Taking Stock

Amazon Pulls Plug On NYC HQ2 Plan; Volume Dips At Brick & Mortar Units

Less than a week after The Washington Post and New York Times published sourced stories that Amazon was reconsidering its decision to build part of its new secondary headquarters (HQ2) in New York City, the Seattle-based e-commerce distribution, retail and analytics firm confirmed that speculation.

The reason: according to the company it was opposition from politicians. “While polls show that 70 percent of New Yorkers support our plans and investment, a number of state and local politicians have made it clear that they oppose our presence and will not work with us to build the type of relationships that are required to go forward with the project we and many others envisioned in Long Island City,” Amazon said on a website posting.

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This seems like a huge cop out to me. Yes, there was vocal opposition from local political and consumer groups, but they still represented a minority. But perhaps the message of the minority was more salient than it was loud.

That message in a nutshell questioned whether the promise (yes, it was only ever a promise) of bringing 25,000 jobs to New York City was worth the trade-off of dealing with the level of disruption to the city’s transportation system while also adversely impacting the cost of housing in the area. Moreover, giving Amazon, a company with the largest market cap value in the U.S. -$800 billion – run by the richest man in the world $2.5 billion in tax credits and an additional $500 million in state construction subsidies, would seem to be highly unfair to the thousands of businesses that struggle under the expensive and over-regulated corporate environment that comes with operating a business in the Big Apple under a mayor who seems to have little concern for existing enterprises.

In the end, the City of New York should shoulder some of the blame for this reversal. The city’s infrastructure has been subpar for years; it’s a complex geography to smoothly navigate and the union presence in the metro New York market – unlike many other areas in the country – is fierce and dominant. But Amazon knew those shortcomings going in when it decided to make NYC one of two winners from a list of 238 cities they looked at.

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Amazon said it would continue to build its co-secondary headquarters in Crystal City, VA and develop an Operations Center for Excellence in Nashville that will handle customer fulfillment, transportation and supply chain activities, but will not pursue a search for another HQ2 city at this time.

Even though I thought, on a balanced basis, this was a bad deal for New York City, I’m frankly surprised that Amazon caved so quickly. I guess if you poke a few holes in Godzilla, the big monster cowers and retreats.

In other Amazon news, the company recently released fourth quarter results, which surprisingly saw a dip in its brick and mortar stores’ performance. Not surprisingly though, the company’s overall sales and earnings were once again explosive as the Seattle-based juggernaut’s earnings jumped to $3 billion compared to profits of $1.9 billion in last year’s Q4. Overall sales rose an impressive 20 percent to $72.4 billion. However, revenue at its 476 Whole Foods Markets, nine Amazon go stores, 18 Amazon bookstores, three 4-Star outlets and 87 Amazon Pop-Up units decreased 3 percent year-over-year. While I can make a pretty good argument that Amazon hasn’t done much to improve WFM, it should be noted that it’s still early in the game (20 months) and just by linking “Prime” members’ deals with its largest brick and mortar segment, there’s future gold in that relationship. However, the true bigger picture is the incredible numbers that Amazon continues to post with its core online silo. Sales for the quarter were nearly $40 billion in that segment, a 13 percent increase over 2017. And for the full year, volume jumped 31 percent to $232.9 billion. That’s enough reason for Amazon CEO Jeff Bezos to smile.

Earlier this month, the Wall Street Journal reported that contrary to its effort to slash pricing which occurred shortly after Amazon acquired Whole Foods in June 2017, the Austin, TX-based merchant has been raising prices according to a market basket survey reported in the paper. To be fair, suppliers have been raising their prices across the board for the past nine months for several reasons. The impact of tariffs has played a role and so have increases in labor, freight and materials. We are in a period of moderate inflation in the food business and virtually all merchants have raised retails.

Of course, there’s a bit of eyewash here. Yes, Whole Foods made a big deal of slashing prices on about 50 items shortly after the Amazon deal was announced. But there was never an effort to cut prices across the board. However, in the 20 months of ownership, Amazon’s influence on WFM could be best seen with their Prime customers, where discounts are more readily available and Whole Foods’ marketing efforts are more aggressive.

And why not cater to your best customers who are paying $119 a year to gain those upgraded services? Currently there are more than 100 million Prime members with that number rising about 10 percent annually. Those membership fees create $12 billion in foundation money before the clock starts (to compare, Costco’s membership fees deliver about $2.6 billion to that company). With such a windfall created by what is arguably the planet’s greatest marketing program, you can afford to embrace the “whole paycheck” image while smiling all the way to the bank.

Supervalu Integration Moving Slowly; UNFI Sues Goldman Sachs For Excessive Fees

Be careful what you wish for. United Natural Foods Inc. (UNFI), the natural/organic/specialty/ ethnic distributor suddenly became a full-service wholesaler last October when it acquired Supervalu.

It’s been a tough go for the Providence, RI-based firm whose stock price has tumbled from about $45 a share to $14 in the nearly seven months since the deal was announced. Not only is Wall Street concerned about the large debt that UNFI inherited with the $2.9 billion acquisition, many Supervalu-supplied independent retailers have criticized the distributor for poor communications and less than satisfactory service levels, especially for products supplied from the company’s new DC in Harrisburg, PA that opened in October.

Sources have told us a major reorg will be announced in the next few weeks, but retailers, vendors and financial analysts remain concerned that combining a specialty-oriented distributor with a full-service wholesaler will be exceedingly difficult to accomplish. And the dozen or so financial sources we’ve spoken to find it hard to believe UNFI’s prediction that realizing $175 million in synergy savings over a three-year period is achievable.

Certainly, some of these challenges can be attributed to growing pains created by integrating two significantly different cultures which, when analyzed deeply, operate two distinctly different businesses. However, the debt service incurred and the reality that the number of independent retailers as a group is declining are two visceral hurdles that will challenge UNFI next month, next year and a decade from now (if it still owns the company by then).

There is a potential bright light for UNFI, though. Not in operations, merchandising or administrative synergies, but in the courtroom. UNFI filed a lawsuit against Goldman Sachs Group alleging the investor firm improperly advised the distributor in its acquisition of Supervalu, extracting more than $200 million for advising the big distributor.

UNFI’s suit, filed February 4 in New York State Supreme Court, asserted that Manhattan-based Goldman Sachs put its interests ahead of that of a corporate client in order to control “all aspects of the transaction in order to extract millions in unjustifiable interest, fees and damage.”

A primary focus of the multi-count suit is a financing loan of approximately $2 billion that Goldman Sachs arranged for UNFI in the deal. The wholesaler charged that the investment bank arranged the financing in a way that hurt UNFI but benefited the financial firm and its hedge fund clients that had placed bets in the credit-default swap (CDS) market against Supervalu. They also accused Goldman of taking advantage of the deal’s terms to extract more money from UNFI.

Goldman Sachs denied UNFI’s claims and says it will defend itself against the suit.

UNFI said it acquired Supervalu to become a full-service wholesaler, and expected Goldman Sachs to provide advice and services to arrange the acquisition, which was announced in July of last year and closed on October 22.

“We feel we have an obligation to hold Goldman Sachs and others accountable for the ways in which they materially harmed UNFI and its shareholders in arranging the financing and managing related activities for our acquisition of Supervalu,” said a statement from UNFI.

Named defendants in UNFI’s complaint include Goldman Sachs and its principal executive overseeing the Supervalu transaction engagement, as well as Bank of America, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated. UNFI filed similar claims separately against U.S. Bank for its collusive action, led by Goldman Sachs, in these matters.

UNFI’s complaint laid out how Goldman Sachs used its market power and influence to exploit the company as part of a concerted effort to maximize the bank’s profits. UNFI said it entrusted Goldman Sachs to provide a full range of transaction advisory services and to arrange a multi-billion-dollar loan for the acquisition of Supervalu. UNFI asserted that, while positioning itself as a trusted advisor on the one hand and its counter-party lender on the other, Goldman Sachs consolidated its command over all aspects of the transaction in order to extract millions in unjustifiable interest, fees, and other damages suffered by UNFI and its shareholders.

“We feel we have an obligation to hold Goldman Sachs and others accountable for the ways in which they materially harmed UNFI and its shareholders in arranging the financing and managing related activities for our acquisition of Supervalu,” said Steve Spinner, UNFI’s CEO and chairman. “We expected our extremely well-paid transaction advisors to provide ethical counsel and unbiased support around this landmark acquisition – not leverage their positions to pursue larger profits for themselves and other clients at our expense and ongoing damage. UNFI is completely committed to the Supervalu combination and firmly believes in its many benefits and synergies, as we have repeatedly exhibited, but we are also determined to pursue our claims against the defendants for their unlawful acts surrounding the deal.”

UNFI said it will seek to recover damages through the lawsuit. The complaint charged the defendants with breach of contract for misappropriating $40.5 million in term loan related marketing period fees as well as withholding $11.4 million in advisory fees from the term loan. Moreover, the suit charged that the defendants breached their duty to act in good faith by forcing UNFI to increase the cost of financing, which damaged the company by $140 million, and committed fraud against UNFI, in turn manipulating the $470 million market for Supervalu credit-default swaps. UNFI also alleged that Goldman was focused on maximizing their own profits, while failing to make good faith efforts to syndicate the term loan prior to the closing of the Supervalu acquisition.

UNFI additionally asserted that the defendants made material misrepresentations and omissions of fact to induce UNFI to accept their demand that Supervalu be added as a co-borrower on the term loan. UNFI claimed that Goldman Sachs said that the impact would be minimal. However, UNFI alleged that the effect of adding Supervalu as a co-borrower caused significant harm to UNFI because – “unbeknownst to the company but well-known to Goldman Sachs” – the change was part of an unlawful quid pro quo between the bank and CDS holders to solidify their participation in the term loan. The co-borrower adjustment spurred an artificial and significant spike in the value of CDS protection contracts held by the bank’s hedge fund clients.

I’ve written a lot of stories about litigating against investment banks and hedge funds. These cases are very difficult to prove and typically take years to resolve because of the seemingly unlimited dollars these financial service firms will burn through to defend themselves. I’m not sure UNFI can wait that long.

Lidl Gets New U.S. Chairman Of Ops; Unveils Discount Unit In Aberdeen, MD

It looks like (thus far) under-performing discount retailer Lidl is bringing in more corporate firepower to its U.S management team. The German based merchant, which entered the U.S. in June 2017, has named Roman Heini (that’s neither a typo nor a statue that you might see on Via del Corso) chairman of its U.S. operations. The 18-year Lidl veteran will work with Johannes Fieber, U.S. CEO who was named to lead U.S. operations last June. Both men will be based at the company’s headquarters in Arlington, VA.

While Lidl has fallen short of its goal of 100 new stores during its first year of operation, the limited assortment merchant unveiled its first downsized unit last month in Aberdeen, MD.

The 25,000 square foot new store, which has been on the books since 2016, is located on Route 40 in the Harford County berg about a half mile from a smaller, six-year old Aldi unit and a large Walmart SuperCenter.

By early 2018, Lidl had opened only about 50 U.S. stores, many of which have been underwhelming. Parent company Schwarz Group took notice and the discounter’s CEO Klaus Gehrig criticized his company’s U.S effort for choosing bad locations and not properly recognizing the shopping habits of U.S. consumers. Additionally, Lidl U.S. cut back on the number of stores it would open, fired its U.S. CEO Brendan Proctor and replaced him with 11-year company veteran Fieber. Lidl also said it would look to build smaller, more efficient stores in the 15,000-25,000 square foot range rather than continuing to open stores that were about 36,000 square feet in size. Lidl is also revising its real estate policy and now will lease new stores as opposed to its original plan of acquiring real estate and building stores on that site, a very costly proposition.

Lidl owns the site in Aberdeen, and the interior changes that come with a 35 percent footprint reduction are almost unnoticeable. However, the store’s exterior is quite different from the original U.S. design which Gehrig described as “glass palaces.” The architecture utilizes more brick than glass and Lidl merchandises its “Rethink Grocery” on the front of the store along with its distinctive yellow, blue and red sign.

And unlike many Lidl stores, business has been very good during the first four weeks. As is the case with many other Lidl units, the retailer’s in-store bakery is the highlight of the store. But unlike its more than 50 stores in Virginia, North and South Carolina, there is no beer and wine department because of state law restrictions, something that the discount merchant also faces as it expands into Pennsylvania, Delaware and New Jersey.

During the past month Lidl opened its first two Georgia stores (giving the chain 66 units in the U.S.) and closed on its first U.S. acquisition, the 27-store purchase of Best Market whose stores are primarily located on Long Island. The company said it would begin converting those perishables-driven supermarkets to the Lidl format this spring with the process continuing for 2-3 years.

Although I’ve been among Lidl’s biggest critics (my main complaint echoes Gehrig’s bemoaning of the lack of understanding of the U.S. consumer), it’s way too early to count the company out. Not with its tremendous success in Europe and its deep well of capital.

Clearly, the company should have never been “all-in” on acquiring its original real estate. Huge infrastructure commitments including four distribution centers and a palatial headquarters office in Arlington, VA could have been tempered, too.

With its other Maryland store in Bowie doing relatively well, too, Lidl is clearly learning from its initial U.S. misreads. However, as we all know, Lidl is still the new kid on the block and as such is climbing uphill against an over-stored, diverse group of retailers.

‘Round The Trade

A few impressions from last month’s FMI Midwinter conference held at the “over-golded” Trump National Doral resort in South Florida. You’ve got to give FMI CEO Leslie Sarasin and her team a lot of credit for turning what was seemingly a directionless large trade association five years ago into a well-run, profitable, cutting edge entity. Although most of the meetings that I attended featured members of the “30/30” club – 30-year olds with 30-pound brains – I found many of the areas covered to be too conceptual and feel there should have been a greater retailer presence on some of the programs. Yes, I realize that IRI, Accenture and Nielsen are sponsoring some of the panels (nobody knows better than me that you’ve got to take care of your advertisers) and I don’t want to sound too critical of what is certainly useful information, but as one retail CEO said: “Have any of these speakers had any P&L responsibility in the food retail area?”…and speaking of IRI, the large syndicator reported that grocery e-commerce sales for consumer packaged goods increased 35.4 percent in 2018. According to the IRI research: “Pure-play retailers garner more than half of all online purchases, but traditional brick and mortar retailers continue to invest in the commercial pie. It is incumbent upon the future success of these traditional retailers to invest in the shopper experience both in-store and online,” noted Sam Gagliardi, who heads e-commerce for the syndicated data firm…Walmart is improving its “time off” policy for its associates, giving workers more flexibility to miss time while also rewarding associates who show up more often by providing bonuses ($550-$900 per quarter). Last year, the Behemoth raised its minimum wage (to $11 an hour) for all of its 1.1 million hourly employees. Walmart is the country’s largest private employer… Save-A-Lot has relocated its corporate headquarters from Earth City, MO to nearby St. Ann, MO and confirmed it has riffed about 100 associates. It’s not been a good run for the limited assortment discounter which has struggled since Canadian hedge fund Onex Corp. acquired the company from Supervalu in 2016. Thank goodness for Save-A-Lot licensees who continue to outperform the retailer’s corporately-owned stores…Leonard Green and Partners and CVC Beacon Capital, the two private equity firms that engineered BJ’s Wholesale Club’s IPO last year, now want to pull their entire investment from the club store chain. In a filing, the company said that all 58 million shares held by Green and CVC were put up for sale which could bring the investors more than $1.5 billion in proceeds. Before BJ’s went public last June, the two PE firms received a $735.5 million dividend…it looks like it will take a bit longer for the winners in the Shoppers’ sweepstakes to be announced. Although final bids were reportedly due by last November, sources tell us that parent company UNFI is still sorting through some due diligence issues before it makes the final announcement. That may be true, but several retailers who bid on multiple Shoppers units have confided to me that they have been unofficially told that their bids concerning specific stores were successful or unsuccessful. Of course, UNFI might be waiting a bit longer in the hopes of attracting more interest in stores that were underbid or received no bid at all. And it’s perfectly logical that leasehold/landlord items, pension fund concerns and union issues could also be creating the delay…he’s baaaaack – earlier this month, the U.S. Bankruptcy Court in New York approved “Slow Eddie” Lampert’s $5.2

billion offer to reacquire Sears Holdings. The new deal will allow Sears to keep 425 stores open and preserve 45,000 jobs. Since “Slow Eddie’s” offer was the only semi-legitimate one that the court received, it opted to give him another shot. Lampert, who has stepped down as chairman due to what was described as a “going concern” and is not the “result of any disagreement with the company or any matter relating to the company’s operations, policies or practices.” That’s technical jargon due in part to avoid a conflict of interest

with Transform Holdco LLC, the newly created division of Lampert’s main organization,

ESL Investments, which controls his equity in Sears. To be clear, Lampert will remain the controlling operative at the bereft retailer, which will also be searching for a new CEO  (sounds like a career advancing job opportunity – Craig Herkert might be available). Of the 425 stores that will remain open – 223 will be bannered as Sears and 202 as Kmarts. “Slow Eddie’s” new operating model calls for more space to be dedicated to tools and appliances (play the laugh track coming from Home Depot and Lowe’s) and he also wants to open more smaller stores. Going public again is a possibility in Lampert’s distorted field of dreams. Where is Sigmund Freud when you need him? Is there anybody with a milligram of retail horse sense who’s willing to bet on this guy again?…we have a tie between Michael Mihelic and Reggy McDaniel for this month’s worst retailer award. Mihelic, operator of four Shop ‘n Save stores in the Pittsburgh area, is accused of bilking suppliers of more than $300,000 in a coupon clipping operation that apparently began with Mihelic’s late father. He’s been charged with dealing in proceeds of illegal activity, receiving stolen property and theft by deception. And I thought those coupons scams ended in the inglorious days of Jack Millman and Harold Friedland. As for brother McDaniel, his 18 Mac’s Fresh Markets in Louisiana, Arkansas and Mississippi have recently been “livening up” their weekly circulars by adding this message of hope: “Heaven has a wall, a gate and a strict immigration policy. Hell has open borders, Let that sink in.” That’s a heavy and deep bit of inspiration that would want to make one hurry over to Mac’s to do some impulse shopping. Then again, that righteous shtick may play well in Olla, LA.

Local Notes

Taxes, taxes and more taxes. One of the typically clever New York Post headlines that appeared in the tabloid’s February 9 edition – “New Jersey Wants To Tax The Rain” (although that headline doesn’t come close to the “Bezos Exposes Pecker,” which appeared a day earlier) – was a criticism of Governor Phil Murphy’s successful effort that now allows municipalities to levy fees to finance their own public stormwater utilities with the state reaping 5 percent of said fees. Earlier this month, the ultra-liberal guv signed into law a bill that will raise the state minimum wage to $15 an hour by 2024. Late last year, the $15 minimum wage became law in New York City, which joined Seattle and San Francisco as major cities with similar minimums. Another half dozen states have passed phase-in laws that will bring the minimum wage to $15 an hour over a 3-6 year period. And how about this crazy idea? Newly elected Connecticut Governor Ned Lamont is considering including a new tax on groceries and prescription drugs as part of his administration’s first budget which is due to be announced later this month. Get a grip, dude. And in a somewhat related legislative matter, New Jersey is close to signing into law a bill that would ban most stores in the Garden State from becoming cashless operations. Some progressive retailers and restaurants like the cashless concept as it improves efficiency and reduces the risk of robbery. However, several consumer groups contend that cashless stores discriminate against the poor who don’t have access to credit or debit cards and seniors who aren’t comfortable paying with digital devices. Similar bans are currently being considered in New York City and Philadelphia. Do you think this could be perceived as an anti-Amazon move? Let’s face it, it’s been a tough month for Jeff Bezos…Trader Joe’s will end grocery delivery services from its seven New York City stores on March 1. The nation’s best sales-per-square-foot food retailer, which is owned by German discount merchant Aldi Nord, cited rising costs and the availability of other delivery services as the reasons it will be exiting the from that segment of the biz…last month we published a story about how Stop & Shop would be unveiling a fleet of driverless vehicles in the Boston area, perhaps as early as this spring, that will allow customers (using a smartphone app) to command a modified food truck to park outside their homes where they then can personally select a limited group of items (mainly perishables) that they procure in a checkout-free manner. That timeline may be pushed back a bit. According to a story in the Boston Globe, Robomart, the creator of the driverless trucks, has not done the necessary due diligence to get the project approved. According to William M. Strauss, the state representative who chairs the joint committee on transportation, the remote-controlled delivery service would need multiple approvals from state agencies, the State Police and local police in communities where the vans would operate. Robomart said it does not plan to apply for a special permit because its delivery vans will still be operated by humans – just not from inside the vehicles. Strauss indicated that the state legislature would likely need to adopt new laws specifically for remote-controlled vehicles. “Until then,” he noted, “they shouldn’t be allowed on the road”…Seasons Kosher Supermarket, which filed for bankruptcy last fall, has two new owners. Six Seasons stores, which are located in Metro New York/New Jersey, are being acquired by Joseph Bistritzky, CEO of Maramont Corp., a foodservice organization based in Brooklyn. The new owner of the 25,000 square foot Pikesville, MD Seasons is Shalom Rubashkin, who heads a group of investors. Rubashkin, who has been in the meat business for many years, hails from – you guessed it, Brooklyn – is expected to be part of the new group that takes possession of the 25,000 square foot northwest Baltimore location… Musser’s Markets has closed one of its four locations – a 17,5000 square foot unit (its smallest store) – in Columbia, PA (Lancaster County). The family-owned independent will continue to operate its other supermarkets in Lebanon,  Buck  and Mountville, PA…from the obit desk, we offer our condolences to the family of one of the toughest, most competitive and greatest baseball players of all time, Frank Robinson, who has died at the age of 83. Robinson played for five teams in his 21-year career and remains the only player to be named an MVP in both leagues. He was also a rookie of the year, triple-crown winner, member of two World Series championship squads, first ballot Hall of Famer and baseball’s first black manager. Robinson’s grit and tenacity made him one of the most feared and respected players in the game during a career that spanned from 1956 to 1977. During his six-year tenure in Baltimore, Robinson proved to me that he was the greatest player ever to wear an Orioles uniform…I guess the old adage “ashes to ashes, (saw)dust to (saw)dust” would apply to the passing of Alfred J. Dunlap, 81, former CEO of Scott Paper and Sunbeam. Dunlap, who was hired from Scott in 1996 (he was responsible for selling Scott to Kimberly-Clark for $9 billion, a deal in which he earned $100 million for himself) to turn around the struggling appliance manufacturer, quickly justified his nickname of “Chainsaw” by whacking scores of employees, closing facilities and ruling with a type of autocratic authority rarely seen in business at that point. It was those aggressive tactics (and highly abrasive management style) that ultimately led to an SEC investigation alleging accounting fraud. He subsequently was fired by Sunbeam, now called Jarden, and agreed to pay $500,000 to settle the SEC’s charges…we lost a great actor earlier this month when Albert Finney passed away. Finney, a graduate of the Royal Academy of Dramatic Arts in London (his classmates included Peter O’Toole and Alan Bates) made his film debut in 1956. His career spanned nearly 60 years and included 65 movie and TV roles. The British actor rose to star status in the 1963 film “Tom Jones” for which he received his first Oscar nomination. He was also nominated for (but never won) four other Academy Awards for his roles in the films “Murder On The Orient Express” (1974); “The Dresser” (1983); “Under The Volcano” (1984) and “Erin Brockovich” (2000). One of his last memorable roles was as Kincade the gamekeeper of the James Bond family estate in “Skyfall” (2012). Finney was also known as a fine stage actor, appearing in many Shakespeare productions, primarily in London. He was 82.