TALK OF SALE HEATS UP FOR STRUGGLING RANDALLS CHAIN

HOUSTON -- Continued struggles at Randalls here have led to increasing industry speculation that Safeway may be trying to sell the chain.While such trade reports have circulated for months, "there's some truth to the smoke going on there," one source told SN last week.Safeway acquired Randalls, a $2.6 billion company that operated 116 stores under the Randalls name in Houston and Austin, and the Tom

HOUSTON -- Continued struggles at Randalls here have led to increasing industry speculation that Safeway may be trying to sell the chain.

While such trade reports have circulated for months, "there's some truth to the smoke going on there," one source told SN last week.

Safeway acquired Randalls, a $2.6 billion company that operated 116 stores under the Randalls name in Houston and Austin, and the Tom Thumb banner in Dallas, from the Onstead family in 1999 for around $1.8 billion. In the five years since, Randalls has seen market share erode, and sales and profits plummet as competitors like Wal-Mart Stores and H.E. Butt Grocery have aggressively moved to increase their Houston presence. At the time it was sold, Randalls was the second-largest supermarket chain in Houston behind Kroger, with market share of around 20%, according to Randalls' Securities and Exchange Commission filings. More recent estimates published in SN show Randalls' market share in greater Houston at 11.8%, behind Kroger (23.2%), H-E-B (21.8%) and Wal-Mart (14.2%).

Sales have also declined, sources said. According to independent research by David Livingston, a Pewaukee, Wis.-based industry consultant, Randalls stores in greater Houston have experienced same-store sales declines of around 17% since 2002, though other sources estimated the slide to be less severe than that. Safeway, based in Pleasanton, Calif., declined comment.

Multiple sources told SN last week they understood that Randalls' former owner, Randall Onstead, had been approached about buying all or part of the chain back.

Onstead, whose father Robert Onstead co-founded Randalls in 1966, formerly served as Randall's president and chief executive officer. More recently, Safeway tapped Onstead to lead its Dominick's Finer Foods division in Chicago, but Onstead resigned from that position last fall after less than a year at Dominick's.

In an interview with SN, Onstead said his return to Houston is what has sparked speculation that he may be interested in re-acquiring his family's chain. Yet he would neither confirm nor deny that talks had occurred.

"I guess a lot of people assume that I would be approached (about buying Randalls). You can make that assumption if you want to, but I certainly wouldn't confirm that," he told SN in a recent telephone interview. "I really don't have anything to say about it at this point."

Onstead told NS he relocated to Houston in October to oversee family investments following the death of his father last summer. "I've heard rumors myself that I'd be acquiring this chain or that chain, but I wouldn't put much stock in it at this point," he said. "I think Randalls is a great franchise still, and Safeway is still very proud of their Texas operations."

Randalls' recent struggles in Texas, observers said, stem not only from pressure from Wal-Mart, but from shoppers' reticence to accept Safeway's private brands, which for a time replaced Randalls' Remarkable label.

Safeway has taken goodwill impairment charges of $704.2 million in 2002 and $447.7 million in 2003 related to Randalls, which it said has been adversely affected by overstoring in its markets.

Richard Kochensperger, a professor of food marketing at St. Joseph's University in Philadelphia, said any sale of Randalls would depend on whether Safeway can get an acceptable price; it would also require the purchasing party to invest heavily in the assets to succeed in Texas' competitive environment. "Any buyer would need deep pockets," said Kochensperger, who characterized Safeway's investment in Randalls as "minimal" since taking over.

"This isn't something that can be turned around in one year. It might take four, five or six years. A lot depends on how well they can hold their ground because other companies are struggling there, too," he added. "If one competitor leaves, they could be in good shape."

The recent sale of Minyard's chain in Dallas suggested transactions are possible, even in challenging competitive markets.

"The thinking among the investment banking community is that, if they see Minyard's as a decent bet, then they see Randalls' as an even better bet," Burt P. Flickinger III, managing director of Strategic Resource Group, New York, told SN. "The problem is that with Wal-Mart and H-E-B (as) the co-leaders in Texas, you've got the two best retailers in the world waiting in the same market, which raises some risk. But Randalls is a great trade name with great recognition, and is still well regarded by customers."