in emerging and growing categories) and also spoke about the importance of its private label brands (one new private label item is introduced every day), both in its core business and its soon-to-be spun-off Save-A-Lot unit (where the company recently unveiled its America’s Choice brand which was acquired from bankrupt A&P where, coincidentally, new S-A-L chief executive Eric Claus used to work). It’s been an excellent first five months for Gross, who has clearly added a more focused, strategic approach to Supervalu’s go-to-market mindset.

But there are challenges that will be tough to handle. The company certainly helped itself by doubling its equity stake (to 40 percent) in its attempt to launch an IPO for Save-A-Lot. While I expect the offering to be successful, it might not happen until late this year or early next year.

And there may have been a good reason why Gross spent little time or detail at the annual meeting on its corporate stores. That’s because many trade observers (including me) believe they have no future. In all areas that SVU operates corporate stores, there has been no increase in market share for years and virtually no-cap ex provided for new stores or major remodeling. The “investment in price” that Gross spoke of isn’t discernible in light of the competitiveness of Baltimore-Washington, Tidewater, Chicago, Minneapolis or St. Louis. This is what got former SVU CEOs Jeff Noddle and Craig Herkert in trouble: either you’re committed to retail or you’re not. Supervalu hasn’t made that firm commitment in a decade and it’s too late now for Gross to fix it.

As for wholesale, there certainly is opportunity in that arena, and it’s what the company does best. I think Gross has the intelligence and moxie to convince other regional chains and independents to switch to Supervalu (after all, he learned from the best dealmaker in the wholesale business – Rick Cohen).

Just before presstime, SVU released its first quarter financials (ended June 18 which represents the period that Gross faced when he first took the job as CEO). Not surprisingly, both earnings and net sales were down on an overall company basis and revenue was challenged in all three segments of Supervalu’s business. Identical stores sales at Save-A-Lot’s network units dipped 1.4 percent (and were down 1 percent at its company-owned S-A-L stores); corporately-owned supermarkets faced a 4.5 percent ID volume decline and total sales within its wholesale segment dipped 7.6 percent.

“It takes time to bring on new business and our first quarter results reflect the sales run rate we experienced coming out of last year’s fourth quarter,” Gross stated. “We’ve been replacing lost business, and I am confident in our ability to attract new customers and grow our business.”

Gross has begun to make changes designed to turn the big SVU ship around, but what does that ultimately portend for Supervalu’s future after Save-A-Lot is spun off and its corporate stores are eventually sold or closed? Can the company stay relevant as a publicly-traded wholesale grocer (its stock price is currently about $5.20 a share; its 52-week range is $3.94 to $9.37 per share)? And is a bigger deal forthcoming in a few years where SVU acquires another wholesaler or is purchased by a bigger wholesale player such as C&S or AWG?

As much as Gross is beginning to change the momentum of the company, I don’t think this will be a lifetime job for him.

 ‘Round The Trade

One key executive who won’t be with Supervalu is former EVP-marketing, retail and pharmacy Mark van Buskirk who left the company earlier this month. Van Buskirk was hired by former SVU chief executive Sam Duncan in 2013 and clearly the company’s culture has already changed under Gross. A search is on for van Buskirk’s replacement, but those will be big and important shoes to fill, especially if a large part of Gross’ vision centers around merchandising…July is typically the month when Target opens all of its new stores for the year and indeed the Minneapolis mass merchant cut the ribbon on four new units this July. However, except for a traditional 122,000 square foot Target that opened in Lower Macungie Township near Allentown, PA, the other three units in Philadelphia (Chestnut Street); Queens, NY (Forest Hills) and Brookline, MA (Packard’s Corner) all were in the 16,000-22,000 square foot range. Ten more smallish Targets are slated for the remainder of 2016 including Northeast units in Philadelphia (Rittenhouse Square); State College, PA; Closter, NJ; Manhattan, NY (Tribeca); Brooklyn, NY; Elmont, NY; and Freeport, NY. All of those stores range in size from 20,000-46,000 square feet, and the same beat will continue next year when the company opens 13 new units. Except for a 126,000 square footer opening in Spring, TX the other new Targets slated for 2017 fall in the 21,000-49,000 square foot range. Among the new Northeast stores scheduled for next year are small-sized units in: Roxborough, PA; Philadelphia, PA (Art Museum); Bethesda, MD (Wisconsin Ave.); and Cambridge, MA (Central Square). I’ve been to several of Target’s new smaller stores (once known as City Target or Target Express) and have to admit I’m fairly impressed. The food offerings in these smaller units are more specialty oriented with improved merchandising for its expanded “grab and go” variety. While not inexpensive to build or operate (given the real estate costs of these locations), I believe Target’s small-sized units will be a boon to the retailer and give them a clear point of separation from Wal-Mart on an overall basis and from drug chains and specialty merchants (including restaurants) that dominate the urban locations where Target is opening stores. However, the bigger challenge for CEO Brian Cornell (ex-Pepsi, ex-Safeway, ex-Wal-Mart) is how will he be able to better compete with the Bentonville Behemoth in the food arena in its conventional stores where Target’s variety still pales behind Wal-Mart, which is also upping its game in grocery merchandising and service?…The U.S. Department of Justice has reportedly cleared the path and will approve the $106 billion (that’s billion with a “B”) acquisition of SABMiller by InBev/Anheuser Busch. There are some caveats and divestitures that need to be completed by both parties, but if this deal doesn’t reek of anti-competitiveness then I must have been sleeping when the Exxon-Mobil deal was approved. I don’t think the DOJ needs to deploy the Herfendahl-Hirschman market concentration index when evaluating mega-deals like this, common sense would work just fine. Hey, this must give new hope for Walgreens that its pending acquisition of Rite Aid will also be approved…and speaking of large federally-oriented bloated bureaucracies, the U.S. House of Representatives voted earlier this month to require that all foods containing genetically modified ingredients be labeled. The U.S. Senate passed a similar resolution earlier this year and it is expected that President Obama will sign this into law next month. The entire GMO debate has been an interesting one from the outset, with many food industry executives passionately arguing that any GMO labeling should be voluntary. To me that argument is spurious, only because in 2016 any perceived roadblock that dilutes transparency can’t succeed. There are still many unanswered questions that remain about what information the labels will ultimately contain and also about the entire food safety issue surrounding GMOs. This is a start – it’s just too bad that industry groups and other lobbyists spent so much time and wasted so much money on a losing cause. Now it’s time for the industry to band together and utilize the transparency to its advantage… good news for Dunkin’ Donuts fans (yes, I’m a member of the club): the big coffee roaster and donut merchant will be replacing the in-store food courts at many BJ’s Wholesale Club locations with DD kiosks. Both companies are based in Massachusetts, BJ’s in Westborough and Dunkin Donuts in Canton. The first two stores slated for conversion are in Northboro, MA and Kearny, NJ.

Local Notes

After exiting Chapter 11 bankruptcy on July 3, Fairway Market has named a new board of directors which includes some high-profile current and former industry executives. Among those who joined the new board with food industry links were Jim Demme (Kings, Bruno’s, Homeland Stores); Ken Martindale, current CEO of Rite Aid stores and president of Rite Aid corp. (formerly of Pathmark, Fred Meyer); and Errol Schweizer (former VP grocery at Whole Foods). Other board members include Eugene Irwin David chairman and CEO of Pirinate Consulting Group (and no relation to Larry) and Robert D. Zable, senior managing director at GSO Capital Partners (the credit arm of PE firm Blackstone Group, one of Fairway’s new lenders). The board already made one good move – shutting its Lake Grove, NY store, which has barked like a dog since it opened two years ago. Last month, Fairway announced that it still plans to open a former 40,000 square foot Waldbaums unit in the Georgetown section of Brooklyn later this year. Good luck to the new board members and to the future fortunes of what once was a great merchant – they’ll need every bit of positive mojo to turn Fairway around…one of the non self-inflicted factors that caused the decline of Fairway was Whole Food’s new stores on Manhattan’s Upper East Side (3rd Ave. & E. 87th St.) and in the Gowanus section of Brooklyn. On July 26, WFM opened its second Brooklyn unit, a 51,000 square foot two-level store on Bedford Avenue in Williamsburg. That part of Brooklyn is undergoing a massive regentrification and later this year Trader Joe’s will also enter the fray with its first Brooklyn store in the new City Point development about three miles from the new Whole Foods…according to our friends at the New York Post (which inspires my headline writing on a daily basis), Amazon is planning to open a brick-and-mortar café and bookstore in Manhattan’s huge Hudson Yards project which should open in the next 24-30 months…Wawa, which entered the Florida market in 2012, has even bigger plans for the Sunshine State. After opening 92 stores in the Orlando and Tampa-St. Petersburg market over the past four years, the stellar c-store chain recently broke ground on two “east coast” units in West Palm Beach and Pompano Beach. The Wawa, PA-based employee-owned company plans to build as many as 120 new c-stores in southeast Florida by 2022. The high volume convenience store merchant is also reportedly looking to open stores in the Jacksonville area in the near future…a tip of the hat to Weis, Ahold USA and Redner’s, for not only hosting wonderful golf outings, but for raising mucho dinero for wonderful charitable causes. In particular, Ahold’s “Our Family” event was spectacular with more than 2,000 golfers playing on a very warm Monday afternoon. More important, raised a record $10.7 million the Children’s Miracle Network and other local charities. Kudos to the vendors, too, for playing such an important role. And a particular shout out to Deb Hill, AUSA’s manager of public and community relations who has done such yeoman’s work with this event for many years. This year Deb, who is an all-star performer for all her other duties, addressed the audience and spoke passionately about the importance of raising money for children with significant physical problems, including one she was especially close to. There wasn’t a dry eye in the house…while Ahold will post its second quarter financials on August 25, its new partner Delhaize continued to produce solid sales number in its second period at its Food Lion and Hannaford units in the U.S. The Belgian retailer said its comp store sales increased 2.9 percent, despite a 1 percent deflation factor. Underlying profits increased by 7.6 percent (to $188 million). “With 3.9 percent real growth during this quarter, Delhaize America continued to experience good sales momentum at Food Lion and Hannaford, while inflation remained negative,” said Delhaize Group CEO Frans Muller…Weis Markets reported solid sales gains in its second period ended June 25. The Sunbury, PA based merchant said that its comp store revenue increased 1.8 percent and overall sales rose 1.7 percent on higher store traffic. Earnings however declined 8.3 percent due to increased associate compensation and a holiday calendar shift, the company said. “Wage increases and Easter calendar shift aside, we continue to post solid results which we attribute to our long-term price investments, increasingly efficient logistics and improved customer experience,” said Jonathan Weis, CEO. “During the period we saw a strong increase in customer traffic, which helped generate significant sales increases in deli/foodservice and pharmacy.”…Lidl has officially broken ground on its third distribution center in Elkton, MD (Cecil County). That depot will be 754,000 square feet in size and is expected to cost the German-discounter, which won’t open its first U.S. store until early 2018, more than $100 million. That facility is expected to open next year as will other Lidl warehouses now under construction in Fredericksburg, VA and Mebane, NC…speaking of DCs, C&S, the nation’s largest grocery wholesaler, will reopen its North East, MD facility, three months after shutting it down…several obits to report this month, including the death of Lois Lane. Actually, that would be actress Noel Neill, who played Superman/Clark Kent’s sidekick and foil on the television series, “Adventures of Superman,” which ran from 1952-1958. Ms. Neill was the second Lois Lane in the TV series; she replaced Phyllis Coates who served as the original Lois (and I think a superior actress) for one year. However, it was Neill who originally portrayed the Lois Lane character in 15 movie serials in the late 1940s. After the TV series went off the air following the death of star George Reeves, Neill gave up acting but returned to the big screen in the 1978 version of the movie (starring the late Christopher Reeve) as the mother of a school-aged Lois. Neill was 95 when she passed…also leaving us from the world of entertainment was Hollywood director and writer Garry Marshall, 81, who created many very popular TV series, including “The Odd Couple;” “Happy Days;” “Laverne & Shirley;” and “Mork & Mindy.” Marshall also directed several hit movies including “Pretty Woman” (1990) and “The Princess Diaries” (2001). He was also the brother of actress and director Penny Marshall, who happened to play Laverne in the TV series…one of the most influential guitar players in rock and roll history has died. Scotty Moore was part of Elvis Presley’s original band, having first met the legendary Sam Phillips, founder of Sun Studios in Memphis. Phillips had just signed a young singer from Mississippi who needed a backing band. It was in 1954 that Moore and Presley first teamed up when they cut Elvis’ first single, Arthur Crudup’s “That’s All Right Mama,” Later, bass player Bill Black and drummer D.J. Fontana joined the group, forming Presley’s original quartet. “When I first heard ‘Heartbreak Hotel’ I knew what I wanted to do in life,” said Rolling Stones guitarist Keith Richards. “It was as plain as day. All I wanted to do in the world was to be able to play and sound like that. Everyone else wanted to be Elvis, I wanted to be Scotty.” Moore, 84, was inducted into the Rock and Roll Hall of Fame in 2000…one of the most important and inspirational men of the past 50 years – Elie Wiesel – has died at age 87. A Holocaust survivor who was liberated from the notorious Buchenwald concentration camp in Germany as a 16 year old, Wiesel spent the rest of his life as the soul of other Holocaust survivors and an educator to many others. He was awarded both the Nobel Peace Prize and the Congressional Gold Medal of Achievement, wrote more than two dozen books and gave hundreds of lectures about the importance of peace, atonement and human dignity. Wiesel’s powerful message could be felt in the following excerpt from his 1960 book, “Night:” “Neve
r shall I forget that night, the first night in camp, which has turned my life into one long night, seven times cursed and seven times sealed. Never shall I forget the smoke. Never shall I forget the little faces of the children, whose bodies I saw turned into wreaths of smoke behind a silent blue sky. Never shall I forget those flames which consumed my faith forever. Never shall I forget the nocturnal silence which deprived me, for all eternity, of the desire to live. Never shall I forget those moments, which murdered my God and my soul and turned my dreams to dust. Never shall I forget these things, even if I am condemned to live as long as God himself. Never.”