For Many Weary Retailers, The Long Battle Continues; Who Will Survive?
The new rules of the road are now firmly in place: if food retailers (in all channels) are going to survive and perhaps even prosper, they’d better dig in for a few more years of major market disruption. If anyone thinks a major shakeout is right around the corner after the rough and tumble battles of the last five years, you need to think again.
While it’s going to take talent, intellect and capital just to maintain the status quo for all retailers, it’s also going to take grit, tenacity and a forward-looking plan on how they are going to manage their companies in the near term. All of those elements make for a tricky formula, and frankly, I’m not certain all the competitors in this overstored marketplace are going to survive in their current forms over the next three years.
Based on some of those foundational tenets that I mentioned, what lies ahead for companies such as Tops Markets, Price Chopper, D’Agostino’s, Gristedes, King Kullen or Fairway Market? And it’s not just regional chains and independents that may be vulnerable. What about Lidl? Its debut in the Mid-Atlantic has been disastrous. Poor sales may be the most visceral result of its problems, but the German discounter clearly needs some American lessons on merchandising, product selection and management stability. Lidl’s deep pockets may allow them to continue in the U.S., but the fixes it needs are many and complex.
The Fresh Market (TFM)? Now owned by a division of Apollo Global Management (another brilliant private equity play), the company is no better off than it was a few years ago when it was publicly-traded and run by a different management group. TFM is not a bad operation – it’s just not a good one. Here’s a quick lesson: if you want to play in the upscale perishables/prepared foods division, you’d better be a very good operator. No offense to the denizens of some smaller Southern markets where TFM has enjoyed some success, but operating in Destin, FL or Macon, GA ain’t like competing in Glen Mills, PA or Montvale, NJ.
Those retailers may be most obvious to list because of top line/bottom line challenges or future perpetuation questions – and I’m certainly not saying all those merchants are headed for extinction. However, I do believe that many will find life in a different form or with a new partner.
On a broader scale, the truth is that virtually every retailer selling groceries today is being challenged at their highest levels because of ongoing difficult market conditions.
It’s not just the firepower of Amazon.com or Walmart that creates retailer agita – although those two mega-merchants certainly give retailers reason to worry – it’s the food landscape as a whole, where there are too many total stores operating in six distinct channels – supermarket, club, mass, drug, c-store and dollar – that all sell groceries. Add to that the “hidden” dollars generated by ecommerce and foodservice and it’s not hard to see why some retailers want to or will have to find a different matrix or simply put up the white flag.
As for how the years of turmoil have impacted the market leaders, here’s my annual update and analysis.
ShopRite – ID sales were slightly positive and the market leader in Metro New York and Philadelphia operated two more stores than last year and slightly extended its market share dominance in both large markets. According to our data, net new or new replacement ShopRites are planned for: Bronx, NY; Riverhead, NY; Port Jefferson Station, NY; Lake Ronkonkoma, NY; Mount Kisco, NY; Shrewsbury, NJ; Sussex, NJ; Sparta, NJ; Old Bridge, NJ; South Brunswick; Wyckoff, NJ and Stroup Township, PA. That’s a pretty full pipeline and pretty much ensures that the 50-retailer owner/members of Wakefern will maintain and likely build greater market share in the region over the next five years. As I’ve said previously, ShopRite has earned all of its spoils by consistently delivering the most compelling consumer experience in the entire market.
Stop & Shop (New York Metro Div.) – A year of stability for the region’s second largest retailer. And that’s a good thing. No leadership changes, no store closings and more consistency in its messaging. One internal change worth watching: the progress and ultimate effectiveness of parent firm Ahold Delhaize USA’s decentralized merchandising system (which for Stop & Stop is based at its Quincy, MA headquarters). It’s clear by now after watching the parent company’s model that Stoppie, like other ADUSA retail units, is less interested in bolstering store operations and more keenly focused on process and gaining internal efficiencies. From a bottom line perspective, the model is effective, but could it do better if a higher value was placed on increasing store labor and upgrading associate training?
Walmart – Very good year for the Bentonville Behemoth. Walmart’s improvement in service levels, store cleanliness and slightly better customer service were noticeable. Also noticeable was its ability to integrate its growing ecommerce operation into its stores to increase sales. Low prices will always be the company’s cornerstone, but CEO Doug McMillon has achieved something remarkable in his five-year run: he helped change Walmart’s image and culture and was smart enough to convince the board (comprised of several Walton family members) to allow the company to invest heavily in technology and digital initiatives. The results are paying off on the bottom line and with its consumer perception. Clearly a long-term player in any area in which they currently compete.
Giant/Martin’s – Still the best performing “brand” in the Ahold Delhaize USA portfolio. The non-union operator continues to dominate the Central Pennsylvania market, while also faring well with its 67 stores in and around Philadelphia. Nick Bertram moved from senior VP-merchandising in the old Ahold USA structure to become Giant’s president on January 1 and sales have remained solid. As said previously about sister firm Stop & Shop, Giant could be doing better if it put more capital into day-today store ops. Given the mindset of the parent company, that’s unlikely to happen. Also, unlikely is any significant decrease in the company’s market share in its core operating areas.
Acme Markets – There’s still a long row to hoe, but there have been some subtle, positive changes for the division of Albertsons which operates more supermarkets in the Delaware Valley than any other traditional grocer. With a full year under his belt, division president Jim Perkins (in his second tour of duty with Acme), has improved morale and opened up the company’s wallet to lower prices and become aggressive on promotions. An active store remodeling program has also helped. Despite great locations in and around Philly (including the Jersey Shore), Acme will still need to reinvest heavily into its physical plants to avoid losing share to the myriad of competitors its faces. Other questions: can Acme make headway in Northern New Jersey where it continues to struggle after acquiring the largest batch of A&P stores a few years ago? How will the pending merger of Albertsons and Rite Aid ultimately affect how the two merchants, especially with Acme and Rite Aid operating so many stores in the Keystone State?
Weis Markets – A solid year for the Sunbury, PA-based operator which continued to post strong comp stores sales -16 consecutive quarters of positive same-store revenue. The leadership tandem of chairman and CEO Jonathan Weis and COO Kurt Schertle is very effective and Weis has done a good job of improving store operations, upgrading management personnel and combining “infill” acquisitions with a few new stores (the company opened two units in Maryland since the first of the year and will cut the ribbon at its Randolph, NJ store next month). Weis is also continuing to increase its cap-ex budgets and doing a better job with its digital/ecommerce initiatives. With no debt and the majority of the company’s common stock controlled by the Weis family, this is one regional chain that I believe will be around for a while.
Wegmans – The gold standard. Even in its heyday, Walmart couldn’t collapse a market the way Wegmans can. As rugged and diverse as brick and mortar food retailing is today, Wegmans seems almost undaunted by current market conditions. Every store in the Metro New York and Delaware Valley market is doing well over $1 million in sales a week and the numbers keep improving. Even with the heavy competition, that’s not surprising given Wegmans’ stellar execution at store level and its “theater of food” merchandising. The Rochester, NY based company opened two “killer stores” over the past 12 months – Hanover Township, NJ and Montvale, NJ – whose impacts were felt by all retailers that operated within a 10-mile radius of those mega-stores. Wegmans has four other new stores planned for Pennsylvania, New Jersey and New York – Lancaster, PA (opens this September); Middletown, NJ; Brooklyn, NY; and Harrison, NY – over the next few years. That alone will create more major market disruption and make several other existing retailers even more battle weary and scarred.
Krasdale – Krasdale’s model is truly unique. The White Plains, NY-based distributor has served independent retailers in the Metro New York area since 1908 and through its Alpha 1 division, continues to help its independents remain a dominant force in a primarily urban landscape dominated by Hispanic and Asian operators. Krasdale’s customers remain very loyal and the privately-held company succeeds the old-fashioned way: by providing strong service and offering customized programs through its multiple banners including C-Town, Bravo, AIM, Fine Fare, Market Fresh, Shop Smart and Stop 1, that are dedicated to driving sales.
Key Food – A good year for the Staten Island-based retail co-op. While sales have flattened a bit after a tremendous four-year run, Key Food continues to add new independent customers to its base. Its partnership with syndicated data giant IRI has allowed the company to offer targeted data for the five boroughs of New York City where Key is a dominant player. Led by CEO Dean Janeway and COO George Knobloch, Key Food’s direct, aggressive approach has clearly paid dividends. With an all-around strong leadership team and a variety of programs and banners to offer independent retailers in the Metro New York market, the company’s $2 billion sales goal by 2021 is certainly achievable.
Supervalu Seeks To Create Holding Company To Segregate Wholesale, Retail Businesses
As it meanders down a path that many predict will ultimately see the end of most or all of its corporate retail operations, Supervalu proposed a new corporate structure in which its core wholesale grocery business will operate separately from its struggling company-owned retail stores.
In a preliminary proxy statement/prospectus issued on June 7, the Eden Prairie, MN-based firm said the reorganization would change Supervalu’s current corporate structure into a holding company which would “organize and further segregate Supervalu’s wholesale and retail operations in an operationally efficient and strategic manner, including to separate the wholesale and retail operations” held by its current public company entity.
Additionally, Supervalu said the proposed changes would: facilitate the company’s previously announced strategic transformation plan to sell certain retail assets to third parties; better segregate the liabilities of the organization into their respective business segments; increase Supervalu’s strategic, business and financial flexibility; and enable the company to achieve its strategic transformation plan in a tax efficient manner that may facilitate the ability to utilize a material portion of Supervalu’s capital loss carryforward, which could generate approximately $300 million of cash tax benefits for the organization over the next approximately 15 years.
“We have been executing a strategic transformation of our business over the last two years to become the wholesale supplier of choice for grocery retailers across the United States, while also executing initiatives to deliver long-term stockholder value,” said Mark Gross, SVU’s president and CEO. “The proposed holding company structure is another significant and important undertaking by our team that would support and advance our transformation by further separating our wholesale and retail operations in a tax efficient manner.”
More than 75 percent of Supervalu’s revenue is derived from its wholesale business.
Supervalu also advised shareholders not to support any new board members nominated by New York investment firm Blackwells Capital, which has an ongoing proxy battle with the wholesaler/retailer to accelerate its restructuring efforts in an effort to bolster Supervalu’s share price, which was $19.89 at the close of business on June 13. About a year ago, Supervalu initiated a “1-for-7” reverse stock split in an effort to increase trading activity and value. Blackwells, which holds a 7.3 percent equity stake in Supervalu, is seeking to add six of its own candidates to join SVU’s board. Shareholders will vote on the new restructuring at the company’s annual shareholder’s meeting which still does not have a scheduled date.
If this plan is successful, it is yet another indicator that most or all of Supervalu corporate retail will be toast within a year. The probable exception is Cub Foods, the company’s largest retail banner and one that has not experienced the same level of deterioration that has befallen Shoppers, Food & Pharmacy, Shop ‘n Save and the now defunct Farm Fresh banners.
As I’ve said several times recently, Gross is in a pressurized situation which he largely inherited. The pressure from Blackwells certainly exacerbates things, but he’s taken the right approach by attempting to dump much of corporate retail. Unfortunately, many of SVU’s corporately-owned stores aren’t in great physical shape and the current market isn’t exactly a seller’s delight.
Even if the separation of wholesale and retail buys Gross more time and breathing room, he probably won’t get much money or many supply contracts with these store sell-offs. As painful as the process has been (and it will become even more painful), Gross is plotting the right course for Supervalu and he and the board shouldn’t allow any tinhorns from Wall Street to disrupt their reshaping plan.
‘Round The Trade
It looks like Stew Leonard’s is close to finalizing a deal to open its seventh store and first in New Jersey. The high-volume perishables-driven family-owned independent is looking to move into the space formerly occupied by a now shuttered Sears store in the Paramus Park Mall in Paramus, NJ…while we’ve devoted a lot of ink in this column to report about the struggles of New York City-based retailers such as Fairway, D’Agostino’s and Gristedes, it appears another Big Apple icon is headed for rocky waters. Dean & Deluca is in the midst of a major restructuring as it closes stores and attempts to refocus on its core business in New York and in northern California. According to the New York Post and several other sources, the company, now owned by Thai entrepreneur Sorapoj Techakraisi, which acquired D&D in 2014, has been closing stores rapidly over the past year, and now operates 18 stores nationally as well as nine licensed stores overseas. The Post story tells of pending lawsuits from suppliers (confirmed by us) and early termination of leases which has angered landlords. Even in Manhattan it is struggling and recently back out of new stores plans for three prospective units in the Meatpacking district, near Wall Street and in the Graybar Building on Lexington Avenue. It has also hired financial investment firm Emerald Capital Advisors to help with its financial mess. To say that Dean & Deluca in no way resembles its former upscale and exotic stature is a gross understatement. As I’ve said many times, when you go from great to (far) less than that in the perishables arena, you’re done or overdone. Today, not only is Dean & Deluca a shadow of its former self, it just isn’t a very worthy shopping experience. And as it can only do, the Post summarized D&D’s dilemma with just one sentence: “Can’t afford that $45 box of cookies at Dean & Deluca? Neither can Dean & Deluca?”…BJ’s quest to go public has created a lot of hoopla over the past month, and no matter what investment path it takes, the third-ranked club store operator will have to continue to move the needle forward if it wants to keep pace with rival and club store king, Costco. That Issaquah, WA based club store king posted another phenomenal sales and earnings report for its third quarter ended May 13. The core numbers: overall revenue up 12.1 percent to $31.62 million; U.S. comps increased 7.7 percent (excluding fuel and foreign exchange); membership fees rose 14.4 percent to $737 million; store traffic grew 5.1 percent; ecommerce sales jumped 36.8 percent; and earnings increased from $700 million to $750 million. During the 13-week period Costco opened two new club stores and plans 25 new units in overall fiscal ‘18. Impressive!…Amazon.com’s Whole Foods has added Philadelphia, Baltimore, Richmond and Boston to its list of cities where it will offer free two-hour delivery of natural and organic products through Amazon’s “Prime Now” service. That announcement comes on the heels of WFM expanding the geography where it will offer a 10 percent savings to all Prime members. That program was initially launched in Florida in April and is now available in 12 more states mainly in the West and Southwest. The service is expected to be offered at all Whole Foods by the end of the year…Walmart is adding some flash of its own, launching “Jetblack” a new personal shopping service that lets customers place orders via text message and receive same-day or next-day delivery, Currently, Jetblack is only available in parts of New York City and membership costs $50 a month. However, this new high-end service, developed by the Behemoth’s in-house incubator, Store No. 8, does not deliver groceries or alcohol.…”Slow” Eddie Lampert, CEO of Sears Holdings and leader of the company’s “crash and burn” extinction tour, is closing another 63 stores (48 Sears and 15 Kmarts), mostly in the West and Midwest. Stores in the Mid-Atlantic/Northeast slated for closure by September include Sears units in Springfield, MA; Peabody, MA; Lawrenceville, NJ; Ocean, NJ; Burlington, NJ; South Hills, PA; Pittsburgh, PA and Kmarts in West Babylon, NY; Rosedale (Queens), NY; and Latrobe, PA…while I’m not doubting the veracity of Oliver Wyman’s recent survey in which it claims that Lidl is growing sales and gaining popularity with millennials, I’m wondering if the Manhattan-based consulting firm took into consideration the bigger issue with Lidl – how many people aren’t shopping at the discounter because of disappointing expectations which have led to early lackluster sales. Who commissioned this report anyway? Perhaps a more meaningful study by Catalina – “Defending Supermarket Share When Lidl Comes to Town” – points out that sales at 83 supermarkets operating within a 3-mile radius of 30 Lidl stores declined by 7 percent during the first month of a Lidl opening, but bounced back to show only a 2 percent decline within four months…Kroger will exit the Raleigh-Durham area by August. A total of 14 stores are affected, impacting approximately 1,500 associates. However, eight of those stores will essentially change banners as Kroger subsidiary Harris Teeter will occupy them. Jerry Clontz, president of Kroger’s Mid-Atlantic division based in Roanoke, VA (and a former Harris Teeter executive), noted that Kroger has not been able to grow its business the way it would like and, after a thorough evaluation, decided to close or sell its R-D stores. The obvious reason for Kroger’s underperformance in the most affluent part of the state is overstoring created by new competition, especially from Publix, which entered the area in 2015. Coming soon will be four new Wegmans stores which will disrupt the market in an even more volatile manner. The big Cincinnati-based merchant has operated in the Triangle area of the Tar Heel State since 1989…several obits to report over the past month. For the last 10 years, since I began writing about industry members and celebrities passing on, I have noticed an increasing number of deaths by suicide. Two very talented personalities – fashion designer Kate Spade and celebrity chef Anthony Bourdain – both took their lives earlier this month. Spade, who rose from an entry-level position at Mademoiselle magazine to senior editor to fashion designer, took her life at the age of 55 in her home in Manhattan. Bourdain, 61, a colorful personality who was a recovering drug and alcohol addict, had seemingly cleaned up his life and was starring in his Emmy-winning culinary and travel show “Parts Unknown.” He was found dead in his hotel room in France while filming an episode of his show. Very sad endings for two extremely talented artists… also passing away was San Francisco 49ers wide receiver Dwight Clark, 61, who was on the receiving end of “The Catch” in the 1981 NFC championship game against the Dallas Cowboys, which remains one of the greatest individual plays in the history of the National Football League. Clark, who disclosed that he had Lou Gehrig’s disease in early 2017, fought his illness with courage and dignity. The impression that Clark left with his family, friends and teammates was aptly summarized by former 49ers owner Ed DeBartolo Jr.: “I will always remember Dwight the way he was – larger than life, handsome, charismatic, and the only one who could pull off wearing a fur coat at our Super Bowl parade. He was responsible for one of the most iconic plays in NFL history that began our run of Super Bowl championships, but to me, he will always be an extension of my family. I love him and will miss him terribly.”…Gerard Marenghi is dead. You may never have heard of Marenghi, but you certainly have seen him. Marenghi, who changed his name to Jerry Maren when he entered show business, was the last living Munchkin from the 1939 movie “The Wizard of Oz.” He passed away earlier this month at the age of 98. In the classic film, Maren was part of a trio of Munchkins who sang “The Lollipop Guild” and welcomed Dorothy (Judy
Garland) to Munchkinland. Presumably, Maren can now be found “somewhere over the rainbow.”