By PG Editors
Contributing coverage by Burt P. Flickinger III,
managing director, Strategic Resource Group

If the developments that transpired in the waning days of 2011 and the early part of 2012 are any indication, the retail food industry seems likely to experience continued upheaval in the coming 11 months, as the gap between the stalwarts and the laggards will likely remain – if not widen – as the new year progresses. • With this in mind, Progressive Grocer has synthesized a variety of scenarios unfolding around the industry to create a snapshot of key developments that will further influence retail grocers in 2012, with a speculative barometer of the expected highs and lows that might bubble to the surface under an increasingly intense pressure-cooker climate. • With two noteworthy deals occurring as 2012 came fully into view – one in the form of Bi-Lo's acquisition of Winn-Dixie, the other with Safeway's divestiture of its Genuardi's division to Ahold USA – the PG Doppler radar detects related hot spots lurking elsewhere, which are explored further in our extended Retail Food Forecast that follows.

Ahold
After nearly a decade of retrenchment, Ahold USA is on the prowl once again on the Eastern Seaboard. Indeed, the American arm of Netherlands-based Royal Ahold's domestic subsidiary – which accounts for about 60 percent of its parent's retail sales, courtesy of its 750 Stop & Shop, Giant and Martin's supermarkets from Massachusetts to Virginia – at presstime had acquired 16 Philadelphia-area Genuardi's stores from Safeway Inc. for $106 million.

The deal, which is expected to close in the first half of the year, is a logical extension of Giant's growing presence in the greater Philadelphia area, where the productive Carlisle, Pa.-based division already operates roughly 40 existing locations as part of its 132-strong Pennsylvania store base.

The move is the first manifestation of a master plan Ahold revealed in late 2011, relating to "six pillars" of an ambitious strategy to accelerate growth, including further development and rollout of successful store formats, the expansion of its online business and the implementation of a "more relevant" in-store assortment, the extension of the company's geographic reach in Europe and the United States, streamlined operations and reduced costs, and a focus on recruitment and training.

The aggressive agenda is part and parcel of a series of favorable quarterly financial results, including at its U.S. divisions Giant-Carlisle, Giant-Landover and Stop & Shop, as well as a slew of high-level executive appointments in the States, which collectively position the chain advantageously for continued acquisitive growth in existing and adjacent markets.

As the omnipresent cautionary tale of the retail food business reminds us, however, bigger isn't always better, though consumer and shareholder expectations most certainly always are.

A&P
Evolving from the second-largest corporation in the world at its peak to one of the most consistently inconsistent of all U.S. supermarket chains in recent history, you've got to hand it to the team of captains now steering the beleaguered A&P ship alongside chief executive Sam Martin, for managing to keep the oars moving in the same direction and toward the unified goals of restoring solvency and relevance after years of veering spectacularly off course.

The weight of Montvale, N.J.-based A&P's legendary financial and operational woes was finally addressed head-on in December 2010, when it filed for Chapter 11 bankruptcy protection amid a long-overdue restructuring aimed at stabilizing the business for a more viable future as a regional food retailer, inclusive of underperforming store closures, restored service levels, consistent pricing, and renegotiated vendor and labor union contracts.

Heading into 2012 with 335 locations – a sum that declined by 14 to 321 as we went to press with this issue the second week of January – the company is wasting no time paring its pre-Chapter 11 store count of 395 while keeping a close eye on its related goal of shedding one-third of its previous debt load. Calling the latest move to shutter the 14 underperforming locations "a very difficult decision … that was absolutely necessary" to strengthen A&P's operations and performance, Martin pledged that related "necessary steps" will continue to be taken to reposition A&P on respectable footing while focusing "on our top priority: providing great value and service to our customers every day."

Meanwhile, a $490 million capital infusion from backers such as The Yucaipa Cos., a noted expert in turning around the troubled fortunes of supermarket operators, continues to generate interest as the embattled grocer's fate unfolds. A two-day confirmation hearing is set for Feb. 6, when the approval of the company's Chapter 11 reorg plan is revealed. Unsecured creditors were told they can expect to recover from 2.1 percent to 2.7 percent, per a revised disclosure statement, confirmation for which was simplified when A&P settled late last year with holders of 79 percent of the $310 million in second-lien notes. In return for being paid in full in cash when the plan is implemented, second-lien creditors are dropping their claim for additional interest or a make-whole payment.

Indeed, Yucaipa's savvy investment mogul, Ron Burkle, has a history with A&P that dates back to 2007, when the private equity firm sold the Pathmark chain to the company. Two years later, Yucaipa injected another $115 million into A&P, so how the rest of the story plays out will be well worth watching in the weeks and months ahead – as will the evolving relationship between A&P and the United Food and Commercial Workers.

Bi-Lo/Winn-Dixie
In a deal that captured headlines from Clemson to Clearwater, the year-end news of Bi-Lo's acquisition of Winn-Dixie is poised to produce the country's ninth-largest supermarket chain, with 690 locations (assuming that a pending lawsuit alleging Winn-Dixie's board breached its fiduciary duty to adequately shop the company before inking the deal will be quashed).

In a weekly memo to company employees updating them about the pending sale to Bi-Lo, Winn-Dixie's chairman, president and CEO, Peter Lynch, said in early January that it was "typical for plaintiffs' firms to file lawsuits" after such significant deals have been tendered. "Our board believes the deal is in the best interests of our shareholders, and we intend to vigorously defend this litigation," Lynch affirmed.

If all goes as planned, Winn-Dixie will become a privately held, wholly owned subsidiary of Bi-Lo, with both companies expected to retain their existing banners and respective presences in each headquarters city. And though it's still unknown what the leadership of the combined operations will look like, the merger would bring the grocers full circle, in a sense: Former Winn-Dixie executive Frank Outlaw founded Bi-Lo in 1961.

Prior to the merger news, chief among Jacksonville, Fla.-based Winn-Dixie's growth strategies was the renovation of select stores in its five-state Southeast footprint to "transformational formats" featuring a focus on fresh food, upgraded décor and more tailored community touches. Additionally, in support of its neighborhood marketing strategy, the grocer also phased out its limited-assortment SaveRite stores in favor of its flagship banner.

In the view of Burt P. Flickinger III, managing director at New York-based Strategic Resource Group: "Winn-Dixie has bounced back from bankruptcy using its model of chain buying and self-distribution to serve its Southeastern stores. Peter Lynch and his team have invested in strong weekly price and promotional programs to offer savings on a significant number of items in key categories throughout its stores, whose combined savings on food and fuel offer Southern consumers additional ways to save, particularly in markets like New Orleans with high unemployment and lower levels of income."

Again, assuming the Bi-Lo transaction is approved, Flickinger says it's "competitively critical that Winn Dixie stores receive sufficient capital to reinvest in the stores to adequately compete against expansion initiatives from the camps of Walmart, Publix, Target, Kroger, Costco, Whole Foods, Aldi, Save-A-Lot, CVS and Walgreens, as well as dollar stores that now accept food stamps." Additionally, Winn-Dixie's most recent quarterly results missed expectations with a comp-sales decline of more than $99 million and an operating loss of $25.8 million, which Flickinger says further reinforce the "tremendous importance to sustain cap ex to compete successfully in markets with growing competition and limited levels of income, due in part to high unemployment."

For its part, Mauldin, S.C.-based Bi-Lo kept busy in the months leading to the deal by updating its store base, rolling out 22 refreshed stores in 2011 under an ongoing design program that emphasizes the chain's fresh offerings and signature private label products.

The Kroger Co.
A clear, collective focus on people, products, prices and shopping experience continues to set the tone for The Kroger Co., whose steady-Eddie same-store sales trends throughout 2011 bode relatively favorably for the Cincinnati-based retailer for the foreseeable future.

Having long ago made the necessary investments in pricing and related areas that have since given the nation's top-ranked food retailer the flexibility to pick and choose how and when to move in a different direction, Kroger's leaders continue to beat the "Customer 1st" drum that has served the company well in a variety of economic environments.

Moreover, as the major unionized retailer competing aggressively with Walmart, Kroger has made record-level investments to drive sales with successful store formats. Further, its strategic alliance with Dunnhumby, coupled with its strong corporate and regional leadership teams, has given the company a decided edge in the realm of promotional and loyalty programs spanning groceries to gas.

Separately, Kroger and the UFCW recently merged four pension funds, which will streamline benefits administrative functions with the chain and its various local labor unions.

Safeway
Putting to rest months of speculation on whether it would exit the Philadelphia market in favor of focusing on more promising operating areas, Safeway at presstime finally folded its flagging tent in Philly with the sale of 16 of its 27 Genuardi's stores to Ahold's Giant Food Stores LLC for $106 million, while seeking buyers for eight other locations not part of the deal (discussed further on page 32).

The sale to Giant – coupled with the closing of three more stores and the hoped-for sale of the remaining eight – likely signals the end of the Genuardi's name, which was once among the Delaware Valley's most highly regarded retail banners before Safeway acquired the family-owned regional retailer in 2001 for $530 million.

While some observers believe a similar fate is being mulled for its Chicago-based Dominick's division (see related commentary below), Safeway continues to prioritize health as a central part of its overarching strategy – the health of its financials, its consumers and the planet.

The grocer started the year off with a natural food line consisting of more than 100 products ranging from fresh beef and pork, fresh chicken, and beef hot dogs, to bread, yogurt and ice cream. The launch was followed immediately by its "SimpleNutrition" program, an in-store shelf tag system to help customers decide which foods and beverages have the nutritional properties they're seeking.

Even some of its executive appointments were health-related: Safeway appointed Darren Singer as its new SVP of pharmacy, health and wellness, and Dr. Kent Bradley came aboard as chief medical officer, a newly created position focused on further building the retailer's reputation as a health care innovator.

Unfortunately, health is one of the reasons Safeway is one of three grocers in contract negotiations with the labor unions representing its stores' grocery clerks and butchers, who have been in talks with the grocer for the past several months over wages and medical costs, and the impact of non-union competition. However, Safeway agreed to extend its UFCW contracts until Feb. 25, avoiding a strike during the holiday season – which would have been most unhealthy for sales.

As a whole, Safeway is often cited most frequently by industry observers as being a prime example of an operator situated "in the dreaded middle," as noted by one industry watcher who describes the grocer "as a good company. But what do they stand for? Price? Quality?"

That's a fair question, and one that PG will continue to track.

Wal-Mart Stores Inc.
While Walmart has packed up and exited continental Europe, Korea and other regions outside the Americas, the Bentonville, Ark.-based mega-chain is fully focusing on food retail expansion in the Americas to reverse two years of negative same-store sales.

"Walmart is expanding with its smaller-format stores to enter markets like Omaha, Neb., and other midsize to larger U.S. cities," market analyst Flickinger says. From 1994 to 2009 in some Sunbelt regions, he continues, "Walmart's retail food market shares ultimately exceeded 50 percent, primarily [through] supercenter expansion."

Facing a slew of its own challenges being aggressively waged from highly capable, well-capitalized competitors around the nation, the chain clearly has its share of reciprocal competitive challenges as well.

Flickinger also cites the global retailer's recent elimination of its employee profit-sharing plan that "Mr. Sam" Walton established 30 years ago, "as it operates stores with full-time workers working less than 40 hours a week. In our Strategic Resource Group observations," Flickinger continues, "Walmart appears to struggle to stay in stock with part-time hourly workers on weekends, when many people shop for food."