THE COMPETITIVE landscape changed significantly in 2006 when Albertsons, the nation's third-largest conventional supermarket chain, was broken up and sold.
In a deal negotiated at the end of 2005 and consummated last June, Minneapolis-based Supervalu acquired Albertsons' best-performing divisions for $24.5 billion; a partnership of Cerberus Capital Management, New York, and Kimco Realty Co., New Hyde Park, N.Y., paid $1.1 billion for the underperforming divisions of Albertsons; and CVS Corp., Woonsocket, R.I., acquired the chain's freestanding Osco and Sav-on drug stores in the Midwest and California for $2.5 billion.
The 1,124 Albertsons stores Supervalu acquired, with a combined volume of $24.5 billion, included Jewel-Osco in Chicago, Shaw's and Star Markets in New England, Acme Markets in Philadelphia and the Albertsons-banner stores in Southern California, the Pacific Northwest and the Intermountain region — a deal that doubled its sales base to $44 billion on an annualized basis and tripled the size of its retail operations.
Supervalu also acquired 12 distribution centers from Albertsons.
To make the deal happen, Supervalu agreed to sell its 26 corporate-owned Cub Food stores in Chicago to Cerberus — a sticking point after initial negotiations broke down over whether Albertsons or Supervalu would take responsibility for any antitrust issues.
The transaction made Supervalu, which had operated with a retail-wholesale split of approximately 50-50, into the nation's third largest conventional retailer, behind only Kroger and Safeway, with 80% of its business in retail.
“We think this is a once-in-a-lifetime opportunity — a very compelling opportunity — to be able to select a great part of this company for our portfolio and our supply chain,” Jeff Noddle, chairman and chief executive officer, said last summer. “[Growing the company's retail business] in one transaction, rather than over an extended period of time, is the right decision for our shareholders that accelerates plans we've had for 10 years.”
CVS Corp. acquired 695 freestanding drug stores, and the Cerberus-Kimco partnership — doing business as Albertsons LLC and based in Albertsons' headquarters city of Boise, Idaho — acquired 661 Albertsons stores in Northern California, Texas, Florida, Arizona, Colorado, Wyoming, South Dakota and Nebraska, primarily for the real estate value, it said at the time. Within weeks it closed 138 locations across all divisions and put them up for sale.
“Once we took over the stores, we closed some and decided to operate the rest because we felt there was more upside in taking stores that had been under-managed and making improvements and making sure they were run properly,” according to Bob Miller, CEO of Albertsons LLC.
Earlier in the year the company said it had agreed to sell 46 locations across the U.S. to Ross Stores, Pleasanton, Calif., a deal that was pending as the year ended. The company also put another 92 stores up for sale.
In late November Albertsons LLC decided to sell its complete Northern California division — encompassing 130 operating units and two that had been closed — to Save Mart Supermarkets, Modesto, Calif.
“Even before we completed our acquisition, Bob [Piccinini, chairman of Save Mart] called and said he wanted to talk about this deal,” Miller told SN. “Bob was the only person I talked to about a division sale, and he made us a good offer that was a good deal for him and for our associates, who all get to keep their jobs, so we decided to sell the division.”
As the year ended, Supervalu was intent on hiring a chief merchandising officer to help it develop marketing initiatives for its new stable of stores, “and within a year we think we can have a marketing competency that far exceeds what either Supervalu or Albertsons had [before the merger] and that brings us up to speed with the best in the industry,” Noddle said.
Among the first changes Supervalu made at the former Albertsons stores was to slow down an aggressive promotional effort at Shaw's. “Shaw's was extremely price promotional this past year, which negatively impacted its earnings, and we are now taking a more balanced approach, [with expectations of a] much improved earnings performance,” Noddle said.
Supervalu earmarked approximately $1 billion during 2006 for capital investment in its new retail store base, with a goal of opening 80 new stores and remodeling 80 more by the end of its fiscal year in late February, “to invigorate and position the store fleet,” Noddle said, with priorities going to investments in the in-store experience — the key failing at Albertsons, analysts pointed out — rather than the store-level technology Albertsons had been concentrating on.
Toward that end, Supervalu said it would focus on expanded perishables, more natural and organic offerings, international food sections, enhanced and expanded pharmacy offerings and better customer service.
The company promised to maintain an aggressive pace of store remodels throughout 2007 as well, though it was not specific on the spend. “If we can generate additional cash, we will probably try to get more remodels done more quickly rather than paying down more debt each year because the upside is better than we thought,” Noddle said in October.
From the outset, Noddle expressed confidence Supervalu would be able to avoid integration problems encountered in other large industry acquisitions “because we will be sharing best practices and there won't be one-size-fits-all. We will do this at a very measured pace over three years. It will definitely be a combination of technologies and systems [using] processes from both companies.
“While you hear about companies losing focus and taking their eye off the ball in these kinds of transactions, we believe that, given the strength of the Albertsons division management and our management, we can keep people focused on the customer.”
Chains Try to Get Lucky
Lucky Stores, a proud banner that once flew over one of the major chains in California but that had been absent for several years, made a comeback on two fronts in 2006.
The name disappeared in 1999 when Albertsons acquired American Stores Co. and decided to convert the Lucky Stores in California to its own name.
Because the name had gone pretty much unused since then, a federal court judge in San Francisco ruled Albertsons had abandoned Lucky as a trademark and refused to grant a temporary restraining order that would have blocked anyone else from using it.
Grocery Outlet, a chain of 125 bargain warehouse stores based in Berkeley, Calif., claimed the right to the name after the judge's ruling and mounted it on April 1 at a store in Rocklin, Calif., near Sacramento, as part of a test of a neighborhood-oriented format. When it came to selecting a name for the store, “we realized the format was very similar to the original Lucky format [which focused on everyday low prices],” said Bob Tiernan, president and chief operating officer.
Tiernan's plan was to test the format at Rocklin for six to eight months and then expand it to five or six other stores — at the same time it would begin introducing the Lady Lee and Harvest Day names — two Lucky private-label lines — on its own lines of products.
Within days of the store's opening, however, Albertsons reintroduced the Lucky banner as part of a newspaper and radio campaign and on its website alongside Jewel-Osco, Acme and other chain banners, and in May Albertsons said it planned to convert five stores to the Lucky banner.
In July the same federal judge enjoined Grocery Outlet from using the name, saying the preponderance of evidence did not support its claim to the name — prompting the company to cover up the Lucky banner on the Rocklin store. That case is on appeal.
In the interim Supervalu had acquired the best-performing divisions of Albertsons, and it subsequently kept the Lucky banner on the five stores — three in Southern California and two in Las Vegas. Its intent, Jeff Noddle, chairman and chief executive officer, explained, was “to relaunch the Lucky banner in neighborhoods where ethnic customers predominate [and] where the Lucky identity may have a more important neighborhood feel.”
He said Lucky stores will offer “a more locally tailored assortment, with a focus on items that are most relevant to customers in those areas. Consumers recognize that Lucky delivers the right products at the right price, and we're excited to have the promise of the Lucky brand in our portfolio.”
Using the Lucky name for a portion of its Southern California store base will enable Supervalu “to purposely build the Albertsons brand [in other parts of the region] at the same time,” Noddle said.
— ELLIOT ZWIEBACH
