Q&A: retail acquisition rumors over “one horse show” - FreshFruitPortal.com

Q&A: retail acquisition rumors over “one horse show”

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Q&A: retail acquisition rumors over “one horse show”

Amid speculation that Cerberus Capital Management plans to acquire U.S. retail chain Safeway, it remains uncertain how such a deal – putting the retailer under the same roof as Albertsons and Shaw’s – would impact operations, produce suppliers and consumers. To put the situation in context, freshfruitportal.com caught up with consultant and industry veteran Dick Spezzano.

Dick SpezzanoBefore we discuss the buyout rumors, what would be your assessment of Safeway’s business model in terms of profitability, competitiveness and providing a unique offering to consumers?

Please keep in mind my comments will be based upon my observation of the northern and southern California marketplace. These 540 out of the 1629 stores probably produce well over 40% of their sales and over 50% of their profits. Their operational cost and retail prices are probably higher in California than any other operating area.

Their sales have gone from US$40.1 billion in 2010 to US$44.2 billion in 2012, which is a small increase. Their same store sales were down in 2010, only up 1% in 2011, and only up .05% in 2012, and that doesn't cover the food inflation factor of those years.

With these flat sales their operating profit has gone from US$1.16 billion in 2010 down to US$1.10 billion in 2012. This is not a good corporate report card. Their stock price is at a 52 week high of over US$35 which is almost double what it was one year ago, however this follows seven or eight years of a very flat stock price.

My guess is the stock is up because of their IPO (initial public offering) of part of their Black Hawk business (their very profitable gift card business), their sale of the Canadian division, their announced sale of their Chicago division, and the rumors that they will either be bought or sell off other divisions.

When Safeway developed their lifestyle store concept it was very good and widely accepted by their customers as a new and unique offering. That was 10-12 years ago and they really haven't improved much on that concept and since then we have seen all of the non-union competition eat away at their market share in many divisions.  They compete with the various Kroger divisions in most of their operating areas, and Kroger has certainly caught up and probably passed them in presenting a modern, well-merchandised and updated store.

Looking at the produce industry, how does Safeway rate compared to others in its ability to rotate fruit and vegetables well, keep consumers interested and develop demand for new product lines?

Operationally Safeway, like many conventional supermarkets, struggles to keep their stores well stocked, fresh, and appealing all the hours that they are open. Safeway was once the market leader in offering fresh organic produce that was well-merchandised and well-priced. This was also part of their lifestyle store rollout and since then many in the marketplace have matched them and the fresh stores have passed them in this offering. As far as the "locally grown" trend goes, I have noticed the regional retailers and fresh stores doing a better job marketing this trend.

So what trajectory do you see it being on, regardless of any buyout deal?

I am afraid that they have become a "one horse" show with their lifestyle store. This concept really is a store that appeals to upper middle and high end consumers, and they have not done anything significant to reach all of the other customers. However, Kroger with its Food For Less division does a very good job of attracting those customers. By Safeway's report they currently have 270 stores in southern California and in 1998 they had 328 stores. I know they have built some and bought a few stores in that timeframe.

This would mean that they have closed more than 58 stores in 15 years and that is a very high rate of underperforming stores. Regardless of any buyout deal we already know that their Dominick’s division is up for sale and they have already divested the Genuardi's stores. They bought those two brands for about US$1.5 billion, probably invested another US$200 million and probably will come out with only US$200-300 million from both of the sales. I would think the next division to go on the block would be Texas and maybe followed by Arizona. This would leave them with a strong position in Pacific Northwest, Denver, California and their Eastern Division.

Let’s look at Cerberus. What is it about Safeway that makes this rumored acquisition so desirable?

They certainly are on a buying spree and don't forget they are a real estate company. I think they have gone from a buyer, to a real estate holder, and then planned on being a seller of stores in part or in whole. After the Albertsons LLC's purchase of the Albertsons divisions that Supervalu bought they did divest of Florida, northern California and other stores. They now are a real estate and supermarket operator and I think they like the returns they are achieving. Safeway has over US$4 billion in the bank from their Blackhawk IPO and the Canadian sale; coupled with the fact that Safeway owns 45% of their 1,600 stores this makes them very attractive.

What sort of synergy do you think Safeway would have with Cerberus’ stores Albertsons and Shaw’s?

This would put Cerberus as a major operator of conventional supermarkets. No doubt the FTC (Federal Trade Commission) would make them sell some or all of the Safeways in southern California, Arizona, and Chicago. There are always backyard synergies that the elimination of duplication would save.

How would you describe the latter two chains in terms of their approach to retail, particularly in produce?

From my observation of what Cerberus has already accomplished in the southern California market, they have a much different approach in produce. Cerberus is not interested in private labels, returnable plastic containers, or even expanding their organic offerings. The Southern California Albertsons had the highest retail pricing in produce and now they are among the lowest of the conventional chains. Their promotional pricing entn from the worst to probably the best in the market.

Their produce quality has significantly improved, noticeably in the apple, grape and berry offerings. They are converting much of their prepared value-added offering from third party to ins-store. They are making their own salsa, guacamole, much of their cut fruit, much of their cut vegetables and even Greek parfait yogurt-granola-berries, and candied apples.

In the meat department they have converted to a USDA (United States Department of Agriculture) Choice beef program and they are the only major conventional chain with this program. The big difference is that Safeway has a modern fleet of stores, and almost all of the former Supervalu stores are old and outdated and will require a large infusion of capital to get them up to speed.

What would such a union mean for the retail landscape, and most importantly, produce growers, exporters, shippers and distributors?

Many companies talk about "best practices" when there is a merger/buyout but more often than not the company that is doing the buying is the "smartest person in the room" and their practices are the "best practices". This may mean that Cerberus would continue to have regional buying verses Safeway's centralized buying. If it was my decision I would centralize the buying that makes the most sense and decentralize those purchases that work best bought at the regional level.

Items like value-added salads, bananas, carrots, and the non-perishable products could work best at a centralized buying office and items like locally grown, regionally produced, and many vegetables could work best at a regional buying office. If they honestly look at both buying methods they should be able to come up with a hybrid model. At the end of the day the bigger a retail company gets, the more pressure the buyers put on the supply side for service and pricing.

In what way would or wouldn’t the potential deal give more buying power to the retailer due to market concentration, as is the case in other markets?

If, and it is a big if, it would create a company with 2,200 to 2,400 stores. The new company would be dominant in all of California, Arizona, Colorado, Texas, and the Pacific Northwest. With the expanded buying power comes the increased need to supply these stores. This usually means the buyers have to work with the bigger suppliers both domestic and off shore.

Unlike Australia and many European countries, there are many large and small retail players in the U.S. and dominance is difficult to achieve. Even Wal-Mart, as big and powerful as they are, doesn’t dominate but a few markets.

Having seen other consolidation deals take place in the U.S. market, what would be your speculation on how this acquisition may pan out?

Having seen other consolidation in the industry, the needs of Wall Street are usually paramount over the needs of the individual operating divisions and the final consumer. These types of mergers or buyouts are supposed to reduce the costs of produce and other store products to the consumer, but that isn't always the case.

If it were the case, then the regional operators would be all gone, and in fact many of these regionals are very strong competitors to those companies that have merged. We have seen the consolidation by Supervalu, Safeway, Ahold, and Food Lion and their conversion to centralized buying and merchandising operations with all of the mentioned having significant financial, market share, and operational problems.

The exception is Kroger with its various acquisitions as they take years to consolidate the buying and merchandising, yet leave a lot of the decision making at the regional level. A great example of regional decision making is Whole Foods as the regional managers call the shots. Look how successful they are.

Is there anything else you’d like to add?

I believe if the conventional operators are going to survive at all then they have to have many different store formats to deal with the many different consumers. This would mean having a conventional offering, a fresh store offering, a price impact offering, a high end offering, and a website offering.

This may mean an acquisition of a fresh store, high end, and an ethnic store operation and partnering with a website fulfillment partner.  All of the fresh store and ethnic operators that I am aware of are non-union and most of the conventional operators are union. This is a serious issue that would have to be dealt with.

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