It’s time for a time for a celebration – yes, it’s hard to believe that Craig Herkert, Supervalu’s chief executive, has been at the helm of his deteriorating company for three years. Check that, did I say “deteriorating?” I must be reading from the wrong script, because according to the industry’s best spinmeister, Supervalu is actually realizing it objectives.
And to give the man credit, Supervalu’s loss this year was a mere $1.04 billion, a solid improvement from FY 2011’s $1.5 billion worth of red ink. That’s progress that should be highlighted.
“I am pleased with the launch of our business transformation this year…,” Herkert stated in the company’s fourth quarter and FY 2011 release. Later that morning, in his conference call to financial analysts, the 52 year old CEO noted, “Our business transformation strategy and the ‘8 Plays to Win’ framework are helping us redefine our value proposition. In the 12 months since we unveiled this strategy, we developed and rolled out new tools and capabilities to improve the ways we run our business.”
Those statements alone beg two follow-up inquiries: 1) if you believe this new strategy has been so beneficial over the past 12 months, what was Herkert and his ever-changing management team doing during the first two years as his tenure as CEO; 2) does his definition of “value proposition” differ that much from what Supervalu’s customers, vendors and many of his associates think?
So, after 36 months in the saddle for Herkert, those who follow Supervalu know a few things to be consistent. In Herkert’s world, the glass is always more than half full (so don’t count on hearing much real insight into solving the company’s vast problems); in his view it’s always better to concentrate on “feel good” stories such as the new analytics tools, private label revampment and the improvement in shrink control. For other retailers whose balance sheet and overall performances are better (and that includes an overwhelming majority of all food retailers), those might seem like notable achievements. With Supervalu’s ongoing challenges (with sales and earnings declines and plummeting shareholder value), prioritizing an issue like shrink control progress is truly “majoring in the minors.” But if you haven’t figured it out by now, “fake left, go right” is a tack that Herkert has perfected.
I don’t want to diminish all of the man’s skills. After all, there is nobody more gifted when it comes to creating slogans and acronyms to describe some of Supervalu’s initiatives. Beginning in October 2009 when he humbly introduced Supervalu as “American’s Neighborhood Grocer,” the (mis)hits just keep on comin’.
Remember “SHE” (Simplify Her Experience), which was unveiled in early 2010? We won’t fault you if can’t recall this acronym, because its shelf life was short and it was buried like a slice of Russian history under Herkert’s tenure. And if you like games, you probably got a big kick out of “Plenty for Twenty,” “Wish Big, Win Big,” and “Sizzlin’ Summer Giveaway.”
But seriously, those cutesy wordplays are a mere bagatelle when compared to the true Herkertian genius of “8 Plays To Win.” This is the big one – the ultimate turnaround strategy slogan delivered by the ultimate talking head.
In case you’ve forgotten already, those “8 Plays” are: provide competitive value; deliver high quality “fresh”; match stores to their neighborhoods; hassle-free shopping; simplify and improve capabilities; funding in advance of investment; expand Save-A-Lot; and grow independent business.
OK, now back to reality. Thirty-six months on the job has yielded Herkert more than $13 million in compensation. SVU’s staffing – at its headquarters in Eden Prairie, MN, at its divisional bases and in its stores – continues to be significantly reduced (at this point, these job riffs are not about efficiency, the company is understaffed) and, despite Herkert’s rose-colored view of his company, the grocery trade and the company’s consumers are signaling a dire message of concern about the viability of what was once a great company.
So, in the interest of “balance,” (after all, if Herkert can deliver his “The Company According to Me” doctrine, so can I), here’s my counterpoint perspective – “8 Plays For Why You’re Losing:”
1. Declining overall sales – When Herkert was named CEO on May 6, 2009. Supervalu’s total sales were $44.6 billion. Today that number is $36.1 billion
2. Continuing negative identical store sales – Under Herkert’s reign his record is perfect. Twelve quarters as CEO, 12 consecutive quarters of negative identicals. The total SVU number is actually 16 quarters in a row (but under the company’s “history in the closet” rule, who’s counting?)
3. Higher than average retails – Despite Herkert’s rants about the improvements and fairness of SVU’s retails, the company’s banners in a significant majority of its markets still offer among the highest retails in their given marketing area. Yes, there has been some pencil sharpening, but not enough to convince price checkers or the ultimate judges, Supervalu’s consumers, that “fair prices” are a reason to visit one of the company’s banners.
4. Market share declines – See #3. After three years of Herkert rule, is it unreasonable to expect at least some market share improvement, someplace? Instead, we continue to hear that the company’s share in its top 20 markets declined again – this quarter by 40 basis points.
5. Culture and morale – Obviously, tougher to measure as a tangible metric, so I’ll offer you my perspective after talking to several hundred associates at store level, division level and in Eden Prairie over the past year. It sucks.
6. Real estate/cap-ex – In a word, woeful. Last year, one new supermarket opened. That’s one in a network of more than 1,200 conventional grocery stores. This year three new traditional stores are slated to open (two are replacements including the Acme in Bryn Mawr, PA which will open next month). To contrast that number, Redner’s Markets, one of SVU’s independent customers with 39 supermarkets, will have opened about the same number of new units during that same period. No real estate growth is akin to standing still, which is akin to roadkill.
7. Declining wholesale volume – Very competently run, at least in the Eastern region. But for a company that used to be the biggest and arguably the best pure play wholesaler in the industry, independent sales accounted for only 22.9 percent of total revenue, making it virtually impossible for “wholesale” to significantly contribute to solving the company’s deeper and more long-term problems. Even after subtracting the volume of Total Logistic Control (which was sold in 2011), overall wholesale revenue has declined since Herkert became CEO (the addition of Western Beef or C&K Markets on the West Coast can’t begin to compare with the loss of the Target distribution business).
8. Hyperlocal/hyperjoke – As one Acme store manager told me: “Hyperlocal really means that we’ll order an item for you that we typically don’t stock because we reduced our variety so much.” Ouch. His comments may have been a bit over the top, but his point is accurate: as a full-service supermarket, compare the inventory and individual product selection at Acme, Shoppers or Shaw’s and tell me they’re competitive with ShopRite, Safeway, Market Basket, any of the Ahold USA banners, or even Wal-Mart SuperCenters. And to this reporter, “hyperlocal” also means having a strong presence with “locally-grown” produce items and increasing the use of overall local products and vendors.. Things may be better than three years ago, but there’s a lot less traction with this new program/slogan that Herkert implies.
So, let’s not “rope-a-dope” anymore. Here are a couple of more facts to consider when assessing Supervalu’s current and long-term health: debt is still above $6 billion and the company’s stock price on April 20 was at a ridiculously low $6.45 per share (it was $16.75 per share when Herkert took over).
Kreider Farms Vindicated On “Inhumane Conditions” Allegations
It’s been a difficult few weeks for Ron Kreider, his family and the associates of Kreider Farms, the third generation egg producer based in Manheim, PA. On April 12, company officials were startled to learn that they were being accused of raising their hens in filthy, cramped conditions, creating a potential public health issue. The first 24 hours were particularly anxious for Kreider and VP-sales Dave Andrews because of the typical consumer media overreaction (“guilty” – before objective review of both sides) Not surprisingly, there’s more to this story than just the accusations. Reportedly, someone connected with the Humane Society of the United States (HSUS) had an insider at Kreider Farms (allegedly) filming these “inhumane conditions.”
But here’s the back story. The HSUS is trying to build support for federal legislation that would improve conditions for hens. Aligned with the HSUS is the United Egg Producers (UEP), a large trade association that Kreider Farms is not a member of. There’s belief that UEP is working with the HSUS to target farms not aligned with the trade group.
While it is not a UEP member, Kreider Farms does support the new proposed legislation. In the ensuing days after the story broke, Kreider Farms worked feverishly and proactively to defend its name and provide evidence that was contrary to the charges made by the HSUS.
George Greig, Secretary of the Pennsylvania Department of Agriculture, released the following statement: “The state veterinarian visited and inspected the entire Kreider Farms Manheim facility on two occasions over the past three days (April 12-14). All practices, procedures and conditions that our veterinarian observed were consistent with industry best practices. Kreider Farms has passed every state inspection over the past five years, showing high and consistent standards of flock health management, above PEQAP (Pennsylvania Egg Quality Assurance Program) standards.”
Ron Kreider added: “Inspections from state and third-party experts returned glowing reports of our current facilities. Additionally, these comprehensive audits recognized our excellent ratings over the past five years. There is zero evidence of any type of animal abuse or food safety concern at Kreider Farms.
“These results confirm what we’ve maintained since the beginning: The allegations by HSUS are unfounded – completely untrue. Our chicken houses are and have been professionally managed at the highest levels, and our birds are well-cared for, healthy and active.
“HSUS’s video demonstrates no connection to Kreider Farms – it could have been taped at any chicken house. The day these allegations broke, we welcomed television cameras immediately inside our chicken houses. Viewers observed that conditions in our facilities bear no resemblance to the HSUS video. Consumers should question how these videos were shot, edited and assembled.
“It is not a coincidence that this video release coincides with the political debate over egg production standards. We believe HSUS is targeting farms not affiliated with UEP, its partner in petitioning for new standards. Kreider Farms is not a member of UEP, but we are in good standing with the U.S. Poultry & Egg Association. We fully support such legislation, contrary to HSUS claims. More than 80 percent of our birds are already housed in state-of-the-art facilities – we would have the least to do to comply.
“Kreider Farms is one of the most highly respected, progressive egg companies in the U.S. My grandparents founded Kreider Farms in 1935. Today our family continues the mission of delivering high-quality products; to be good stewards of the land; and to operate clean, efficient, modern facilities.”
Furthermore, Kreider officials reached out to three other independent auditors who visited multiple Kreider facilities in Central PA – Dr. Greg Martin of Penn State; Dr. Donna Kelly of the University of Pittsburgh and Dr. Eric Gingrich of the American College of Poultry Veterinarians. All inspections again validated Kreider’s claims that their facilities were operating at or above industry standards. The company has passed every state inspection in all categories dating back to before 2007.
Moreover, Andrews noted that SQF (Safe Quality Food) food safety audits reveal mostly “excellent” ratings and Kreider Farms was the first egg producing farm east of the Mississippi to achieve SQF food safety certification.
“We were the second egg farm to achieve SQF certification in the United States,” Andrews asserted. “Kreider Farms is also a founding member of the Pennsylvania Egg Quality Assurance Program known as PEQAP. PEQAP was the model for the new National FDA egg program enacted in 2010. And despite the saber-rattling from another “do-gooder” organization with an agenda (it’s a small, but increasing list), Kreider Farms maintained every retail and foodservice customer on its roster.
“In fact,” Andrews noted, “we’re getting inquiries from potential new customers who recognized how unfairly we were treated and want to learn more about us.”
‘Round The Trade
Ahold CEO Dick Boer, speaking at the retailer’s annual meeting (AGM) in Amsterdam earlier this month, reiterated to shareholders that he is bullish about the company’s future. He singled out all the chain’s four U.S. divisions noting that Giant/Carlisle “delivered another outstanding performance.” Boer also noted G/C’s debut in the city of Philadelphia, its pending acquisition of 16 Genuardi’s stores (which should be announced very soon, but most likely will be a few stores short of the original 16 sought), the unveiling of a more compact supermarket model and the expansion of Peapod’s online and delivery service in the Delaware Valley. At Giant/Landover, Boer praised that banner’s performance noting that success was achieved from its “Project Refresh” remodeling effort and the division’s focus on its fresh assortment and customer loyalty. At Stop & Shop/New York Metro, progress was achieved through in-market acquisitions in New Jersey and Staten Island and the continued success of Stop & Shop’s loyalty card program. And at its bellwether Stop & Shop division in New England, Boer noted the opening of a new concept store featuring new services and a pick-up point enabling customers to order groceries on line and pick them up at the store. Stop & Shop also launched a mobile application that allows customers to scan their groceries, tally their orders, receive personalized orders and pay using their Smartphones. A couple of more important points made by Boer when discussing Ahold USA: Peapod, now the leading online grocery service in the country, achieved a double digit sales increase last year and the company’s merchandising headquarters in Carlisle, PA is making “good progress” toward its goal of 40 percent “own-brand” penetration… I see the lightning. I hear the thunder. No it’s not a Springsteen concert, but the rumble from Wegmans’ newest store that will open on May 6 in King of Prussia, PA. I’m predicting opening week sales in excess of $2.5 million, and even though it may cannibalize some business from existing Wegmans units in Collegeville and Malvern, the King of Prussia location hits the center of the bull’s eye demographically speaking More Wegmans stuff: with its very successful opening of its first Boston area store in Northborough, MA late last year and three other “Hub” units planned in Burlington, Westwood and a downsized 70,000 square footer in Chestnut Hill, CEO Danny Wegman recently told the Boston Chamber of Commerce that he believed his company should be operating in the city of Boston itself, perhaps in the urban upscale Downtown Crossing area of the city. And an online story in The Atlantic offers a unique perspective about the family owned company (“The Anti-Wal-Mart: The Secret Sauce Of Wegmans Is People”). The piece is written by the talented David Rohde. Another highly stimulating (and beautifully written) essay by financial writer James Surowiecki can be found in the March 26 issue of The New Yorker (“The More The Merrier”). Both stories share a common theme: don’t undervalue the importance of real customer service and training…The Fresh Market, the perishables-driven chain which went public in late 2010, has big plans for fiscal 2012. The Greensboro, NC retailer, which now operates 115 stores in 21 states including 10 in the New York-Northern Virginia corridor, said it will open between 14-16 units over the next 12 months, including its entry into the California market. CEO Craig Carlock told financial analysts that his company was “enthusiastic about business and growth prospects and we expect 2012 to be another exceptional year for both revenue growth and profitability.” Carlock also predicted earnings per share growth in the 18-22 percent range…Target is slowing its pace of P-fresh (hybrid food) conversions to about 230 units this year, about half the number of retrofits it completed in 2011. The primary reason: many of the high-volume market conversions (its first priority) have been completed and the lower volume store conversions are not at the same urgency level…officially completed is Bi-Lo’s acquisition of significantly larger Winn-Dixie. Controlled by private equity firm Lone Star (which already owned Bi-Lo) the $560 million deal will include 688 stores in eight states and be run by Randall Onstead, whose experience encompasses retailing (Randall’s – now part of Safeway) and the venture capital world. Onstead will serve as CEO. The new firm will also eventually relocate its headquarters from Mauldin, SC to W-D’s base in Jacksonville, FL. No specific timetable was given for the shift, but Onstead noted that “…the Jacksonville infrastructure is best positioned to host the combined Bi-Lo and Winn-Dixie support center, corporate office and distribution facilities.”…my quick non-partisan take on the “pink slime” controversy that has had a profound effect on retailers and many of their beef suppliers: the critics are correct in chastising the industry for not being more transparent, and retailers and particularly those processors that produce “lean textured beef” should have developed a better SWOT strategy (strengths, weaknesses, opportunity, threats). On the other hand, the product has met all USDA standards and has not been proven by anyone to be unhealthy. And one potential economic impact of this mess is that 1.5 million more cattle will have to be raised to offset the elimination of the added fat trimmings. Of course, the real issue now is consumer perception. And retailers, regardless of their knowledge and opinion, have virtually been forced to offer product that no longer includes the additive. And that will almost certainly mean significantly higher ground beef prices… sadly, more notable deaths than usual to report this month. From the grocery industry, we lost one of the true gentlemen in the business when we learned of the death of Lee Javitch, retired chairman and CEO of Giant/Carlisle. Lee’s dad David founded the company as The Carlisle Meat Market in 1923. During Lee Javitch’s tenure as chairman and CEO, beginning in 1967, the company grew to become a leader in Central Pennsylvania. He sold the company to Royal Ahold in 1981. Lee was one of the nicest and smartest people you could ever meet, a man of character and humility and a great ambassador for the food industry. I was also very sad to learn of the passing of James S. Herr, founder of Herr Foods and a great inspirational leader, not only to his family and the company’s associates, but also to many, many people he helped in 86 fruitful years of life. He was truly a servant leader. Also ascending into bagel afterlife was Murray Lender, founder of Lender’s Bagels. Murray, whose sales skills and passion allowed him to sell those chewy ring shaped dough rolls from Manhattan to Montana, passed away at age 81 last month. Actually, it was Murray’s father, Harry, a Polish immigrant, who founded the company in New Haven, CT in 1927, but it was Murray who took the company to stratospheric levels when it rolled out frozen bagels in the early 1960s. From there, Murray Lender’s name and face became closely linked with a product he loved and promoted tirelessly. He sold the company to Kraft in 1984 and for the past nine years Lender’s has been owned by Pinnacle Foods. I was fortunate to befriend Murray early in my career in the mid-70s and his strong work ethic, belief in his products and the kind and gentle way that he treated people made him a true mensch. From the world of music, three true pioneers have died in the past month. Iconic banjo player Earl Scruggs, 88, who with his partner guitarist Lester Flatt, formed one of the most successful bluegrass acts of all time, has passed. Long before Eric Clapton and Stevie Ray Vaughn perfected the art of bending strings on their guitars, Earl Scruggs had already mastered the skill on his five string banjo. Scruggs was simply one of the best pickers of any stringed instrument – ever. Also leaving terra firma was Dick Clark, 82, who was the granddaddy of all video jocks with his seminal “American Bandstand (AB)” show. AB ran for an unbelievable (by TV standards) 30 years (1957-1987) and beginning from his Philadelphia base, introduced us to hundreds of rock and roll singers and musicians over the years. “He was true pioneer who revolutionized the way we listened to and consumed music. For me, he ranks right up there with the giants of our business,” said record executive Clive Davis, who like Clark is a member of the Rock and Roll Hall of Fame. I’m also particularly sad to report the death of one of my all-time personal favorites, Levon Helm, 71, the great singer and drummer from “The Band” (and Rock and Roll Hall of Fame member, too). In recent years, Helm hosted and played with an all-star group of musicians at his home in Woodstock, NY. Those gigs, which came to be known as Midnight Rambles, grew from Helm’s experiences as a child when he went to see musical tent shows near his native Turkey Scratch, AR. I’ve been to many Midnight Rambles over the past six years and I’ve never witnessed better musicianship, a warmer ambience or a kinder, gentler soul than Levon. May you rest in peace… and a couple of final notes. Kudos to Dan Sanders, outgoing Acme president, who will be leading another Supervalu troubled division – Albertsons in Southern California. Dan did tireless work in his two years in Malvern, PA and, although he didn’t have many tools or much money to work with, he gained tremendous respect from his associates. Lastly, (and I’ll be writing more about him in a few months), a tip of the hat to Howard Stoeckel, Wawa’s CEO, who will be retiring at the end of the year. Is there a better chief executive in the entire spectrum of the food business?