Taking Stock: Growth Plans Aside, Delhaize America Has Roadblock Ahead

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If you live in the Mid-Atlantic region and you’re asked to assess the status of Delhaize America (DA), you might be less than praiseworthy.

While the company is effusive about the prospects of its Bottom Dollar Foods (BDF) banner, after more than a year of operating in the Delaware and Lehigh Valleys, our research indicates that there are more “misses” than “hits” when analyzing sales.

Over the past three weeks, the big Belgian-owned retailer opened 14 Bottom Dollar units in the Pittsburgh-Youngstown area. Success in those markets is going be challenging, too, not only because other discounters (Save-A-Lot, Aldi) are already present, but because, as the newest kid on the block, it’s almost always more difficult to become established.

And much like its core Food Lion banner, I’ve wondered exactly what the BDF banner represents and who is it taking business from?

As we move further south into the Washington, DC market, Delhaize America’s recent announcement to close eight stores and convert 34 Bloom stores and 12 Bottom Dollar units back to Food Lions seems like a measure of desperation. In fact, the name Bloom will become extinct very shortly.

It was only five years ago that the retailer made a big ballyhoo about changing its image in the greater DC area by offering an upscale model (Bloom) to the many affluent consumers who live in the region and also by creating an extreme value alternative for customers in a different economic strata (BDF).

The latter concept might have been more effective if the units hadn’t been as large as they were (approximately 30,000-35,000 square feet; the newer stores around Philly which average about 19,000 sq. ft. work better) and had competed with better in-stock conditions.

And, at the outset, even Bloom had potential with a nice décor and service departments (although it wasn’t exactly a Wegmans or, for that matter, a Harris Teeter), and Bloom might have worked if Delhaize had stuck with the plan. Instead, sales started out a bit softly and soon the retailer abandoned its service component. And it’s been a downhill ride from there. Now we’re getting a revival of the Food Lion brand. Delhaize America believes that its new refreshed and enhanced look (which it has unveiled in Raleigh, NC and Chattanooga, TN) will revive the banner’s small, old and tired perception. The upgraded model may be scoring points further south, but don’t count on moving the needle significantly around Washington.

Why?

Because unless you’re building large edifices such as Wegmans or Wal-Mart designed to do a million or more in weekly volume, the share of market meter typically doesn’t move much in these times of over-storing and a diversity of retailing styles.

I’ve seen the revamped Food Lion model. It’s fresher, cleaner and better merchandised than the 35,000 square foot “workhorse” which still dominates the chain’s population of stores. But it isn’t a game breaker.

In a market like Washington, perishables and customer service are important. Food Lion is still behind the curve in both areas. Since Food Lion abandoned its original banner around DC in 2006, a lot has changed. Wegmans has doubled the number of stores in the market; Harris Teeter has added approximately 20 new units; Target has unfurled its Pfresh model; dollar stores have exploded; market leader Giant/Landover has improved its store base and subsequently its image; and Wal-Mart has added more than a dozen SuperCenters (and if there’s one merchant Food Lion needs to defend against with a wooden cross, bright lights, holy water and garlic, it’s Wal-Mart).

Given that market lineup in 2012, is Delhaize America better off today than it was when it took down the Food Lion banner in 2006?

On the corporate stage, along with the expansion of the Bottom Dollar banner in Pennsylvania, New Jersey and Ohio, the company is closing other Food Lion, Bottom Dollar and Bloom units (126 store closures in all). Of that number, 113 Food Lions in Florida (where that banner will disappear), Georgia, Kentucky, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia and West Virginia are scheduled to close this month. Additionally, the company will shutter its Clinton, TN distribution center. These moves serve a two-fold purpose for the company: 1) to provide more productivity and efficiency as its seeks annual sales growth of 5-7 percent annually and; 2) to achieve the desired corporate initiative issue by the mothership in Brussels to save about $650 million by the end of 2012. Sure, Delhaize would also like to add 450 new stores worldwide and become more profitable and consistent from a sales perspective (considering the impact of food price inflation, Delhaize America has struggled with comp store sales).

However, as a price for meeting its corporate savings directive, Delhaize America has created a unique and controversial centralized merchandising organization that many sales reps, brokers and analysts would argue impairs vendor relations and offers less attention to store operations and local merchandising. At the end of the day, it’s not as though the other DA banners – Hannaford, Sweetbay, Harveys and Reid’s – aren’t important, but with more than 1,100 Food Lion stores representing about 70 percent of Delhaize America’s fleet, the international retailer desperately needs its stalwart banner to improve. That test is just under way. Report cards will be issued later this year.

Herkert ‘Spins Away’ As SVU Posts Q3 $750M Loss; Another 800 Associates Riffed In Efficiency Move

A quarterly loss of $750 million. A pre-tax charge of $907 million for the write-down of goodwill and intangible asset impairments. Identical store sales at negative 2.9 percent (still worst in supermarket class). And, another 800 employees whacked in what the Eden Prairie, MN company described as a “streamlining” decision. If you were running a multi-billion dollar publicly-traded corporation, you might be alarmed by those quarterly results. And if those results were essentially repeated for nearly three years, you might be in full panic mode. But associates, shareholders and vendors need not be worried, because Craig Herkert’s at the helm. And much like his previous messages to those concerned about the company’s future, the “Process King” will tell you, “I feel good about what this team has done and the direction we’re going and the pace with which we’re moving it.”

Hey, if your company paid you nearly $14 million over the past two years and Supervalu’s board (whose theme song must be The Who’s “Tommy (Can You Hear Me)”) continue to support your agenda, I guess you’d feel pretty good, too.

So what if the numbers continue to suck and Supervalu’s stock price is a ridiculously low $6.75 a share? Craig Herkert wants you to know he’s on the case and that the company’s new analytical measuring tools are really beneficial as is Supervalu’s ability to leverage “high engagement, traffic-driving promotions” like its “Collect & Win” and “Wish Big, Win Big” games. It’s also great to hear him embrace the positive energy generated by the “Shoppers Value” private label and that real progress is being made on SVU’s “8 Plays To Win” corporate initiative.

However, I’m here to tell you that what’s being delivered from the Kremlin (I mean the executive offices in Eden Prairie) is mostly eyewash. Let’s look at some real numbers delivered personally from the lips of Herkert and CFO Sherry Smith during the analysts’ conference call. Customer Counts: down 4.6 percent in the quarter; Transaction Size: up 1.7 for the 39 weeks (but with a 4.5 inflation rate to consider); Market Share: down 40 basis points this quarter in its Top 20 markets (which represents about 66 percent of SVU’s total retail sales). Independent Stores Sales: projected to decline by 4.5 percent; Save-A-Lot Expansion: 29 new stores this year (Herkert in 2009 predicted that approximately 1,200 new S-A-L units would open by 2014, an average of 250 per year). And just to illustrate that the old spinmeister hasn’t lost his unique ability to not directly answer a specific question, check out this interchange between the “Process King” and Shane Higgins from Deutsche Bank AG.

Shane Higgins: How is your shift towards everyday fair pricing plus promotions positioned you guys versus competitors? And how close do you think you are to pricing parity today?

Craig Herkert: It’s a great question, Shane. Well, as I’ve mentioned in the call, we’ve begun to do it most importantly in the produce area where we’ve been fairly vocal about it and really like what we’ve done there. What we see is that we brought us much closer. We track it weekly. We are now on a base price level. We are very, very competitive and we still promote. What we see is, and this is the really good news, is we see a continued change in the mix from what we sell on promotion and what we sell everyday. Recall that our goal here is to improve the everyday mix that customers feel comfortable about shopping at our stores for products when they’re not on sale, as well as when they are on sale. So we do track it. We’re very, very happy with the movements that we’ve made and we have a ways to go.

Another “great” question, another not so great answer.

Shouldn’t it really boil down to assessing the performance standards by which any CEO should be judged: consistent profitability, sales growth, shareholder value, morale of the associates and leadership ability? On all those counts, Herkert’s tenure as chief executive has been calamitous.

More specifically, in terms of measurable performance, how about some positive ID sales, some consistent earnings and sharp pricing (not “improved” pricing or “selective” pricing, but aggressive market pricing that consumers believe is truly competitive)? How about a few net new stores, something that would enhance value and create a positive vibe among the division associates? How about closing the culture gap that exists between the executive tower in Eden Prairie and the individual stores/divisional associates who feel little connection to the corporation they work for?

Herkert can “rope-a-dope” around the core issues all he wants, and the board can continue to serve as his ineffectual toadies, but the seemingly unending poor performance of what once was a great company will soon place it in a position that’s beyond repair.

‘Round the Trade

Fresh & Green’s, which acquired eight Maryland Super Fresh stores in last year’s A&P auction, is selling two of them to Giant/Landover. The two units, on 41st Street in Baltimore City and in Parkville, MD were stores that had Giant bid on (and finished as runner-up) at the same auction which was held in New York last May. The 41st Street unit will serve as a replacement to the chain’s old and small Rotunda store. Fresh & Green’s, controlled by Canadian private equity firm Catalyst Capital, has struggled from the get-go, but has improved its merchandising and marketing in recent months. Last month, it named Baltimore based MGH as its ad agency to help bring brand awareness. However, no amount of awareness is going to substantially improve Fresh & Green’s sales until they spend significant capital on store improvements and modernization…more Supervalu news: Julie Dexter Berg, who as executive VP-chief marketing officer was one of Herkert’s most highly touted acolytes, has quit to return to the West Coast. Replacing Berg is Michael Moore (no, not that Michael Moore), who joined Supervalu last year as business transformation officer. Moore has 24 years of CPG experience at P&G. We wish him good luck in his new post – he’ll certainly need it…the reorganizational hearing that will potentially lift A&P out of Chapter 11 bankruptcy began on February 6 in White Plains, NY. As we went to press February 10, Judge Robert Drain continued to listen to objections from still considering arguments made by creditors and other interested parties, who objected to portions of A&P’s plan. Two weeks earlier, Drain had approved a $750 million financing plan for the Tea Company. That move essentially allowed A&P to operate as a privately-held company once the reorganization plan is sanctioned. The financing plan consists of a $400 million revolving loan and a $350 million term loan from J.P. Morgan Chase and Credit Suisse. Last month, A&P also announced that it will close 14 stores after its fiscal year ends on February 26. Included on the list are Pathmark stores in: Manahawkin, NJ; Kearny, NJ; Mount Vernon, NY; and East Islip, NY. A&P bannered units slated for closure include supermarkets in: Bayonne, NJ; Garfield, NJ; and Danbury, CT. Five Waldbaum’s stores are also on the list: Lake Ronkonkoma, NY; West Babylon, NY; Rockville Center, NY; Huntington Station, NY: and Commack, NY. “We are continuing to take the steps necessary to position A&P to emerge from Chapter 11 with a strong future and ensure that we remain focused on our top priority – providing great value and service to our customers every day,” said Sam Martin, A&P’s chief executive. It seems that A&P is a bit agitated with Ahold USA over the latter firm’s fear that two of its banners (Stop & Shop and Giant/Landover) might be liable for increased pension contributions if A&P withdraws from several of its multiemployer pension funds which both Ahold banners are a part of. Other than the FELRA (Food Employers Labor Relations Association) plan in Baltimore-Washington (a market that the Tea Company has virtually withdrawn from), A&P previously has given no indication that it will no longer participate in those pension plans. Also in court papers, A&P asked U.S. Bankruptcy Court to disallow “vague” lease-related claims made by Ahold that the Tea Company said are intended to slow the retailer’s emergence from Chapter 11. “Ahold would undoubtedly prefer that the debtors liquidate and sell off their assets at a discount rather than reorganize in the best interests of the debtors’ stakeholders and emerge from bankruptcy as a formidable competitor – even if Ahold’s ‘claims’ were left worthless in the process. On the sales front, Ahold USA posted strong numbers, both for its fourth quarter and full-year (ended December 31). In the quarter, overall sales increased 5 percent to $5.9 million and its identical fourth quarter sales at its more than 780 U.S. stores jumped 3.9 percent (2.9 percent ex-gas), with comp revenue up 4.2 percent. For the 52 week fiscal year ended December 31, net sales were $25.1 billion, a gain of 6.6 percent and ID revenue grew 4.9 percent (2.9 percent ex-gas). Comp sales were up 5.1 percent. The company will issue its full earnings report early next month. “We are pleased to have delivered another solid performance over the quarters, growing sales and market share in the United States and the Netherlands,” said Dick Boer Ahold’s chief executive. “We continue to be well positioned in challenging market conditions and customers remaining cautious in their spending.”… in a not so surprising move, Peter Lynch has announced that he will be resigning his post as CEO of Winn- Dixie once that Jacksonville, FL retailer is acquired by Bi-Lo Foods in approximately 90 to 120 days. Lynch, who truly is one of the good guys in the grocery biz, noted in a statement to his associates, “Working with all of you these past seven years has been the highlight of my career. Together, we have accomplished what many said could never be done: we took a company that was challenged, and we successfully turned the company around.” I don’t think Lynch, 59, will be out of a job too long if he seeks to continue his full-time career in the food industry…good news for our friends at Bozzuto’s. The Cheshire, CT based wholesaler, which has been making strides in the Mid-Atlantic region in recent years, was named the winner of the IGA President’s Cup, presented annually to the licensed wholesaler of the year in honor of its extraordinary effort in support of IGA’s retailers and the brand. “Bozzuto’s is strongly committed to helping its IGA retailers serve their communities in the best possible way and equally devoted to growing the power of the brand with new Bozzuto’s supplied stores,” said Mark Batenic, chief executive of IGA. “In the course of the last year, Bozzuto’s has played a vital role in the success of its IGA retailers by providing services that go well beyond that of supplying food. Day-in and day-out, Bozzuto’s worked with IGA retailers to foster the regional connections that make the brand strong and IGA stores the ‘preferred place to shop’ in communities throughout the Northeast.” …Wal-Mart has filed a motion  in U.S. District Court in San Francisco seeking to dismiss a reconstructed lawsuit which alleges the planet’s largest merchant discriminated against women for a prolonged period. A class action version of the gender discrimination suit was rejected by the U.S. Supreme Court last June. The high court implied that the allegations made by the plaintiffs were too broad and would be better served by being heard in local jurisdictions. Wal-Mart is claiming that the California suit is a thinly-veiled effort to cover all Wal-Marts nationally, not just the approximately 45,000 women in California. The Behemoth is seeking a May hearing. In a key personnel move involving Wal-Mart, Brian Cornell, CEO of its Sam’s Club unit since 2009, has resigned and will be replaced by Rosalind Brewer, who currently serves as president of Wal-Mart’s eastern U.S. business. Cornell, a former Pepsi executive, is a highly talented marketer, who is best remembered for shaping Safeway’s “Lifestyle” store format about a decade ago. Cornell said he and his wife wanted to move back to the Northeast for family reasons. Much like Peter Lynch, Brian Cornell, who is only 52, won’t have to be knocking on any doors to find a new gig – if he so chooses. In news about other Wal-Mart executive changes: Gisel Ruiz has been promoted to EVP and COO of Wal-Mart U.S. (she was EVP-people for the company’s U.S. stores); Rollin Ford is the company’s new chief administrative office (he was Wal-Mart’s chief information officer -CIO); and Karenann Terrell moves into the CIO job from her previous post as assistant CIO. Northeast…Costco, which previously announced that it will build new club stores in Washington, DC (South Dakota and New York Aves., NE) and Wheaton, MD (adjacent to the Wheaton Mall), last month also announced that it will build a new unit in South Alexandria (Route 1), VA, which could open as early as the spring of 2013…I’m sad to report the deaths of two music legends who coincidentally are linked together. Passing away last month at the age of 90 was Johnny Otis (born John Veliotes), musician, impresario, bandleader and arguably the man most instrumental in bringing rhythm & blues to white audiences in the 1950s, particularly on the West Coast. Many people thought Otis was African-American and it wasn’t until he wrote and sang his signature 1958 hit, “Willie and the Hand Jive” (I know a cat named Way Out Willie…) that audiences discovered he was Caucasian. In fact, one of the first paragraphs of his Los Angeles Times obituary notes, “Born white, the son of Greek immigrants…” (Born white? Did the LA Times think he had reverse Michael Jackson surgery?) Among the many R&B artists that Otis either discovered or brought into the mainstream were Jackie Wilson, Hank Ballard (writer of the “The Twist”) and Etta James. And that’s where our story continues, because also passing on recently was Ms. James. It’s hard to describe the difficult life or the supreme talent of Etta James in a few words, but before there was Aretha, before Beyonce, before Adele, there was James, whose voice could rival any R&B singer of any generation. One listen to “I’d Rather Go Blind” (1967) is all you need to hear. James, a Rock & Roll Hall of Fame member, was 73…and finally, could this be the end of Hostess Brands? The once powerhouse baker last month filed for Chapter 11 protection for the second time in eight years (the first bankruptcy lasted a near record five years). This time you’ve got to Wonder (pardon me) if the Irving, TX company can realistically emerge from another bankruptcy action. A more realistic scenario is that the company’s iconic brands are sold off to competitors such as Kraft, Flowers, Bimbo or Pepperidge Farm. After all, wouldn’t we all be in a worse place if there were no mo’ Ho Hos, Ding Dongs, Sno Balls or Twinkies?