Licensees Unhappy As Save-A-Lot Continues To Fumble, Bumble & Stumble

Jeff has been reporting, analyzing and opining about the retail grocery business since 1973. He has served as publisher of Food Trade News and Food World since 1978 and as president since 2007. He can be reached at jeff@foodtradenews.com.

Beleaguered discount grocery chain Save-A-Lot may be on the verge of major changes.

The St. Ann, MO-based value-added merchant, which was acquired in late 2016 by Canadian private equity firm Onex Corp. from Supervalu for $1.4 billion in cash, has done a pretty good job of irritating many of its licensees which control about 70 percent the retailer’s approximately 1,280 locations nationally (and about 65 percent of S-A-L’s annual sales).

According to an internal memo sent by CEO Kenneth McGrath, the company is in the process of reviewing its strategic options to “accelerate our transformation.”

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The memo goes on to say that for the past few months, Save-A-Lot has been working to evaluate potential strategic partnerships that enhance its opportunities for growth.

“We have been, and continue to be, actively engaged in discussions with multiple strategic parties regarding transaction alternatives. If realized, these alternatives would meaningfully accelerate the company’s go-forward strategy,” McGrath explained, adding, “in the event that we do not choose one of these options, we will continue to assess our portfolio of assets, both wholesale and retail, to identify where we can be the most competitive. We have begun to identify certain assets (in both our wholesale and retail business) which we believe could potentially be more strategic to third parties. Should we choose this path, the result would be a smaller but more profitable core from which to grow the brand.”

After the release of the memo, Bloomberg published a critical story about the discounter’s declining status citing debt issues and sales challenges. The story, citing sources, said that S-A-L’s debt jumped more than 20 times its adjusted EBITDA at the end of June. And parent firm Onex did acknowledge that the extreme value merchant’s EBITDA slid from $70 million to $35 million in its most recent quarter. Bloomberg said S-A-L is currently in discussions with several parties including rival Lidl, where McGrath was formerly employed for 13 years including a tenure as CEO of its U.S. unit from 2013-2015. McGrath quickly issued an internal memo to Save-A-Lot associates and licensees noting that the Bloomberg story contained “multiple inaccuracies,” adding that “we do not intend to make any external comment.” He also asked that all media requests be handled by its own internal communications person.

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In his original internal memo, the Irish-born executive who joined Save-A-Lot in 2017, cited one recent example of internal efficiency – the decision to exit its distribution center in Pompano Beach, FL and consolidate operations into Save-A-Lot’s Plant City, FL depot about 215 miles away.

“We are confident that either option will ensure we are well positioned to continue to execute against our transformation plan,” he proclaimed.

I wouldn’t be that confident.

While Save-A-Lot has been struggling since long before Onex took over (oh, to relive the glory days of founder Bill Moran and former CEO Bill Shaner), the situation, as some licensees see it, has devolved to a point that the company’s ownership operates from a virtually hands-off position, and its current leadership has little sensitivity about the needs of the independent owners.

“As licensees, we became successful because we knew our markets and our customers. The old Save-A-Lot culture was excellent because their goal was to help us become sharper and more efficient merchants. This new team has no sensitivity about what we need. It’s a ‘play by the numbers’ management style – heavy on centralization with little direct connection to the owners,” said one licensee who owns multiple S-A-L locations on the East Coast.

And there’s more than just the poor communications between leadership and store owners. While Lidl isn’t exactly threatening anybody with its body of work, the retailer’s U.S. debut in 2017 has further diluted an already crowded field of value merchants, particularly in the Mid-Atlantic and Southeast. And let’s face it, Aldi is kicking everyone’s butt and dollar stores (particularly Dollar General and Dollar Tree) are also adversely impacting Save-A-Lot.

Exploring strategic options? Sounds like the raising of the white flag is imminent. Transformational plan? Sounds like a cry for new ownership to install a new management team – if selling the company (or pieces of it) is even a viable option.

However, you don’t need a trade analyst to assess Save-A-Lot’s problems. Just ask the associates and the licensees.

‘Round The Trade

Target, which in my opinion remains lodged in the “mushy middle” as a grocer (although they are improving), later this month will unveil a new private label program as it attempts to become more relevant in the food arena. Approximately 650 new “own brand” items under the “Good & Gather” label will replace current house brands Archer Farms and Simply Balanced (Market Pantry SKUs will also be significantly reduced). “Good & Gather” items will not contain artificial flavors or sweeteners, synthetic colors or high fructose corn syrup. By late next year, the new brand will expand to 2,000 items. This is certainly a step in the right direction as Target continues to build momentum on many fronts under the strong stewardship of CEO Brian Cornell. One area where it is already capturing strong results is in its new small format stores, a concept that began about five years ago. According to a piece in Inc. magazine, the Minneapolis mass merchant has found that a combination of pinpointing demographics in urban locations (its store in Herald Square in Manhattan is the best of the new lot), product offerings and SKU rationalization, has opened up a new profitable silo for Target. The story notes that the retailer could open as many as 30 new smaller format stores annually over the next few years. On the balance sheet, the Minneapolis mass merchant also posted excellent numbers with earnings zooming to $938 million in Q2 (vs. $799 in last year’s comparable period) and comp stores sales increasing 3.4 percent, well above the industry average… more store closings from other channels to report: Walgreens said it will close 200 stores nationally over the next few months (about 3 percent of its fleet) and could take as much as a $2.4 billion write-down in fiscal 2019 which ended on August 31… at woebegone Sears/Kmart (now called Transform Co.), another five Kmarts and 21 Sears units will close later this month. At the rate of its store closures over the past three years, the formerly bankrupt retailer will shortly be operating a negative number of stores. And the man with the greatest reverse Midas touch in retailing history, chairman “Slow” Eddie Lampert, can then continue to justify his new nickname – “Mr. Non-Transform.”

Local Notes

A few thoughts about the upcoming labor negotiations involving Giant and Safeway with the United Food and Commercial Workers. While I expect the bargaining to be intense and lengthy, I just can’t see things getting so out of hand that a job action will result. That’s never been the case over the past 50 years when the two chains and the two UFCW locals have been negotiating contracts. Even at the corporate level, Safeway (Albertsons) has almost always been able to ink agreements with its labor partners (save for the 20-week strike in Southern California in 2003-2004) and locals Local 400 and 27 have never struck either chain, Moreover, after the pain, which still endures, of the 11-day strike at Stop & Shop in April of this year, I don’t think parent firm Ahold Delhaize has any appetite for another job action. And as noted in our lead story on page 1, creating and enacting a strategy to reduce the bloated unfunded liability (more than $1 billion) of the combined parties’ pension plan has to be put in place. As noted in the story, the “FELRA/UFCW” multi-employers plan is one of many nationally that’s significantly underwater – if a mutual strategy to begin to reduce the debt isn’t put in place during these negotiations, there’s no doubt that many current and retired clerks and meatcutters could be looking at another General Motors 2008 situation. And that would be a huge lose/lose for all…

Good news for our friends at Karns Quality Foods. The Mechanicsburg, PA-based family-owned independent will open its ninth supermarket at the site of the former Darrenkamp’s unit (originally a Super Fresh) in Etters, PA (Newberry Township). The 39,000 square foot store will undergo a major remodeling and is set to open in early 2020. While the Etters location has proven challenging for its first two owners (there’s a Walmart SuperCenter virtually next door), CEO Scott Karns and his team have done a great job of successfully acquiring other former grocery stores by offering customers a clear point of differentiation, primarily with its upscale meat and seafood departments. We wish them all the best with this new site.

It didn’t take very long for some UNFI retailers to again become disillusioned with their wholesaler. After meeting with mystery men Steve Spinner, CEO and Sean Griffin, COO at the company’s annual Trade Expo in St. Paul, MN, several retailers told us they were encouraged by the candor of the two executives who vowed to more aggressively address issues dealing with item selection, billing and private label. We asked several of those independent merchants if communication and execution had improved over the past 30 days? I think “crickets” would best summarize their answers. And still no word about the fate of Shoppers. Sales continue to languish and morale sucks as the company continues to perform at a lackluster level. If there’s good (?) news to report, UNFI’s stock price increased marginally to $8.43 per share (on September 4), a year ago its share price was $34.41. It will be interesting to listen in on the company’s Q4 and fiscal 2019 earnings call on September 19. Key points to focus on will be the company’s Supervalu legacy comp sales and possibly an update on the Shoppers situation, where we expect the announcement to be made in Q1 or Q2 of the new fiscal.

According to the Baltimore Business Journal, Aldi will spend $18 million to upgrade 13 Baltimore area store to reflect its new operating model featuring expanded produce, meat and seafood as well as wider aisles. The perishables-oriented prototype being rolled out with remodels nationwide along with new stores, has really propelled Aldi’s sales performance over the past 18 months. One if its chief competitors, who’d very much like to be more like Aldi (at least in the U.S.) is Lidl, which ramped up its new store openings in the area recently. During the summer, the discounter’s Arlington, VA-based U.S. unit opened stores in College Park, MD and Hagerstown, MD. And earlier this month Lidl cut the ribbon on its first Central PA store in York. Other openings this month include stores in Trooper, PA, Royersford, PA and Lacey, NJ. We have seen some improvement at Lidl, both sales-wise and with its merchandising, But it still has a long way to go before you’d call the company’s U.S. entry even moderately successful.

Could the “365” store targeted for Fairfax City eventually open as one of Amazon’s new retail concept units? That 30,000 square foot space, which was destined to be a “365” store when parent Whole Foods announced the project in 2016, will certainly not open as the more price friendly and streamlined version of a Whole Food Market. That concept was scrapped shortly after Amazon acquired WFM in 2017 and several planned “365” store have since opened as standard Whole Foods units. But there’s some talk that the Fairfax space will be one of the early tests for its new mysterious retail concept which the company said would be unveiled in late 2019 or early 2020. The Fairfax store should open sometime next year. And it looks like Whole Foods will indeed be opening its second Richmond store (a 40,700 square foot unit on West Broad Street adjacent to the C.F. Sauer property). The company finally put a sign on the site acknowledging it will build. WFM first announced it had secured a lease for the location way back in 2014.

And speaking about Richmond, our buddy Greg Gilligan of the Richmond Times-Dispatch/Richmond.com, and one of the best food business reporters in the industry, was able to snag a comment from Publix CEO Todd Jones at the company’s new store opening on Three Chopt. Road, its 13th Richmond area supermarket since it debuted in July 2017 (three more are planned). Jones said he is happy that Publix is opening stores in the Richmond market, adding “I think our brand has resonated well.” With all due respect to Mr. Jones, if he means that Publix is doing well in the 26 months since the chain entered the market, either his bar is much lower than I thought, or he’s using some type of binary measuring system.

From the obit desk, we have a few deaths to report this month. Toni Morrison, one of the great authors of the past 50 years, has passed away at the age of 88. Morrison was the first African-American woman to win a Nobel Prize in literature. Books such as “Beloved,” “Song Of Solomon” and “God Help The Child” depicted the stark realities of living life as an African American. Her gift was her writing style, in which she was able to blend the lives of complex characters into dark realities such as slavery and misogyny…from the acting community we lost both Peter Fonda and Valerie Harper in the last 30 days. Harper, 80, was best known for her role as Rhoda Morgenstern, the self-deprecating, wisecracking neighbor of Mary Richards on the “Mary Tyler Moore Show which premiered in 1970 (one of the best supporting characters in TV history). In 1974, the producers developed a spinoff, “Rhoda,” in which Harper’s talents were more individually showcased. “Rhoda” ran for four years. All told, Harper’s career spanned 63 years (1956-2019) and she won four Emmys. We also lost Peter Fonda, one of the coolest actors of his generation and a member of the Fonda acting dynasty, which included father Henry, sister Jane and daughter Bridget. Fonda’s early appearances usually cast him in roles as an outsider or societal misfit. His breakthrough role in that genre was as a drug dealing, hippie motorcyclist touring the country (along with Dennis Hopper) in “Easy Rider” (1969), the first great countercultural film of the Sixties generation, Fonda also wrote the screenplay and produced the movie. Thirty years later, Fonda was nominated for an Academy Award for his “against type” role as a widowed beekeeper in “Ulee’s Gold.” In 1951, Fonda, then 11 years old, accidentally shot himself in the stomach. In 1965, he related that experience to John Lennon at a Hollywood party, who referenced it, with the line “I know what it is like to be dead” in the song “She Said She Said” (Revolver, 1966). All told, Peter Fonda appeared in 116 movies and TV shows and was twice nominated for an Academy Award…it is with sadness that I report the passing of Mike McCann, the popular and successful food broker who was an integral part of the Baltimore-Washington market for more than 40 years. I spent a lot of enjoyable times with Mike in the 1980s and 90s. The stories were often hilarious, the conversations were always stimulating, and the spirits were top notch. He was smart, successful and a helluva salesman. Mike, who was 81, is survived by his beautiful wife Mackie, three children, five grandchildren and one great grandchild. A savvy and classy man, Mike McCann you will be missed.