Supersizing Supervalu
Elsevier Food International Vol.9, Number 2, May 2006 Len Lewis
In one swift move, the world’s largest wholesaler is becoming one of the world’s biggest supermarket operators with the power to significantly alter the dynamics of the US marketplace.
The deal in question involves Minneapolis-based Supervalu’s pact with an investment group led by Cerberus Capital Management to acquire Boise-Idaho-based Albertsons for an estimated US$17.4 billion. The acquisition more than doubles the sales of the 135-year-old Supervalu to an estimated US$44 billion with an EBITDA of US$2.7 billion while tripling the size of its retail operations with banners that simply languished under Albertsons control, according to many observers.
Based on the sheer number of locations, the transaction catapults Supervalu to the second largest operator of conventional stores in the US behind Kroger and the fourth largest overall retailer behind Wal-Mart, Kroger and Costco. “This massively increases Supervalu’s stature in grocery retailing by putting them into new markets and increasing their buying power,” said Bryan Roberts, senior retail analyst with Planet Retail, London.
Managing pain
Moreover, it changes the nature of Supervalu’s business model and the source of its revenue. “They clearly made a decision to move away from wholesale and into retail. This was an historic opportunity to do it in a single day rather than painfully over a period of years,” noted John Rand, director of retail insight, grocery channel, Management Ventures, Inc., Cambridge, Massachusetts.
However, the deal is not without its painful aspects. Albertsons earnings plummeted 17 per cent in the recent fourth quarter, the result of Gulf Coast hurricanes, accounting changes related to merchandise discounts and costs associated with solicitation of bidders. Additionally, Supervalu is acquiring approximately US$6.1 billion of Albertsons debit.
Supervalu has expressed confidence that the newly formed company will generate sufficient cash flow to support its debt service requirements. Nonetheless, observers see the massive debt load putting a crimp on building plans. “The earnings to interest ratio is about US$2.60 to US$1 of interest. Traditionally the grocery industry runs closer to US$5 or US$6 of earnings per dollar of interest,” noted Rand. “They may find some ways to free up some additional capital. But there won’t be a lot of capital expenditures available for aggressive building or remodelling near term.”
Roberts added: “There are always risks with transactions of this scale and the US market is littered with examples of poorly thought out consolidations. “But I’m confident they will do a good job of it.”
The company has an estimated US$1.1 billion in capital from the merger that will be used to invest in new stores and an “active” remodelling programme. Officials noted that approximately 85 per cent of Supervalu’s existing store base has been remodelled in the past seven years. Meanwhile, under the aegis of president and coo Mike Jackson, the company has launched ten “enterprise” teams composed of people from both Supervalu and Albertsons to look at all functional and operational disciplines.
Strong regionals
“For Supervalu, it’s a simple strategy – run Albertsons better than it’s been run before,” said Neil Stern, senior partner, McMillan/Doolittle, Chicago-based retail consulting firm. “They won’t have the drug store division or 5,000 underperforming stores in geographically spread out markets. What they have acquired are some very strong regional chains like Jewel and Shaw’s that have dominant positions in their markets,” he said, noting the deal gives Supervalu access to 54 new marketing areas.
Roberts also offered a positive perspective. “Many of the assets acquired are decent businesses in their own right. Shaw’s has suffered under Albertsons’ ownership because of pricing campaigns and private labels that were forced on them. Albertsons made successful acquisitions; their failure was in not leaving them alone. Now they can flourish. I also think Cerberus will end up with most of the underperforming Albertsons markets. They will probably try to turn it into a growing concern. But there is some reason to suspect it will turn into a real estate play rather than a retail business,” said Roberts.
However, Supervalu also has to become better at doing things that were not core to them in the past, said Rand, citing operational skills, evaluating a wider range of people and becoming better at local marketing. “The company recognises that this is going to take time and they are talking about a three-year transition plan as opposed to just six months.
“This is a complicated acquisition and if you don’t have the staff to just take it over, you have to use the people that are already there and assess what those people can do.” However, he noted that there are some extremely talented people in the Albertsons group – particularly the mid- and upper-tier management.
Corporate structure
The acquisition consists of approximately 1,124 stores including Acme Markets, Bristol Farms Jewel-Osco, Shaw’s Supermarkets, Star Markets and Albertsons banner stores in the Intermountain, Northwest and Southern California regions. This lifts, Supervalu’s total store base to 2,651 units, including 1,759 corporate stores. Previously, corporate stores numbered only 635. Supervalu is expected to run Albertsons through existing structures and divisions. But observers are confident that Shaw’s can run itself and that Jewel can, in time, re-establish its identity
The deal also includes 12 distribution centres, the in-store pharmacy operations under the Osco and Sav-On banners. CVS Corporation is acquiring Albertsons interests in 700 freestanding drug stores in Southern California, the Southwestern states and the Midwest and changing the banners to CVS. They will also take over a drug store distribution centre in La Habra California. The Cerberus investment group will acquire Albertsons assets in such markets as Dallas/Fort Worth, Northern California, Florida, the Rocky Mountains and the Southwest.
“They are getting rid of albatross markets like Florida, Texas and Northern California. But they still have to make the Albertsons name mean something for consumers – and that’s not a cost cutting issue,” aid Rand. “This means getting reasonably competitive on price and differentiating Albertsons. They can’t stay in the middle,” he said. “Standardisation has been rejected by the American consumer. It doesn’t take much for people to find another store. I think Shaw’s and Jewel are still okay. The question is what will happen to the standard Albertsons banner in California and the Mountain States,” said Rand.
One reason the deal is being hailed as a triumph is because Supervalu was able to cherry pick the operations it wanted. As Jeff Noddle, chairman and CEO of Supervalu explained: “We purchased those exact assets we felt fit in our geography and our portfolio. The acquisition is a strategic fit with Supervalu’s approach of operating a diversified portfolio of regional banners – locally managed and branded – with strong prevailing market shares.”
Position of strength
Spectra, a Chicago-based marketing and research firm, estimates that six of Supervalu’s new markets are among the top 25 in the country and will thus give the company a position in 20 of the nation’s top 25 markets, including Boston, Chicago, Las Vegas, Los Angeles, Minneapolis, Philadelphia, San Diego, St. Louis and Washington, D.C.
The West Coast will be among the most lucrative in terms of market share, according to Spectra, which noted that Albertsons 94 supermarkets in the Los Angeles metropolitan area will give Supervalu an immediate 11.9 per cent market share, putting it in third place behind Ralphs, owned by the Kroger Co., and Vons, owned by Safeway. In the Santa Ana, California market, the acquisition of 53 Albertsons stores will give Supervalu a market share of 21.6 per cent – in second place behind Ralphs. In Chicago, the addition of about 155 stores gives Supervalu a market share of 33.8 per cent and in Philadelphia, 70 stores will result in a 20 per cent jump in market share, according to Spectra.
Supervalu is no stranger to growth by merger and acquisition, something which has continued throughout its 135-year history. The company began operating in the prairie town of Minneapolis in 1870 as B.S. Bull and Company, a dry goods wholesaler. Its direct descendant, The Newell Company was founded in 1924 and merged with Winston, Harper and Fisher to create the Winston & Newel Company, which went on to build the first modern grocery warehouse in the industry and the first to utilise large trucks, the forerunners of today’s tractor trailers.
By 1942, the chain had formed its own chain with affiliated retailers. About 12 years, later the company name was changed to Supervalu and soon after began acquiring regional food wholesalers, primarily in the Midwest, Southeast and Northwest – an expansion programme which lasted until the late 1980s.
Meanwhile, in 1980 the company acquired Cub Foods, one of the industry’s first warehouse store operations. Other acquisitions in the 1980s and 1990s included: Scott Foods, Wetterau, Inc., which gave them the Save-A-Lot banner; Hyper Shoppes, the Cincinnati-based hypermarket operator; Richfood Holdings.
Hands-off management
“Supervalu has a much better track record in preserving their operations autonomy with local management,” said Planet Retail’s Roberts. ‘They are a fairly hands off operation but behind the scenes they bring great expertise in supply chain management and private label marketing and merchandising.”
In the past, some Supervalu-supplied retailers complained that they were, in effect, competing with the wholesaler’s corporate stores. These complaints – in part – resulted in the company’s refocus on wholesale operations. However, the addition of Albertsons is not expected to raise similar concerns.
“There is a broad conflict of interest since they will be competing with some of the businesses they supply. But there shouldn’t be much in the way of complaints if they continue to offer their retail clients a competent level of service. Competing with the people you supply is a hard position to be in. But Supervalu is more than equipped to deal with it,” said Roberts. However, Supervalu is selling some 26 Cub stores in the Chicago area to the Cerberus group.
As noted earlier, much of the discussion has centred around what Supervalu will do with the acquired Albertsons units – most of which have been described as “plain vanilla” or middle-of-the-road stores that lack excitement. The fact is that Supervalu is capable of running stores at all points in the retail spectrum, everything from the Save-A-Lot deep discount stores to upscale Farm Fresh units. “Albertsons is firmly planted in the middle which is not a great place to be these days,” said Roberts. However, the stores could easily be converted to either upmarket or downmarket concepts. Supervalu needs to do something, even if it is just improving private label or the selection of organics.
Organics format
“But they have considerable expertise in rejuvenating underperforming retail operations. At any rate, it’s hard to see how they could do a worse job than Albertsons.” Some of the acquired stores are expected to be converted to Sunflower Markets, a natural foods store concept which carries between 8,000-12,000 natural and organic products. Approximately 50 Sunflower Markets are expected to be operating by 2011, said analysts.
Furthermore, the integration of Albertsons into Supervalu is going to be a lot smoother than the 1990s merger of American stores and Albertsons, whose failure to properly integrate both operations has continued to plague the Boise-based chain. “Supervalu has a dynamic sand vibrant management culture with people they can parachute into various businesses. There have been some musical chairs going on at their various chains recently. But there might be more of a rotation policy within management in the future.”
As to who will be tapped to run Albertsons, Roberts replied: “I don’t know at this point. But they are running some great separate grocery businesses. Any one of those people could be transplanted to run Albertsons stores. There’s no shortage of candidates,” he said.
The new Supervalu
Store Count: 2,656
Number of states: 48
Number of Employees: 200,000
Sales: US$44 billion
EBITDA: US$2.7 billion
EBITDA mix retail-89 per cent
wholesaling-11 per cent
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