For those Taking Stock readers who believe I have for the past few years harbored a strong personal dislike for deposed Supervalu CEO Craig Herkert, you would be inaccurate. On the other hand, for those of you who believe my criticism has been directed at Herkert’s utterly dismal performance, you would be making an accurate analysis.
In fact, now that he has been summarily fired, this month’s column will most likely be our last mention of Herkert’s name (unless some other publicly-traded company has the poor judgment to hire someone who arguably has been the worst chief executive to lead a grocery company in the past 25 years).
So, before I move on to more current and pressing events at the troubled Eden Prairie, MN organization and its appointment of board chairman Wayne Sales as CEO, here are a few of my final thoughts about what really occurred between June 2006 (when SVU acquired Albertsons’ key assets) and today.
The failures of the past six years can be primarily attributed to incredibly poor judgment, hubris and absence of leadership – first by former chief executive Jeff Noddle (through April 2009) and, for the past 39 months, by Craig Herkert.
It really does all boil down to leadership (or the lack of it). The beginning of “the end” can be traced to that fateful day in June 2006 when then Supervalu CEO Noddle wrote a $12.4 billion dollar check to acquire the key assets of Albertsons.
To say that Noddle “overshot the runway” with what Supervalu paid for five of Albertsons’ key operating divisions would be a whopping understatement. Essentially bidding against himself, Noddle offered, in the judgment of some industry analysts, what was as much as 40 percent above market value to acquire approximately 1,100 supermarkets from Albertsons. Those operating divisions (Acme, Shaw’s, Jewel and two Albertsons units in Southern California and the Pacific Northwest) might have looked impressive on paper, but it was clear they were already backsliding due to a lack of capital investment for many years – part of a deliberate strategy created by the slick, carnival barker talents of Larry (“The Milkman”) Johnston, Albertsons’ CEO from 2001 until 2006.Johnstonmay not have been much of a grocer, but he sure could sell underwear to nudists. About 18 months after the Albertsons deal was consummated, and now with $10 billion in corporate debt, it was clear that Emperor Noddle was shedding clothes at an alarming rate.
By early 2009, Noddle had had enough. Earnings were generally mediocre to poor, and the enormous debt was choking opportunities to build new stores and adequately refurbish many of the older units thatJohnstonhad managed to hold together for years with chewing gum and duct tape. Most importantly, it was clear that Noddle and his team had never really made the necessary adjustments from a wholesale mindset to a retail one, where the speed of the game is noticeably faster.
So, when it came time to search for a new leader (allegedly with Noddle’s blessing), the Supervalu board ended up with kind of a “retail version” of Jeff Noddle (intelligent and detail driven). Yes, Craig Herkert – on paper – seemed to be the perfect candidate to pass the baton to. Beginning at Jewel inChicago, Herkert’s industry career accelerated quickly and led to high level corporate positions at Albertsons and Wal-Mart. He seemed to fit the Supervalu profile to a “T.”
However, in the three years and two months that Herkert was in office, he proved to be the worst kind of leader – a Teflon-coated, process-oriented executive with limited people skills who deflected controversy/reality into his unique version of “good news speak.”
Even after the dismal earnings announcement that was delivered on July 11, which also included the news that Supervalu would suspend its dividend (which had offered a handsome 8 percent annual yield) and would undergo a board of directors-led strategic review of all assets, Herkert chose to primarily focus on the improvements he claimed Supervalu continued to make (at least in his fantasy world).
And what’s truly amazing is that, unlike Larry Johnston, Herkert wasn’t selling an elixir at a tent show, he truly believed that his plodding, micro-managed based theories would ultimately result in a turnaround.
To wit: in a July 21 interview (10 days after the company’s dismal earnings announcement and nine days before he was shown the door), Herkert told the Minneapolis StarTribune: “I’m not one of those people who thinks we don’t have time to do this (turnaround).” Other nuggets from the interview included: “I tend not be an individual or CEO who looks back too much and says, ‘what it, what if.’ ” And: “Our promotional prices were wonderful…”
So, now the “Wayne Sales era” has arrived. The book on the former CEO of Canadian
Tire Corp. is that he’s smart and outgoing and possesses strong people skills. He’s been on SVU’s board since 2006 and became non-executive chairman in 2010. (With his track record and reported engaging people skills, perhaps the board should have hired him in 2009.)
Certainly Sales deserves the opportunity to attempt to turn around a very, very leaky ship. But, to be blunt, it was under Sales’ watch (and that of the other nine directors) that approval was given for the debt-laden Albertsons deal. They also allowed Noddle to stay too long, hired Herkert and then tolerated his ineptitude for more than three years.
At the outset, Sales is saying the right things in appealing to Supervalu’s associates for their assistance in helping the company achieve better results. But, after six years of gross mismanagement and lack of decisiveness by the board itself, how many believe that Sales can be a game changer?
A more likely scenario, in my opinion, is a complete asset sell-off, or at least an attempt at that. After all, why were Goldman Sachs and Greenhill & Co. named to head the strategic review? These guys aren’t consultants, they’re investment bankers who find the real spoils in the break-up fees that will be generated by asset sales.
As it now stands, Supervalu is not a candidate for any type of bankruptcy filing (especially with the dividend allocation being redirected to help pay down debt that still stands at approximately $6 billion). That said, it’s hard to believe that every piece of furniture in SVU’s house isn’t up for sale (as one of our readers noted: “Goldman Sachs is the horse and Wayne Sales is the newly assigned jockey”).
Save-A-Lot, although not quite as bright a star as it was several years ago, remains the most viable piece to be sold as a total entity, mostly likely to a private equity firm. Jewel, despite its plummeting sales, still has value as a whole with its great locations and 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 Ahold USA and 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 constrictive union contracts). The same holds true with Supervalu’s 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 unit, that, 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 that is part of a potential Supervalu sale won’t be an easy sell. Additionally, with many of its distribution centers supplying both independents and Supervalu’s 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 that 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 it’s one that won’t be completed quickly. In the end, “buyers” will hold a lot of leverage and will largely have the final say in what will ultimately be paid for those assets.
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 an all-time low of $1.68 per share (it rebounded slightly after the Herkert/Sales announcement and closed at $2.54 per share on August 3), why would any logical analyst believe that Supervalu is salvageable?
However, with Herkert finally gone, it’s a better day for most of Supervalu’s 130,000 associates who essentially have been misled and deceived by the most disingenuous chief executive that I’ve witnessed in my 37 years of writing about the food business. And what’s equally alarming is that the “Spinmeister” will walk away with more than $16 million for doing such an abysmal job.
The detritus that Herkert (and Noddle) left behind means that Wayne Sales has arguably inherited the most challenging job in America, especially in an industry where the economy remains a factor, competition has never been more ferocious, and Supervalu has done little to defend its former leadership positions in any market in which it operates (by its own admission, Supervalu’s share of market in the top 20 markets in which it operates has consistently declined over the past three years). The process that could lead to a radical sell-off will be a test of Sales’ skill as he tries to hold together a company with a very fragile psyche and a host of other challenges. We wish him well.
‘Round The Trade
Nobody can seem to stop the Whole Foods juggernaut. Once again, theAustin, TX based “good for you foods” retailer posted third quarter sales and earnings numbers that were off the charts. Profit rose 32.1 percent to $116.9 million for the period ended July 1 and comparable store sales jumped a whopping 8.2 percent (a super stellar number given the economy and the competitive landscape). “In an economic environment that is proving to be difficult for many retailers, we are thriving and pleased to report another quarter of strong growth and excellent results for our stakeholders,” said Walter Robb, co-chairman of the company. “Our accelerated growth plans are on track, and we believe we will continue to gain market share through further differentiating our shopping experience, improving our relative value positioning, and reinforcing our position as America’s healthiest grocery store.” Whole Foods also announced it has signed 12 new leases averaging 37,700 square feet in size that are scheduled to open in fiscal 2014. Three of those units are located in the Mid-Atlantic – in Parsippany, NJ, Wynnewood, PA and Columbia, MD.The unit in Columbia will be 45,000 square feet in size and will be a part of a “town center” revitalization project. Whole Foods will move into the building that previously served as headquarters of the Rouse Company, which founded and built the upscale Maryland city…. speaking of Columbia, Wegmans has lost its battle to open a 10,000 square foot liquor store on the upper level of its newest store, which opened on June 17. Officially, the Howard County Alcoholic Beverage Hearing Board voted 5-0 against approving the license. Among those to testify on behalf of the proposed unit was Christopher O’Donnell (husband of Wegmans president Colleen Wegman), who was slated to own 90 percent of the liquor store. They are expected to appeal. Although the denial of a liquor store for the Wegmans location hurts, I wouldn’t be too worried about the Rochester, NY uber-retailer’s results in Columbia. In seven weeks of operation, the store has yet to produce a volume of less than $2 million per week. Giant/Landover is clearly feeling the biggest hurt from Wegmans’ Howard County debut, but Safeway, BJ’s and Costco are also feeling the ramifications that the new mega-player has had on the market. Expect Safeway, Giant and Shoppers to feel the same sting when Wegmans opens its next store in Gambrills, MD on October 28. In fact, Safeway might be the most vulnerable – not only does the Pleasanton, CA retailer have a high volume unit adjacent to the new Wegmans, one of the strongest operating areas in its Eastern division is the corridor between Crofton and Annapolis. Safeway has also recently struggled with its earnings and stock price. For its second quarter ended June 16, profits were down 15.8 percent to $122.7 million and ID sales (excluding fuel) gained only 0.8 percent. Additionally, Safeway’s stock price has continued to decline reaching a 52 week low of $14.73 on August 2. “It is always difficult to predict the market reaction,” said Steve Burd, Safeway chairman and CEO. “But I think when somebody else (in the business) struggles, people say, ‘I guess everybody is struggling,’ and it never really occurs to them that others who might be having some level of success might actually be contributing to the struggles of others.” Burd was obviously referring to Supervalu. One of those potential “successful” entities is Safeway’s Just for U digital marketing platform, which was recently rolled out chain-wide. I have to admit that the Just for U program is one of the best digital models any grocery merchant has developed, but I remain skeptical about how much any retailer’s digital and social media programs will ultimately contribute to their bottom lines. Yes, all retailers must develop such platforms to engage younger shoppers, but at what return?…kudos to Ahold USA, Weis Markets and Redner’s Markets, all of which again held charity golf outings within a 10 day span in July. Not only do the three events provide sales reps, retailers and other industry members a special day of camaraderie, the millions of dollars these three chains (and many other retailers which also continually give back) have raised continue to improve the quality of life for many families in the markets they serve. Philanthropy and personal relationships are a big part of what makes the grocery business special…one of the casualties of the Craig Herkert regime at Supervalu was the departure of Tom Lenkevich, chief operating officer at SVU’s Save-A-Lot unit. Lenkevich, who cut his teeth in the grocery business inBaltimore, left shortly before Herkert’s termination and is one of many skilled executives to depart because they couldn’t adapt to his tunnel-visioned view of management. Tom’s a good man and will certainly be an asset to the next organization he joins…a host of industry trade associations and individual retailers such as Wal-Mart and Target have voiced their disappointment with the $6 billion price-fixing settlement of a lawsuit against Visa and MasterCard. In addition to the cash settlement, credit card companies have agreed to reduce swipe fees for eight months, but the settlement does not apply to debit cards, which are the fastest growing segment of the overall “card” business. Wal-Mart’s take on the settlement is that it will require merchants to waive their right to take action against future acts of detrimental conduct by the credit card networks. Target noted that the settlement, which still needs final court approval, would be bad for both retailers and consumers…should there be one national produce trade association? Apparently not, as we have learned that merger discussions between the Produce Marketing Association (PMA) and United Fresh fell apart after months of negotiations. With the rapid pace of overall industry consolidation and the merging of several other trade groups over the past five years, the aligning of these two associations, which are focused on the same audience, seemed like a no-brainer, at least on paper. However, when egos stand in the way of progress, the outcome is usually less than desirable. If you don’t believe that, ask the rank and file membership (many of whom belong to both associations) how they would have voted…news from up north: it shouldn’t be all that surprising that Weis Markets (three stores) and Giant/Carlisle (15 stores) are showing gains at the former Genuardi’s locations they have reopened in the past six weeks. Also cutting the ribbon in mid-July was McCaffrey’s fourth store, the former Genuardi’s unit in Newtown, PA. All stores have been substantially upgraded, not only with physical improvements but with 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 affluent Newtown represents 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 the communities his stores serve combined with 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 that unit of Ahold USA in two areas. At more than half the stores it purchased there will be solid net new growth opportunities. 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 grabbing 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 should have eclipsed Wawa as the third largest retailer in the market. And if all goes extremely well, Giant could even surpass Acme (current market share at 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…also in the Delaware Valley: 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 withCampbell,” 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 inNorth Americaand offers exciting opportunities for expansion into adjacent packaged fresh segments that respond directly to powerful consumer trends.”… and finally, some farewells to report this month. First, goodbye 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 to 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. Also passing on was Gore Vidal, author, playwright and bon vivant, who died at the age of 86 last month inLos Angeles. In my opinion, Vidal was one of the most interesting men of the last 50 years. He wrote several good, but not great, books (“Lincoln,” “The Best Man”), lost the two times he ran for public office, and was initially denied membership into the American Academy of Arts and Letters. Simply put, Gore Vidal was a brilliant, outspoken observer of society’s mores, one who could speak knowledgably about literature, culture, politics and religion. His cynical, sometimes mocking regard for the foibles of society could be painful to hear, but he usually delivered it in such an articulate, biting way that it would make you laugh and think. He was kind of like an acerbic version of Paul Lynde. Gore Vidal was a true slice of Americana. Also, “movin’ on up” was Sherman Hemsley, better known as George Jefferson, who first appeared as a neighbor of Archie and Edith Bunker on the iconic Norman Lear sitcom “All in the Family.” That character led to Hemsley and his TV wife Isabel Sanford getting their own Lear spin-off, “The Jeffersons,” which ran from 1975 to 1985. The Philadelphia born Hemsley, 74, made his Broadway debut in “Purlie” in 1970. Hemsley can now join Weezie in that “deluxe apartment in the sky.”