Taking Stock

Amazon’s NYC HQ2 Deal: Where’s The Fair Shake For Other Competing Merchants?

Other than clueless New York City Mayor Bill de Blasio and slightly less clueless Governor Andrew Cuomo and Amazon itself, who actually likes the fact that one of the world’s most powerful companies is getting a heavily subsidized ride to open HQ2, its second headquarters (along with Crystal City, VA), in the Big Apple?

The fact that local citizens and lawmakers (including city councilman Jimmy Van Bramer whose district covers Amazon’s planned Long Island City site) knew virtually nothing about the deal until it was announced is unseemly enough. When you add the future effects of increased traffic (both automobile and subway), potentially spiraling real estate costs and the city’s $2.8 billion incentive package bestowed upon Amazon, how is this a good deal for most New Yorkers?

Advertisement

And if you believe de Blasio and Cuomo’s “promise” that the Amazon deal will fetch a return of $12.5 billion in tax revenues, I’d advise you to check the dealmaking scorecard of both politicians.

But there’s a separate hypocrisy that’s also occurring with the Amazon lovefest – the unfairness of nearly $3 billion in incentives to the country’s fastest growing retailer and the effects Amazon’s local presence will have on existing retailers that have operated for many years in the city of New York.

What kind of incentives have independent retailers who are supported by Allegiance, General Trading, Key Food, Krasdale or Wakefern received over the past 10 years? How about Fairway, Stop & Shop or Target? And even though Amazon-owned Whole Foods has received some financial help with some of its newer NYC projects, that aid is nothing like the bonanza it will be receiving from a mayor and governor who seemed to have selectively shifted from their usual anti-business mindsets.

Advertisement

And how about Walmart? Whatever you think about the “Behemoth,” has there ever been a more determined effort than the one waged by New York City’s political leaders to keep Walmart out of the five boroughs?

Local pols have consistently used the “anti-union” mantra when railing against the Bentonville, AR-based juggernaut. But wait a second, isn’t Amazon a non-union company? And Walmart may get the last laugh with this ridiculous political tug of war, by already selling products in the city through its jet.com and walmart.com online entities.

This story is far from over. Once Amazon’s plans become more crystalized, the pushback will become stronger. And we’re already seeing some initial signs of protest. According to Bloomberg, some associates at the company’s newly opened (September 2018) 855,000 square foot fulfillment center in Staten Island have publicly stated their intent to unionize, allying themselves with the Retail Wholesale, Department Store Union (RWDSU).

Additionally, anti-Amazon stickers decrying the Long Island City plan have appeared on products at several Whole Foods stores in NYC. Such attention-getting slogans as “Don’t buy it – the Amazon deal is a bad deal for NYC” and “Stinks – the Amazon deal stinks for NYC” have been placed on both produce and dry grocery items by mysterious Amazon skeptics.

“We’re looking at any and all ways in which we can reassert the city’s and people’s process here. It cannot be that the mayor, governor and (Amazon CEO) Jeff Bezos – literally three men in a room – can conspire to give him $3 billion…,” said councilman Van Bramer.

He’s right. Not only would his constituents ultimately suffer, many other New York City denizens and merchants would also feel the torment of this insider deal.

Acosta Reorg Creates Uncertainty About National Broker’s Long-Term Health

The first call came from a large retailer in the Northeast. He asked if I was aware of the recent changes at Acosta Sales & Marketing, the second largest national brokerage organization and one of the most influential sales and merchandising companies in the grocery business.

I have been following the Jacksonville, FL-based firm for many years and was certainly aware of some of their financial issues and organizational changes that have been made in the past few years, especially since private equity firm The Carlyle Group acquired Acosta in 2014. But as I further researched the current changes, I was surprised to learn the depth of its recent restructuring.

According to a video recorded by new CEO Alejandro Rodriguez Bas (ex-C&S, ex-Lala

Dairy) who came aboard in July, Acosta has made these changes in order to become a more efficient organization that will “eliminate structural redundancies and barriers.” Acosta will now operate six geographic regions (hubs) across the country with five dedicated customers teams – Kroger, Publix, Target, H-E-B and Albertsons/Safeway (what happened to Walmart, Ahold Delhaize USA and Wakefern?). The company said it will also resign “negative margin business” because “like you (Acosta’s clients) we need to make a profit.” Bas also promised that Acosta will have 4 percent more planning and selling resources than before.

Since we began Best-Met Publishing 40 years ago, our publications have always devoted a lot of space to the important role of the food broker in the entire grocery industry. We’ve seen the business evolve from a local/regional mom-and-pop entrepreneurial model to one where three huge national brokers, some large regional entities and a few specialty brokers now comprise the sales agency playing field.

Ever since the late 1990s, when the roll-up movement of many local brokerages began and evolved to the formation of a national broker model, there has been much industry discussion about whether a “one size fits all (or many)” sales organization could sustain itself and ultimately prosper. In the early years, the most public of those national firms – Marketing Specialists, which was formed in early 1998 and literally went public later that year – flamed out spectacularly three years later.

Today, along with Acosta, Advantage Solutions and Crossmark remain as the two other national food brokerage companies.

But all three companies, in my opinion, have been handicapped by the significant debt on their books and the ownership structures they are governed by (all are controlled by private equity firms and both Advantage and Acosta have had multiple PE owners over the past 14 years).

Of all three firms, Acosta seems to be the most strapped. It currently sits on a $3 billion debt load (that it reportedly hasn’t been significantly reduced in 2018). Earlier this year, Moody’s, the economic research and credit rating service, downgraded Acosta’s credit rating (to Caa2 CFR). The April 2018 report noted: “The Caa2 also reflects ongoing industry headwinds and Acosta’s financial sponsor ownership, both of which contribute to its weakened financial profile. Acosta’s credit profile continues to benefit from its ability to cover its debt service costs with EBITA to interest expense of 1.4 times at January 31, 2018.

And according to Maggie Taylor, Moody’s senior VP who is the company’s chief Acosta analyst: “We view Acosta’s capital structure as unsustainable as we believe industry headwinds will make it difficult for it to improve EBITDA over the next two years to the extent that it supports refinancing the large amount of debt which matures in 2021 without a high risk of a restructuring.”

So, the restructuring was executed late last month, but at quite a cost. We spoke to more than a dozen current and former Acosta employees as well as some of the company’s principals and retail customers. All were concerned about the staying power of one of the great selling organizations in the business and the effect the changes would have on the current associates. Several also expressed concerns about the Acosta executives who were riffed as part of the reorg.

Reportedly, Acosta cut approximately 10 percent of its total payroll – resulting in an estimated “savings” of about $30 million annually. More than 30 jobs at the SVP, VP and director level were also reportedly eliminated as the company seeks more financial stability and a revised operating model going forward. Moreover, we’ve heard that what remains of Acosta’s “fresh” unit will be rolled into the company’s core grocery business.

We reached out to Acosta for a comment on the current events and were told that we would only receive an email response: “As an organization with experience and a knowledge base that spans more than 90 years, Acosta has weathered and witnessed a myriad of changes in the retail environment and the consumer packaged goods (CPG) industry. In recent years, the market landscape has transformed much more rapidly than ever before in our industry’s history. Alongside our clients and customers, we have collectively felt the impact of this fundamental shift in our businesses.

“To successfully lead our organization, our clients and customers into the future, we realized a need to execute a strategic organizational redesign to respond more efficiently to our clients’ business challenges and to mirror the trends impacting the CPG industry as a whole. After a thorough evaluation, Acosta will work to establish a simplified, more standardized model of operation that will not only eliminate inefficiencies and reduce organizational layers but will allow the company to better invest in frontline talent who can add value to clients’ businesses. We are actively recruiting for these frontline positions. The redesign will enable Acosta to maximize results for our clients and customers.” said Kirsten Barnhorst, senior manager marketing communications.

Of course, Acosta’s issues are more than financial. Much like its industry peers, it has attracted some of the country’s largest CPG manufacturers into its fold by offering a diversified menu of national services at reduced commission in many cases.

According to our reporting, large packers such as ConAgra and Nestle are paying 1 percent or less, a number that seems incompatible with profitability no matter what level of service any broker is performing.

If Bas and Acosta management think they can attain higher commissions from their larger CPG clients by offering a more personal and focused approach, that’s a bet that I wouldn’t want to make. And when financial decisions become a prime motivator on how to manage your business, you’re already heading backwards.

With the tremendous industry consolidation of the past five years resulting in fewer retail customers to serve, you have to wonder, does the national broker route still provides the best service and sales opportunities for larger clients today?

And specifically at Acosta, can a new CEO and a restructured organizational approach allow it to overcome significant debt and the impediments that come with PE ownership?

‘Round The Trade

It hasn’t been a great month for UNFI which suffered an $18.8 million operating loss in its first quarter. And the financial community, which was not smitten by the company’s acquisition of Supervalu earlier this year, hasn’t helped to bolster UNFI’s image. On the day prior to the purchase announcement (July 25), UNFI was trading at $41.18 per share; on December 13, the stock price had nosedived to almost a 15-year low of $10.17 per share (it was also announced that UNFI would be shifting its trading platform from NASDAQ to the New York Stock Exchange on January 2). Obviously, analysts fear the significant debt that UNFI inherited with the deal and they question the Providence, RI-based distributor’s ability to shift from a natural/organic and specialty distributor to a full-service wholesaler, and a troubled one at that. UNFI is also making further progress on selling its corporate retail stores. Coborn’s Inc., St. Cloud, MN, a current UNFI customer and owner of 114 retail stores (including 53 supermarkets), acquired eight of the nine Hornbacher’s stores (including one under construction) in North Dakota and Minnesota. And we expect to hear something early next year about several new buyers of UNFI’s Shoppers Food & Pharmacy units since final bids were submitted by interested parties last month. Expect Giant/Landover, Safeway, Harris Teeter and a few independents to be in the mix…C&S Wholesale, which slugged it out with UNFI in a bidding war to acquire Supervalu, made an acquisition of its own earlier this month when it agreed to buy Olean Wholesale Grocers, a co-op based in that Western New York berg. Olean currently services more than 270 independents and c-stores and operates a 380,000 square foot DC. C&S will also continue to supply Best Markets stores, even after Lidl officially acquires the Long Island based family-owned merchant. That’s quite a coup for the Keene, NH wholesaler because Lidl currently operates three under-utilized warehouses of its own. Once the conversions to Lidl’s operating model are completed next year, expect the product mix to change radically…it looks like Campbell’s and hedge fund bully Dan Loeb (Third Point LLC) have settled their differences. No, there won’t be an overthrow of the board and Campbell’s won’t be selling to Kraft/Heinz. Instead, Third Point will get two board seats – Kurt Schmidt, former Blue Buffalo CEO, and Sarah Hofstetter, president of Comscore – which will expand Campbell’s board to 14 members. Meanwhile, the Camden, NJ-based soupmaker continues its search for a new CEO to replace Denise Morrison, who left the company in May…according to both Bloomberg and the New York Post (still the greatest headline writers in the rag biz), FreshDirect has hit a rough patch after experiencing start-up issues with its new 400,000 square foot fulfillment center in the Bronx and heightened competition from other online delivery merchants including Amazon, Instacart, Peapod and jet.com. Co-founder and former CEO Jason Ackerman left the company a few months ago to be replaced by David McInerney, another co-founder of the 19-year old firm. FreshDirect not only serves Metro New York but has also expanded into the Delaware Valley and the Washington market in the last few years…apparently “Slow” Eddie Lampert hasn’t given up on reviving Sears, the iconic retailer he personally drove into ruins. According to published reports, Lampert wants to use $4.6 billion of his own money to resuscitate the bankrupt company. In more realistic news, the company will close an additional 40 stores by the end of the year and plans to offer 505 stores as a group to be sold next year – LOL! What’s not so funny is the reported initial legal bill that law firm Weil, Gotshal & Manges (WG&M) slapped on Sears – $5 million for 17 days of work ($1,600 per hour). Nice work if you can get. The same law firm is also advising Catalina, the St. Petersburg, FL-based marketer and checkout coupon provider, which filed for Chapter 11 bankruptcy protection on December 13. With a debt load of $1.9 billion and private equity ownership (Berkshire Partners and Hellman & Friedman), Catalina has been struggling for several years with financial and management issues. It is hoped that the elimination of $1.6 billion in debt will “enable us to accelerate investments in technology, advanced analytics, data science and talent to strengthen our core capabilities and enable date-driven solutions for our customers,” said CEO Jerry Sokol, who joined Catalina in October…in a surprise move, Amin Maredia, CEO of Sprouts Farmers Market, has resigned in the midst of one of most successful runs in the history of the Phoenix, AZ-based natural and organics retailers. Apparently, no hidden ball trick here – Maredia, who became chief exec in 2015, is leaving to pursue other interests. Jim Nielsen, Sprouts’ president and COO, and Brad Lukow, CFO, will take on co-CEO duties on an interim basis. Sprouts is ramping up its Mid-Atlantic expansion rapidly and its balance sheet remains very strong. In a not so surprising move, Instacart and Whole Foods will be divorcing. Instacart began providing home delivery to WFM in 2014 and currently services 76 Whole Foods stores, a number that has been declining since the organics merchants was acquired by Amazon in June 2017. As Amazon began expanding its own PrimeNow service to many of its nearly 475 stores, Instacart’s fate was sealed. And according to market research firm Hexa Research, online grocery sales are expected to reach nearly $27 billion by 2025. Current estimates peg online grocery sales at approximately $17 billion…Costco continued its record sales and earnings pace, posting a 10.3 percent sales increase in its first quarter ended November 25. Comp store revenue (ex-fuel) jumped an impressive 8.3 percent, in-store traffic increased 5.2 percent and its e-commerce sales rose 26.6 percent. Profits were also strong – a 19.8 percent gain to $767 million. Costco CFO Richard Galanti said that despite the strong numbers, other club operators and come supermarkets were impacting the Issaquah, WA-based merchant’s “fresh” margins. “Our competitors are working in a little lower margin there and we’re not going to let anybody take it away from us,” he explained. He added that he expects Costco to open 20-23 net new clubs (and four relocations) next year. That likely includes a new store in Harrison, NY (where Wegmans is also building a new unit) and possibly Cherry Hill, NJ (which also may open in 2020)…just before presstime, we learned that Anthony Hucker, former president of Giant/Landover and current CEO of Southeastern Grocers, has been awarded more than $4.5 million from another former employer, Schnuck’s Markets. Hucker sued the St. Louis-based regional chain after it fired him in October 2016 for what an arbitrator ruled was wrongful termination. As long as I’ve known the erudite Englishman, no matter the strengths of the headwinds that he faces, he always seems to be land on his feet – with a smile.

Local Notes

Relating to my piece about the “gimmes” that Amazon would be getting for building its HQ2 location in Long Island City, Google is proving that new tech jobs will come to NYC without the freebies that “Godzilla” will be getting. The online information giant, whose parent company is Alphabet Inc., said it will add 7,000 new jobs (double its current workforce) in Manhattan without the special perks that Amazon was offered. Google will develop a 1.7 million square foot campus (Hudson Square) near the Hudson River in the Chelsea and Tribeca areas of Manhattan and will spend more than $1 billion for its New York City expansion…Uplift Solutions, the great non-profit spearheaded by ShopRite’s Jeff and Sandy Brown, is working with Atlantic City to build a new supermarket in one of the most economically strapped cities in the Garden State. Other than limited assortment merchant Save-A-Lot, which opened in 2012, there hasn’t been a full-service supermarket in “casinoland” since 2006. Research is ongoing, and no retailer has been officially selected yet, but according to a spokesman for the project, funding options are currently being explored and the store hopes to open in the 2019-2020-time frame…Paramus, NJ-based E.A. Berg, a family-held food broker that been in business since 1923, has agreed to partner with Boise-ID-based national brokerage Impact Group. For E.A. Berg, the deal is expected to expand its range of services and geography; for Impact, the partnership will create a greater East Coast presence. Founded in 1994, Impact has grown significantly in the past two years, aided by investments by PE firm CI Capital…Giant/Martin’s has entered into a multi-year agreement with the Commonwealth of Pennsylvania and the state’s Department of Agriculture to become the official sponsor of the Exposition Hall at the PA Farm Show Complex in Harrisburg. In related news, the Ahold Delhaize “brand” has delayed the opening of its first small format store – Giant Heirloom Market – to next month. That 9,500 square foot specialty store is located on Bainbridge Street in Philadelphia. In Newton, MA, Stop & Shop cut the ribbon on its version of small-format retailing on December 14. De-emphasizing (and perhaps ultimately scrapping the bfresh name in the region), the 21,000 square foot store – which will operate as a Stop & Shop – features an upscale look with an emphasis on perishables and prepared foods. As for the three bfresh stores that remain open in the Boston area, plans are for the company’s Brighton unit to close while stores in Allston, MA and Somerville, MA remain open with a potential new name down the road…Sheetz, one of the best c-store operators in the country, has announced that Travis Sheetz, executive VP-operations, has been promoted to the new post of COO, the first chief operating officer in the history of the 66-year old family-owned firm. Taking Travis’ former spot is Adam Sheetz, a third-generation member of the family, which operates more than 500 stores in PA, MD, WV, OH and NC. Joe Sheetz remains CEO of the Altoona, PA-based company…a tip of the hat to Ron Carkoski, chief executive and president of Four Seasons Produce, who is retiring from the Ephrata, PA-based distributor after more than 35 years in the produce business. Carkoski joined Four Seasons in 1994 and become CEO seven years later. Along with helping lead Four Seasons to a period of unprecedented expansion and success, Ron is truly one of the guiding lights in the entire produce industry with his tireless work ethic and his mentoring abilities. He is one of those rare people who makes you feel better about yourself once you’ve interacted with him. Ron will be moving back to his native Dorr County, WI (Green Bay area) where he hopes to keep semi-active in the business. We wish him all the best in his future endeavors…also kudos to our buddy, Dave Dulude, VP of independent retailer sales at Imperial Distributors. Dave will be retiring at year’s end after a lengthy and productive career at the Worcester, MA-based GM/HBC distributor. Dependable, always candid and quietly very funny, Dave’s impressive sales skills reminded me of those old school peddlers who met their customers fully prepared with a firm handshake and a keen understanding of their specific needs. We’ll miss Dave’s contributions to his company, his humor and generosity…unfortunately, it was a busy time at the obit desk this month.…from the world of entertainment, Ken Berry has left us. Berry, 85, was a big TV sitcom star in the 1960s, 70s and 80s with key roles in “F Troop” (1965-1967), “Mayberry R.F.D.” (1968-1971) and the “Carol Burnett Show” spinoff “Mama’s Family” (1983-1989). Berry said his favorite role was playing Capt. Wilton Parmenter, the bumbling officer in the goofy but hilarious sitcom about a group of inept soldiers defending their fort from the local Indian tribe (the Fugawis, changed later to the Hekawis after the censors figured out the joke)…one of the great screenwriters of our generation, William Goldman, has also transcended to a new level of consciousness. Among Goldman’s best and most notable screenplays were “Butch Cassidy & The Sundance Kid” (1969), “All The President’s Men” (1973) and “The Princess Bride” (1987). He also wrote a great book – “Adventures In The Screen Trade” (1983) – a cynical and funny book about movie making. He was 87…Penny Marshall has also left us. The Bronx born actress and director created one of TV’s most beloved characters – Laverne DeFazio – on the hit show “Happy Days” (1976-1983). A movie-lover all of her life, Marshall 75, yearned to become a director and made her behind-the-camera debut in the 1986 Whoopi Goldberg comedy “Jumpin’ Jack Flash.” While that film was not a success, her next project certainly was. Her effort in the comedy “Big” (1988) made her a mainstay director in Hollywood. In 1992, she directed “A League of Their Own.” Both “Big” and “League” became the first two $100 million films directed by a female. A new documentary Marshall made about basketball weirdo Dennis Rodman is scheduled to be released next year. Marshall’s show business roots were very strong; she was once married to director/comic actor Rob Reiner (“All In The Family” and “This Is Spinal Tap”) and her late brother director/character actor Garry Marshall (“Pretty Woman” and “Murphy Brown”)… I was sad to hear about the passing of Ricky Jay, 72, a great “that guy” character actor and perhaps the best sleight-of-hand card trick artist of his time. Often appearing as a nefarious dude or a notorious henchman in such films as “House Of Games” (1987), “Boogie Nights” (1997) and “The Spanish Prisoner” (1997), Jay (born Richard Jay Potash) really excelled in his ability with a deck of playing cards. His one-man show was a combination of history, card throwing and unbelievable tricks. Jay was one of my favorite performers of the last 30 years and his 1996 HBO special, “Ricky Jay and His 52 Assistants” (hard to find) and a 2012 documentary about his life called “Deceptive Practice: The Mysteries and Mentors of Ricky Jay” are very much worth seeing. You’ll be mesmerized by this guy… “Bleecker Bob” has also died. The proprietor of one of the great record stores of all time, Robert Plotnick, who was 75, ran his Greenwich Village vinyl vault from 1967 to 2013. A disenchanted attorney who loved rock ‘n roll, Plotnick left the legal profession in 1967 and opened his first record store – Village Oldies – at 149 Bleecker Street. Over the next 46 years “Bleecker Bob” moved his shop to several locations in the Village. However, with each move, nothing seemed to change – each location always had the same funky look – tens of thousands of albums, rock posters from all eras and a strange collection of clocks. I know that I have dropped a few shekels at “Bleecker Bob’s” emporium and I was happy to do it, because I learned a lot about formerly unknown (to me) artists and also knew
I was supporting somebody whose deep love of music was passionate and genuine.