Taking Stock

Six Months Later, Retailers Upset By UNFI’s Poor Execution, Communication 

“It gets late early here” – Yogi Berra

Six months is usually not a long time when measuring a business cycle, but in the case of United Natural Foods, Inc. (UNFI), that span seems like an eternity, especially to many of the wholesaler’s independent retailers and its own associates who have witnessed what one independent retail customer called a “meltdown” in the period following UNFI’s acquisition of  Supervalu for $2.9 billion last October.

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Some of challenges are obvious: poor earnings results; a share price that has plummeted from $45.14 per share on July 24 (the day before the Supervalu acquisition was announced) to its current trading price of $13.32 per share; its $4 billion debt load (most of which it inherited from SVU); and a major executional breakdown at its new Harrisburg, PA DC when it opened in October that created low service levels throughout the holiday season adversely impacting many retailer’s sales during their most important operating period.

And when measuring the intangible parts of its newly blended business, the situation is equally as bad, perhaps worse. We talked to about a half dozen independent retailers who are UNFI Eastern region customers and who are serviced from two UNFI warehouses in (problematic) Harrisburg and in Mechanicsville, VA.

All were highly critical of the way UNFI has handled the transition. All were also skeptical as to whether UNFI can successfully convert from a NOSE (Natural/Organic/Specialty/Ethnic) distributor to a full-service wholesaler.

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“We saw problems with the way they integrated Haddon House,” said one retailer who wasn’t surprised that the Providence, RI-based distributor was having difficulty transitioning into a full-service wholesaler. “Within six months, UNFI pretty much abandoned the customer service mantra that had been Haddon House’s calling card and customers started leaving. Now that they’re playing in the big leagues, it’s actually worse. Communications are almost non-existent, and we’re forced to deal with former Supervalu employees who don’t even know if they’ll have a job by the end of the year. The deal was announced in July and we’ve still yet to meet with any of UNFI’s senior management.”

Another multiple store owner stated: “We’re hugely frustrated by the lack of communications from UNFI. To think that it’s been nearly nine months since the deal was first announced and almost six months since it was consummated and no one from UNFI legacy leadership has bothered to put together a town hall meeting with all customers. Even if those initial meetings were just with UNFI’s larger customers, it’s vital to understand where the company is going and how they will address important issues such as cost of goods. At this point, what we’ve experienced is increased fees which have cost us tens of thousands of dollars. I’m also concerned from what I’ve read – which is all I can go by at this point – which is that UNFI wants to offer more ‘better for you’ products. That’s fine, but what about its many independent customers who operate inner city stores or supermarkets in economically challenged areas? The fact is that those customers still drink soda, eat sugared cereals and other processed foods – they need to pay attention to those items as well. One of our long-standing criticisms of Supervalu was that they hadn’t been very good at serving the perimeter of the store. Several of their current customers don’t buy an industry proportional amount of meat or produce from them for that reason. What we’ve also witnessed in the past six months is an unacceptable increase in out-of-stocks and no direction regarding private label strategy. I can attest that several of our competitors including ShopRite, Aldi and Giant have retails lower than our wholesale cost. This isn’t a good way to start a relationship that was going to be complex from the outset. I know that some of our SVU peers have reviewed our supply agreements to understand when we can become free agents.”

And one more comment from another multiple-store owner: “I think these guys are in way over their skis. Are Steve Spinner (UNFI CEO), Sean Griffin (Supervalu CEO) and Chris Testa (UNFI president) hiding from us? I thought our relationship with Supervalu had improved tremendously over the past five years because of the skills of (past CEOs) Sam Duncan and Mark Gross. Those men understood our needs and challenges and were excellent listeners. Now I feel like we’re back in the dark days of the Jeff Noddle and Craig Herkert era. Show me some leadership.”

Beyond its issues with earnings, stock price, service levels and criticisms from their own independent customers, UNFI has created another mess with the sale process of its Shoppers Food & Pharmacy stores. UNFI was candid from the outset – they would be divesting themselves of all corporately-owned retail.

The process to sell Shoppers started months before the UNFI/Supervalu deal was announced. Several retailers told us that final bids were due last November, but to this point, except for a handful of stores that have been sold (others have been closed), the process lingers. During UNFI’s recent second quarter conference call (it posted a $341 million loss), Spinner said he was confident that the sale will be completed in the coming months.

Coming months? Seriously, why is the process taking so long? It’s unfair to the thousands of associates who still work for Shoppers, who have been told nothing directly about their future.

It’s gotten to the point where Mark Federici, president of UFCW Local 400, which represents Shoppers’ clerks and meatcutters in the Washington market (and is the largest UFCW Local in the country), has threatened action against UNFI if they aren’t more forthcoming about the status of the retailer’s employees.

“Our members have been the backbone of Shoppers’ stores far longer than UNFI has had an interest in those stores and they deserve more respect than UNFI has shown in this process,” Federici wrote in a letter to Spinner. “They deserve to know what the future holds.”

And to his members, Federici penned this: “In the coming weeks, we expect UNFI to provide us with the information we have requested. If they do not, we will take appropriate action, including actions we will be asking you to participate in, both in your stores and in the communities you serve.”

I believe it was the great educator and civil rights leader Benjamin Mays who said, “Honest communication is built on truth and integrity and upon the respect of one for the other.”

For UNFI, it’s time to step up to the plate or it will be getting later much earlier than they think.

Jim Donald: We Hardly Knew Ye

OK, now that you’ve read the headline on page 1 you should realize that we’re exaggerating more than a little bit here. That Jim Donald will be stepping down as CEO of Albertsons on April 25, seven months after he accepted the position and 13 months after he rejoined the large Boise, ID-based retailer after 27 years, shouldn’t be surprising.

After all, the catalyst for Donald to come back to Albertsons in March 2018 was Bob Miller, then chief executive of the supermarket chain and one of the greatest leaders in the supermarket business of the past 50 years. In the nearly 30 years that I’ve known Jim, he has often mentioned that he’s learned more from Miller (now chairman emeritus) about the grocery business than anybody else. He considers him a mentor.

So, as Albertsons began the process of attempting to complete a merger with Rite Aid, Miller called on his old protégé to help run Albertsons while Miller and then Rite Aid chief executive John Standley (another protégé) would work on digesting the bigger enchilada. Donald made it clear from the outset that rejoining Albertsons wasn’t going to be a long-term gig, but like all of his previous jobs, Jim would tackle this challenge with the same passion and tireless work ethic that have been hallmarks of his entire career (starting with Publix in his native Tampa in the mid-1970s).

However, as it often does, life has a way of altering the best laid plans. When the Albertsons/Rite Aid plan failed to even make it to a shareholder vote, Albertsons’ principal owner, PE firm Cerberus Capital Management, felt that it now had to revamp Albertsons’ leadership in an effort to take it public or find another merger partner. In September, Donald, 65, agreed to take on the role of CEO, a role where he’s had plenty of experience from his tours of duty at Pathmark, Starbucks, Haggen and Extended Stay Hotels. He was also well versed in the often complex relationship that CEOs have with their private equity owners.

Still, elevated status didn’t mean that Donald’s long-term focus had changed. When I had dinner with Jim last summer (pre-Rite Aid collapse) he made it clear that his role was transitory and that he would be moving on once all the collective parts were in sync. He added that he would attack his new job with the same dedication and zest as he did with his other jobs. When he was elevated to CEO the view would change, but Donald’s attitude wouldn’t. He was determined to retool a solid company with aging stores and significant debt (more than $10 billion). He was also confident that his strong people skills would only enhance an already solid culture. However, he made it clear that it was important to find his successor, one who was younger and perhaps would have a differentiated background.

Vivek Sankaran, former PepsiCo COO, fits that description on paper. He’s 10 years younger than Donald and has also worked for a large, pressure-filled organization similar in size to Albertsons (approximately 270,000 employees). He became available after losing the battle to become Pepsi’s chief executive last fall when Ramon Laguarta was named to replace Indra Nooyi.

Those who know Sankaran describe him as extremely intelligent with strong negotiating skills and the ability to work well with both his associates and with the trade (he served as PepsiCo’s chief commercial officer for the past four years).

But one silo Sankaran has not yet entered is food retailing. And despite his many years of dealing with the nation’s top retailers, Sankaran has never sat on that side of the desk. It won’t be an easy conversion – retail, particularly food retail, is as “real time” as it gets. It’s visceral, seemingly endless, with successes fleeting because it’s so fluid. Dealing with Albertsons’ internal issues might seem somewhat parallel to what Sankaran was used to at Pepsi; however the on the field issues are much different. The company operates 2,300 supermarkets under nearly 20 different banners. Within each market are hundreds of individual trading areas with different competitors – some established, some emerging – operating with diverse retail styles. There will be unions to deal with and more than 20 distribution centers and 20 manufacturing plants to oversee. And beyond that, it goes back to instinct. Will Sankaran be able to reinvent himself as a merchant/operator? And will he be able to take a company, which has unsuccessfully tried twice, into the public arena?

Donald is betting strongly that Sankaran is the right man for the job. And he’s well aware that “learning retail” is Sankaran’s most important priority. As such, he will be spending a lot of time with his successor to accelerate that curve.

And Donald himself isn’t going to Tahiti anytime soon, either. He’ll be staying on as co-chairman (along with Cerberus executive Len Laufer), adding that he’ll be nearly as busy as he’s been since he got  to Boise 13 months ago (the irony is that with Donald’s constant travel schedule visiting Albertsons’ 14 divisions, he didn’t spend the majority of his time at company’s headquarters).

While this indeed might be Jim Donald’s last full-time pit stop, don’t expect him to retire anytime soon. There will be board directorship opportunities to consider (if he desires) and I’m certain he’ll continue his very successful sidebar career as a speaker. It’s something he loves to do, is very good at and as Jim has joked, “the margins are much better than running a supermarket.”

And certainly there must be a few hundred people in America who haven’t yet heard his fish story.

‘Round The Trade

It looks like there’s more management turnover at Lidl. Earlier this month, CEO Jesper Hojer resigned after a two-year tour of duty. Ignazio Paterno, deputy purchasing director at the Neckarsulm, Germany discounter and former chief exec at Lidl’s Italian division, will head the company on a “provisional” basis. In late March, Patrick Kaudewitz, who was CEO of parent firm Schwarz Group’s conventional supermarket chain, Kaufland, also resigned. That follows several changes in the U.S. over the past few years. When the company first announced plans to enter the U.S. in 2014 it named Kenneth McGrath as its CEO. He stayed about a year, and after leaving the grocery business for a short spell, is now chief executive at rival Save-A-Lot. Replacing McGrath in 2016 was Brendan Proctor, who stuck around long enough to open the first batch of disappointing Lidl stores in the U.S. He was replaced nearly a year ago by Johannes Fieber, another Lidl European import who remains on the job today. In February, Lidl bolstered its local management by adding company veteran Roman Heini as U.S. chairman. And at Heini’s hidey-hole, its corporate headquarters on S. Clark Street in Arlington, VA, Lidl has carved out about 1,000 square feet of space to operate its own convenience store – Lidl Express – that is open to the public, but it is expected to primarily serve Lidl associates who work in the high-rise building. The small unit carries typical c-store items as well as some fresh bakery, produce, prepared foods and beer and wine…in what is somewhat of a rarity, ShopRite is closing a store. Collins Family Markets, which operates the Glen Burnie, MD ShopRite (and four other SRs in Philadelphia), will shut its doors in the Old Line State late next month. The store, a former Kmart, opened in 2010. The company said on its Facebook page “We have been unable to reach a sustainable level of sales and have decided to close.”…April 5 was a busy day for Giant/Martin’s as it reopened the five former Shop ‘n Save stores it acquired from UNFI late last year. The stores are located in Smithsburg, MD; Greencastle, PA; Berryville, VA; Hedgesville, WV; and Martinsburg, WV. Also debuting that day was a new Giant unit in Warrington, PA (a former Redner’s store) which replaces another older, smaller Giant unit located in nearby Jamison, PA…and speaking of Redner’s, the Reading, PA-based regional chain will cut the ribbon later this month on its first “fresh market” at the site of its still open conventional store on Berkshire Boulevard in Wyomissing, PA…Weis Markets, which competes with both Giant and Redner’s, achieved record company sales of more than $3.5 billion for the 52-week period ended December 29, 2018, up 1.2 percent compared to the same period a year ago, while annual comparable store sales increased 0.7 percent. Income from operations rose $7.2 million, or 9.4 percent to $83.6 million compared to $76.4 million for the same period in 2017. The Sunbury, PA-based merchant’s annual and fourth quarter net income comparisons were impacted by the federal government’s implementation of the Tax Cuts and Jobs Act (tax reform) in 2017. Weis said it realized a $49.3 million decrease in its deferred income tax due to this legislation, which improved net income in both its 2017 and fourth quarter results. The current annual results contain no such benefit. Annual net income totaled $62.7 million (-36.3 percent) compared to $98.4 million in 2017. Annual earnings per share totaled $2.33 compared to $3.66 per share in 2017. “We made significant forward progress in 2018 by driving sales, investing in our store base and information technology and by improving store-level efficiencies,” said Weis Markets chairman and CEO Jonathan Weis. “The result was a 9.4 percent increase in annual operating income and increased comparable store sales in 2018. During the year, we also expanded online ordering with in-store pickup and home delivery to 173 stores which resulted in more than 100,000 orders and a 33.2 percent increase in online sales.” During the 13-week period, the closely-controlled regional chain’s sales increased 1.0 percent to $892.9 million compared to the same period in 2017, while fourth quarter comparable store sales increased 0.9 percent. Income from operations in the fourth quarter totaled $17.2 million compared to $22.3 million in the same period in 2017 and Weis’ Q4 net income declined 79.2 percent to $13.2 million compared to $63.7 million in 2017, while earnings per share totaled $0.49 compared to $2.37 per share for the same period in 2017…another company that competes with all three retailers in Central PA – Grocery Outlet – has filed to launch an IPO. The Emeryville, CA based discounter operates 20 stores in the Keystone State and operates more than 300 units in all (mostly on the West Coast) with sales of more than $2 billion. Founded in 1946, the former family-owned merchant was first acquired by Berkshire Partners and then sold to another PE firm Hellman & Friedman in 2014. Most of its stores are owned by independent licensees…Whole Foods has reduced prices on more than 500 items and parent company Amazon has expanded grocery deals for its Prime members as part of the discount program. Many of the items are in produce and meat, but after the last round of cuts, I’m skeptical since the price reductions were more flash than substance. And in our price checking research over the past year, nobody has raised prices more than WFM has (although to be fair, with inflation, virtually all retailers have raised their everyday retails). We’ll get out our comparative price book and let you know if this round of reductions is actually more filling and taste great. And if Amazon has big plans for any form of bricks and mortar retailing, they might have to rethink their plans about entering City of Philadelphia and the state of New Jersey, which officially banned cashless stores within their jurisdictions…if you’re wondering why the hype over meal kits has waned significantly, all you need to know are a few recent tidbits. First, Albertsons recently announced that it is cutting the number of stores where its Plated meal kits are available and will now only be marketing them in select stores. Albertsons acquired Plated 18 months ago and in the past few months both co-founders have left the supermarket chain. And Blue Apron, which helped fan the meal kit mania by going public nearly two years ago, has another new CEO, Linda Kozlowski, after former chief executive Bradley Dickerson resigned early this month. Blue Apron, which fizzled from the outset, was trading at a whopping $1.04 per share at the close of business on April 3…part of virtually every discussion I have with retailers about the current state of their businesses seems to focus on how the overstoring glut isn’t shrinking. Now comes word from JLL’s Grocery Tracker that new food store openings (all formats) increased nearly 30 percent last year with more than 17 million square feet in retail space added nationally…Ocado, the British e-commerce distribution company that has aligned itself with Kroger in the U.S. and Sobey’s in Canada, will establish its first American office in Washington, DC. While it searches for a permanent residence in the District, it will operate out of temporary digs in Tysons Corner, VA beginning later this month…just when you thought we were heading for quiet period for the “Slow” Eddie Lampert watch, the former and (weirdly) current CEO of Sears Holdings has been accused of “lifting” $57.5 million from several Sears bank accounts in the final days before Lampert closed his $5.2 billion deal to create a new and significantly downsized organization still under the control of another Lampert company – Transform Holdings. Creditors are fuming over this and U.S. Bankruptcy Judge Robert Drain strongly advised the worst retailer of his generation to return the funds. An April 18 hearing will settle the matter. Additionally, Sears has confirmed it will open new smaller specialty format stores that wi
ll focus on home goods (like appliances, tools and mattresses – no apparel) called Sears Home & Life (not to be confused with House of Death). The first three stores will open in late May in the merchandising hot spots of Lafayette, LA; Overland Park, KS; and Anchorage, AK…we have a several obituaries to report this month including the passing of Kelly Tobin, daughter of Bob and Audrey Tobin. Bob is the former CEO of Ahold USA and one of the finest people to ever serve the grocery industry. I’m very sorry for their loss…two music industry unsung greats have also left us. Hal Blaine, the literal foundation of the LA session stable of musicians known as The Wrecking Crew, has died at age 90. Simply said, Blaine was one of the greatest drummers in pop and rock history, playing on 35,000 records (that’s not a typo) mainly in the 60s and 70s (including 40 number one hits and 150 top 10 songs). He was closely associated with Beach Boys leader Brian Wilson – listen to his subtle work on the song “Good Vibrations” – and was a vital part of that group’s success in the 1960s. And here’s a piece of trivia that will never be equaled. Blaine was the only drummer to ever back Elvis Presley, Frank Sinatra and John Lennon…another great musician has also left us. Dick Dale, the guitar player who pioneered surf music in the early 1960s, has died at the age of 81. Armed with a Fender Stratocaster and an array of customized amps and speakers, Dale perfected a sound that had peaked by the mid-60s, but saw a resurgence 30 years later after Quentin Tarantino used Dale’s version of “Misirlou” in the opening credits of his iconic film – “Pulp Fiction (1994).” Despite many health problems, Dale continued to tour until early this year…Clem Daniels, 83, has also passed. Now you have to go back, way back in the sports annals to remember Daniels. But if you’re a football fan over the age of 60, you might remember the Prairie View A&M alum as an excellent running back for the Oakland Raiders dynasty teams of the old American Football League. And if you dug a little deeper, you’d find that Daniels was a four-time Pro Bowl selection who played seven seasons for the Raiders (1961-1967, which included an AFL championship in ’67). And before the 1970 AFL-NFL merger, Clem Daniels held a record which will never be broken, most career rushing yards – 5,103 – in the history of the AFL…hard to believe that my friend Andy Klein is dead. Klein, 65, president and CEO of nine-store Klein’s ShopRite group, was tragically killed last month when a ShopRite truck driver, on the way to make a delivery at one of Klein’s stores in Bel Air, MD, lost control of the vehicle and collided with 12 other cars, including Klein’s. Klein’s car was pinned under the truck, which caught fire. A seven-year old boy was also killed. This is a real tragedy for the Klein family who have been in the food retailing business in Harford County since 1925. I’ve known the family for more than 40 years, including Andy’s late parents Ralph and Shirley Klein and his brothers, Howard and Michael. Andy Klein also leaves his wonderful wife Jayne and three great children Marshall, Rachel and Sarah. Fourth generation siblings Marshall and Sarah remain active in the business. A man with a big heart with a great sense of family and community, I’ll miss Andy Klein.