2011 Year in Review: Reversal of Fortune

2011 Year in Review: Reversal of Fortune

For some operators — including A&P and Supervalu — 2011 brought signs of hope for the future, while all food retailers saw a sales boost from inflation

By MARK HAMSTRA

Despite the difficult economic climate in 2011, the environment in the food-retailing space was in many ways one of renewal.

Montvale, N.J.-based A&P, which filed Chapter 11 bankruptcy approximately one year ago, appeared to get a new lease on life [3] from veteran industry investor Ron Burkle and his Yucaipa Cos.; Supervalu, Minneapolis, said it was making progress [4] in repositioning its far-flung fleet of stores; Wal-Mart Stores, Bentonville, Ark., finally reversed two years [5] of comp-store sales declines; and the whole industry felt a little relief — on the top line, at least — from a return of food inflation [6].

Against that backdrop, the pace of mergers and acquisitions [7] appeared to pick up in 2011, from the strategic merger of natural-foods specialists Sprouts and Henry’s in the Southwest to the private-equity buyouts of BJ’s Wholesale Club and Andronico’s.

Other notable industry events from 2011 included the removal of self-checkouts [8] from Albertsons LLC and Big Y and repositioning efforts by Food Lion and Bi-Lo [9].

More reflections on 2011 can be found in the Fresh Market [10] section  and Center Store [11].

Return of Food Inflation Boosts Sales, Frays Nerves

By JON SPRINGER

Supermarket operators had their top lines tickled — and their nerves tested — when inflation returned in 2011.

With prices up an estimated 4% to 5% for the year, inflation was a friend to many retailers at least until fears of a more sluggish economy made some retailers balk at passing all their costs along and/or invest in lower prices.

Particularly early in the year, retailers said they were doing their best to pass along their higher costs to consumers and were helped along by what they described as rational behavior among competitors. This resulted in a tailwind for sales from retailers that began with Wal-Mart Stores and continued up the line, analysts said.

“We’ve gotten tremendous pass-through of price increases,” John Heinbockel, managing director of Guggenheim Securities, said during SN’s annual financial analyst roundtable this summer. “Wal-Mart has led the charge, and others have followed.”

Mike Schlotman, Kroger’s chief financial officer, during a conference in May said retailers had generally been conscious of protecting margins and were engaging in fewer money-losing promotions to lure shoppers. “I would say that kind of activity is dramatically more rational today than it has been for the last three or four years.”

But as the year wore on, the balancing act appeared to get trickier. Kroger said it had to invest heavily in price to maintain volumes during the summer when consumers were spooked by rising prices.

“A good acrobat can ride the tightrope for a while, but eventually, they’ll fall, especially if the wind gets stiffer from the economy and food inflation,” Gary Giblen, an analyst for Aegis Capital, said regarding Kroger’s second-quarter results, which were announced in September. “This time, they couldn’t get the right balance.”

Delhaize’s Food Lion reported similar troubles passing along increases in some Southeast markets. “We’ve attempted to pass along as much of the cost inflation as we could, but we simply are not able to do that in all markets,” Ron Hodge, executive vice president, confessed during a quarterly conference call in November.

As the year ended retailers reported that some of the fast-rising prices of the first half of the year had stabilized, leading to hope that modest inflation would provide a gentler ride in 2012.

Veteran Industry Investor Seeks to Revive A&P

By JON SPRINGER

A&P by year-end was in the final stages of a stay in U.S. Bankruptcy Court that saw the company shed 65 stores, its previous management team, and millions in annual costs — leaving Ron Burkle with a clean sheet upon which to execute a sales turnaround.

Burkle, whose Yucaipa Cos. had invested in A&P before its Chapter 11 filing last December, was a presence throughout the bankruptcy with holdings in preferred stock and in its debt. Yucaipa teamed with other bondholders in a $490 million deal that would buy the company out of bankruptcy as soon as this February, where it would continue to operate as a private company with Burkle as its chairman. Tengelmann Group, the German retailer that controlled A&P for more than 30 years, was ousted in the process.

Burkle’s offer to invest came just in time to address what many figured would be the most delicate moment in an ambitious program of cost savings executed under bankruptcy: Negotiations with union employees on contract revisions. In the late stages of negotiations, Burkle met with union leaders personally and ultimately came to an agreement that for workers required substantial give-backs and lengthy wage freezes but spared the potential that contracts would be rejected through a 1113 motion. Under the pending plan of reorganization, a representative from the United Food and Commercial Workers union would serve alongside Burkle on A&P’s board.

The union deal represented the final hurdle in a cost-savings plan for A&P that in the previous 11 months saw new contracts struck for warehousing and distribution, along with dozens of exits from onerous store leases. These represented what A&P officials called unsustainable “legacy costs” that landed the company in Chapter 11.

For a company attempting a simultaneous financial and operational turnaround, A&P was remarkably successful. In February it rejected a longstanding trucking agreement with Grocery Haulers Inc. and bid the business to C&S Wholesale Grocers. C&S and A&P meanwhile agreed to a new supply deal in May projected to save more than $50 million annually. C&S subsequently shut down A&P’s New Jersey warehouses and shifted distribution to a Pennsylvania facility.

These deals were tackled by a lean new management team led by Sam Martin, the chief executive officer, and Jake Brace, the chief restructuring officer who also served as chief financial officer when the last of the former regime’s executives were cleared. They named six new merchandising and marketing executives in February, including Marie Robinson, who helped the company negotiate a new deal with C&S.

After announcing 25 store closures in late 2010, the company put another 32 stores on the block in February, most as part of the SuperFresh banner in the Baltimore-Washington region. Ten of them were eventually sold as A&P planned to concentrate development efforts within its Northeast foothold. It opened a new SuperFresh in Philadelphia in September and battled to keep a development site in New Jersey in the pipeline for a future location. Its plan for post-bankruptcy called for a multi-million dollar program of renovations.

Food-Retailing Acquisitions Pick Up Steam in 2011

By MARK HAMSTRA

Food retailers executed a handful of strategic acquisitions in 2011 as both national and regional players strengthened their positions in existing geographies, and, in some cases, expanded into new markets.

Private equity also made some significant investments in the industry, including buyouts of BJ’s, Haggen and 99 Cents Only.

Activity was especially robust in the first half of the year, when Food Institute, Upper Saddle River, N.J., reported a 27% increase in food-industry mergers and acquisitions — closed or announced — through the end of June, compared with the same period in 2010.

One of the biggest deals of the year was in the natural and organic space, as Henry’s Farmers Markets and Sprouts Farmers Market merged to form a regional presence across the Southwestern U.S.

Apollo Management, which had owned the 34-unit Henry’s and nine-unit Sun Harvest banners in California and Texas, respectively, merged the chain with the privately owned Sprouts Farmers Market, which had 55 locations Arizona, California, Colorado and Texas. Apollo, which also owns Los Angeles-based Smart & Final, retained a majority stake in the combined natural-foods chains.

Sprouts, which had been expanding through new-store development in the Southwest, has since converted all the Henry’s and Sun Harvest stores to the Sprouts banner. It now has more than 100 locations generating more than $1 billion in revenues annually.

Analysts said the merger would give Sprouts increased buying power and could create other synergies over the next few years.

“This is a very good strategic move in an industry where size matters,” Scott Van Winkle, an analyst with Cannacord Genuity, Boston, told SN at the time.

It was Stan and Steve Boney, the sons of veteran retailer Henry Boney, who opened a group of stores in 1969 that changed the name of its California stores to Henry’s Marketplace in 1997 while acquiring Sun Harvest stores in Texas and retaining that name.

Lowe’s Buys Super S

Elsewhere in Texas, another merger brought together Littlefield, Texas-based Lowe’s Market with San Antonio-based Super S Foods, creating a 143-store chain with an estimated $950 million in volume.

Lowe’s, supplied by Affiliated Foods of Amarillo, Texas, acquired the 53-store Super S, which had been supplied by Grocers Supply Co., Houston, for undisclosed terms in a deal that closed in May. Both companies were family-owned.

The Lowe’s chain operates primarily in the Texas Panhandle area with additional stores in New Mexico and a single unit in Arizona; Super S operates in central and south Texas, with no overlap between each other’s stores, local sources pointed out. The acquired locations continue to operate under the Super S Foods banner.

Kroger, Schnucks Trade Deals

A pair of back-to-back sales and acquisitions between Cincinnati-based Kroger Co. and St. Louis based Schnuck Markets saw the two companies essentially trade share in two markets.

Kroger bought nine of the 12 Memphis-area Schnucks supermarket locations, and converted eight of them to the Kroger banner as Schnucks exited the market. Kroger also bought eight of the Schnucks fuel centers in the market and converted seven to its Kwik Shop convenience-store banner.

“Schnucks competes very favorably in other markets, but in the Mid-South, fierce competition including a growing number of non-traditional grocers and a lingering high-price perception was the one-two punch that brought us to [this sale],” said Scott Schnuck, Schnucks chairman and CEO, in a statement when the transaction was announced in September.

Schnucks had entered the market in 2002 with the purchase of the 12-unit Seessel’s chain.

Just a few days later, Schnucks announced it was acquiring seven Hilander stores in Rockford, Ill., from Kroger for undisclosed terms. Schnucks had already been operating its Logli banner in that market.

The Hilander acquisition gave Schnucks control of 11 stores in the Rockford market and appeared to vault it from third in market share to first, according to data from Metro Market Studies, Tucson, Ariz.

Target Goes to Canada

Target Corp. ended industry speculation about when it would expand internatioally when the Minneapolis-based company announced in January that it was acquiring a large chunk of stores from Canadian retailer Zellers for about $1.8 billion.

Target said it planned to open 125 to 135 stores in Canada, and would begin converting the acquired Zellers locations to the Target banner in 2013. Target acquired 189 Zellers locations in total and transferred 39 to Wal-Mart Stores.

Stellarton, Nova Scotia-based Sobeys inked an agreement to supply the Target stores in Canada.

Other food retailers that made strategic acquisitions in 2011 included:

• PAQ, Stockton, Calif., parent of Times Supermarkets in Honolulu, which acquired five Big Save Value Centers for an undisclosed amount. The acquisition broadens Times’ position statewide, adding stores on the island of Maui to its 20-store operation on Oahu and Kauai. Big Save was based in Eleele, on Maui.

• Stop & Shop, which bought out King Kullen in New York’s borough of Staten Island and also acquired five Foodtown locations in New Jersey.

• ShopRite operator Village Super Markets, which bought two Super Fresh stores in White Oak, Md., and Timonium, Md., for approximately $6.6 million from Montvale, N.J.-based A&P.

• Mrs. Green’s Natural Market, a Scarsdale, N.Y.-based natural and organic retailer, which bought eight Maryland Super Fresh stores from A&P. The move market the debut of a new hybrid organic and natural concept in the area called Fresh & Green’s.

• H.E. Butt Grocery Co., which acquired three Texas stores from rival Albertsons LLC, but will convert only one of them — in Kerrville — to its H-E-B banner.

• Hartland, Wis.-based Fox Bros. Piggly Wiggly, which in September agreed to acquire four corporate-owned Piggly Wiggly stores from its franchiser, Piggly Wiggly Midwest.

• Oklahoma City-based Homeland Stores, which acquired four Super Save Food stores in north Texas from independent owner William “Bill” Kiker.

• British supermarket chain Wm Morrison Supermarkets acquired a 10% stake in online grocer FreshDirect, based in New York, for about $50 million, the two companies said in March. Morrisons said the investment “will play a key role in the development of Morrisons’ online food business in the U.K.”

Private Equity Investments

In addition to the strategic acquisitions, private equity also made some plays in the food-retailing space in 2011 — most notably when Leonard Green & Partners and CVC Capital Partners took warehouse-club operator BJ’s Wholesale Club private for about $2.8 billion.

BJ’s, the smallest of the “big three” club chains, operates 190 stores in 15 states, although analysts said the chain’s new owners could pare the chain back a little while investing in revitalizing the business.

The company had been the subject of buyout speculation for several years.

In February, Bellingham, Wash.-based Haggen Inc., operator of 30 Haggen and Top supermarkets in Washington and Oregon, said it reached an agreement to sell the chain to The ComVest Group, West Palm Beach, Fla., for an undisclosed price. ComVest became the majority owner, with the Haggen family, which founded the chain in 1933, taking a “significant minority position.”

In October, Texas-based Renovo Capital closed on the $16 million acquisition of specialty retailer Andronico’s Community Markets in San Francisco after receiving approval from the U.S. Bankruptcy Court. The chain, which had filed Chapter 11 in August, has since closed two locations in Berkeley, Calif.

Supervalu Takes Steps to Revive Itself in 2011

By ELLIOT ZWIEBACH

Supervalu spent most of 2011 looking for ways to get back to financial respectability — a goal it believes may be on the horizon.

In April the company acknowledged it had been tweaking its strategies for two years without seeing positive results “[because] the best plans in the world are not going to be effective if you don’t have the tools and processes in place to enable your people to execute against it,” Craig Herkert, president and chief executive officer, told the investment community.

“We’ve got great people in our company and I think we’ve had the right plan. [But] we did not provide them with the right tools and processes to go ahead and get after it. Today we have that, and that’s the big difference.”

By August sales declines were slowing, and Herkert said the turnaround effort was gaining some traction as the company sought to improve its value offering and insure local selections — while keeping a lid on prices through a program called “fair pricing plus promotions,” designed to drive more consistent volume from shoppers who had been cherry-picking its stores on sale items.

Herkert cited an instance in which one of its banners re-set its base pricing and promoted “value pricing” on several items with less depth and frequency — a move that resulted in higher sales and stronger margins. The effort, he said, represented a “departure from past practices” and demonstrated how the company was “acting differently.”

In October Supervalu reversed one of its key strategies — opting to slow the growth of Save-A-Lot in favor of allocating more resources to upgrade more of its conventional stores.

Supervalu said it would spend between $700 million and $725 million before the fiscal year ends in late February to open fewer Save-A-Lots (between 80 and 90, down from the 160 it had originally projected), while boosting the number of conventional store remodels to a range of 80 to 90, compared with earlier projections of 55 to 75.

Herkert said Supervalu would allocate capital on remodels to customer-facing assets such as improved merchandising fixtures, in addition to improving logistics and transportation and investing in cost-saving energy projects.

According to one industry observer, “Before Supervalu thinks about growing the business, it really needs to focus on getting its conventional banner stores operating properly, and if taking that money from expanding Save-A-Lot and putting it into projects that turn things around at Acme, Shaw’s, Jewel and its other conventional stores can do that, then it’s a good thing.”

Supervalu also adopted hyper-local initiative to regain sales — “a strategy that empowers experienced store directors to customize corporate programs to best serve their customers,” a company executive explained, enabling each banner to have different points of emphasis within their local communities.

The company also unveiled a new private-label line, Essential Everyday, to replace individual store-banner brands.

During the year Supervalu closed 10 under-performing units — after shuttering 47 in 2010 — amid speculation it might seek to divest entire banners at some point.

Retailers Make Progress in Checkout, Mobile, Coupon Technology

By MICHAEL GARRY

Mobile phones, coupons and self-checkout featured prominently in retail technology news in 2011.

Big Y and Albertsons LLC defied industry trends by announcing they would remove their self-checkout lanes in favor of more a personalized checkout experience. But the chains did not set off a stampede as most food retailers stayed pat with their self-checkout systems.

Meanwhile, at the National Retail Federation Show in January, Kroger showed off a self-checkout “tunnel” system, which it developed with Northrop Grumman Corp.’s business unit, Adaptive Optics Associates, and has tested in a store in Hebron, Ky.

Mobile phone technology continued to captivate food retailing in 2011. Numerous retailers released smartphone apps enabling shoppers to make lists, download offers to their loyalty card, and locate products in the store, among other functions. Several retailers, including Hannaford Bros., Fresh & Easy and Green Hills, participated in the Foursquare check-in, location-based mobile service, while Big Y and Jewel-Osco offered deals via the social buying aggregator Groupon.

Ahold USA’s Stop & Shop division went a step further, running a test in 48 stores of a mobile app modeled on its Scan It! handheld shopping device offered to loyalty shoppers in 350 Stop & Shop and Giant/Landover stores; like the handheld device, the smartphone app empowers shoppers to scan products, tally them up and pay conventionally at any checkout, while receiving personalized offers.

On the coupon front, the industry set June 30 as the date when CPG manufacturers would completely transition to a new bar code — the GS1 DataBar — on coupons, which have featured both the DataBar and the traditional UPC-A bar code since 2008. But most manufacturers decided to delay implementation of DataBar-only coupons until later in 2011 and the beginning of 2012, in order to ensure that enough retailers were ready to scan the DataBar and capture its more complex offer information.

Supermarkets Refine Positioning in 2011

By MARK HAMSTRA

Many supermarket companies seemed to focus on fine-tuning their pricing and positioning in 2011 amid a lingering economic downturn, and some experimented with new value propositions in the form of more personalized offers and loyalty programs.

Salisbury, N.C.-based Food Lion was among those chains that made a significant investment in its position, rolling out what it called a “rebranding” of the banner in two markets — Raleigh, N.C., and Chattanooga, Tenn. The revamp, which could be rolled out to as many as 800 stores in 2012, calls for investments in price image, a focus on private label, improvements in the overall shopping experience, and a better produce offering, among other changes.

“We took all the research and boiled it down to what should the Food Lion brand stand for, and from there we learned there is significant sales growth within the four walls of existing stores that we can go after,” said Cathy Green Burns, president of the Delhaize-owned chain, at a recent investor conference.

Other chains that invested heavily in redefining their position in the market in 2011 included Mauldin, S.C.-based Bi-Lo, which undertook an extensive remodeling effort at 22 locations during the year and steered the offering at its entire 207-store chain around the theme of “Savings Without Sacrifice.”

“What we’re trying to do is embrace the middle,” Brian Carney, Bi-Lo’s chief financial officer, told SN in an interview early in the year. “We understand you’re watching your household budget but we don’t think you have to compromise on quality on meat and produce, the customer service you receive, and the shopping experience for the sake of value."

Other repositioning efforts in 2011 included Supervalu and Tops, which successfully converted the Penn Traffic stores it had acquired in New York.

Among the chains experimenting with new loyalty strategies was Pleasanton, Calif.-based Safeway, which cited gains from its Just for U program that allows customers to download customized offers to their loyalty cards. The company recently said it expects to roll the program out chainwide by the second quarter of 2012.

Meanwhile Big Y, based in Springfield, Mass., in March debuted a new fee-based loyalty-card program.

Wal-Mart Gets Small While Refocusing on Growth

By ELLIOT ZWIEBACH

For Wal-Mart Stores, 2011 was a good year.

The company saw the dismissal of a 10-year-old lawsuit, the introduction of a new small format and the end of more than two years of negative comparable store sales.

“There is no greater priority than getting sales back into positive territory,” Michael T. Duke, president and chief executive officer of Wal-Mart Stores, said early in the year.

What held back positive sales, Duke noted, were “merchandising assortment and presentation issues that contributed to customer traffic declines.”

After seeing comp sales drop 1.8% last year following a 2% decline the year before, Wal-Mart made an attempt to eliminate past mistakes by increasing store assortments and restoring the big display section known as Action Alley — two approaches that had been abandoned in prior years as the company sought to upgrade its image.

It also began to re-emphasize low-price leadership, improve store remodels and take steps to facilitate customer interactions through technology.

Having achieved a positive comp of 1.3% in the fiscal third quarter, Wal-Mart executives were able to breathe easier.

Another major source of relief to the company was the news last June that the U.S. Supreme Court had ruled that a gender discrimination class-action lawsuit filed in 2001 — Wal-Mart vs. Dukes — could not go forward because the plaintiffs had failed to demonstrate discriminatory policies on a companywide basis.

During the year Wal-Mart began shifting resources from remodels to new stores after attributing part of its comp sales declines to a drop in the number of new units.

It said it would open 152 new stores this year and 200 more next year, compared with 135 in last year. Among its plans:

• Launching Walmart Express — a format of 10,000 square feet to 15,000 square feet. The company opened the first five Express stores around mid-year, including three in rural northwest Arkansas, plus single units in Richfield, N.C., and Chicago, with between 15 and 20 more planned for next year.

• Opening between 90 and 100 Walmart Markets, the re-tooled Neighborhood Market format, which the company said has been generating returns similar to supercenters.

• Taking a more aggressive position on expanding in established markets, despite potential cannibalization. Citing growth by competitors that put some of its market shares in jeopardy, Bill Simon, president and CEO of the company’s U.S. stores, said, “The choice is to cannibalize ourselves or get eaten up by someone else, and we’ve determined we need to build a competitive number of stores in some of our strong markets to grow our share.”

Wal-Mart also expanded its distribution with the launch of Pick Up Today, which allows customers to order products online and pick them up at the stores; and Walmart To Go, a home delivery program. It also began a one-store test of same-day delivery.