Taking Stock

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Oh, What A Year It Hasn’t Been!

When the going gets tough…retailers make changes. And rarely – or ever – has it been more difficult for the majority of food retailers (particularly supermarket operators) than  it’s been over the past 12 months. And never have the changes been so vast as they were in 2013.

Let’s look at the overview of the key issues creating such market turmoil. The shaky economy remains a huge factor, particularly for the middle, lower-middle and lower class consumers.  Virtually every retailer in the Northeast and Mid-Atlantic (a geographic swath that extends from New England to the Tidewater region of Virginia) has felt the sting of overstoring (and within that realm an increasing diversity of retail formats and styles). In fact, the growth of “other channel” retailers (mass, drug, club, dollar stores, on-line) is now growing at a rate of nearly four times that of conventional supermarket merchants. Government regulation and interaction (reduction of SNAP benefits and implementation of the Affordable Care Act) have adversely affected most retailers and things could get worse next year if a new Farm Bill isn’t passed and there’s more micromanaging by the USDA.

So, against that backdrop – and a few other intangible factors that aren’t necessarily directly related to performance issues (family squabbles, personality clashes at the executive level, planned transitional management changes) – here’s a list of changes and key events that occurred in 2013 in the marketing areas we cover (listed alphabetically):

Ahold USA – James McCann replaced retiring COO Carl Schlicker as the Dutch company’s top U.S. executive. AUSA also replaced Giant/Landover president Anthony Hucker with Gordon Reid.

Delhaize America – After only a year on the job, chief executive Roland Smith resigned (that job is still unfilled).  Pierre-Olivier Beckers, CEO of parent firm The Delhaize Group, retired and was replaced by European grocery executive Frans Muller.

Farm Fresh – Replaced president Bill Parker with Micky Nye.

Fairway Market – Led by majority investor private equity firm Sterling Investment Partners, which controlled the company since 2007, successfully completed public offering.

Kroger – Announced that Rodney McMullen will replace retiring CEO David Dillon. Acquired Harris-Teeter.

Market Basket (Demoulas) – Arthur T. Demoulas remained CEO amidst re-escalating family feud with first cousin Arthur S. Demoulas, whose faction still controlled the board of directors.

New Albertsons – Cerberus Capital unit acquired 877 stores from Supervalu and named Jim Perkins president of Acme and Shane Sampson president of Shaw’s.

Safeway – Robert Edwards replaced long-time CEO Steve Burd as top executive. Retailer sold Canadian unit, reshuffled leadership team at its Eastern Division and announced withdrawal from Chicago market with Dominick’s store closings.

Supervalu – Cerberus Capital gained control (30 percent equity stake) of struggling retailer/wholesaler. Bob Miller named chairman, Sam Duncan elected CEO.

Tops Friendly Markets – After six years of control by Morgan Stanley Capital Partners, the private equity firm sold the business to Tops’ management, led by current CEO Frank Curci.

Wal-Mart – Announced that long-time executive Doug McMillon will replace the retiring Mike Duke as CEO. Pledged to build more than 200 smaller stores (Neighborhood Market, Wal-Mart Express) in next three years.

Wawa – Chris Gheysens appointed chief executive, replacing veteran CEO Howard Stoeckel who retired.

Weis - Weis Markets CEO Dave Hepfinger resigned. Vice chairman Jonathan Weis assumes chief executive post on an interim basis.

That’s the biggest single year of change we’ve seen in the past two decades, and 2014 promises to bring another 12 months of tumult as retailers struggle with declining identical store sales and marginalized earnings.

Yes, there’s even more short-term pressure emanating from Wall Street, and the growth of private equity control in the retail food business will only ramp up those pressures. For all retailers, but particularly the unionized operators, the ramifications of “Obamacare” are still not fully known, but are likely to increase costs to both merchants and their associates.

For those who believe that change is good, they ought to take the temperature of the current state of retail food industry in the Northeast. Current temperature: chilly. Future forecast: chillier.

It ain’t your father’s grocery business, anymore.

 ‘Round The Trade

Interesting scenario developing at Natural Markets Food Group, the Irvington, NY-based unit of Canadian PE firm Catalyst Capital, which owns Mrs. Green’s Natural Markets. Now led by former Giant/Landover president Robin Michel, the company is in the midst of an aggressive store expansion program which features planned new stores in  to open shortly in: Dobbs Ferry, NY; Manhattan, NY (Hudson Street); Tarrytown, NY; New Canaan, CT; Princeton, NJ; Chicago IL; and Fairfax, VA. During this past year, the hard working, extremely demanding and well-traveled executive, equipped with increased capital and a new management team largely taken from Giant during her 18 month tour of duty with the Ahold USA unit (Chris Paradissis, Shige Hatanaka, Paul Aguiar, Brian Shelton, Rick Hoffman), is trying to upgrade the original Mrs. Green’s natural and organic format with larger stores (about 15,000-25,000 square feet), while also expanding fresh and prepared food offerings. In the past six months, she’s opened new prototypes in: Hartsdale, NY; Wilton CT; and Chicago (and also closed a hybrid restaurant format called Wilde & Greene’s in Skokie, IL), and, according to several reports, is eyeing a future initial public offering (IPO). If true, that’s mind boggling, only because of the size of the NMFG organization, which currently consists of 14 Mrs. Green’s, a large restaurant in Toronto (Richtree Natural Market), and seven Planet Organic stores in Western Canada.

The firm used to be slightly bigger, but later this month, Michel will oversee the closure of the six remaining Fresh & Green’s stores that NMFG acquired at auction from A&P/Super Fresh 30 months ago (she was not working for the company at the time, having joined NMFG 13 months ago) . Originally, eight Super Fresh stores were acquired at the auction and Catalyst Capital paid more than $20 million for the opportunity to enter the Baltimore-Washington retail business. From the day in June 2011 when the acquisition was announced, the entire adventure could have been part of a newer version of the 1970s movie “The Gang That Couldn’t Shoot Straight.” If you can believe it, the stores were uniformly worse than when A&P exited the market in 2011. Except for the outdoor signage, most of the six remaining stores look very much like the crappy Super Fresh units did before The Tea Company put most if its Maryland stores on the auction block in early 2011. Some of the units have even retained that signature nasty smell that seemed to be part of the “A&P experience.” This example could serve as  a business school model of  company with 30 months of abysmally poor performance serving as a teaching platform about how to not to operate a supermarket organization. So, considering going public? Huh? None of the food stores individually are currently generating enough volume to be considered “prime time” and there’s just not enough heft for Wall Street to even give credence to a public venture (even though the parent company operates essentially as a hedge fund). It’s a long road to the public markets, as witnessed by Fairway and Sprout’s, which were both doing considerably more volume and have established much stronger reputations with their customers. NMFG is years away from reaching that level of success and credibility (if it ever does)…as expected, Fresh & Easy, Tesco’s failed and bankrupt entry into the U.S. food retailing business, was given Delaware court approval to sell 150 of its approximately 200 stores to private equity firm Yucaipa Cos. in a deal that will see Tesco loaning $120 million to Yucaipa. The PE company, controlled by billionaire Ron Burkle, has named former 7-Eleven CEO Jim Keyes to run the F&E venture, which many believe will ultimately re-emerge as Wild Oats Markets, the natural/organics retailer Yucaipa had a major stake in before it was acquired by rival Whole Foods in 2007…and, last month, Food Lion finally completed the last phase of its “brand repositioning” by revamping 169 stores in eastern North Carolina and South Carolina.  The rebranding effort began 30 months ago with the refurbishment of 167 stores in the Raleigh, NC and Fayetteville, NC markets…staying south, Southeastern Grocers, the parent firm of the newly aligned Bi-Lo/Winn-Dixie stores, posted significantly decreased earnings of $14.2 million in its third quarter ended October 2. That represented a 55.2 percent profit plummet. Sales also declined 3.1 percent. Southeastern Foods, which is controlled by Lone Star Funds and former Randall’s CEO Randall Onstead, is attempting to launch an IPO next year…Harris Teeter’s fourth quarter numbers were considerably better, although its profit was down, too, primarily because of costs associated with its pending sales to Kroger, the Matthews, NC-based retailer said. Fourth quarter profit was $21.1 million, down 7.5 percent ($5.9 million was attributed to merger related expense). Overall revenue jumped 4.5 percent, driven by new stores, and comp store sales increased a healthy (for the current economic environment) 1.5 percent. HT and Kroger are still hopeful that the FTC will approve the sale before the New Year…Safeway, which blew up its eastern division leadership team earlier this month, will also close its remaining Dominick’s units by December 28. Also earlier this month, it was announced that Roundy’s, led by former Dominick’s CEO and current Roundy’s chief executive Bob Mariano, would acquire11 Dominick’s units for $36 million in cash.  It’s a good fit for Roundy’s, which has been growing in the Chicago market, a territory that Mariano knows like the back of his hand. The stores will be converted to the upscale Mariano’s banner (currently 13 units, with five more planned in 2014), giving Roundy’s a significantly stronger presence in Chicagoland. Safeway previously sold four Dominick’s units to Jewel and said it will exit the market on December 28. With only 15 of a possible 72 stores having been moved since Safeway announced it was withdrawing from its 15 year old failed investment in October, the process seems extremely slow. However, one of our Chicago sources said that he expected more activity once the remaining stores are closed, because interested parties will have more negotiating leverage with Safeway and can also avoid possible union organization if the stores are dark for 30 days. And our source added, “Chicago is severely overstored, a number of units are mediocre or poor and with new competition moving in – Wal-Mart, Meijer and Roundy’s – I could envision a good number of stores not being moved.” His description seemingly could apply to every major metro market in the U.S…while foodservice is not our primary domain, I couldn’t help but notice the announced acquisition of US Foods by Sysco in a deal involving the leading two foodservice distributors in the country. We received plenty of emails from readers who wondered how the FTC could ever allow such a seemingly anti-competitive deal to be consummated. Competitive or ant-competitive issues are always in the eye of the beholder, and in this case unless there are other legitimate offers for the entire company, I believe the government will allow this deal to go through (think Sirius and XM radio). Since Ahold sold US Foods (then US Foodservice) to private equity firms KKR and Clayton, Dubilier & Rice in 2007 (after an internal accounting scandal had badly damaged the AUSA subsidiary) for $7.1 billion, the large national restaurant distributor has struggled earnings-wise in a marketplace even more challenged than retail food. In fact, the entire deal will cost Sysco about $8.2 billion (including $4.7 billion in debt), so it’s clear that as purely an investment this wasn’t going to be a home run for the two hedge funds. If the FTC does sanction the deal, this monster organization will have annual revenues of about $65 billion and will control approximately 30 percent of a very fragmented national foodservice market.

Local Notes

It was another big month for ShopRite, with store openings in Belleville, NJ (Infusino/LoCurcio) and Morristown, NJ (Village). On the earnings front, Village Super Markets said a $10 million tax ruling led it to post a loss of $6.8 million in its first fiscal quarter. The company said sales for the quarter, which ended October 26, were about $357 million, down 0.3 percent from a year ago. Same-store sales also fell 0.3 percent. In the corresponding period a year ago, quarterly net income totaled $5.9 million, including $693,000 from a national credit-card suit settlement and a charge of $376,000 to settle a landlord dispute. The Springfield, NJ-based publicly-traded 29 unit ShopRite operator said, “The tax ruling in the recent quarter related to prior years “as a result of an unfavorable court decision by the New Jersey Taxation Court related to a dispute over nexus.” Excluding the extraordinary items from both years, net income in the first quarter declined 42 percent vs. a year ago primarily due to higher sales in the last week of the year-ago quarter due to Hurricane Sandy, lower gross profit percentages, higher operating expenses as a percentage of sales and an increase in the income tax rate as a result of the New Jersey Tax Court decision. Other ShopRite news: Joe Colalillo’s new Bethlehem, PA unit finally broke ground early this month and it appears that an early 2015 opening is likely. And, we just heard that Colalillo will open another new store in Yardley, PA (we’re told it’s the now closed Super Fresh), which would give the high-powered retailer and CEO of Wakefern five units. Other new store openings this month include The Fresh Market’s debut in tony Bedminster, NJ (a former 22,000 square foot A&P unit) and Whole Foods’ Brooklyn debut as it cut the ribbon in the Gowanus section (214 3rd Street) of the densely populated borough…. C&S Wholesale Grocers, the largest wholesaler in the country, has been awarded $3.6 million in development aid by New York state to build a new automated distribution center on Long Island (SuffolkCounty). C&S’ grant was the largest of $716 million in aid announced by New York Governor Andrew Cuomo this month. The Brattleboro, VT-based distributor plans to build a 500,000 square foot $130 million automated facility at a yet undisclosed location in SuffolkCounty that would potentially employ 400 workers. C&S once operated a 526,000 square foot depot on “the Island” (Central Islip), but closed the DC in 2007, electing to service those customers from other depots in New York and Connecticut… Paula Price, CFO of Ahold USA, will be leaving the company at year’s end to pursue a career in academia – she will lecture at a leading university on leadership and technical topics. An extremely nice and very talented lady, we wish Paula all the best in her new career direction. She’ll be replaced by Dan Sullivan, currently senior VP-business planning and performance for AUSA, who joined the Carlisle, PA-based retailer in 2010 after serving as the chief financial and operating officer for Heineken USA…a third extension has been agreed to by UFCW Local 1500 and clerks at Stop & Shop and King Kullen stores on Long Island. This new extension expires on December 21 and will allow more time for all sides to continue bargaining. The original contract expired on September 28. “In the last two negotiation sessions we’ve made steady progress, especially in the areas of pension and welfare. This two-week extension demonstrates the good faith that has been shown throughout our negotiation process between our union and King Kullen,” Bruce W. Both, president for UFCW Local 1500, said in a statement. In a related note, just before presstime on December 11, UFCW Locals 27 and 400 representing nearly 30,000 Giant/Landover and Safeway clerks and meatcutters in the Baltimore-Washington market have tentatively agreed to new 18 month contracts (ratification is scheduled for December 17 and 18). Those two unions were working on their third extension which has expiration date of December 20. As one of our readers (who happens to be a lawyer), explained it to me, “All these new deals that are being delayed ultimately are going to be extremely detrimental to the security and possible survivability of labor unions in the near future. And it’s not their fault, unless you want to blame organized labor for its continued inability to organize all the new competition that has entered all major marketplaces in the past 15 years. Unions are being threatened because ‘Obamacare’ potentially dilutes the strength of Taft-Hartley multi-employer health plans and could render those plans obsolete as more members join state and federal exchanges. That’s much better news for the organized retailers, who won’t be as burdened by the increasing costs of helping maintain these multi-employer plans.” Our labor source added that the ambiguity and remaining lack of disclosure about the fully actualized costs of the Affordable Care Act will most likely elevate premium costs for union workers, and those at the higher tiers will find it difficult to match existing benefits offered by the exchanges, even with credits and incentives attached to the AFA. And he added that the variances among state exchanges, along with a separate federal exchange, could make monthly premium costs fluctuate by state even if profiles match (e.g. a clerk who works at a unionized New Jersey supermarket and is married with two children could potentially not have the same premium costs and benefits as a similarly profiled retail clerk working for an organized chain on Long Island). What a mess…our condolences to the family of Bob Carey, former president of the Produce Marketing Association (PMA), who passed away late last month. Carey was one of the early produce pioneers who took the helm at the Newark, DE trade association in 1958 when it was almost bankrupt. “Bob’s real genius was getting the best out of everyone around him – members and staff – and that’s become a core part of PMA’s culture,” noted current PMA CEO Silbermann. “Bob’s leadership was the linchpin for PMA’s growth and success, but it was his engaging personality, compassion, humor and empathy that endeared him to all those around him.” Carey, who retired in 1996, was 82…and finally, I want to wish a very healthy, safe and prosperous holiday season to our readers and advertisers. And thanks for all the support.