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The grocery industry is always an exciting and dynamic place to be, as operators maneuver to enhance and solidify their market positions in a variety of ways, from mergers and acquisitions to reinvention.
The eyes of Progressive Grocer are on all of it, but here are five to which we?ll be paying particularly close attention as 2015 unfolds: Albertsons/Safeway, C&S Wholesale Grocers, Fresh & Easy, Price Chopper and Walmart.
The following corporate outlook includes insights from Food Marketing Institute (FMI) SVP Mark Baum, retail consultant David Diamond, industry analyst Burt Flickinger and The Hartman Group, along with PG?s c-suite-centric sister publication, Retail Leader.
For an update on last year?s class of Ones to Watch, visit Progressivegrocer.com/onestowatch. For further analysis of the retail landscape, check out www.retailleader.com, as well as PG?s daily news reports at Progressivegrocer.com.
Albertsons + Safeway
By the time you read this, the acquisition of Safeway by Albertsons should be nearly complete, but the biggest challenges may still lie ahead.
The $9 billion deal creates a network that includes more than 2,400 stores, 27 distribution facilities and 20 manufacturing plants, employing more than 250,000 associates. It?s what analyst Burt Flickinger calls ?an exciting combination of stores.?
According to Albertsons CEO Bob Miller, who becomes executive chairman of the combined company, the transaction presents ?the opportunity to better serve customers by adapting more quickly to evolving shopping preferences in diverse regions across the country.?
That said, Flickinger, managing partner of New York-based Strategic Resource Group, warns that ?it?s still going to take the Albertsons side two to five years to catch up, considering the market share Albertsons has lost over the last decade.?
He continues: ?Albertsons is facing a lot of competition and postponed capital expenditures in stores, and sales have declined significantly over time.?
For its part, Safeway went into the deal after a year of upheaval that included its withdrawal from the Chicago (Dominick?s) and Canadian markets, moves the company made in part as a response to a buyout threat from activist investors. Those moves, overseen by CEO Robert Edwards, who becomes president and CEO of the combined company, apparently made Safeway an even more desirable target for acquisition, a move already being explored a year ago by New York-based private equity firm Cerberus Capital Management, owner of AB Acquisition LLC, parent of Albertson?s LLC and New Albertson?s Inc.
When the deal was announced last March, Miller affirmed that Safeway?s ?best-in-class private label program? was a very attractive aspect of the Pleasanton, Calif.-based retailer?s portfolio and represented ?a real strength that can be spread to all stores, with more variety? and sophistication.
In addition to its eponymous banner, Safeway also operates stores under the Vons, Pavilion?s, Randall?s, Tom Thumb and Carrs nameplates. The Fortune 100 company has held the second-largest standing among food and drug retailers in the United States for years, with 2013 sales of $36.1 billion, placing it fourth (behind Walmart, Kroger and Target) among top grocery sellers in PG?s Super 50 ranking last May.
Albertsons (ranked seventh, with sales topping $23 billion) operates stores under its flagship banner, plus several others, including those it sold to Supervalu in 2006 and reacquired in 2013.
The combined company will operate with three regions and 14 retail divisions, the latter of which will be supported by corporate offices in Boise, Idaho; Pleasanton; and Phoenix.
It will also operate without three of Safeway?s highest-ranking executives, who are leaving the company upon consummation of the deal: Larree Renda, EVP of Safeway and chair of The Safeway Foundation, which oversees the grocer?s charitable giving activities; EVP and Chief Marketing Officer Diane Dietz; and EVP and CFO Peter Bocian.
Cerberus plans to sell off Property Development Centers, Safeway?s real-estate development arm, which owns several store sites and was overseeing a couple of new-store construction projects in California. For the time being, the new company says it doesn?t plan to close any stores. However, when Cerberus made the original purchase in 2006, it gave similar reassurances of not closing any stores, and then ended up shuttering hundreds, essentially wiping out the Albertsons banner in northern California.
As this issue went to press, AB Acquisition and Safeway had agreed to sell 168 stores to four separate buyers as part of their merger deal. Bellingham, Wash.-based 18-store chain Haggen will buy 146 stores across Arizona, California, Nevada, Oregon and Washington; Associated Wholesale Grocers (AWG)/Minyards will buy 12 stores in Texas; Associated Food Stores (AFS) will purchase eight stores in Montana and Wyoming; and Supervalu will purchase two in Washington.
Unclear at press time was whether this spelled the end of private equity investor Sam Zell?s grocery aspirations. Zell, in partnership with Los Angeles-based Oaktree Capital Management and Florida-based Comvest Partners, had bid on 140 stores in advance of the merger.
Zell was reportedly working with private investor Stuart Sloan, chairman of the Quality Food Centers grocery chain from 1986 to 1999. ?Sam Zell?s a brilliant retail investor,? Flickinger tells PG, recalling Zell?s bailout of the Revco drug store chain in the late 1980s and its sale nearly a decade later to CVS. ?From a property standpoint, he certainly knows the business. He?s got a good retail partner, but neither has run retail chains in the new millennium ? things have changed quite a bit.?
C&S Wholesale Grocers
Keene, N.H.-based C&S Wholesale Grocers spent a good part of 2014 shifting its focus as a supplier and distributor to independent retailers after making its bones by providing third-party services to major regional chains.
In October, a U.S. Bankruptcy Court judge approved C&S? $288 million bid to acquire Associated Wholesalers Inc. (AWI) and its subsidiaries, beating out Minneapolis-based Supervalu to purchase the regional co-op food distributor that operates two distribution centers in Pennsylvania, along with its White Rose subsidiary, which operates three distribution centers in New Jersey, and four corporate Nell?s Shurfine Markets.
?This transaction will give us an even greater capacity to provide the unique services required by independents and regional chains,? said Rick Cohen, chairman and CEO of C&S, which serves about 5,000 stores, including Stop & Shop, Giant Carlisle, Giant Landover, Bi-Lo/Winn-Dixie, A&P, Safeway and Target, from more than 50 facilities across the country.
What remains to be seen is who will supply the 2,000-plus Mid-Atlantic stores that AWI and White Rose serviced prior to the bankruptcy filing. C&S has a clear advantage, thanks to its previous stalking-horse status that it parlayed into a done deal, assets of which include joint lease ownership of stores for several of AWI?s largest former member-owners; many of these are also tied into the former co-op?s front end IT systems. But don?t count Supervalu Inc. out of picking up a solid base of AWI?s indy operators, who might well feel more comfortable with the Minnesota company, given its long history with independents.
Fresh from its winning bid to acquire Robesonia, Pa.-based AWI and its subsidiaries, C&S also tied up the purchase of Houston-based The Grocers Supply Co.?s wholesale distribution and supply business. Although Grocers Supply?s retail operations aren?t part of the deal, C&S will take over its warehouse and distribution operations in the Houston, Dallas and Rio Grande Valley areas, along with approximately 1,800 employees.
And no sooner was that deal?s ink dry than C&S tendered a pact to acquire Greenbax Enterprises, the privately held parent company of Piggly Wiggly Carolina Co., which in November sought shareholder approval to liquidate The Pig?s Charleston, S.C.-based parent company, paving the way for the purchase of its wholesale operation by C&S for $9.3 million.
C&S, which has owned the Piggly Wiggly name for years, won?t take ownership of any stores but will continue to act as their wholesale supplier. Piggly Wiggly Carolina operated 30 independently owned franchised stores and 19 corporate stores; the franchised stores will retain the Piggly Wiggly banner, while the 19 corporate locations will be sold to local operators or ownership groups.
Signaling its intention to further ramp up growth as industry consolidation has diminished opportunities for growth in third-party services, C&S hired PepsiCo alumnus Alejandro Rodriguez as EVP of new business and market development, and Christopher Brown, a three-decade industry veteran who?s worked mainly with indyfocused wholesalers, as SVP of independent sales.
Independent retail consultant David Diamond anticipates that C&S will continue to selectively acquire other wholesalers as they become available. ?Eventually, they could be as big in that game as Supervalu,? says Diamond, a columnist for Progressive Grocer Independent. It?s becoming evident that, though serving smaller independents has not historically been C&S? strength, it has designs on taking that market by storm.
Yet others are becoming increasingly concerned about C&S? aggressive stance, which, according to one observer who requested anonymity, ?is all but begging for Federal Trade Commission intervention. C&S is getting too big for itself, and its corporate culture is in stark contrast to that of many local, community-based grocers it?s now courting.?
In a general sense, the deals indicate that ?the independent sector continues to be alive and well,? says Mark Baum, SVP for industry relations and chief collaboration officer at the Arlington, Va.-based FMI. ?They wouldn?t make these investments if they didn?t think a future is there. This demonstrates a commitment to the independent operator moving forward,? adds Baum, noting the 5,000 independent grocers across the country, along with larger chains requiring secondary suppliers.
No doubt about it: Deals like this are changing the way independents are able to compete with chains. ?Every year, change comes, dynamics shift, you have channel migration where grocery has been the loser,? he says. ?We?re winning back some of that share, and C&S is positioning itself to be one of the winners.?
Looking ahead to 2020 and beyond for all channels, Baum predicts: ?There will always be independents that will be among the winners. ? There is opportunity for independents to partner with wholesalers and win in the marketplace.?
Diamond adds: ?Fundamentally, with the acquisitions, C&S has migrated its strategy from being an outsourced distribution partner for big chains to being a true wholesaler, dealing with hundreds of different accounts. On one hand, it makes a lot of sense, especially since the competitive set is very small and not terribly competent. The interesting question is why they moved from a very unusual business model ? a wholesaler with only three or four customers, basically allowing Ahold, A&P and a few others to outsource distribution [to a voluntary wholesaler]. I guess the hole in the market was just too big for them to ignore.?
But as yet another observer asserts: ?The toughest foe for C&S? East Coast indy aspirations is the formidable Wakefern Food Corp., whose rock-solid base of indy member-owners is as good as any in the country.?
Fresh & Easy
Following its acquisition by Yucaipa Cos. in November 2013 in a bankruptcy auction, El Segundo, Calif.-based Fresh & Easy is aiming to reinvent itself after its former British-based parent Tesco?s grand plans to be as big in the United States as it is in the United Kingdom went spectacularly awry.
?They were in such free-fall,? Flickinger says, referencing the chain?s woeful misguidance by a U.K.-based management team that was out of step and stubbornly tone-deaf to local market conditions and preferences.
But following a year of virtual radio silence under its new Yacaipa ownership, Fresh & Easy stepped out of the shadows with a high-visibility marketing campaign inviting customers to rediscover the 167-store chain. Positioning the relaunch with an ?anytime, anyway, anywhere? tagline touting healthy, convenient and affordable food, the multiplatform campaign centers on five pillars: affordable organics, handmade prepared foods, fresh daily deliveries, no hidden ?unpronounceables? and quick meal solutions.
Building on that initiative, the chain in December rolled out a new prototype store design featuring restaurant-quality meals at food stations, a hot bar, a pizza oven, a coffee bar and made-to-order sandwiches. A Fresh & Easy spokesman described the concept as ?natural like Whole Foods, unique as Trader Joe?s, convenient as 7-Eleven, with the hot food of Panera.? Led by former 7-Eleven executive James Keyes, the retailer expected to have 17 stores converted to the new concept by the end of last month.
?Now that Fresh & Easy has its freedom, it has the first opportunity to turn around in over five years,? Flickinger says, ?and has a good chance to do it with the economy improving, and by rebalancing its inventory with regional and national brands and less private label product.?
Price Chopper/Market 32
Defining moment or risky gamble? That?s the assessment of at least one analyst, reacting to the decision of The Golub Corp., parent company of Schenectady, N.Y.-based Price Chopper, to reinvent itself with a brand-new Market 32 banner across its store feet, which the company says ?will transform food shopping through modernized stores and new services and products.? Named for the year of the company?s founding, the concept will be rolled out across the grocery chain?s six-state market area this spring. ?Market 32 represents the next leap forward for our company,? declared the legendary Neil Golub, Price Chopper?s executive chairman of the board, when announcing the audacious store-rebranding program. ?We have evolved from the Public Service Market to Central Market to Price Chopper by responding to customers? changing needs over time, and Market 32 is the next natural progression for us. Early learnings gleaned from our Market Bistro concept store have put our next generation in an excellent position to make this move.?
The company is kicking off the initial phase of its eventual $300 million investment by converting Price Chopper stores in Clifton Park and Wilton, N.Y., and Pittsfield, Mass., to the new banner; ground was broken in November on the first ground-up Market 32 in Sutton, Mass. A second wave of conversions will then begin over the next 18 months; more than half of the 135-store chain will be converted within five years.
?Market 32 combines what we are hearing from our customers and what we are learning at Market Bistro, with some of the best thinking in the retail industry, and will focus on delivering a distinctively different shopping experience to our customers,? asserts Jerel ?Jerry? Golub, Price Chopper?s president and CEO. ?Our stores will meet customers? needs today and for decades to come. Most importantly, though, we will continue to offer great value for great food and service.?
That greatness will include expanded foodservice options, an enhanced product mix and a re-emphasis on customer service. ?It is a complete refocus of our company on the core values that our customers are looking for in a store,? Jerry Golub says.
Flickinger calls the plan ?a very impressive concept? but questions how it will be received, ?because so many of the markets they operate in have less disposable income. Consumers are really under pressure and historically have concentrated on Price Chopper as a place to save.?
Meanwhile, Wakefern Food Corp.?s ShopRite stores opening in Price Chopper?s territory are ?having spectacular sales success,? Flickinger notes, acknowledging that the Golub operation is scoring well with openings in Massachusetts and is a ?great store of multigenerational success.?
That family connection is a plus, according to The Hartman Group. ?Price Chopper may just pull off the most radical reinvention in grocery history,? the Bellevue, Wash.-based market research firm said on its blog in December. ?Why? They are a privately held, employee-owned and family-managed company. This means that they have a frontline and backstage staff entirely vested in the success of this reinvention.?
The Hartman Group considers Price Chopper?s move a bellwether for middle-tier grocery stores: ?We have never seen a system renovation this ambitious and this extensive by an independent operator. Price Chopper has gone all in on all things fresh, and it will be either the biggest mistake of grocery retail in the last decade or a defining tipping point for a flat-lining midmarket grocery sector.?
The move by Price Chopper is compelling The Hartman Group asserts ?since most every supermarket operator that has reinvented their stores toward all things fresh has engaged in highly compartmentalized experiments that utilize new stores not renovations,? noting as examples H-E-B?s Central Market Mariano?s Fresh Market by Roundy?s and Giant Eagle?s Market District.
?Being successful takes a tremendous amount of labor to reach a break-even point ? they?d have to do a Wegmans volume of sales,? Flickinger remarks. ?They?ll need to go slowly and evaluate and redefine the retail concept as they do because the cost is so much higher than their other stores and their competitors.?
The big-box stores that came to define Walmart ? the ones where shoppers can seemingly find every SKU of anything they want ? haven?t been a bright spot on the company?s balance sheet lately. Same-store sales have been declining with a 0.4 percent drop in the last holiday season and no growth in the most recent quarter.
Grocery, the category where Walmart now makes more than half of its money, isn?t doing any better: It?s been hit by cuts in food stamps, higher payroll taxes, stagnant wages and other blows to its core shopper constituency
?Walmart misread its own store base,? explains Flickinger. ?Supercenters are not the problem; they provide operating leverage and opportunities for profitable growth. ? [But] supercenters are starved for inventory and staff. Walmart supercenters have the worst out-of-stocks of any retailer in America. If Walmart reinvests in simply stocking the shelves, sales would grow 3 percent to 5 percent instead of being negative.?
Walmart, like Target and other competitors, has experimented with smaller stores for years. The experimentation is coalescing around the concept of Neighborhood Markets, stores of about 45,000 square feet, about half the size of a regular Walmart, and about a quarter the size of a Supercenter.
The small stores have made a big impact, at least in terms of their potential. Their same-store sales were up 4 percent last year and 5.6 percent in the last quarter. Walmart has responded by accelerating their growth. It had originally planned to open no more than 150 of them, this fiscal year; it?s now doubling those plans and will build between 270 and 300 of them. (By contrast, Walmart plans to open about 115 new Supercenters.)
But not everyone is convinced that going smaller is necessarily the solution for long-term success.
?Neighborhood stores do well in the beginning, because they?re new and fully stocked,? Flickinger argues, ?but as they get into the third year ? ultimately a small box will have the same problems as a big box.?
Flickinger asserts that Walmart faces challenges on a much grander scale. While Walmart has managed to vanquish many smaller, underfunded competitors, it struggles against strong regional players like H-E-B, Market Basket, Woodman?s Markets and Kroger?s regional banners. ?Walmart has most of the business it?s going to get from Kmart and other retailers,? Flickinger says. ?Walmart?s losing consistently against other privately held capable competitors. ? Now that it?s facing bigger competitors, 2015 Walmart is facing more uncertainty.?
Further, Flickinger notes, stores in Central and South America that Walmart acquired from Ahold are struggling, and the company faces additional challenges in Africa, Asia and the United Kingdom. ?Walmart struggles so much outside of North America, it?s going to be that much more important for Walmart to succeed in Canada going forward,? he says. ?Aldi?s going to be expanding very aggressively; Dollar General is going to continue to expand. Walmart can?t find a way to beat Dollar General on general merchandise and hasn?t found a way to beat Aldi. With Costco being its worst enemy, Walmart?s fighting a four-front war for the first time.?
Greg Foran, promoted in July to CEO of Walmart U.S., had been a top executive with Woolworths, Australia?s leading grocer, where smaller-format stores are more common. Foran?s promotion sparked rumors about the future of Duncan McNaughton, the retailer?s U.S. chief merchandising officer, who ultimately left the company just before Black Friday.
Flickinger says Walmart?s executives ?know how to course-correct,? but the company?s board needs to ?change its view on cost versus investment? in regard to staffing. ?They?ve got good leaders and, given the resources, could turn the company around.?
He concludes: ?It?s very important that Walmart turn around in 2015 or risk having the first 50 years of this century be what the last 50 years were for Sears and Kmart.?
?IT?S STILL GOING TO TAKE THE ALBERTSONS SIDE TWO FIVE YEARS TO CATCH UP, CONSIDERING THE MARKET SHARE ALBERTSONS HAS LOST OVER THE LAST DECADE.?
?Burt Flickinger Strategic Resource Group
?THIS DEMONSTRATES A COMMITMENT TO THE INDEPENDENT OPERATOR MOVING FORWARD.?
?Mark Baum, FMI, on C&S Wholesale Grocers
?NOW THAT FRESH & EASY HAS ITS FREEDOM, IT HAS THE FIRST OPPORTUNITY TO TURN AROUND IN OVER FIVE YEARS.?
?Burt Flickinger, Strategic Resource group
?IT WILL BE EITHER THE BIGGEST MISTAKE OF GROCERY RETAIL IN THE LAST DECADE OR A DEFINING TIPPING POINT FOR A FLAT-LINNING MIDMARKET GROCERY SECTOR.??The Hartman Group, on Price Chopper?s rebranding
?IT?S VERY IMPORTANT THAT WALMART TURN AROUND IN 2015 OR RISK HAVING THE FIRST 50 YEARS OF THIS CENTURY BE WHAT THE LAST 50 YEARS WERE FOR SEARS AND KMART.?
?Burt Flickinger, Strategic Resource Group