Taking Stock: The Beginning Of The End For SVU

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It all boils down to leadership (or lack of it). The beginning of “the end” can be traced to that fateful day in June 2006 when then Supervalu CEO Jeff Noddle wrote a $12.4 billion dollar check to acquire the key assets of Albertsons.

To say that Noddle “overshot the runway” for what Supervalu paid for five of Albertsons’ key divisions would be a whopping understatement. So, with an enormous $10 billion debt load things quickly began to unravel in other areas as well. Supervalu did little to refurbish its aging store fleet. It failed to keep its real estate pipeline active in terms of building new stores, and it never really made the adjustment to convert from a wholesale mindset to a retail one.

After three years of ineptitude, Noddle left and the board chose Craig Herkert to replace him. And, on paper, Herkert had a rich pedigree and an indirect connection to Supervalu. He started his career at Jewel (which later became part of Supervalu’s network), rose to the rank of corporate executive VP at Albertsons and then served as president of the “Americas” for Wal-Mart.

So, to be fair, Noddle’s decision making (or in some cases lack thereof) has been the root of Supervalu’s deep problems. However, much like the transition from President Bush to President Obama, there is an intangible statute of limitations after which the new leader needs to be a change agent, not an excuse maker for the problems of the previous regime.

And in the 38 months that Herkert’s been in office, he’s proven to be  the worst kind of leader – a Teflon-coated process-oriented executive with limited people skills who deflects controversy/reality into his unique version of “good news speak.”

Even with the dismal announcement that was delivered on July 11 that the company would suspend its dividend (which offered a handsome 8 percent annual yield) and was going to undergo a board of directors-led strategic review of all assets, Herkert chose to primarily focus on the improvements Supervalu continues to make (at least in his fantasy world).

But even those so-called improvements continue to take too long to implement. To wit: retail prices have been too high at the company’s primary banners since even before the Albertsons acquisition six years ago. Since Jeff Noddle did little to diminish the company’s high retail pricing image, lowering everyday retails should have been priority one when Herkert was named CEO. Now, more than three years later, the company, newly armed with analytical “tools,” has begun to make some price adjustments. However, according to the “Spinmeister,” those changes won’t be fully implemented until fiscal 2014. And this is going to be accomplished with a 25 percent reduction in cap-ex. How many believe that Supervalu will actually still be in the retail business in two years?

So, what’s the plan going forward?

First off, SVU is not a Chapter 11 candidate. The company’s liquidity has never been an issue and with the dividend now suspended (eliminated?) there will be even more cash to put into its hopper.

That said, I believe the whole company is up for sale. Save-A-Lot, although not quite as bright a star as several years ago, remains the most viable piece to be sold as a total entity. Jewel, despite it plummeting sales, still has value as a whole with its great locations and its ability to continue to earn substantial profit. And, in my view, some of the original SVU regional chains – Farm Fresh, Shoppers and Shop ‘n Save inSt. Louis- could be valuable additions to corporate chains such as AholdUSAand Kroger.

Beyond that, I’d look for a lot of piecemeal action.

Certainly in the Northeast, Acme and Shaw’s still have some value (primarily because of store locations), but I can’t see one buyer stepping forward (in addition to continuing declining sales over the past six years, both chains have expensive and restrictive union contracts). The same holds true with its Southern California division, which is its largest in terms of number of stores (what must former Acme president Dan Sanders be thinking now?)

As for its wholesale division, it, too, still has value, but the wholesale business has largely become a regional one. Securing the potential trust and confidence of SVU’s current independent customers (once their contracts expire) to align themselves with a possible new wholesaler won’t be easy.

Additionally, with many of its distribution centers supplying both independents and its own banners, selling those depots becomes more complicated.

My vibe is that Ron Burkle (founder of Yucaipa Cos.) and Rick Cohen (CEO of C&S Wholesale Grocers) will be players in this lottery once all is said and done. Both have done extremely well in cobbling together deals which involve a lot of semi-connected pieces and both are among the smartest and most creative people in the history of the food business.

The selling of Supervalu’s assets will be a complex process and won’t be completed quickly. In the end, “buyers” will hold a lot of leverage and will largely decide on what they want to pay.

In hindsight, Supervalu’s “review” process should have begun at the outset of Herkert’s tenure in May 2009. Even a year ago, the company was in a significantly stronger position than it is today. And with the dividend suspended and the company’s share price nosediving to $2.34 per share, why would any logical analyst believe that Supervalu is salvageable?

As for Craig Herkert, his record indicates that he deserves the title as the worst current chief executive in food retailing.

However, Craig’s signed on for another year (and was even given a raise by the equally misguided board), so perhaps he’ll fare better with his newly added title: chief divestment officer.

Genuardi’s Buyers Already Making Hay At New Locations

It shouldn’t be all that surprising that Weis Markets (three stores) and Giant/Carlisle (10 units to date) are both showing significant volume gains at the former Genuardi’s locations they have reopened in the past four weeks. And over the next week, Giant will have opened the remaining five stores it acquired from the unit of Safeway and Jim McCaffrey will open his fourth store, a former Genuardi’s unit in Newtown, PA.

All stores have been substantially upgraded, not only with physical improvements but enhancements in merchandising and pricing. And while we think most of the stores will continue to fare well, I believe the McCaffrey’s unit in affluentNewtownrepresents the best chance for the greatest volume increase. At his original three stores (Yardley,PA;West Windsor,NJ; andPrinceton,NJ), owner Jim McCaffrey has already proven himself to be a world-class merchant. With his commitment to his communities and his skill as an operator, sales at the Newtown unit could eventually double those of Genuardi’s (at least in recent times).

For Weis and Giant/Carlisle there are opportunities, too. The acquisition of the former Genuardi’s units in Doylestown, PA, Conshohocken, PA and Norristown, PA provided Weis the momentum to enter the Delaware Valley market in a more meaningful way (Weis currently operates four stores in Del-Val, but all are on the periphery of the $20 billion market). Those three units were among the best physical locations in the Genuardi’s fleet and we expect that the Sunbury, PA chain will continue to add stores in the region.

As for Giant/Carlisle, the acquisition helps them in two areas. At more than half the stores it purchased there will be solid net new growth opportunities for the unit of AholdUSA. While there will be some cannibalization with several stores, strategically that’s OK, because the deal also allowed Giant to keep potential new competitors from gaining those locations.

In fact, a year from today, Giant, with 8.8 percent of the Delaware Valley ACV, will operate about 65 stores in the market and will have eclipsed Wawa as the third largest retailer. And if all goes extremely well, Giant could even surpass Acme (current market share 10.44 percent and sliding) as the closest competitor to ShopRite.

As it goes in retailing, one man’s meat is another man’s poison and the Genuardi’s deal will be the first of several that you can expect in the next 12 months in the highly competitive 15 county Delaware Valley market.

‘Round The Trade

A tip of the hat to Chris Kenny, 36, who late last month was named president and CEO of Kenny Family Shop Rites, the five store Wakefern member that operates all of its stores in Delaware. Chris’ dad, Bernie, 74, one of the best merchants in the Northeast, remains chairman. Additionally Bernie, Chris and the entire Kenny ShopRite team once again did a wonderful job at their recent 16th annual golf outing and community day at the Deerfield Golf Club in Wilmington, DE which raised funds for the Kenny Family Foundation…congratulations to Weis’ Kurt Schertle on his promotion to executive VP for the 164 store regional chain based in Sunbury, PA. Kurt’s new post is well earned and at age 40, he remains on the top of my draft board to become CEO of a significant retail organization in the next five years…C&S Wholesale Grocers has added industry veteran Max Henderson to its staff as senior VP-customer development. Max, who for many years toiled at Ahold USA (Giant/Carlisle, Tops), will be a real asset to C&S. Another wholesaler who has gained share in the Mid-Atlantic region over the past few years, Bozzuto’s, has gained a new customer. Baltimore based Santoni’s Super Markets has left Supervalu and joined the Cheshire, CT distributor…in other news in the B-W market, Shoppers Food  & Pharmacy (a unit of Supervalu) and UFCW Locals 400 and 27, have agreed on a new two year contract. Wegmans opened its 80th store on June 17 in Columbia, MD and the opening proved to be one of the Rochester, NY chain’s best ever… Wegmans also confirmed it has signed two new leases and will build new uber-stores in Montvale, NJ and Charlottesville, VA…Wal-Mart officially celebrated its 50th anniversary on July 2.  I wonder what “Mr. Sam” would think of the Behemoth he helped build when he opened his first store in Rogers, AR a half century ago?…Rite Aid held its annual shareholders meeting last month at the Holiday Inn in Swatara Township, PA. “We’re making very good progress,” CEO John Standley told shareholders. “We’ve had solid sales growth and ‘script’ growth, which are key to getting where we want to grow.” To give Standley his due, the former Fred Meyer and Pathmark executive has only been chief executive only two years (he replaced the underwhelming Mary Sammons) and the numbers have improved slightly. However, the company’s recently released third quarter earnings for the period ended June 2 still leave a lot to be desired. Rite Aid lost $30.7 million (compared to $65.5 million last year) and, while comp store sales increased 2.5 percent in the first quarter, that metric fell for the entire month of June when comps declined 1 percent. Again (and please pardon my political incorrectness), this “narrowing” of losses spin falls into the “for a fat girl she didn’t sweat much” category. When Rite Aid is consistently profitable, its stock prices shows some bounce (RAD was trading at $1.33 per share on July 11) and is also gaining market share on rivals Walgreens and CVS, that is when it would be more appropriate to use the term “very good progress.”  Am I the only one turned off by the financial “double speak” that CEOs of struggling organizations often use so they don’t have to disseminate continuing bad news? The master of this type of spin, of course, is Supervalu CEO Craig Herkert. Listening to Herkert’s conference call with the analysts following the poor first quarter earnings report (which also included the suspension of SVU’s dividend and a call for a board-led strategic asset review) brought a few related thoughts to mind: if associate morale was already poor at SVU, how much worse will it be knowing that your current job may be in lame duck status beginning July 12? Also, equal and proportionate aside, how will vendors treat Supervalu knowing that the potential for asset divestment is very real? And speaking of classic Herkert “rope-a-dope,” during his conference call he refused to provide any forward guidance about Supervalu nor would he reveal any specifics about what the company’s strategic review process would entail. Yet he was happy to tell Ed Kelly from Credit Suisse about the positive relationships the company has with its vendors, particularly noting the ‘salty snack” category. Talk about continuing to “major” in the “minors.”…Camden, NJ based Campbell Soup has acquired Bakersfield, CA manufacturer Bolthouse Farms for $1.55 billion in cash. Bolthouse Farms is owned by private equity firm Madison Dearborn Partners and makes refrigerated beverages and salad dressings and posted annual sales of $1.2 billion in its most recent fiscal year. “Bolthouse is a great strategic fit with Campbell,” said Denise Morrison, Campbell’s president and CEO, “Its business platforms, capabilities and culture are well aligned with the core growth strategies we announced last year. Its strong position in the high-growth packaged fresh category complements our chilled soup business in North America and offers exciting opportunities for expansion into adjacent packaged fresh segments that respond directly to powerful consumer trends.”…another tough month in the obituary column. From the world of entertainment, I’m sad to report the death of the great sports artist LeRoy Neiman. His impressionist works featured bold, bright brush strokes that captured many famous sports figures over the past half century including Muhammad Ali, soccer great Pele and Joe Namath. And let’s not forget that Neiman’s career breakthrough can be credited to Playboy’s Hugh Hefner, for whom he created the long-running “Femlin” cartoon series that began in 1955. Just before presstime, we learned of the death of Andy Griffith, who reached iconic status for his role as Sheriff Andy Taylor on “The Andy Griffith Show” which ran from 1960-1968 (and a show that many baby boomers can still remember each episode). Griffith returned to TV stardom nearly 20 years later with “Matlock” (1986-1995). Although “The Andy Griffith Show” made him a household name to millions of Americans (and a very wealthy man to boot), some of Griffith’s best work can be seen early in his career as a film actor, including “No Time For Sergeants” (1958) in which he reprised a role he first made famous on Broadway. A year earlier, Griffith made his film debut in Elia Kazan’s “A Face In The Crowd” (1957) in which he was cast as a slick-talking southern drifter named “Lonesome” Rhodes, who becomes an overnight sensation after being “discovered” by a producer (the always underrated Patricia Neal) in an Arkansas jail. She decides that Rhodes’ charisma is worthy of a radio spot. As he ascends to stardom, Rhodes attracts fans, sponsors and endorsements by the carload, and soon he is the most powerful and influential entertainer on the airwaves. Beloved by his audience, the real Lonesome Rhodes reveals himself to be a power-hungry manipulator who will use anybody around him for personal gain. Just when it seems that there’s no stopping Rhodes’ megalomania, Neal exposes his true personality. Forty-five years later the film still holds up and it remains, in my opinion, Griffith’s best work. And finally, farewell to Ernest Borgnine, the Academy Award winning actor who appeared in more than 200 films and television shows. Best known for his Oscar wining role in the movie “Marty” (1955), and as the irreverent Capt. Quinton McHale on “McHale’s Navy,” which ran on TV from 1962-1966, Borgnine was really a character actor at heart, one who could play both good guys (“Escape From New York”  1981) and tough guys (“The Dirty Dozen” 1967). Two of his best roles came in the latter genre as “Fatso” Judson, the sadistic stockade sergeant in “From Here To Eternity” (1953) and as Coley Trimble, one of Spencer Tracy’s goonish acolytes in the very dark melodrama “Bad Day At Black Rock” (1956). Borgnine was 95 when he passed, and clearly lived his life as all of us would wish: with great exuberance, wonderful health and a smile on his face most of the time.