Merger-and-acquisition activity touched many of the largest supermarket operators in 2013 in what could be described as a year of “banner churn” in food retailing.
The companies that had in recent years been known as the “big three” of supermarket retailing — Kroger Co., Safeway and Supervalu — all made major moves to either add banners to their portfolios or shed them. Kroger agreed to acquire Harris Teeter; Safeway unloaded both its Canada division and its Dominick’s chain in Chicago; and Supervalu returned to its former self by reversing the Albertsons acquisition of 2005 and selling 877 stores under several different banners to an investment group led by Cerberus, the parent company of Albertsons LLC.
“The industry is rebuilding as much as it can” following the rapid rollouts of grocery offerings from Wal-Mart and Target and the recent recession, said Andrew Wolf, a Boston-based analyst with BB&T Capital Markets, in comments at SN’s annual Financial Analysts Roundtable earlier this year.
“Consolidation is definitely a defensive reaction, mainly by the survivors.”
Others in the top tier of operators, including Bi-Lo/Winn-Dixie and Delhaize America, also made deals to adjust their holdings through M&A activity, and two of the nation’s largest grocery wholesalers, Nash Finch Co. and Spartan Stores, completed a merger. In Canada, in addition to Sobeys’ acquisition of Safeway Canada, Loblaw Cos. acquired Shoppers Drug Mart in a merger of that country’s largest supermarket and drug-store operators, respectively.
Also speaking at the Roundtable, Meredith Adler, an analyst with Barclays Capital, New York, noted that other factors also played into the uptick in mergers and acquisitions.
“Maybe consolidation is being led by the performance of the stocks. Who wants to sell when Kroger is trading at a multiple of 13-times EBITDA? But I would also say other conditions like really cheap money are making consolidation a lot easier,” she said.
Perhaps the most talked-about deal of the year happened in July when Cincinnati-based Kroger Co. disclosed an offer of $49.38 per share — plus the assumption of $100 million in debt — to acquire Harris Teeter Supermarkets, considered one of the nation’s premier regional chains with a growing presence in the Carolinas and the Mid-Atlantic.
“We think this is a very good acquisition for Kroger, given the quality of the asset and its operations in high-growth markets,” Adler of Barclays said at the time.
Matthews, N.C.-based Harris Teeter had disclosed earlier in the year that it was seeking strategic alternatives, after being contacted by investment firms.
The reuniting of the two Albertsons divisions — a deal announced in January — was less surprising at first, but it evolved to become just as intriguing as it became clear that Cerberus and its partners were going to continue to operate much of the acquired business, under the leadership of Albertsons Chief Executive Officer Robert Miller.
“We’re in this for the long haul — to run a great supermarket company,” Miller recently told SN. “We bought several iconic banners, some of which are close to 100 years old, and our intention is to run really good stores and make them better. We have no plans to sell any of the brands.”
In fact, the company actually expanded even further with an agreement later in the year to acquire Lubbock, Texas-based United Supermarkets, operator of three banners in Texas.
2013 also saw the end of the long struggle by Delhaize to reinvent the banner formerly known as Kash n’ Karry in Florida under the Sweetbay name. In May, Bi-Lo/Winn-Dixie — which themselves merged just a year ago — moved to strengthen their presence in the Southeast by agreeing to acquire Sweetbay and its Delhaize-owned sister chains, Harveys and Reid’s. Later in the year they also agreed to buy 22 Piggly Wiggly locations in South Carolina and Georgia.
Most of the Sweetbay stores are expected to be converted to Winn-Dixie, while the Piggly Wiggly stores will be converted to the Bi-Lo banner.
Meanwhile, a much shorter-lived effort to create a new brand on the other side of the country also ended in failure, when Tesco revealed that it had found a buyer for its Fresh & Easy chain. Longtime supermarket investor Yucaipa Cos. will take over about 150 of the stores, but it’s unclear what its exact plans for the banner are.
Many industry observers believe the M&A activity of 2013 will continue.
“With positive industry fundamentals driving overall growth, and changing consumer tastes, the food retailing industry will be forced to continue to adapt,” wrote Irene Marks and David Mell of Wells Fargo in a recent blog post on SN. “As a result, we believe consolidation and capital markets activity will remain robust well into 2014 as the grocery industry continues to evolve to suit today’s eclectic, diverse and conscientious consumer.”
— Mark Hamstra
Successful IPOs
As much as private equity played a role in industry refinancing in 2013, the public markets also continued to participate.
Phoenix-based Sprouts Farmers Market, which a year ago had merged with Sunflower Farmers Market, went public Aug. 1 and saw its shares more than double in price during the first day of trading.
The fast-growing, natural-food retailer raised $333 million by selling 18.5 million shares at $18 during the initial offering, and saw the price rise to $40.23.
“There’s a lot of growth in our sector and a lot tailwind in natural and organic,” Doug Sanders, chief executive officer, Sprouts Farmers Market, told SN in an interview at the time. “We’ve grown into a pretty sizeable company over the years and have some tremendous momentum.”
Fairway Group Holdings, meanwhile, parent of the high-volume Fairway chain in the New York City area, had set the tone for food retailer IPOs back in April with a much smaller issue. It raised about $159 million for investors, rising about 30% in the first day of trading.
Those IPOs had followed others by growth-oriented operators in previous years, including successful issues from The Fresh Market Inc. and Natural Grocers by Vitamin Cottage.
And there could be more to come, based on activity already put in place in 2013.
The Bi-Lo/Winn-Dixie acquisition of Sweetbay, Harveys and Reid’s— expected to close early in 2014 — laid the groundwork for the formation of a new parent company called Southeastern Grocers, which has filed for an initial public offering seeking to capitalize on investor interest in food retailing. The company said the potential for economic growth in the Southeast and its success against such competitors as Wal-Mart and dollar stores leave it well-positioned for the future.
“We believe we have developed an effective strategy and shopping experience to compete with these formats, as evidenced by our consistent positive pro-forma comparable store sales growth over the past several years,” Southeastern Grocers said in the filing.
In addition, Natural Markets Food Group, the Irvington, N.Y.-based parent of the Mrs. Green’s chain of natural-food stores, was positioning itself for a potential IPO as well, according to some reports.
— Mark Hamstra
CEO Departures
2013 saw the exit of CEOs of the two largest traditional supermarket operators, Steve Burd of Safeway and David Dillon of Kroger. In addition, Pierre-Olivier Beckers stepped down as CEO of Delhaize, and the company’s newly minted U.S. chief, Roland Smith, resigned when he didn’t get the top spot at the parent company.
Then, as the year was closing out, Wal-Mart Stores said its CEO, Michael Duke, would leave early next year.
Kroger said in September that Dillon would step down after 11 years as CEO, to be succeeded by his longtime partner in decision-making, President Rodney McMullen. The transition is expected at year-end.
Analysts said at the time that they expect the transition to “go smoothly,” citing Kroger’s strong momentum — it recently reported its 40th consecutive quarter of identical-store sales growth — its management depth and the fact that McMullen has played an active role in many of Kroger’s key initiatives.
Analysts had similar opinions about the future of Safeway under Robert L. Edwards, the former chief financial officer and president who was named to succeed Burd in April.
John Heinbockel, an analyst at Guggenheim Securities, New York, said Edwards’ selection had been expected and would mean a continuation of the strategic programs championed by Burd.
“Burd’s day-to-day presence will be missed at the company,” Heinbockel said at the time. “We found him to be a strategic and innovative executive. Edwards is a talented, well-respected and results-oriented executive, and we suspect he will seek Burd’s counsel on a regular basis.”
At Wal-Mart, reports had surfaced earlier in 2013 that Duke could be on his way out, but it wasn’t until November that the world’s largest retailer — whose sales have been unusually sluggish in the U.S. — formally unveiled its plans for Doug McMillon to be president and CEO, effective Feb. 1. McMillon, 47, is currently CEO of Walmart International.
Duke, 63, who had been CEO since 2009, will remain as chairman of the company’s executive committee and will stay on as an advisor for one year, Wal-Mart said.
“Mike put in place the building blocks for the next-generation Wal-Mart and today the company is stronger, more global and more unified across all our stores, mobile and online,” said Rob Walton, chairman of the company’s board. “He also reinvigorated the productivity loop and delivered strong financial performance. During his tenure, the company made critical investments in talent and technology to expand Walmart to even more customers globally and stepped up its progress on social and environmental issues.”
— Mark Hamstra
Restaurant Concepts
Foodservice at supermarkets has come a long way from roasted chicken and pizza in recent years, but 2013 saw an exceptional number of new restaurant-style concepts. Retailers took cues from quick-service, fast-casual and even casual dining establishments by incorporating innovative foods and flavors, open kitchens and new in-store experiences.
“There’s a lot of supermarket chains that are feeling that a lot of this innovation that’s happening in restaurants, they want to pay attention to and be very much aware of and understand that so that they can incorporate some of these new and interesting flavors that are happening on the menu into their prepared foods areas,” Brian Darr, managing director of Datassential, told SN earlier this year.
99 Ranch Market spices up prepared foods with a Filipino barbecue station, a May addition to a store in Anaheim, Calif.
At Café Mueller, opened in July at an H-E-B in Austin, the trendy flavors come from Texas craft beers and hard-to-find wines. The cafe even hosts live music performances on weekends.
Though live acts aren’t common at most supermarket restaurants, many include an element of theater when it comes to food preparation.
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“If they’re remodeling their prepared foods areas, we’ve seen stores experimenting with more open kitchens so that the consumer can see the food being freshly prepared there. And that’s a big a deal for consumers,” said Darr.
Customers at a Brookshire’s Food Store in Shreveport, La., can watch workers prepare their customized meals at the taco bar, which debuted in March. The hibachi bar at a King’s Food Market in Gillette, N.J., also new in March, shows everything is made fresh to order.
To appeal to the needs of different types of customers, some retailers have added seating areas or simplified to-go orders, Darr noted.
“They’re trying to balance the full-service prepared foods area with self-serve.”
Taking service to the extreme, Hy-Vee has pinned its foodservice future on its Market Grille and Market Cafe concepts, which offer full service or limited service dining with a full bar. The retailer plans to open 75 Market Grille locations in the next three years, and add a Market Cafe to the remaining Hy-Vee stores.
“And when the consumer feels like the quality perceptions are on par at the supermarket with casual dining operations and fast casual operations, then supermarkets are absolutely a very relevant competitor to traditional foodservice outlets,” said Darr.
— Liz Webber
FSMA Rules Released
After a delay of almost two years from when President Obama signed the Food Safety Modernization Act in 2011, the Food and Drug Administration began releasing its proposed FSMA rules this year.
The agency came out with its rules for produce safety and preventive controls in January, followed by proposals for foreign supplier verification programs and accreditation of third-party auditors in July and pet food and animal feed in October.
Following industry petitions, FDA extended the comment period for certain proposed rules to give stakeholders more time to review the complex regulations.
Comments for the produce safety and preventive controls rules closed in December. The United Fresh Produce Association, among others, posted comments that severely critiqued portions of the proposals.
“These proposals were a good first step, but can be significantly enhanced to be more effective in protecting public health, while allowing produce growers and distributors to continue providing an abundance of healthy and affordable fresh produce to consumers,” Tom Stenzel, United Fresh president and CEO, said in a media statement announcing the organization’s comments.
Some legislators have called on FDA to release a second round of proposed rules before issuing the final regulations.
In July, a court ordered FDA to issue all proposed rules by Nov. 30, and receive all comments by March 2014. The agency must publish final regulations by June 30, 2015.
FDA has repeatedly stated it lacks the funds to fully implement the rules. The agency doesn’t have the manpower to inspect every U.S. farm and food processing facility, let alone the imported products that would be subject to the same protocols as U.S. foods under FSMA.
“FDA, if they took every inspector off drugs, devices and food and just went to food, it would take them 10 years to get to every farm in the United States,” Jim Gorny, the Produce Marketing Association’s vice president of food safety and technology, said at PMA’s Fresh Summit show in October.
— Liz Webber
Cronut Craze
2013 was the year of the Cronut. The croissant-doughnut hybrid — created and trademarked by Dominique Ansel Bakery in New York last spring — spurred reports of long lines and scalping due to the limited supply.
The bakery makes the pastry using a three-day process of proofing a croissant-like dough and then frying in grapeseed oil, according the Dominique Ansel Bakery website. The bakery rolls the Cronut in sugar, pipes in cream and adds a glaze.
With such a time-intensive method, the small bakery was not able to quench the nation’s thirst for the $5 Cronut. And so many retailers in the U.S. and abroad tried their hand at developing Cronut-inspired pastries.
Stew Leonard’s, for instance, launched a smaller and more economical “cro-do” at $3.99 for a two-pack.
“We did a test batch at our Newington store and gave them out as samples to see what our customers thought,” Rich Dibble, bakery manager at Stew Leonard’s told SN last summer.
“They were a hit. We also posted a photo of the cro-dos on social media and customers actually came into the store to try them just by seeing them on Facebook and Twitter.”
Stew’s took the Cronut concept to the next level with a croissant-doughnut bun for a burger at its How-Down Grill.
“Stew’s croissant-doughnut sales in our bakery took off like a rocket over the last few months,” Mike Olbrys, executive chef, told SN in September.
Shake Shack, the New York-based hamburger chain also known for long lines, leveraged the Cronut buzz for charity. Partnering with chef Dominique Ansel, the chain developed a Cronut Hole Concrete. The sales of the 1,000 concretes available only on Sept. 17 benefited the New York Police Department and Madison Square Park Conservatory.
While the Cronut excitement cooled down in the winter months, the pastry showed the appeal of combining two everyday bakery items into a new product.
—Jenna Telesca
The GMO Battle
Efforts to impose mandatory labeling of foods made with genetically engineered ingredients took a hit this year when Washington voters defeated a ballot initiative that would have required GM disclosure.
Supporters held out hope in the days after the election that Initiative 522 had a chance. But even after vote-by-mail ballots were counted, the measure was defeated 51% to 49%.
The Grocery Manufacturers Association, which spent more than $7 million on the “No on 522” campaign, was pleased with the outcome. But in advance of the vote was the target of a lawsuit filed by Washington Attorney General Bob Ferguson, who alleged that GMA illegally collected and spent the funds while shielding the identity of its contributors. In the interest of transparency, GMA subsequently revealed the CPG companies that contributed to the campaign.
The association maintains that labeling GM foods is a bad idea because it will mislead shoppers to think that foods produced through biotechnology materially differ from their conventional counterparts. GMA will presumably fight other labeling efforts including a ballot initiative in Oregon.
Other states debated GM legislation in 2013 and Connecticut set a precedent by passing a requirement that manufacturers label genetically modified foods, but only after four other states — including one that borders Connecticut — enact similar measures. In addition, any combination of Northeastern states with a combined population of at least 20 million must mandate GMO labeling. Maine likewise passed a law that won’t take effect until other states take the lead by mandating disclosure.
Meanwhile, retailers like Whole Foods Market voluntarily addressed GM foods. Last March, Whole Foods committed to full GMO transparency by announcing that in five years its suppliers must label products containing GM ingredients.
After Whole Foods’ announcement, there was a flood of new enrollment in the Non-GMO Project, which Whole Foods began working with in 2009 to verify the non-GMO status of products.
Interest from conventional producers and retailers had been on the rise since 2012 when a GMO labeling ballot initiative in California raised awareness of genetically modified foods. Voters defeated the California initiative.
In addition to Whole Foods, Aldi, Marsh Supermarkets, PCC Natural Markets and Trader Joe’s have pledged not to sell genetically engineered salmon or other seafood. And Ben & Jerry’s is phasing out GM ingredients from its ice cream.
Foodservice establishments are also getting involved. On its website, Chipotle Mexican Grill now lists which menu items include genetically modified ingredients.
The restaurant chain plans to phase out GM ingredients in the future It has already switched its fryers from soybean oil to sunflower oil because commercial sunflower oil is GMO-free.
— Carol Angrisani and Julie Gallagher
Health and Wellness
Retailers elevated their health and wellness positioning over the last year with new types of health-related facilities.
Hannaford, Scarborough, Maine, for instance, opened a community wellness center in Albany, N.Y., that offers group exercise, weight management programs and personal training.
The 5,277-square-foot “Healthy Living Center,” located inside a Hannaford supermarket, is the result of a partnership between the retailer, the Capital District YMCA and health insurer CDPHP. Fitness classes and other programs are offered free of charge.
In addition to Mommy and Me Yoga, the center offers programs that address specific health needs, such as 30 minutes of exercise for seniors and diabetes prevention. There’s a group exercise room, fitness equipment, personal lockers and shower facilities.
CDPHP set up a private office in the center to answer questions regarding health insurance and what changes under Obamacare will mean for individuals.
Hannaford also took part in a service that links health incentives to supermarket shopping, called NutriSavings, whereby participants receive electronic offers, cash-back rewards and other incentives to purchase fruits and vegetables, whole grains, lean proteins and other products that can lower body mass index, cholesterol, blood pressure and blood glucose. Purchases are tracked through Hannaford’s loyalty card program.
Albertsons, Boise, Idaho, opened a hospital-based pharmacy that provides prescriptions, gifts and even select grocery items.
Located inside the lobby of the Palomar Medical Center in Fullerton, Calif., the 2,200-square-foot Sav-On Pharmacy operates daily 7 a.m. to 8 p.m.
The satellite pharmacy is the latest in a growing relationship between Palomar and Albertsons. Palomar operates urgent care centers in several Albertsons stores in the San Diego area. The centers provide treatment for medical conditions like strep throat, allergies, ear infections, skin conditions, cold and flu and minor injuries. Vaccinations, physical exams and select health screenings are also offered.
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As health care providers joined Accountable Care Organizations — under which the government or a private insurance company offers incentives for providing quality care while keeping costs down — Cincinnati-based Kroger’s The Little Clinic forged partnerships with larger health systems to improve patient outcomes. Under a series of medical system affiliations, The Little Clinic began operating under a triage system where it initially screens for and diagnoses patients with diabetes; then refers them to an endocrinologist within the larger health system; and handles routine visits once there condition is stabilized.
Schnuck Markets, meanwhile, deepened its commitment to health and wellness by opening an infusion facility in St. Louis. At the 6,500-square-foot facility, pharmacists prepare and administer medications for infusion therapy.
The facility also houses the Schnucks Regional Specialty Pharmacy, which specializes in medications that treat chronic conditions and provide support to all Schnucks in-store pharmacy patients.
In other specialty pharmacy news, Pittsburgh’s Giant Eagle acquired RX21 Specialty Pharmacy as part of a move to provide enhanced services to hepatitis C and organ transplant patients and providers under its Giant Eagle Specialty Pharmacy.
— Carol Angrisani
Retailers Hit the Road
Retailers broke out from the confines of their stores, and engaged shoppers in parking lots, at state fairs and local festivals with a variety of marketing campaigns highlighting everything from their health and wellness offerings to baby products, produce and beef.
Hy-Vee, West Des Moines, Iowa, launched what it described as a mini health fair on wheels. The Hy-Vee Healthy You Bus features two rooms equipped to provide flu shots and health screenings for blood glucose, cholesterol, triglycerides and blood pressure. Visitors can learn about the MyPlate nutrition guide and NuVal Nutritional Scoring System. The bus also has a made-to-order omelet station for breakfast and healthy grill offerings for lunch. In addition to visiting store parking lots, health center on wheels attends large events such as the Iowa State Fair, Hy-Vee Triathlon and Kansas City Chiefs football games.
Meanwhile, H-E-B, San Antonio, launched a baby-themed mobile marketing tour. An H-E-B and Pampers-branded bus traveled to 60 H-E-B locations throughout San Antonio, Laredo, Corpus Christi and the Rio Grande Valley over a 12-week period last spring.
The “Little Texans Tour” was designed to promote healthy families and raise awareness of baby products offered in stores.
At each stop, shoppers received coupons, interacted with product demonstrators and received samples from sponsors such as the H-E-B Baby private label, Pampers, Plum Organics and Johnson & Johnson.
In addition to Center Store products, other categories are being touted on the road.
Take Food Lion, Salisbury, N.C., which conducted a mobile produce sampling tour that visited stores. At each stop, apples, oranges, pears and other fresh produce were sampled. Tour operators handed out coupons, and cards with produce storage tips.
The meat department was part of mobile marketing this year as well. SpartanNash, Grand Rapids, Mich., hit the road to promote its private-label Tender Ridge beef brand.
The Spartan Mobile Grill, a mobile sampling vehicle, made stops at various Spartan stores — including D&W Fresh Markets, Family Fare Supermarkets and Glen’s Markets — to sample Tender Ridge Angus and Preferred Angus Beef NY Steak Strips. Cargill Meat Solutions Corp. markets the Tender Ridge brand.
Retailers made their presence known outside the store in other ways. Ralphs Grocery Co., Compton, Calif., for instance, hosted tailgate parties at select football games at the University of Southern California and the University of California at Los Angeles. Ralphs is a division of Kroger Co.
Before kickoff at five USC and five UCLA home games, Ralphs offered food and beverages on the parking lots of each venue.
Ralphs shoppers who used their Ralphs Rewards card to purchase $25 in participating products received a free ticket to the tailgates. Fans could also attend by making a $25 donation to the home university’s charity of choice.
— Carol Angrisani
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