Taking Stock

Publix, Lidl Struggle To Gain Traction In Ferocious, Evolving Richmond Market

It’s been about six months since the newest entrants have arrived in the Richmond market. Newcomers Publix and Lidl have both joined a very competitive, overstored fray and the early results indicate both chains have taken a few shots to the chin thus far.

Lidl’s struggles shouldn’t be surprising on several fronts. The anticipation factor for the German-owned discount chain was huge and, honestly, who could have lived up to that level of hype? Additionally, being the new kid on the block (as is also the case with Publix) almost always makes it more difficult to succeed, especially when you have to sometimes settle for secondary locations and all the other competitors in the market are waiting for your arrival. Tangibly, Lidl’s problems go deeper than that though. After six months of operation, it seems obvious that all those international minds who meticulously planned to offer a unique proposition to the American consumer significantly veered off course. Pricing remains strong, packaging is excellent, certain departments like bakery and wine are winners, but much of the remaining in-store shopping experience is confusing and uncomfortable. With some weekly store volumes hovering in the $140-160K range, there is reason for concern, perhaps alarm. Maybe it shouldn’t be shocking – given the level of ambition they started with – to see that Lidl has fallen short of its initial goals. The bigger challenge lies in its ability to adapt and redirect its efforts towards positive future change. To date, I’ve seen none of that. Yes, there’s been talk of utilizing a smaller footprint to reduce the number of perishable items and change the look of its god-awful general merchandise area. That might be slightly helpful, but Lidl’s problems are more complex than item assortment and aesthetics. The stores don’t flow very well; in-store conditions are far from crisp (especially certain perishable areas); and training seems mediocre at best (I’ve visited more than 20 units thus far including all five – including Fredericksburg – in the Richmond area).

We know that Lidl has already cut back or delayed some future store openings and plans to lease some locations in the future. It is also slated to open six more Richmond area units (including Petersburg and Williamsburg), but none are listed on its website as scheduled to open anytime soon. With deep pockets and a huge infrastructure commitment to its U.S. expansion, Lidl isn’t going away anytime soon – you’ve just got to wonder how they’ll fix the mess they’ve created.

While the shopping experience at the eight Publix stores (including Colonial Heights) now open in the Richmond market is vastly different from that at Lidl, there are similarities between the two retailers. Besides having money and patience to stay the course, both merchants plan to add more stores. Publix is building new stores in Mechanicsville and Fredericksburg and in the past four months has acquired two more former Martin’s units (which were both originally Ukrop’s stores) in Williamsburg and on Forest Hill Avenue in Richmond.

Having visited all the Publix stores in the market, my diagnosis is that the hugely successful Lakeland, FL-based chain is suffering from “corporatitis.” The symptoms are easy to recognize: inflexibility, shortage of local products and an inability to adjust to local competitive conditions. This is the same ailment that plagued Kroger more than a decade ago after they purchased about 10 Hannaford stores. It took several years for the poohbahs in Cincinnati to grant more decision-making power to those executives at field level in Richmond (and Tidewater).

Most of us know that Publix is rock-solid in terms of offering strong store conditions and quality customer service/training. That alone won’t get it done in Richmond where Kroger, Walmart, Wegmans and a slew of other retailers with diverse operating styles are already established.

Publix came into the market offering a minimally different package than in Florida, Alabama or Atlanta where it is the leading food retailer. Prices are slightly on the high side, perishables are decent, not above average, and its prepared foods lack creativity. In other words, an acceptable but sterile shopping experience. A few more signs of ‘corporatitis” that I also witnessed: Richmond isn’t Florida and there’s too much space devoted to Hispanic items, especially when considering that most of Richmond’s Latino community is centered in “Southside” where Publix doesn’t operate a store. Additionally, I saw a Publix ad recently promoting “local wines.” That might have been an effective promotion if the wines being promoted weren’t from North Carolina.

And while Publix has remained firm in not offering any type of loyalty card, the potential to mine data in a new marketing area would be a significant advantage to any incoming entrant. Especially when Kroger, Wegmans and Food Lion have offered loyalty cards to their customers for many years.

So, what’s the score at this point? In my analysis, Kroger, Walmart and Wegmans have been virtually untouched by the new competition and all three operators enjoyed strong holiday seasons. Even Food Lion (Ahold Delhaize USA), which many thought would be adversely impacted by Lidl’s arrival, has held its own, aided by the remodeling of its entire Richmond fleet and the addition of more perishables. Business at the four The Fresh Market units seemed to be down and Aldi’s business seemed to be slightly affected at three of the four locations near Lidl units that have opened.

Richmond remains a cluster jam. The current retailer lineup contains virtually all heavyweights and we’re still in the early innings. If there’s one takeaway thus far, it’s that the per-store average leaders (excluding club stores) – Walmart (Neighborhood Markets), Kroger and Wegmans – have maintained their solid market shares and have a clear strategy to maintain same-store stability and possibly even growth.

As for Lidl and Publix, both need to better adjust to local market conditions while also creating an improved shopping experience for potential Richmond customers who have more shopping options than perhaps any other market in the country.

Supervalu Grows Sales; Earnings Impacted By Holiday ‘Pressures’

It was kind of a mixed bag from Supervalu in its recently completed Q3. The Eden Prairie, MN-based wholesaler/retailer reported a 31 percent increase in net sales in its third quarter of 2017 to $3.94 billion, compared to $3 billion during the same period last year. Net earnings were $18 million, or $0.46 per diluted per share, which was in line with analyst estimates. A tax benefit pushed earnings up to $23 million, or $0.61 per share.

Supervalu’s wholesale division once again paced the company’s gains with a 52 percent increase in net sales to $2.89 billion thanks to new store sales and the company’s Unified Grocers business, which it acquired last summer. However, wholesale earnings slipped 11.5 percent, to $46 million, due to “the mixed impact of the acquired Unified Grocers business contributing to operating earnings at a lower percent of net sales and higher trucking and logistics costs,” according to the company. Supervalu’s retail sales continued to struggle in the third quarter, with identical-store sales down 3.5 percent, including a 3.4 percent decrease in traffic and a decline in average basket size of 10 basis points. Overall retail sales fell 4.1 percent in the quarter, to $1.02 billion.

“With the influx of significant new business in certain distribution centers, we experienced a larger-than-anticipated increase in expenses, but we’re encouraged by the work we are doing to address those costs and believe they are manageable going forward,” Supervalu CEO Mark Gross said in a statement. “We remain committed to investing in our wholesale business to drive future growth.”

Some of those expenses which impacted earnings were the cost of leasing additional warehouse space, increases in trucking capacity expense and employee overtime. Wholesale sales now represent 73 percent of total sales at Supervalu, up from 63 percent a year ago.

Supervalu completed its acquisition of Associated Grocers of Florida shortly after the December 2 close of the quarter.

The retail segment operating loss totaled $6 million, including $3 million in charges and costs related to store closures. The year-ago retail operating loss totaled $14 million, which included $15 million in goodwill impairment charges and $1 million for charges and costs related to store closures.

In his follow-up conference call with financial analysts, Gross said some retail banners are performing better than others, and that the company would continue to invest in those that are performing better and will minimize its investments in those that are performing poorly. He did not specify which corporately-owned retail divisions were performing “better.”

“Every asset has got to be productive, and we’ll fully support and invest in those that will give a return to our shareholders,” he said.

Gross is continuing to keep his focus on growing wholesale by adding new customers, increasing purchases with existing retailers and creating purchasing opportunities with independents that are not currently primary Supervalu customers. And that brings us back to corporate retail which seems clearly in play. However, it’s not going to be easy to sell whole divisions (banners) or even large blocs of stores within a banner given the tremendous overstoring and competition that currently exists in virtually all markets. And the hope that perhaps some of those stores that are eventually sold will continue to utilize SVU as its primary supplier might also be difficult to achieve. As I’ve said earlier, Gross has some tough decision ahead, but I believe he’s handling the challenges deftly thus far.

No pain, no gain!

‘Round The Trade

Perhaps the biggest early story of 2018 is the significant cash infusion that retailers will enjoy due to the new federal tax plan that began on January 1. With the corporate tax rate reduced from 35 percent to 22 percent all, retailers (both “C” corporations and pass-through businesses), should benefit. I chatted with about six merchants (chains and independents), who all told me they would indeed benefit from the tax break. All added that they plan to utilize the additional funds to bolster cap-ex spending or related infrastructure needs. On a related new tax law note, Walmart, the planet’s largest retailer said that beginning next month it will raise its starting minimum wage to $11 an hour. “Tax reform gives us the opportunity to be more competitive globally and to accelerate plans for the U.S.,” said CEO Doug McMillon. And the Behemoth’s chief brick and mortar rival, Target, has planted itself firmly in the grocery delivery business with the announcement that it has agreed to acquire Shipt.com, the Birmingham, AL-based online same-day delivery platform, for $550 million in cash. The purchase significantly accelerates Target’s digital fulfillment efforts, bringing same-day delivery services to guests at approximately half of Target’s stores by early 2018. The mass merchant said that service will be offered from most Target stores, and in all major markets, before the 2018 holiday season. “We laid out an ambitious strategic agenda in early 2017, which included a focus on giving our guests a number of convenient ways to shop with Target, whether it’s ordering online and picking up in one of our stores, driving up to pick up an order, or taking advantage of services like our new Restock program. With Shipt’s network of local shoppers and their current market penetration, we will move from days to hours, dramatically accelerating our ability to bring affordable same-day delivery to guests across the country,” said John Mulligan, executive VP and COO for Target. Some of our readers have already questioned Target’s logic behind this deal, stating that the Minneapolis-based retailer should first figure out how to improve its entire grocery presentation before jumping into the same-day delivery business. I would disagree, however, noting that with competitor Walmart already advancing its delivery platform over the past 18 months, Target needed to jump into the fray if it ever expects to remain a significant national player in food, electronics and apparel. And some of our readers are right: Target has a long way to go to improve its grocery image; in fact, the company has a long way to go to recapture its once mighty mojo. At rival Walmart, Marc Lore, chief executive at the Behemoth’s dot com unit, updated high tech magazine Fast Company on the company’s digital progress while offering up a few predictions. The former jet.com CEO noted that customers who utilize both Walmart’s stores and digital platform double their overall purchases. He believes that “digitally native brands,” those products that “have a direct connection to the customer is very important. Millennial shoppers want to not only buy the product, but know where it’s made, the environmental position of the company and the social impact the company’s making.” And on the topic of the next “big” thing, the 45-year old entrepreneur predicted that “in the next 10 years, you’ll be able to put on a pair of glasses and be immersed into experiences that display products in their native environment. So, you can put on the glasses and say, ‘I’m interested in going camping’ and be transported to a campsite and be able to walk the site…it’s going to completely change the game.” Dude, that’s some wild stuff!…Amazon-owned Whole Foods Market is acting more like a conventional, process-driven retailer every day. After announcing last year that it will be centralizing most of its merchandising functions from its Austin, TX headquarters, several suppliers and media sources have confirmed that the natural/organics chain will be charging suppliers for the privilege of having their products appear on WFM’s stores’ shelves. Vendors that sell more than $300,000 of products annually for groceries will be required to discount their products by 3 percent. For HBC/GM suppliers the discount will be 5 percent. Additionally, national suppliers will be charged $165 per hour for each four-hour demonstration ($110 per hour for local vendors). These moves seem to be orchestrated in conjunction with retail services firm Daymon Associates and its SAS merchandising subsidiary…Campbell Soup has agreed to acquire snack food company Snyder-Lance, owner of Cape Cod potato chips and Snyder’s pretzels and Emerald Nuts, for $4.87 billion ($50 per share, all cash). That represents a 27 percent premium from the Charlotte, NC manufacturer’s trading price on December 13, five days before the sale. This deal would be Campbell’s largest yet and could provide both a financial and emotional boost for the struggling Camden, NJ-based manufacturer, which despite several acquisitions outside its core center store business, still finds offsetting the declining sales of its staple soup business a tough path to navigate. It’s the same challenge that many large CPG companies – Kellogg’s, General Mills, ConAgra to name a few – face in trying to broaden their portfolios beyond their sluggish primary brands. The explosion of private label has also impacted many large CPG packers. Under the leadership of talented and tenacious CEO Denise Morrison, Campbell’s has attempted to venture outside the box by acquiring emerging brands such as Bolthouse Farms and most recently Pacific. This is a risky maneuver with Campbell’s financing the deal through $6.2 billion of debt, but Morrison explained the rationale behind the purchase, noting it “…will dramatically transform Campbell, shifting our center of gravity and further diversifying our portfolio into the faster growing snacking category.” Interesting to note in the tentative deal is that the Warehime family collectively controls 13.2 percent of Snyder-Lance’s common stock (after the 2010 deal when Snyder’s of Hanover and Lance were merged), giving the family of the late, great Mike Warehime a huge windfall…while it’s not deal related, Nestle, the world’s largest food company with a diverse and international portfolio, joins Campbell’s in announcing that it will be leaving the powerful Grocery Manufacturers Association (GMA) before year’s end. The primary reason: differing views on how to respond to changing consumer tastes, especially nutritional issues. Accurate or not, the GMA has long been perceived by some as a complacent, road-blocking group more interested in protecting its flank rather than engaging into proactive change. Wake up, the world is changing…while the transfer of most of its 1,932 drug stores from Rite Aid to Walgreens won’t happen until next spring, the Camp Hill, PA-based chain has shifted 97 drug stores in the past six weeks to Walgreens as part of its initial pilot test. Also included in the $4.38 billion all cash deal are three distribution centers…Albertsons, which also has been racing to play catch up in the fast-paced and evolving world of e-commerce, announced that it has signed a deal with Instacart which will provide same-day deliveries to more than 1,800 Albertsons’ stores (including Safeway units) beginning mid-2018. Earlier this year, the Boise, ID-based supermarket chain acquired meal-kit provider Plated, which this month unveiled its first national TV campaign…Dollar General plans to open more than 900 stores this year, and if achieved, it would be the second consecutive year the Goodlettsville, TN discounter would reach that mark. Dollar General currently operates more than 14,000 stores in 44 states and over the past five years has increased its store count by 35 percent…Peapod’s second annual meal planning forecast is out and among the nuggets than can be found in its national survey are: 73 percent of adults currently prepa
re dinner at home at least four nights a week and 31 percent are planning to cook dinner at home this year (that number jumps to 50 percent for millennials). Additionally, the survey, conducted by ORC International for the e-commerce delivery unit of Ahold Delhaize USA, noted that respondents listed cook mixes/meal kits (41 percent); pre-chopped produce (38 percent); pre-measured ingredients (34 percent); and grocery delivery (25 percent) as factors that would make it easier to cook at home…in the “almost dead” (Sears Holdings) monthly news, the impotent mass merchant announced it will be closing another 103 stores by April (that doesn’t include the list of 63 other units that will be closed by the end of this month). Of those soon to be shuttered stores, 64 are Kmarts and 39 are Sears units. Kmarts closing in the Mid-Atlantic include stores in Crofton, MD; Salisbury, MD; Bridgeville, PA; Sayre, PA; Enola, PA; Harrisburg, PA; Hazleton, PA; Pittston, PA; Hermitage, PA; Franklin, PA; Philadelphia, PA; and Honesdale, PA. Soon to be shuttered Sears stores are located in Wilmington, DE; Toms River, NJ; Pittsburgh, PA; and Philadelphia, PA. Meanwhile to keep the company afloat Sears holding CEO “Slow” Eddie Lampert has secured $100 million in new financing and is eyeing an additional $200 million in additional cost cuts in 2018. I can almost smell the scent of death…speaking of deaths, we have a few obits to report… Two of the finest TV comic actors have passed on. Jerry Van Dyke, whose show business career encompassed nearly 55 years, died earlier this month at the age of 86. Van Dyke appeared in 50 television and film roles. His first starring role was on the sit-com “My Mother, The Car” (1965), one of the least funny TV shows of all time. It was cancelled after one season. As bad as that show was, that’s how good “Coach” was in the nine seasons that it ran, and Van Dyke, as assistant coach Luther Van Dam, was one of the best supporting characters on any TV comedy in the 1990s. He was the younger brother of comic actor Dick Van Dyke, who also is connected to our next obituary. Rose Marie, who played caustic comedy writer Sally Rogers on “The Dick Van Dyke Show” (1961-1966) – one of the greatest TV shows of all time – died last month at the age of 94 (she was also funny as a regular on “The Hollywood Squares”). Rose Marie’s career spanned an incredible 90 years (she started as an infant in vaudeville in the 1920s). All told, she appeared in more than 75 film and TV roles…one of the unsung, great music executives has also has also passed away. Rick Hall, who turned a small music studio in Muscle Shoals, AL into a shrine for R&B and rock, is dead at the age of 85. Hall’s FAME Studios, which he founded in 1959, recorded such greats as Aretha Franklin, Etta James, The Rolling Stones and Wilson Pickett. FAME Studios’ house band included great players like Duane Allman (guitar), Barry Beckett (keyboards), David Hood (bass) and Roger Hawkins (drums). Gregg Allman, Duane’s younger brother, recorded his superb final album, “Southern Blood” at FAME Studios last year. If you are interested in learning more about Hall and the Muscle Shoals sound, watch the excellent documentary “Muscle Shoals” (2013)…Dick Enberg will be “Touching “Em All” on a different playing field. The legendary sportscaster died last month at the age of 82. His career began in 1956 while he was still in college in Michigan. Enberg was a sensational broadcaster whose vast sports knowledge, versatility (he called Super Bowls, Olympics, Final Four basketball games and World Series games) and humility not only made him a fan favorite, but also made him tremendously popular among his peers. “Oh my!”