NEW YORK — Wall Street analysts believe a new wave of consolidation — most of it defensive in nature — will hit the industry, with Kroger Co. and possibly Cerberus likely to lead the way as buyers.
“It’s like the nuclear bombs have dropped, and the industry is rebuilding as much as it can,” Andrew Wolf, managing director of BB&T Capital Markets, Boston, said, “so consolidation is definitely a defensive reaction, mainly by the survivors.”
Gary Giblen, managing director of GMG Capital, Darien, Conn., also said the underlying theme of future consolidation would be defensive, with the ongoing expansion of discounters like Wal-Mart Stores and Target Corp. creating “an impetus [for companies] to get bigger, to get more volume power and hopefully to get some operating synergies and economies of scale.”
Wolf, Giblen and three other analysts made their remarks during the 18th annual SN Analysts Roundtable here. Industry consolidation continued last week as two more transactions were announced: Albertson’s LLC’s agreement to purchase United Supermarkets, Lubbock, Texas; and Yucaipa Cos.’ pending acquisition of Tesco-owned Fresh & Easy Neighborhood Market, El Segundo, Calif.
Scott Mushkin, managing director of Wolfe Research, New York, said consolidation is being spurred by efforts to get things back to normal after the recession of 2008, though five years later, “things still aren’t normal.”
He said he expects Kroger Co. to get more aggressive on consolidation — following its pending purchase of Harris Teeter —“[because] the assets available aren’t massively expensive, and in many cases [Kroger] is the most logical buyer.”
For Meredith Adler, managing director at Barclays Capital, New York, “Really cheap money [is] making consolidation a lot easier.”
However, Adler said she doubts there are many companies Kroger would want. “The message you can take from Kroger buying Harris Teeter is that if you’re a class act, you run great stores, your comps are positive, you’ve made some price investments and customers love you, then you’re an attractive candidate to be purchased. [But] I’m not sure there are that many other companies like that.”
Chuck Cerankosky, managing director of Northcoast Research, Cleveland, said it was private equity that forced Harris Teeter to sell, making it easier for Kroger to buy it in a deal “[that’s] an additive transaction from the get-go because valuations are not excessive. In this case the deal was put on the table and Kroger was able to win it.”
The analysts said Cerberus Capital — the company that headed the coalition that acquired the former Albertsons chains from Supervalu earlier this year — might continue to be a consolidator, even though Cerberus has its hand full with the banners it bought, Mushkin said. “When you look at these assets, you just have to scratch your head a little bit,” he said.
“Cerberus bought them for their raw real-estate value,” Giblen pointed out, “so if it can improve operations even a little bit, it is building value.”
According to Wolf, “Cerberus closes stores and sells them or turns them into shoe stores. That’s a nice part of consolidation.”
The transcript of the first part of the roundtable follows:
SN: What factors do you see driving the current wave of consolidation?
Andrew Wolf: If I can use an analogy, it’s like the nuclear bombs have dropped and there are still more Wal-Marts and Targets coming, but for all intents and purposes, this is a post-fallout situation, and the industry is rebuilding as much as it can. So consolidation is definitely a defensive reaction, mainly by the survivors.
As for the non-survivors, there is a lot of debt out there, so you see Food Lion closing 100 stores, Belle Foods doing a restructuring and Food Emporium for sale. So even in a recovery, there are a lot of stores shutting down, and that’s the good part of consolidation. And then you have a great company like Harris Teeter, and I know in my analytic soul that the sale to Kroger was a defensive move because Publix was about to open stores in its home base — many stores, year after year, much like Wal-Mart does.
Gary Giblen: An underlying theme to consolidation is defensive — not that all the deals are exclusively defensive, but with Wal-Mart and Target expanding, it creates an impetus to get bigger, to get more volume power and hopefully to get some operating synergies and economies of scale. Part of the defensive element also involves special niches. Take the Spartan-Nash Finch merger. Spartan had been a good story for a while, based on a competitive vacuum in its region, but then things kind of played out, while Nash Finch’s stock price had collapsed because of the grocery retail and wholesale sides of its business, and it had to do something. But with Nash Finch’s significant military distribution segment, it gives Spartan a new lease on life
Scott Mushkin: I would say that, after the Great Recession, everyone has been looking for a rebound and for things to normalize. We’re five years out of the Great Recession and things still aren’t normal. We’re talking about sector revenue being better and the stocks working well, but if you look at zero-volume growth and weak employment trends five years out, people are beginning to understand this is the new reality.
Meredith Adler: Maybe it has to do with valuations. 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.
SN: Would you anticipate that we will see more consolidation?
Adler: I think there are small regional players that could be consolidation candidates, like Johnnie’s Foodmaster, which Whole Foods acquired. And I remember talking to Kroger about one Midwest city as a place it was going to open stores — because a local chain there is in deep trouble — and Kroger could certainly go after that chain if it wanted to.
Mushkin: Kroger needs to be the consolidator at this stage. The assets that are available aren’t massively expensive, and in many cases it is the most logical buyer, and I think Kroger is going to get a little more aggressive with consolidation — it’s going to broaden its horizons. I believe Kroger should be interested in Roundy’s. Kroger just bought Harris Teeter, and if it could get access to Mariano’s [in Chicago], that would give it another high-end vehicle — and Roundy’s also has great market-share in southern Wisconsin. So I would think Roundy’s would be a good acquisition for Kroger. It’s in better shape than a lot of other companies, it has a 38% share up in Milwaukee, the stores there are productive, and it has Mariano’s attached.
Wolf: Kroger’s criteria include productive stores and pricing that is not ridiculous. If Kroger bought Roundy’s, it could take pricing down 2% more.
Adler: It seems to me that the message you can take from Kroger buying Harris Teeter is that if you’re a class act, you run great stores, your comps are positive, you’ve made some price investments and customers love you, then you’re an attractive candidate to be purchased. I’m not sure there are that many other companies like that.
Chuck Cerankosky: That’s a good point. Harris Teeter did not put itself up for sale willingly. The private equity guys forced that deal and then Kroger was able to buy it, and it’s an additive transaction from the get-go because valuations are not excessive by our measure. Somebody spoke earlier about defensive transactions, but in this case the deal was put on the table and Kroger was able to win it, and Harris Teeter will be accretive to Kroger’s earnings, so it got done.
Adler: Cerberus was supposedly the cover bid. Talk about a big appetite — Cerberus hasn’t even finished absorbing Jewel, Acme, Shaw’s and Albertsons in Southern California, and none of those are exactly low volume. Sales may be deteriorating, but those are high-volume chains. And then Cerberus wanted Harris Teeter?
Giblen: That’s why Cerberus seems like the most logical buyer for Safeway’s Eastern division, if it were for sale — because the real-estate value certainly is there.
Adler: But if you’re a Safeway shareholder, is selling to Cerberus a good deal?
Giblen: Safeway would probably couch it by saying it is re-deploying the assets, taking the money and doing good things with it.
Adler: But that’s not what Safeway does. What it’s doing with the cash from the sale of the Canada stores is buying back stock — as if that really helps the business.
Giblen: Safeway has considerable flexibility if it wants to do something.
Adler: It depends on what you define as flexibility. Safeway has cash flow, but not earnings, and the Canadian deal will be very dilutive.
Cerankosky: Deals are priced off cash flow. If you look at Sobeys’ purchase of Safeway Canada or Kroger’s Harris Teeter deal, they were priced off multiples of EBITDA, not GAAP P&L statements.
Adler: Would you want to leverage Safeway up — more than it is already?
Cerankosky: I’m not saying you have to leverage it more. I’m just saying the deals are priced based on multiples. Post-Canada, Safeway’s debt will decline.
Adler: No, I’m talking about realizing the value there without leveraging it up.
Mushkin: To do that, you’ve got to sell more. You’ve got to sell assets in the weaker markets.
Adler: But how do you monetize something that nobody seems to want?
Mushkin: Discontinuing operations would be a slow process.
Adler: You have to do it all at once to avoid paying back the leases on some stores.
Mushkin: I think it’s literally a market-by-market situation. It’s going to take a lot of work. Safeway would need to set up people inside the company whose sole job is to monetize assets.
Adler: That’s very difficult in the grocery business. If you have a distribution center, then as soon as you get rid of a third of the stores, it kills your economics for distribution — and also for advertising — to the remaining stores in the market. You’re going to have to sell a market as a whole, but if you’re dealing with multiple buyers, that’s a very difficult thing to do — and you still have to pay the landlords for the leases on any stores you don’t sell.
Giblen: Well, Safeway did restructure successfully in the late 1980s.
Adler: All those deals were LBOs. At Safeway U.K. the company got very lucky — somebody paid a ridiculously high price — but the other assets it sold were LBOs that failed. Every single one of those divisions is gone.
Cerankosky: They were union stores in non-union territories, which is probably why Safeway sold them — noncompetitive cost structures.
Wolf: Maybe H-E-B, which wants to get into Dallas, would be interested in Safeway’s Texas stores.
Adler: H-E-B looked at them many times, but the stores are too small. And who else is going to want to move into Dallas? Who is going to want to buy those stores if H-E-B doesn’t?
Giblen: Safeway has good Arizona locations, including some in small towns that are protected market areas. And in the Washington D.C. area, it has good locations, including some locations that are practically priceless.
Adler: How is that going to get you any money? I don’t know if the stores are cash-flow positive, and I don’t know if you’d want to get rid of them.
Giblen: It would be great if Safeway could sell its Eastern division. If Supervalu could dump all those retail chains for their not-insignificant real-estate value, why couldn’t Safeway do something similar in D.C.?
Mushkin: Any money Safeway can take out of markets where it’s losing money and reinvest it in markets where it’s making money is a good thing, and I think [CEO] Robert [Edwards] is willing to entertain these ideas.
Adler: But what doesn’t make sense about that is, we know Dominick’s and the Texas stores have been on the block for a long time and there are no buyers. It’s so simple to say Safeway ought to sell. What’s harder is to come up with a buyer with money.
SN: What prospects do you see for a sale of A&P?
Adler: A&P said putting itself on the block is not a defensive action, but I hear there’s still a serious cash flow problem there — that it’s been bleeding cash since it came out of bankruptcy, with negative EBITDA — so it doesn’t matter how much you cut your debt if you’re not generating cash from the business. What A&P has is great locations and low rents. So any buyer would probably have to be somebody with a totally different go-to-market strategy. The big problem is, how do you get rid of the union?
Wolf: It sounds like A&P’s future will involve an asset sale.
Adler: A&P crushed the union, but the boxes are small — and the company put itself on the block the last time it went through a bankruptcy, and I don’t think there were any interested buyers.
Mushkin: You have to wonder if Whole Foods would want to take some of A&P’s suburban locations in Connecticut.
Adler: Here’s the problem: You’d have to close the stores for six months to get rid of the union — though if they’re being converted to Whole Foods, that might not be such a big deal.
SN: Do you see Ahold making a strategic play for Pathmark?
Wolf: Pathmark is now an impaired asset, so the Federal Trade Commission may now be OK with a larger in-market player buying it — and Ahold had an interest in buying it years ago, so it could still be interested in Pathmark to expand Stop & Shop.
Mushkin: Would Stop & Shop even want Pathmark now?
Wolf: Those stores are in such poor shape, I doubt it.
Adler: But they’d probably be interested in more of the A&P locations.
SN: What kind of prospects do you see for Cerberus, which just bought the former Albertsons retail properties from Supervalu?
Mushkin: When you look at what Cerberus is doing, there have been some store closures, but mostly we’ve been underwhelmed with the number of stores closed.
It’s still got to close some more stores — perhaps many more.
Adler: Closing stores is not a great solution, though.
Mushkin: Let’s face it, Cerberus made a ton of money [in 2006] selling the Albertsons stores in Florida to Publix.
Adler: And it made a fortune selling the Albertsons stores in Northern California the same year.
Cerankosky: If memory serves, Cerberus paid $1.8 million per store when it bought the not-so-premium pieces of Albertsons in 2006, and this time it paid $3.7 million for the former Albertsons properties. So it will be a little tougher to flip them for huge gains.
Mushkin: The people at Cerberus are certainly smart, and they have made a lot of money, but when you look at these assets, you just have to scratch your head a little bit because Shaw’s, Acme and Albertsons in Southern California are very troubled — only Jewel is OK.
Giblen: But Cerberus bought them for their raw real-estate value, so if it can improve operations even a little bit, it is building value.
Adler: But it is operating them — and the original group of stores is getting better.
Mushkin: The original ones are probably flattish.
Wolf: Cerberus closed two-thirds of them. It kept only the decent ones.
Cerankosky: It has only about 160 of those original stores left.
Adler: It didn’t close them — it sold many of them. And what it is left with are the least saleable assets, and yet Cerberus claims it figured out those stores could be fixed — that the original Albertsons hadn’t run them right. I guess it bought the latest batch to fix them.
Mushkin: I guess. But I’m not sure Shaw’s in New England is a good asset. It’s going to require a decent amount of price and capital investment to fix it.
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Cerankosky: Shaw’s has to get fixed while competing with BJ’s — which operates quite well as an expanding non-union, food-heavy warehouse club — plus Stop & Shop, ShopRite and Demoulas Market Basket. As for Acme, perhaps the only edge is that A&P is just out of bankruptcy.
Mushkin: Yes, ShopRite in Acme’s Philadelphia market is pretty strong and Wegmans is there too, and you have Giant-Carlisle getting much stronger.
Adler: So some of this is a real-estate play. But I want to know, is there anybody else like Cerberus?
Wolf: Cerberus closes stores and sells them or turns them into shoe stores. That’s a nice part of consolidation.
Adler: I think we need to distinguish between consolidation and concentration.
Wolf: Consolidation is when stores go away.
Adler: So you wouldn’t say Kroger is consolidating Harris Teeter.
Wolf: That’s what they call it, but it’s more concentration. In that case, they are both pretty good for the industry.
SN: Which food retailers do you think are best positioned for the direction the economy is heading in right now?
Cerankosky: I would say Kroger.
Wolf: Do you think Kroger is in a better position than Whole Foods?
Cerankosky: Yes, because if you look at some of Kroger’s stores in neighborhoods that aren’t so well off, it has a very different mix, which I think shows it is able to adjust the selection to the demand in each market — to change the mix and improve it And in neighborhoods where Whole Foods is doing well, Kroger is also doing well, so if the bifurcated end has room to come up, I think Kroger is going to catch that, whereas I think nearly all the Whole Foods stores are already performing quite well.
Mushkin: But you can’t look at Kroger without looking at Wal-Mart. And as Andy noted, with prices compressing, our surveys show Kroger is now within 10% of Wal-Mart almost everywhere, and that’s without its direct-to-consumer couponing program. It’s just such a different environment than at the end of 2001, when Kroger first started investing in price — it was probably 25% above Wal-Mart then. So the question is, can Wal-Mart reestablish the price gap? If it can’t, then Kroger is a whole different — and better — stock than it’s been for the last 10 years because it is going to see solid sales growth, improving margins and a higher return-on-capital.
Adler: But it’s already a different stock than it was, right? It’s doubled in value.
Cerankosky: I don’t think Wal-Mart would benefit from a stronger economy the way Kroger would. It’s my opinion that people do not aspire to shop at Wal-Mart.
Wolf: If I were to pick the best-positioned supermarket in the industry, I would say it’s probably H-E-B, which is private. Among the public companies, I’d say it’s probably a toss-up between Whole Foods and Kroger.
Mushkin: Even though Kroger’s stock has doubled in the past year, Whole Foods is a 35-multiple stock, while Kroger is still only a 13-multiple, so if analysts are right and it is able to get margins back up consistently, then there is likely more to run on Kroger over a three-year period than there is on Whole Foods.
Adler: It’s interesting that Kroger finally broke out the fuel part of the P&L, and one of the things you see is that the biggest pressure on operating margin has been the growth of fuel —that the core food operating margin hasn’t been going down. And frankly, Kroger needed to publish that data because people were drawing conclusions that weren’t accurate.
There’s no question Kroger has found the holy grail — that delicate balance between sales and margins. It’s been doing really well — it’s actually done well for four quarters in a row — and it helps that Kroger has had some competition like Safeway and Supervalu that are in disarray and transition.
Adler: But Kroger will tell you it spends the majority of its time thinking about Hy-Vee, H-E-B and Wegmans rather than Wal-Mart, which isn’t changing. It probably spends even more time worrying about WinCo.
Giblen: Just to throw out a hypothesis, what if Safeway were to take the money it got from Canada and put it into some real pricing? That could alter the environment for Kroger.
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Wolf: That is the risk because that’s what’s happening at Delhaize and Ahold. The good news for Kroger is, there isn’t a lot of overlap, other than with Food Lion.
Mushkin: But Supervalu is doing it too. This is why this industry is so curious. We’ve had private equity folks put a floor under the values of these companies, but if you look at the inner workings of the industry, there’s a definite concern, even with the marginally better economic backdrop, because we have everybody investing in price.
Wolf: Well, the price investment is not like it was in the recession. That’s a risk for Kroger because as well as it’s running its stores, its big point of differentiation has been that it’s only 10% above Wal-Mart while the next guy is 20% higher. However, if that next guy is only 12% higher and he’s right down the street from you, Kroger could have a problem. That’s something it has got to think about.
SN: What are your thoughts about Safeway in terms of the impact of the top-level management change there and the Just for U program?
Adler: Safeway lost its opportunity to make a bigger splash with pricing over the past decade. There was a time Wal-Mart was saying it was going to open up hundreds of Neighborhood Markets on the West Coast — though after 10 years I think it has only 73 stores, including supercenters. If Safeway had been smart, it would have said, “We should not assume there will never be price competition in this market, so while it won’t be easy, we should start lowering prices today — slowly, gradually — and then when price competition comes, we’ll be ready.” Wal-Mart is opening Neighborhood Markets now, Aldi plans to go to the West Coast, Dollar General and Family Dollar are expanding, and Safeway is facing a more aggressive Target with food, so it just squandered something like 10 years.
Mushkin: I agree with what Meredith is saying. Safeway is looking at three very large challenges. First, its pricing is still too high and, unfortunately, the margins are down, so it doesn’t have a lot to give, but it still has to do more. Second, it hasn’t paid enough attention to market shares. Robert [Edwards] said the company’s share is under 20% in way more markets than it should be. So not only does Safeway have to take the money from Canada and buy back debt and stock, but I think it also has to do something about those market shares. I think it has to get more aggressive in markets where it’s below 20%. The third issue is, Steve Burd [the former CEO, who retired in May] was such a numbers and shrink guy that the company doesn’t run the stores very well anymore — they are aesthetically pleasing, but the execution is very hit-and-miss. So Robert has got a big job in front of him.
Adler: It’s not clear that Safeway’s one roll of the dice — Just for U — is giving it anything.
Giblen: It seems not to be a game-changer — just a small incremental plus.
Adler: Maybe the fuel program will be an incremental plus, but it’s so late in coming.
Mushkin: Safeway has spent a lot of money on Just for U just to stay in place.
SN: It sounds like you’re saying Steve Burd left Robert Edwards with a very challenging situation.
Adler: It’s not like these problems only came into existence because Steve left. They were all there when Steve was there. He simply chose to ignore them, and Robert could choose to ignore them too.
Mushkin: Safeway has already sold off Canada, one of its best assets, and shrinking to improve profitability is always hard. Then when you look at its relatively low market shares, its current margin structure, or its pricing, clearly Robert has a big task in front of him. We believe he is up to the challenge, but if an asset can’t be fixed, I think he will sell it.
Wolf: I think Safeway’s pricing needs to go down another 2% to 5%, depending on the market.
Mushkin: 5% to 7% more.
Wolf: But time is running out — not in the sense that the company has financial issues but just that the industry isn’t standing still. Clearly, I completely agree with Meredith’s point. When Kroger started to invest in price, it was over — others had to choose to either mimic Kroger if they could or lose market share.
Cerankosky: What I’m hearing here is that Safeway is somehow replacing Supervalu as the industry’s low achiever, which makes no sense.
Wolf: Safeway is better than Supervalu. But yes, it has become the reflexive whipping boy, though it shouldn’t be whipped the way Supervalu has been, because it’s a better asset.
Cerankosky: Safeway is a much better asset than Supervalu. Comps are positive, though they’re not where they could have been if the company had reacted faster, and Safeway’s geography positions it to take some share from the stores Supervalu sold to Cerberus.
Mushkin: I also think Safeway has better attributes. For example, it has a better private-label program.
Cerankosky: It has a strong pharmacy program, a better loyalty program, a better fuel rewards program — it’s got a lot of tools to work with, and though it reacted a bit late on price, it’s successfully adjusting, in my opinion.
Mushkin: The problem is, Safeway prices were 20% over Wal-Mart’s on average and now it’s worked that down to 12% to 15%.
Giblen: Yes, too little too late.
Wolf: I think if you look at the markets where it is better-priced and worse-priced, you may get some clues as to where it might decide to stay or go.
Mushkin: You could look at it like that, though the chain has been pretty uniform. In Chicago, it stopped investing, but it drove pricing all the way down to about 12% to 14% over Wal-Mart, so it’s done a lot there. It just has more to do, unfortunately.
Adler: And it’s all about perception, right?
Mushkin: Yes. Kroger is an interesting company to study because it’s gotten so good at being a high-low operator, and it drives a lot of great deals and excitement without making the stores appear overly cluttered with promotions. Safeway, on the other hand, is not nearly as good of a high-low operator as Kroger, which I think is interesting because Safeway used to be better at one point.
Adler: Well, Safeway is still very, very high-low, and I think high is very high.
SN: Will Just For U change the price perception about Safeway or the amount of business it’s able to do?
Adler: I think Just for U is a failure so far.
Cerankosky: I think Just for U changes the amount of business Safeway is able to do. Though it’s not going to attract new customers as much as keep the existing ones, it will build basket size. Safeway needs to do a better job at getting new customers.
Adler: I still don’t hear anything that good about Just for U from existing customers. Even they are saying it’s hard to use.
Mushkin: We liked what we saw out of the program in Chicago.
Adler: Safeway changed it there. Originally, all you had to do in Chicago was buy the item and show your card and you got the discount. Now, in Northern California, I think the whole program involves going onto the website, clicking on the item and then you get the deal. That’s what’s makes it so much harder to use — you have to ask for it, so it’s a pull, not a push, program and people dislike it.
Mushkin: That’s always the trick with technology — if it becomes too much of an effort to pull, people are going to turn it off.
SN: Let’s talk about Supervalu.
Adler: The market clearly believes Supervalu has the right management team — a team that is very focused and very directed and knows what is important, so execution will be the key factor in the end.
Mushkin: You definitely have a guy in Sam Duncan [Supervalu’s president and CEO] that understands what he’s doing — bringing the strategy back to something I think we all would support. But it’s definitely not going to be an easy layup because he’s coming so late to the deep-discount party. And Supervalu also has a good person running distribution now — Janel Haugarth. She is one of the better executives there, and she’s done it before, and you can’t complain about that.
As for Save-A-Lot, we believe this is not the time for the dollar industry and the deep-discount industry in a macro sense, but the growth strategy for Save-A-Lot seems fine.
Adler: Because Supervalu has been growing Save-A-Lot so slowly, it probably has created a big window for Aldi to open stores.
Mushkin: Not only that, but Kroger has quietly opened deep-discount stores called Ruler Foods.
Cerankosky: And Spartan’s got Valu Land, and then there are 23,000 dollar stores.
Mushkin: We always talk about the high-end channel, but there is a lot going on in the value channel as well, where the economic backdrop actually doesn’t look as enticing.
I think it’s pretty clear Supervalu is going to fix Save-A-Lot — that it was mismanaged — and it is already moving people into certain markets and going with a concept that is a lot more productive and more profitable, with a lot of different merchandising.
Adler: I don’t think it’s just about Save-A-Lot, though. I think it’s about wholesale and the regional banner stores.
Wolf: Wholesaling at Supervalu wasn’t being run too badly, but the company had conflicts between the major retail chains it used to own and its independent customers. Now it is no longer operating stores that compete with its independent customers.
Adler: That’s not true. Cub is one of its biggest retail assets, and Cub does a huge business in Minneapolis, as do some of its biggest wholesale customers like Byerly’s/Lunds. The same is true for Shopper’s Food Warehouse in the Baltimore-Washington D.C. market.
Cerankosky: Now Supervalu is back to its legacy business — distribution and logistics, which it is pretty good at. And I think one of the great things for Supervalu is having new leadership that’s willing to change things and get things on an even keel. The company went through a very traumatic acquisition, and this is the third CEO change in the last few years — but this time around it’s getting back to its old business with Janel Haugarth as a key leader who people are familiar with. There’s also the realization that Save-A-Lot was broken, so management has put new leadership in there, and it’s good to see where the company is at this point, though there is still a lot of heavy lifting to be done.
Adler: Nobody can criticize what the company has set out to do. It’s just got to be executed.
Mushkin: And it probably will be. I like the strategy — it’s kind of a back-to-the-future strategy that’s very simple. But there are problems with thinking things will turn around quickly. Distribution faces very low inflation, which is never a good environment for wholesalers. You’ve got Save-A-Lot, which could be a little bit more of a challenge because the environment is not that great for discounters. And then there are the independent retail banners, which is the area I’m worried about the most. Not that the strategy of going local isn’t fine — it’s just that the assets have been neglected for a pretty long period of time.
Cerankosky: That’s why Supervalu bought Albertsons years ago — to fix the retail banners and grow the retail side of the house.
Mushkin: That’s still the part I worry about the most because I think the other stuff can be fixed over time. But what can Supervalu do with the assets it has left? They’re clean and they’re neat, but they’re not new.
Adler: What’s really interesting is that the whole point behind buying all those Albertsons assets was the idea that scale mattered. But when I talked with the company about that, I pointed out the message it’s giving now is that losing those stores makes no difference, and a senior executive said that’s right — that Supervalu never took advantage of the scale those stores provided.
Cerankosky: Well, scale matters if you bring it to the consumer, and Supervalu didn’t. At the time Supervalu bought Albertsons, it said it was going to take the costs out first and then give the savings to the consumer. Price was always secondary — yet Wal-Mart was still opening locations, dollar stores were opening stores, and Kroger was lowering prices. The economy was definitely a headwind that kept getting worse and worse. And by the time [former CEO Craig] Herkert’s turn came, Supervalu was chasing negative leverage and just never caught up.
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