Taking Stock

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A Tale Of Two Retailers: Albertsons, Tops Heading In Opposite Directions

Fear and loathing in the grocery business in the U.S. Never in my 45 years as a reporter have I seen the levels of uncertainty and competition intersect to the degree we’re currently witnessing. Based on the events of the past 18 months coupled with the fragile psyches of many retailers, things are going to get worse or more uncertain in the near future.

I’ve written a lot lately about how challenging it’s been for those retailers who for years have not offered their customers clearly defined points of difference. The survival rate in the “mushy middle” has diminished greatly and in the past week, one such struggling retailer – Tops Markets – waved the bankruptcy banner as it seeks to reorganize.

It’s true that Tops’ management, which acquired the regional chain from PE firm Morgan Stanley Private Equity for a discount, inherited the tremendous debt that Morgan Stanley created when it acquired the Buffalo-area retailer from Ahold USA in 2007. But Tops’ problems aren’t going to go away even after it receives financial relief. The company has good locations, but much like many other conventional supermarket chains, its physical store base needs refreshing, it’s behind the curve with its perishables offerings and its digital/ecommerce efforts are below average. Throw in a significantly underfunded Teamsters pension plan (inherited from Tops’ 2010 acquisition of Penn Traffic), shrinking population in the region and some fierce discount competition from Walmart and Aldi, one has to wonder – where do the future “wins” for Tops lie?

Tops isn’t the only regional chain whose future looks foggy. We’ve also written about the financial woes of Southeastern Grocers (which has some significant loan obligations to deal with in the next month). According to Bloomberg, Chapter 11 is a possibility as is the consideration to close as many as 200 stores. Much like Tops, the company’s Bi-Lo and Winn-Dixie stores are smaller and older and offer less differentiation than most of its competitors in Florida and the Carolinas. And comparatively, just as Morgan Stanley didn’t have a clue about operating grocery stores and even did a bad job in its supposed strong suit – financial management – SEG’s parent, Lone Star Funds, has proven even more inept for a longer period at operating grocery stores. If SEG does file for bankruptcy, it will mark the third time in Lone Star’s 13-year tenure as a food retailing entity. Pitiful!

On the other side of the mountain lies Albertsons, which I believe really helped itself with the acquisition of about 2,500 Rite Aid stores. It wasn’t so long ago that the large Boise, ID-based chain was also in the same “mushy middle” puddle that Tops, SEG and other retailers now occupy. Sure, they were much bigger and had the clout of a successful and powerful PE firm – Cerberus Capital Management – to support them. But in reality, Albertsons operated about 2,300 conventional supermarkets that lacked pizzazz. It had tried to go public in 2015 and ultimately decided not to move forward with an IPO effort. Sales declined, too, and as large as the organization was, it also lagged in e-commerce and overall innovation.

However, things began to change about a year ago when the merchant directed significant focus and capital on its digital space and technology. Late last year, Albertsons acquired meal-kit provider Plated to create an offset space for it to explore and potentially grow.

And now comes the move to acquire the third largest U.S. drug chain which sold about 1,900 of its stores to Walgreens earlier last year. This deal checks a lot of boxes for Albertsons and Cerberus (which now can exit from its 12-year ownership of the company).

With an acquisition of this size, Albertsons can now be a substantial player in the drug chain derby by expanding its free-standing Jewel-Osco banner into other parts of the country (particularly on the East and West Coasts) and by utilizing the Rite Aid brand for its in-store pharmacies and HBC/GM private label.

Additionally, this is the best option that Cerberus has to exit ownership and allow Albertsons to gain publicly-traded status automatically since Rite Aid is already on the New York Stock Exchange. And for many of the Albertsons leaders who took a flyer and joined company in 2013 when it acquired many of Supervalu’s struggling retail assets, their faith and loyalty will be rewarded.

It’s a great strategic deal for Bob Miller, the old warhorse who has the unique skill of understanding the intangible dynamics that make companies work while also having gained savvy and skill as a dealmaker over the last 20 years.

And while Wall Street has questioned whether Miller’s age, 74, would prove to be detrimental as Albertsons plays catch-up in the strange new world of retailing, his tailor-made successor John Standley is not only one of the smartest people in the food and drug industry, he’s someone who Miller has known and trusted for more than 20 years. Don’t ever bet against Bob Miller.