Acosta Reorg Creates Uncertainty About National Broker’s Long-Term Health
The first call came from a large retailer in the Northeast. He asked if I was aware of the recent changes at Acosta Sales & Marketing, the second largest national brokerage organization and one of the most influential sales and merchandising companies in the grocery business.
I have been following the Jacksonville, FL-based firm for many years and was certainly aware of some of their financial issues and organizational changes that have been made in the past few years, especially since private equity firm The Carlyle Group acquired Acosta in 2014. But as I further researched the current changes, I was surprised to learn the depth of its recent restructuring.
According to a video recorded by new CEO Alejandro Rodriguez Bas (ex-C&S, ex-Lala Dairy) who came aboard in July, Acosta has made these changes in order to become a more efficient organization that will “eliminate structural redundancies and barriers.” Acosta will now operate six geographic regions (hubs) across the country with five dedicated customers teams – Kroger, Publix, Target, Publix, H-E-B and Albertsons/Safeway (what happened to Walmart, Ahold Delhaize USA and Wakefern?). The company said it will also resign “negative margin business” because “like you (Acosta’s clients) we need to make a profit.” Bas also promised that Acosta will have 4 percent more planning and selling resources than before.
Since we began Best-Met Publishing 40 years ago, our publications have always devoted a lot of space to the important role of the food broker in the entire grocery industry. We’ve seen the business evolve from a local/regional mom-and-pop entrepreneurial model to one where three huge national brokers, some large regional entities and a few specialty brokers now comprise the sales agency playing field.
Ever since the late 1990s, when the roll-up movement of many local brokerages began and evolved to the formation of a national broker model, there has been much industry discussion about whether a “one size fits all (or many)” sales organization could sustain itself and ultimately prosper. In the early years, the most public of those national firms – Marketing Specialists, which was formed in early 1998 and literally went public later that year – flamed out spectacularly three years later.
Today, along with Acosta, Advantage Solutions and Crossmark remain as the two other national food brokerage companies.
But all three companies, in my opinion, have been handicapped by the significant debt on their books and the ownership structures they are governed by (all are controlled by private equity firms and both Advantage and Acosta have had multiple PE owners over the past 14 years).
Of all three firms, Acosta seems to be the most strapped. It currently sits on a $3 billion debt load (that it reportedly hasn’t been significantly reduced in 2018). Earlier this year, Moody’s, the economic research and credit rating service, downgraded Acosta’s credit rating (to Caa2 CFR). The April 2018 report noted: “The Caa2 also reflects ongoing industry headwinds and Acosta’s financial sponsor ownership, both of which contribute to its weakened financial profile. Acosta’s credit profile continues to benefit from its ability to cover its debt service costs with EBITA to interest expense of 1.4 times at January 31, 2018.
And according to Maggie Taylor, Moody’s senior VP who is the company’s chief Acosta analyst: “We view Acosta’s capital structure as unsustainable as we believe industry headwinds will make it difficult for it to improve EBITDA over the next two years to the extent that it supports refinancing the large amount of debt which matures in 2021 without a high risk of a restructuring.”
So, the restructuring was executed late last month, but at quite a cost. We spoke to more than a dozen current and former Acosta employees as well as some of the company’s principals and retail customers. All were concerned about the staying power of one of the great selling organizations in the business and the effect the changes would have on the current associates. Several also expressed concerns about the Acosta executives who were riffed as part of the reorg.
Reportedly, Acosta cut approximately 10 percent of its total payroll – resulting in an estimated “savings” of about $30 million annually. More than 30 jobs at the SVP, VP and director level were also reportedly eliminated as the company seeks more financial stability and a revised operating model going forward. Moreover, we’ve heard that what remains of Acosta’s “fresh” unit will be rolled into the company’s core grocery business.
We reached out to Acosta for a comment on the current events and were told that we would only receive an email response: “As an organization with experience and a knowledge base that spans more than 90 years, Acosta has weathered and witnessed a myriad of changes in the retail environment and the consumer packaged goods (CPG) industry. In recent years, the market landscape has transformed much more rapidly than ever before in our industry’s history. Alongside our clients and customers, we have collectively felt the impact of this fundamental shift in our businesses.
“To successfully lead our organization, our clients and customers into the future, we realized a need to execute a strategic organizational redesign to respond more efficiently to our clients’ business challenges and to mirror the trends impacting the CPG industry as a whole. After a thorough evaluation, Acosta will work to establish a simplified, more standardized model of operation that will not only eliminate inefficiencies and reduce organizational layers but will allow the company to better invest in frontline talent who can add value to clients’ businesses. We are actively recruiting for these frontline positions. The redesign will enable Acosta to maximize results for our clients and customers.” said Kirsten Barnhorst, senior manager marketing communications.
Of course, Acosta’s issues are more than financial. Much like its industry peers, it has attracted some of the country’s largest CPG manufacturers into its fold by offering a diversified menu of national services at reduced commission in many cases.
According to our reporting, large packers such as ConAgra and Nestle are paying 1 percent or less, a number that seems incompatible with profitability no matter what level of service any broker is performing.
If Bas and Acosta management think they can attain higher commissions from their larger CPG clients by offering a more personal and focused approach, that’s a bet that I wouldn’t want to make. And when financial decisions become a prime motivator on how to manage your business, you’re already heading backwards.
With the tremendous industry consolidation of the past five years resulting in fewer retail customers to serve, you have to wonder, does the national broker route still provides the best service and sales opportunities for larger clients today?
And specifically at Acosta, can a new CEO and a restructured organizational approach allow it to overcome significant debt and the impediments that come with PE ownership?
‘Round The Trade
It hasn’t been a great month for UNFI which suffered an $18.8 million operating loss in its first quarter. And the financial community, which was not smitten by the company’s acquisition of Supervalu earlier this year, hasn’t helped to bolster UNFI’s image. On the day prior to the purchase announcement (July 25), UNFI was trading at $41.18 per share; on December 13, the stock price had nosedived to a 15-year low of $11.51 per share. Obviously, analysts fear the significant debt that UNFI inherited with the deal and they question the Providence, RI-based distributor’s ability to shift from a natural/organic and specialty distributor to a full-service wholesaler, and a troubled one at that. One person associated with the deal who probably isn’t the least bit troubled is former SVU CEO Mark Gross. His walkaway reward for selling the company at the super-premium price of $32.50 per share: more than $21 million. UNFI is making further progress on selling its corporate retail stores. Coborn’s Inc., St. Cloud, MN, a current UNFI customer and owner of 114 retail stores (including 53 supermarkets), acquired eight of the nine Hornbacher’s stores (including one under construction) in North Dakota and Minnesota. And we expect to hear something early next year about several new buyers of UNFI’s Shoppers units since final bids were submitted by interested parties last month. Expect Giant, Safeway, Harris Teeter and a few independents to be in the mix…C&S Wholesale, which slugged it out with UNFI in a bidding war to acquire Supervalu, made an acquisition of its own earlier this month when it agreed to buy Olean Wholesale Grocers, a co-op based in that Western New York berg. Olean currently services more than 270 independents and c-stores and operates a 380,000 square foot DC. C&S will also continue to supply Best Markets stores, even after Lidl officially acquires the Long Island based family-owned merchant. That’s quite a coup for the Keene, NH wholesaler because Lidl currently operates three under-utilized warehouses of its own. Once the conversions to Lidl’s operating model are completed next year, expect the product mix to change radically…it looks like Campbell’s and hedge fund bully Dan Loeb (Third Point LLC) have settled their differences. No, there won’t be an overthrow of the board and Campbell’s won’t be selling to Kraft/Heinz. Instead, Third Point will get two board seats – Kurt Schmidt, former Blue Buffalo CEO, and Sarah Hofstetter, president of Comscore – which will expand Campbell’s board to 14 members. Meanwhile, the Camden, NJ-based soupmaker continues its search for a new CEO to replace Denise Morrison, who left the company in May…according to both Bloomberg and the New York Post (still the greatest headline writers in the rag biz), FreshDirect has hit a rough patch after experiencing start-up issues with its new 400,000 square foot fulfillment center in the Bronx and heightened competition from other online delivery merchants including Amazon, Instacart, Peapod and jet.com. Co-founder and former CEO Jason Ackerman left the company a few months ago to be replaced by David McInerney, another co-founder of the 19-year old firm. FreshDirect not only serves Metro New York but has also expanded into the Delaware Valley and the Washington market in the last few years…apparently “Slow” Eddie Lampert hasn’t given up on reviving Sears, the iconic retailer he personally drove into ruins. According to published reports, Lampert wants to use $4.6 billion of his own money to resuscitate the bankrupt company. In more realistic news, the company will close an additional 40 stores by the end of the year and plans to offer 505 stores as a group to be sold next year – LOL! What’s not so funny is the reported initial legal bill that law firm Weil, Gotshal & Manges (WG&M) slapped on Sears – $5 million for 17 days of work ($1,600 per hour). Nice work if you can get. The same law firm is also advising Catalina, the St. Petersburg, FL-based marketer and checkout coupon provider, which filed for Chapter 11 bankruptcy protection on December 13. With a debt load of $1.9 billion and private equity ownership (Berkshire Partners and Hellman & Friedman), Catalina has been struggling for several years with financial and management issues. It is hoped that the elimination of $1.6 billion in debt will “enable us to accelerate investments in technology, advanced analytics, data science and talent to strengthen our core capabilities and enable date-driven solutions for our customers,” said CEO Jerry Sokol, who joined Catalina in October…in a surprise move, Amin Maredia, CEO of Sprouts Farmers Market, has resigned in the midst of one of most successful runs in the history of the Phoenix, AZ-based natural and organics retailers. Apparently, no hidden ball trick here – Maredia, who became chief exec in 2015, is leaving to pursue other interests. Jim Nielsen, Sprouts’ president and COO, and Brad Lukow, CFO, will take on co-CEO duties on an interim basis. Sprouts is ramping up its Mid-Atlantic expansion rapidly and its balance sheet remains very strong. In a not so surprising move, Instacart and Whole Foods will be divorcing. Instacart began providing home delivery to WFM in 2014 and currently services 76 Whole Foods stores, a number that has been declining since the organics merchants was acquired by Amazon in June 2017. As Amazon began expanding its own PrimeNow service to many of its nearly 475 stores, Instacart’s fate was sealed. And according to market research firm Hexa Research, online grocery sales are expected to reach nearly $27 billion by 2025. Current estimates peg online grocery sales at approximately $17 billion.