There’s an old football drill where a running back carries the ball through a two-sided wall of defenders who try to strip the ball away. The current version of the drill has been sanitized for safety with gang tackling no longer allowed, but the original “gauntlet” drill was brutal and potentially dangerous.
Over the past two months since Albertsons and Kroger announced their intention to merge, both sides have been facing a political gauntlet of their own, this one as potentially brutal as the football version.
In those two months, the two supermarket powerhouses have faced legal challenges from attorneys general in three states and Washington, DC, as well as intense scrutiny from the U.S. Senate and distrust from multiple labor unions which have accused the chains of potentially creating job losses, despite the fact that Kroger and Albertsons represent the biggest bloc of unionized labor in the supermarket channel.
Let’s recap the external hurdles the two chains have endured since the proposed deal was announced on October 14.
Twelve days after the announcement, attorneys general in Illinois, California and the District of Columbia filed a federal suit claiming that the issuance of a $4 billion one-time dividend to Albertsons shareholders would create antitrust concerns and then weaken the Boise, ID-based chain’s overall financial security. A week later, the attorney general from Washington filed a separate state suit alleging the same issues. Albertsons claimed that the $4 billion dividend, which was supposed to be issued on November 7, would have been paid out even if the merger announcement had never occurred. And they also scoffed that releasing $4 billion would have any material effect on the company’s financial flexibility by stating: “The allegation that this dividend will somehow hinder our ability to compete in the marketplace is also meritless, Albertsons said. “Given our financial strength and positive business outlook, we are confident that we will maintain our strong financial position as we work toward the closing of the merger. Additionally, payment of the special dividend will not hinder Albertsons Cos.’ ability to continue investing in our stores and technology to provide an even better shopping experience while we continue to operate as an independent company, and it will not impact the agreements that we have made with unions representing our associates to increase wages and benefits.”
Federal Judge Carl Nichols ruled that Albertsons could issue its dividend but not until the Washington State case had been adjudicated. That case in state Superior Court was continued twice, and finally on December 9 Judge Ken Schubert ruled in Albertsons’ favor. The Washington attorney general’s office said it will file an immediate appeal to the state’s Supreme Court to continue the temporary restraining order. However, Judge Schubert said he would still offer a continuance unless the AG’s office could find a legal precedent for extending the ruling until the Supreme Court hears the case.
Another leg of the “gauntlet” was a hearing in Washington, DC at the U.S. Senate’s subcommittee on competition policy, antitrust and consumer rights held November 29. For about 150 minutes, Kroger CEO Rodney McMullen and Albertsons chief executive Vivek Sankaran attempted to explain why the $24.6 billion merger would make for a stronger overall organization through lower prices and upgraded stores as well as the fact that the combined company would be better able to compete with Walmart and Amazon as well as other emerging alternative store food retailers such as Trader Joe’s, Dollar General, Aldi and Costco. The meeting was led by Senators Amy Klobuchar (D-MN) and Mike Lee (R-UT), who both expressed a healthy level of skepticism that a merger would benefit consumers at all. Lee may have made the most poignant statement of all when he noted, “The companies assure us that this merger will make everything better. Of course, they haven’t explained how we can be sure that those commitments will be fulfilled, nor have they explained why the merger is necessary to begin with.”
And when a non-political/legal force was heard – in this case organized labor – the pushback was just as negative. You might think unions would applaud a deal between the two largest (primarily) organized supermarket chains in the country, especially with much of new store growth store (and market share gains) nationally over the past 15 years coming from non-union retailers (Walmart, Target, Trader Joe’s and Dollar General). But, that’s clearly not the case. “The proposed merger between Kroger and Albertsons has serious implications for hundreds of thousands of our UFCW members and America’s families who are more concerned than ever about inflation’s impact on the price of their food and groceries, prescription drugs and gas. As America’s largest union of essential workers, protecting the livelihoods of this nation’s grocery workers, union and non-union, is our highest priority…To be clear, the UFCW will oppose any merger that threatens the jobs of America’s essential workers, union and non-union, and undermines our communities,” UFCW International said.
And from UFCW Local 400, based in Landover, MD, one of the largest locals in the country and the labor overseer of stores run by unionized Kroger and Safeway (Kroger subsidiary Harris Teeter is a non-union company) their protestations were even louder. “We are firmly opposed to this merger because of the negative impact it will have on our union members at both Kroger and Safeway, as well as the communities we serve. If this deal goes through, the majority of the grocery industry will be controlled by only two chains – Kroger and Walmart. This sort of concentration of market power is precisely what antitrust laws are intended to prevent. We cannot allow our food system to turn into a duopoly that will eliminate meaningful competition and drive up the price of groceries.
“Furthermore, this conglomeration will result in the loss of a great many good, union jobs in the grocery industry and weaken job standards across all of retail. Our union is committed to protecting our members and customers from the damaging impact this merger would inevitably cause. We call on the Federal Trade Commission to fulfill its mandate to protect American consumers and stop this disastrous deal. We also call on state attorneys general to work to stop this, as well as any and all other officials with the power to intervene. We cannot allow this unprecedented merger to put thousands of essential workers at risk of losing their jobs and irrevocably harm the communities we serve.”
Local 400 cited the role of the FTC in the process; and in the end, the role of the government’s consumer protection agency might be all that matters. Ultimately, that part of the “gauntlet” might be the toughest to get through.
Some might feel optimistic that the big federal agency has granted a “second request” to more deeply review the merger. To me, that’s just boilerplate stuff. What I believe will be more important is how the five FTC commissioners ultimately rule. They and the U.S. Department of Justice hold all the cards.
And that ruling may be largely influenced by Lina “Dealkiller” Khan, the 33-year old chairwoman of the agency who, in her 18-month tenure in the job, has sued to block eight potential mergers or acquisitions. Her latest target occurred on December 8 when Microsoft was informed that its attempted $69 billion acquisition of video game manufacturer Activision would be challenged. Last month, Khan’s group sued to block a proposed deal between book publishers Penguin Random House and Simon & Schuster.
Khan, who in 2017 wrote a story in a legal publication which derided the 2015 Albertsons-Safeway deal, has been outspoken in her distrust of mega-mergers within the same industry. And part of the focus of her distrust lies in the rhetorical point that Senator Lee made at the U.S. Senate hearings which translates to “promising you’re going to do something (improve stores, lower prices?) and actually fulfilling those commitments aren’t always mutually inclusive.”
And to some extent, there are aspects of the deal that I do believe are questionable, although not deal killers.
Kroger’s inference that only about 350 stores might be asked to be sold or closed is, I believe, way light (my guess is 600-800 stores). And the theoretical creation of a landing platform for those unsold stores – SpinCo – seems like something out of “Mystery Science Theater.” While SpinCo was a clever idea to show the FTC that it’s sensitive to those stores (and jobs) which may not be sold, forming a publicly-traded company for second-choice supermarkets under new and unknown banners doesn’t seem like Wall Street’s definition of instant gratification.
But as I’ve written earlier, even if the FTC calls for 1,000 stores to be divested, that means Kroger would still acquire 1,300 net new stores that are mainly profitable and instantly accretive, a far more powerful indicator to its shareholders than building 100 Ocado-inspired fulfillment sheds.
And if you first wondered why both parties said it would take about 18 months to consummate this merger, you should no longer question that timeline – there are a lot of complex, moving pieces to digest, but none more important than the FTC’s final decision, for which the process probably won’t begin in earnest until early next year.
And that will be the final and most difficult part of the “gauntlet.”
Mid-Atlantic Based C-Store Powerhouses Will Expand To New States Over Next Two Years
Local convenience store powerhouses Wawa, Royal Farms and Sheetz all have major expansion plans for 2024 and 2025 that will find them opening stores in new operating areas.
Wawa, which began its aggressive geographic expansion in 2012 when it entered Florida (where it now operates about 250 stores) has plans to open c-stores in North Carolina next year and in Tennessee in 2025. When Wawa does cut the ribbon on new stores in the Tar Heel State in 2024 (the first store is likely to be located in Kill Devil Hills in the state’s Outer Banks), it will mark the seventh state the company will operate in and continue a growth plan that has seen the Chester County, PA-based ESOP open new stores in Washington, DC and Virginia after it debuted in Florida. North Carolina would be an expansion of that effort as would Tennessee which borders the Tar Heel State to the southwest. The Tennessee growth plan is expected to be even more aggressive with a reported 40 new sites targeted for the Nashville area. Oh, there’s more expansion news: Wawa will also open its first c-stores in Georgia and Alabama next year. The Alabama location will be in Fairhope, a city located about 60 miles west of Pensacola, FL. And just before presstime, Wawa confirmed that it will also be entering three more new states – Ohio, Indiana and Kentucky – although that phase of expansion will not begin until after 2025. The c-store juggernaut is currently scouting locations in all seven new states. Wawa currently operates more than 950 stores in six states.
Baltimore-based Royal Farm Stores (RFS), which boldly (and successfully) entered Wawa’s backyard in eastern Pennsylvania in 2015 and New Jersey in 2017, now also has its sights set on a North Carolina expansion next year, also in the eastern part of the state (Grandy will reportedly be the site of Royal Farms’ debut store). All told, at least six new RFS locations are initially planned for North Carolina. Sources have also told us that the privately-held, family-owned company will open its first Michigan unit in the Detroit suburb of Romulus next year. Currently Royal Farms operates approximately 260 stores in six states.
Rounding out the “big three” of Mid-Atlantic based c-store merchants is Sheetz. The family-owned retailer, which was founded in 1952 by Joe Sheetz and now has nearly 675 stores in six states, also has plans to expand to a new state in the near future – Michigan. The Altoona, PA-based operator announced that it plans to open multiple stores in the Detroit area beginning in 2025 and will also be adding about 20 new stores to its Ohio footprint, a state where it already operates more than 60 locations.
If I were running 7-Eleven, I’d be concerned.
‘Round The Trade
If we’re closing in on a recession, as some economists believe, shopping behavior during the Thanksgiving holiday gave no indication that harder times are ahead. During the five-day holiday period late last month, a record 196.7 million Americans either shopped in stores or online, according to the National Retail Foundation (NRF). Not surprising was the 17 percent gain in brick and mortar visits as consumers felt more comfortable making in-person visits after two consecutive years of COVID-restricted shopping habits. At least some daunting labor challenges in the retail food sector can be explained by recent unemployment totals released at the end of last month. Applications for unemployment for the week ended November 26 dropped to 225,000, a decline of 16,000 people who filed the prior week. Unemployment levels remained at a near historic low of 3.7 percent. However, don’t expect retailers and distributors to feel good about the news. Finding acceptable new hires and then retaining those workers is as tough as it’s ever been.
I listened to Walmart CEO Doug McMillon’s December 5 interview on CNBC and was encouraged to hear his optimism (at least about his company). One key takeaway that he said was still moving Walmart’s sales needle forward was the number of households earning “six figures” that are now spending more at Walmart to better offset spiraling retail prices. He added that of all food categories, center store-driven manufacturers have been the least elastic in dealing with the Behemoth’s attempts to stabilize prices.
While I’m happy to hear virtually all retailers are maintaining healthy sales results, the challenges remain obvious. Whereas I expect comp store revenue to remain good in Q1 of 2023 and solid in Q2, I fear the pain points will come in the latter half of next year, particularly during the important holiday season. I hope I’m wrong.
One merchant that has dominated comp store increase levels over the past year has begun to see things slow down a bit. Costco, whose fabulous sales run actually began in 2020, found that its comp store revenue in November slowed to a still very healthy 6 percent in the U.S., down from 9.2 percent a month earlier. As an analyst, I wouldn’t be too concerned. Even more than Walmart, Costco remains the most resilient retailer in the country and one of the best run, to boot. While retailers can unflinchingly tell you that dollar sales are up and units are down, they would also note the significant increase in “own brands” sales. To wit: recent empirical evidence in the form of a new report from IRI about private label (“Private Brands: Look Who’s Buying Now”) indicates that ACV sales of private brands has increased 17.5 in the past year.
And we couldn’t leave you without at least one Amazon story, so here it is: instead of the expected job reduction of about 10,000 associates employed by “Godzilla,” that number, according to several published reports is likely to be closer to 20,000 jobs.
Local Notes
Aldi cut the ribbon on its newest Maryland store earlier this month in Abingdon, MD in the Constant Friendship Shopping Center. Aldi now has four discount units in Harford County and 59 in the Old Line State.
More changes to report at Chesapeake, MD-based Dollar Tree stores. Jennifer Bohaty has joined as chief compliance officer; Terence Goods is the discounter’s new chief diversity officer; Jennifer Silberman has been named chief sustainability officer; and Kristin Tetreault is Dollar Tree’s pick as chief communication officer. Other than CEO Mike Witynski, the retailer’s org chart has essentially been blown up over the last six months. BTW, none of these new executives comes from a general merchandise or retail food background. See what increased private equity presence will lead to?
Some entries into this month’s obituary column include Howard Saval, one of the four sons of Harry Saval, who founded Saval Foods in Baltimore in 1932. The deli processor and broadline distributor has grown significantly over the past 90 years thanks in part to Howard, Murray, and the late Len and Albert (former CEO) Saval who brought the company into the modern era. Today, Albert’s son Paul serves as CEO of the Elkridge, MD-based company which employs about 300 associates. Although I hadn’t seen Howard in quite a few years, I did spend time with him over the last 40 years as he and his brothers helped expand the firm during the ’70s, ‘80s and ‘90s. Extremely intelligent with a quick wit, I always enjoyed Howard Saval’s company. He was 82 when he passed.
Arguably the most underrated member of the world-renowned band Fleetwood Mac has also left us. Christine McVie, 79, actually joined the original British band as a keyboard player in 1970, during the second iteration of what began in 1967 as a blues band. After Peter Green, one of the greatest and most unsung guitar players of all time, quit the band, Fleetwood Mac reorganized under remaining original members drummer Mick Fleetwood and bassist John McVie (to whom Christine was married to for a short time). The band added California-born Bob Welch as its guitar lead and the band transformed itself into more of a pop group releasing an excellent but not widely listened to album “Future Games” in 1971. That was followed by another strong but barely noticed album “Bare Trees” which featured one of McVie’s best songs “Spare Me A Little Of Your Love.” In 1975 it all changed for Fleetwood Mac when the singing-songwriting team of Stevie Nicks and Lindsey Buckingham joined the band. Many of their songs featured tantalizing harmonies and addictive guitar hooks. Christine McVie was also encouraged to write more and she created some of the band’s best-known songs, including “Say You Love Me,” “Don’t Stop,” “Songbird” and “Little Lies.” Her songs tended to be more soulful than those of Buckingham and Nicks, and on the band’s “Greatest Hits Anthology,” released in 1988, she wrote or co-wrote eight of the album’s 16 tracks That disc sold more than 8 million copies! In 1988, she was inducted into the Rock & Roll Hall of Fame, along with other members of the group.
Gaylord Perry, 84, one of the most colorful and successful baseball players of all time, is now throwing balls and strikes in another realm. Perry, who pitched from 1962 until 1983 for eight Major League teams, had loads of natural talent – a high velocity fastball and pinpoint control – but will always be known for his otherworldly spitball or, as Perry termed it, “the K-Y ball.” Perry admitted using the illegal pitch, but never let on how much he deployed it during games. In fact, in his 22-year career, Perry was only ejected from games twice and only once for doctoring the baseball (for which he received a 10-day suspension). According to Yankee All-Star outfielder Bobby Murcer, “The only absolutely unhittable pitch I’ve seen in my whole career was Gaylord Perry’s hard spitter when he was in his prime. I’d rather face a 500 mile-per-hour fastball than that 85-mph spitter Perry used to have. At least then I’d have a chance.” Still, Major League baseball writers ignored Perry’s transgressions, voting him into the Baseball Hall of Fame in 1991. However, it should be noted that perhaps Perry’s statistics justified his induction: during his 22-year career, Perry won 314 games, struck out 3,534 hitters, was a five-time All-Star and won two Cy Young Awards. And there might be a reason Perry was so colorful and a bit goofy – his father named him Gaylord after a close friend of his who died while having his teeth pulled. Ouch!
