Taking Stock: Supervalu Revival? Total Asset Sell-Off Seems More Likely

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First of all, we wish new Supervalu chief executive Wayne Sales the best of luck. He’ll certainly need it after inheriting a damaged company whose ongoing problems are complex, multi-faceted and will be difficult to repair, especially with less money to invest and a lack of confidence from Wall Street.

While the former Canadian Tire Corp. CEO enters his new role as an industry outsider, his enthusiasm alone gives the company’s associates more reason for optimism than did his predecessor, Craig Herkert, who was finally whacked after 39 abominable months at the Supervalu helm (more on Herkert later in this column).

Still, it seems likely that there won’t be much, if anything, left of the once mighty retailer/wholesaler after investment bankers Goldman Sachs and Greenhill & Co. have completed their asset review (asset dump?).

A prospectus of Supervalu’s assets is expected to be available to interested buyers by the end of this month and then the game will really be on.

As I’ve said before, the most saleable of all of SVU’s properties is probably its Save-A-Lot unit. Although its star is not as bright as it was several years ago (negative identical sales performances tend to take the luster off of any business), Save-A-Lot remains the most viable piece to be sold as a total entity, mostly likely to a private equity firm.

Moreover, 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 in St. Louis- could be valuable additions to corporate chains such as AholdUSA or Kroger (given Delhaize America’s recent challenges, I don’t view them as a player in this derby).

Beyond those “first division” properties, things get hazier.

If you want to insert Yucaipa Cos.’ Ron Burkle into the discussion you might find a solution for some of Supervalu’s most distressed properties – Acme, Shaw’s and the Southern California division of Albertsons. However, if you assume that a bottom feeder like Burkle might take a run at these troubled divisions, consider that he would be inheriting some once mighty banners that have fallen precipitously in recent years. And while one might argue that Burkle is the one man who could negotiate new labor agreements with the tens of thousands of UFCW members involved in the deal (as he did with A&P), you must keep in mind that Acme, Shaw’s and Albertsons (SoCal) are part of multi-employer pension funds, some of which are substantially underfunded. And if Burkle were to take a gamble on Supervalu’s most challenged units, he would be facing some FTC scrutiny on overlapping locations (with A&P) in the Mid-Atlantic and would have to spend substantially more than he would at A&P just to get most of the existing physical properties in basic “game shape.”

Of course, if Burkle becomes a player in this bidding process, he might view it as a real-estate play (as A&P could ultimately be), much like Lone Star Fund’s acquisitions of Bi-Lo, Bruno’s and most recently Winn-Dixie.

On the other side, Supervalu’s wholesale unit, while profitable, only represents about 20 percent of the company’s base and, if for sale, won’t be that easy to peddle. While I’ve criticized Herkert and his acolytes harshly during the past three years, the truth is that there are still many talented and dedicated Supervalu associates working at field level. An example is the job that Kevin Kemp and his team have done in successfully running SVU’s eastern region wholesale division, the largest distributor in the Mid-Atlantic serving independent grocers. And therein lies the rub. If Supervalu sells its wholesale unit, that’s an immediate game changer. Securing the potential trust and confidence of SVU’s current independent customers (once their contracts expire) to align themselves with a possible new wholesaler ultimately makes every independent customer that Supervalu supplies a potential free agent (and the courting of those independents by other wholesalers including Bozzuto’s, Wakefern, AWI/White Rose, Burris C&S, MDI which began several years ago, has accelerated in the past few months).

The fact that Wayne Sales signed a two year contact should give you an idea of how long it could take to sell (or attempt to close a deal on) Supervalu’s many disconnected parts.

And despite all the layoffs and sacrifices current Supervalu associates have been asked to make over the years, Sales apparently didn’t offer to take a “hometown discount” to become CEO. His base salary is $1.5 million per year (nearly double that of Herkert). Moreover, he received a $1.26 million signing bonus and could receive additional bonuses of up to $4 million. Supervalu’s board also granted Sales 447,000 shares in the company (at presstime on August 17 valued at $2.33 per share).

As for Craig Herkert, good riddance.

Simply said, he was the worst chief executive to run a grocery-related organization in this millennium and one of the worst in my 38 years of covering the food business.

However, now that “The Spinmeister” has summarily been fired, this month’s Taking Stock column will most likely be our last mention of Herkert (unless some other publicly-traded company has the poor judgment to hire him). And what’s truly alarming is that the “Spinmeister” will walk away with more than $16 million for doing a truly abysmal job.

Supervalu’s failures over the past six years can primarily be 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 Herkert.

By paying $12.4 billion for five of Albertsons’ key operating divisions, Noddle significantly overestimated the value of what was basically 1,100 stores. As it turned out, he was essentially bidding against himself and ultimately paid, in the judgment of some industry analysts, as much as 40 percent above market value while creating a huge $10 billion debt.

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 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 three 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 that the “Wayne Sales era” has arrived. The book on Sales 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.

The detritus that Herkert (and Noddle) left behind means that 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). As noted earlier, the huge errors of the past have forced SVU into the dire straits it now faces. Leading Supervalu during this time of potential radical change 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.

Fairway Markets Takes NewRoute With IPO Registration

 It appears that after many months of speculation that Fairway markets will be going public shortly.

The uniqueN ew York City merchant has registered with the SEC in preparation for an initial public offering. Fairway, which is controlled by Westport, CT private equity firm Sterling Investment Partners, filed its registration under a new option made available earlier this year with the passage of the federal JOBS act. The new provision allows companies to keep their financial data confidential until 21 days before they begin their road show to recruit other investors. The new option was designed for smaller companies to bypass the huge expense and much of the bureaucratic process associated with conventional IPOs. Only companies with sales under $1 billion in sales can take advantage of the provision.

The Fairway story is one of the best in the retail business. Despite operating some of the most unique (and high-volume) stores in the country, the retailer, under the ownership of the Glickberg family (which founded Fairway in 1930), found it difficult to finance future growth. So, six years ago Sterling stepped in, paying $150 million for controlling equity and seed money to build new stores. Today Fairway operates 10 stores doing huge volumes and has added units in New Jersey (its 10th store opened in June in Woodland Park) and Connecticut. Three more future units are also in the pipeline.

So, a potential IPO rewards Sterling’s confidence and patience in its supermarket investment, and allows the Glickberg family (which still owns a significant piece) to continue to further develop a fourth generation (Dan Glickberg, 29, currently serves as a VP and his father Howie is vice chairman).

Analysts are predicting that Fairway, with sales estimated to be about $750 million, could raise as much as $500 million in a public offering.

 ‘Round The Trade

Although July would never be considered as a strong sales month (unless you’re in Wildwood, NJ or Bethany Beach, DE), retailers tell us that sales were particularly soft last month, a trend that has continued into the first two weeks of August. Of course there are always exceptions, such as Costco, where sales in July increased 7 percent at its U.S. stores (excluding gas). And then there’s Whole Foods, a juggernaut that nobody can seem to stop. Once again, the Austin, 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… also from the alternate channel portal, Target posted flat earnings – $704 million – in its second period ended July 30. However comp store revenue rose a solid 3.1 percent and the retailers announced it will shortly begin to open the first of approximately 130 stores in Canada, its first foray in our neighbor to the North. The Minneapolis based mass merchant also said it was pleased with the initial results of its first three City Target locations in Seattle, Los Angeles and Chicago. Like rival Wal-Mart, Target is developing an urban model about two-thirds the size of a typical Target store and company officials hope to open between 75-200 such stores over the next five years as the company pursues its goal to reach $100 million in sales by 2017…more locally, Weis continued its solid sales and earnings run. In its second quarter, ended June 30, the Sunbury, PA regional chain increased its earnings 11.4 percent to 35.3 million while comp revenue inched forward by 0.4 percent. “We are operating in a stagnant sales environment resulting from the poor economy and intense competition. In the second quarter, we continued to improve efficiencies and productivity at store level and in our supply chain while enhancing quality of our customer shopping experience in terms of our in-stock position and overall freshness,” said Weis Markets’ president and CEO David J. Hepfinger. “We also continued to invest in our growth by acquiring and reopening three units in theDelawareValleyand extensively remodeling six units.” The company also attributed its net income and operating income increases to disciplined promotions and marketing and a decrease in depreciation expenses when it changed depreciation methods from accelerated to straight-line…and kudos to Weis, AholdUSA 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…finally, a judge who understands the free enterprise system as it pertains to selling beer, wine and liquor in food stores. U.S. district Judge John G. Heyburn II has ruled that a Kentucky law allowing the sales of wine and liquor by some retailers – but not others – violates the U. S. Constitution. Heyburn cited that the denial of licenses to a certain segment is a violation of the equal protection clause of the 14th Amendment. Can’t we arrange a transfer of Heyburn to the Mid-Atlantic so he can rule similarly in Pennsylvania, New Jersey and Maryland? …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 in Baltimore, 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. And just before presstime, we learned that Andrea Wagner, Save-A-Lot’s VP-marketing has left. New CEO Sales’ job will be challenging enough; he doesn’t need more key executives leaving the nest…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…. Dollar General, the highly successful dollar store merchant, announced it will build a new 900,000 square foot distribution center in Bethel Township, PA, which would add about 500 new jobs. When the depot opens next year it will be the 12th warehouse for the growing Goodlettsville, TN based retailer…the Bozzuto’s Merchandising Marketplace show held earlier this month at Foxwoods in Connecticut was one of the best regional trade shows I’ve attended recently. I had a chance to spend time with several Bozzuto supplied independent retailers who remain very passionate about their business and thankful for the assistance they receive from Bozzuto’s as their wholesaler. Bozzuto’s is one of several Northeast wholesalers that has been aggressively “working the street” for several years in an attempt to attract new customers and has clearly ramped up its efforts in light of the recent Supervalu news. However, on a larger scale, if Supervalu does sell bigger chunks of its business (Shaw’s, Acme) to a financial player (Ron Burkle?), Bozzuto’s seems to have the independent base motivated and in place to run those stores significantly better than they’re being operated today. A tip of the hat to CEO Michael Bozzuto and the gang from Cheshire, CT. Another great Bozzuto’s story features Rick Herrmann, the wholesaler’s south region director, who more than a year ago was forced to take a leave of absence because of a medical problem. For a while it looked like Rick might not survive his illness, or at the least, would not be able to return to work. Through a medical miracle, Rick’s health has improved to the point that he was able to return to work last month. And here’s what’s really special: Bozzuto’s kept him on the payroll throughout his long ordeal and when he was ready to return, welcomed him with open arms to the same job that he had when he was forced to leave… I’m still in disbelief about the passing of Weis Markets VP Bruno Garisto, who died unexpectedly on August 10. Bruno was truly one of the shining lights of our business – exceptionally intelligent, extremely hard working and possessing excellent people skills – a rare triple play in any business. Bruno died of viral pneumonia within a week of falling ill and, at the age of 45, leaves this earth way too young with so much left to offer. He leaves behind his wife Carolyn and two children, and our hearts go out to them. When I reflect on how difficult and unfair life can sometimes be, it reinforces my belief that this is not a dress rehearsal; we only go around one time – so we all need to be sure we enjoy it. And just before we went to press, I learned of another death, this one more expected, but nonetheless very sad. Al Dobbin, retired senior VP-operations for Giant/Landover, passed away on August 15. Al had been ill with Alzheimer’s disease for several years. But still his passing hit me hard because I considered Al to be one of my mentors. When Dick Bestany and I moved here in 1978, Al served as Izzy Cohen’s first lieutenant and right hand man. Not only was Al a true gentleman, he took the time to teach me about the new marketing area we would be covering and how the trade operated. During the course of many meetings, he explained in detail the uniqueness of the Giant culture and, most importantly, he reinforced the importance of being a professional and treating everyone with respect. A beloved man at Giant, where he worked for more than 40 years, Al Dobbin was respected by everybody who had the privilege of knowing him. I’ll miss his humility, his wit and his sense of fairness.