Competitors Beware: Kroger Express Headed Directly Toward Baltimore-Washington Market
Consumers won’t see an immediate change now that the FTC has given its final blessing of Kroger’s nearly $2.5 billion acquisition of Harris Teeter. In fact, the nation’s largest pure play supermarket operator has made it very clear that it wants the successful Harris Teeter “brand” to remain very much in place for shoppers and associates who have helped make the Matthews, NC upscale (former) regional chain highly successful both in its core markets in the Carolinas, as well as in emerging markets in Virginia, Maryland, Delaware and Washington, DC.
And for consumers in those emerging areas, all stores will continue to carry the Harris Teeter banner, and president Fred Morganthall and his team will continue to shape culture and policy as it pertains to the stores.
But, of course, there will be changes and competitors already know that Kroger’s corporate ownership now means increased buying power and expertise in many backroom areas. In fact, no other supermarket chain has displayed the combination of corporate clout and regional flexibility that Kroger has, and that type of “local connection” is one of the prime reasons the Cincinnati chain is the most successful when measured against its peers nationally
And one more thing that Kroger will likely add to its newest acquisition: lower prices. Potentially lowering retails will be a powerful competitive weapon for Harris Teeter, whose only negative perception is that it’s too high-priced. In all the other key metrics in determining what makes a supermarket successful – training, customer service, in-stock conditions, fresh departments, private label, etc. – Harris Teeter grades out near the top of the charts.
So, while lowering prices will certainly help HT against powerful and growing entities like Wal-Mart, Target and Wegmans, it will be an even bigger factor in the Baltimore-Washington market against market leaders Giant/Landover and Safeway.
It’s been 15 years since Harris Teeter first entered the B-W market with a smallish two-level supermarket in the Ballston area of Arlington, VA. The company hoped its presence in the DC market would essentially serve to replace the old Giant/Landover reputation (Giant was sold to Ahold USA that same year) as the “go to” food retailer that provided a high level of customer service and strong perishables departments. A decade and a half later, Harris Teeter (which has now expanded its base into Baltimore) operates nearly 40 stores in the B-W market and continues to take share away from the market leaders which, despite many prized store locations, have chosen not to defend their turf as aggressively as they might have.
Even as a regional chain, Harris Teeter hasn’t shied away from paying more than $30 per square foot for some locations (especially inside the Beltway and in the cities of Washington and Baltimore) and has among the most aggressive real estate programs of any operator in the B-W market, regardless of size. Expect that to continue and perhaps be enhanced by Kroger, which spent more than $2 billion on cap-ex last year.
While Kroger’s stores in other parts of the company are primarily organized, Harris Teeter’s are not. Don’t expect any changes there; Harris Teeter’s stores will remain non-union. And while the closest Kroger banner you’ll see to the DC area is 100 miles south in Richmond (where the chain is currently gaining share, partly at the expense of Ahold USA’s Martin’s stores), it wouldn’t be surprising to see Kroger expand its 125,000 square foot Marketplace format into the B-W market in a few years (there are currently two Marketplace units open in Virginia in Chesterfield County and in Virginia Beach, which compete with its own Kroger banner and will now compete with Harris Teeter as well).
With the Federal Trade Commission’s decision not to force Kroger to divest any overlapping stores, the big chain’s market share will immediately increase exponentially in regions such as Tidewater and Charlottesville, VA as well as in the Raleigh-Durham area of North Carolina and in Nashville, TN.
As I’ve said from the beginning, this will prove to be a great deal for both Harris Teeter and Kroger.
For HT (and the Dickson family and its Teeter shareholders), it found a highly strategic buyer that was willing to pay a premium price to acquire one of the country’s hidden gems.
For Kroger, the opportunity to learn the nuances of an upscale, perishables-driven regional operator and gain entry into new markets offers the best growth opportunity the company has had since its 1998 purchase of Fred Meyer on the West Coast.
Harris Teeter moving into the “top three” in the Baltimore-Washington market? Harris Teeter expanding into the Delaware Valley? Marketplace combo stores opening in the Northeast?
Wait a few years – it’s all possible.
Is The Final Chapter For A&P Imminent?
Sam Martin. Nice guy. Assessing his talent is another matter. If you’re looking simply at his body of work in the 42 months he led A&P, you’d have to say his performance was poor, and perhaps that’s why Martin joined the “excised” list of other of failed Tea Company executives who have held the CEO mantel over the past 15 years.
As recent history shows, A&P doesn’t really need a reason to fire key executives or go through frequent reorganizations. Things seemingly happen randomly in Montvale, NJ and virtually all the time the results are the same. Failure (“…meet the new boss, same as the old boss”).
In this case, the new boss is Greg Mays, a man with plenty of grocery industry experience, and one whose chances of restoring A&P’s image as a significant retailer are about as good as if I were to replace A-roid as the Yankees’ next third baseman. And, according to the company, it is seeking to fill the chief executive slot with somebody new sometime in the future. I would say that whomever A&P hires, that person should look at the CEO job as primarily a temporary money grab, because that individual has no chance of being a game changer either.
So, while Sam Martin wasn’t the reincarnation of A&P founder George Huntington Hartford or Pathmark’s co-founder Herb Brody, don’t blame him for The Tea Company’s recent miseries. That horror show has been playing daily in Montvale for more than 30 years.
What’s made this recent blow-up more notable is that new owner private equity firm Yucaipa Cos. (which gained controlled of A&P as a private company following its March 2012 exit from bankruptcy) promised much more.
While most of us knew that Yucaipa’s main incentive for acquiring A&P was to gain control of its valuable real estate along with an ability to utilize the retailer’s significant cash flow, there were also promises made and concessions granted. The promises: invest more capital to build new stores and refurbish others that were in dire need of remodeling and to take better care of its associates. The concessions: for those store level associates who were going to be treated better (or so they thought), they would have to sacrifice some wages and benefits so the new management at A&P could better attain its goals. Also providing concessions was C&S Wholesale Grocers, the chain’s largest supplier, which agreed to provide distribution and logistics services at a lower cost.
Twenty-two months after A&P’s bankruptcy ended, Yucaipa has shown its true colors. Sure, it received the benefits of A&P’s real estate portfolio (including the Food Emporium units in Manhattan) and has no doubt taken advantage of tens of millions of dollars in weekly cash flow to help subsidize other businesses, but as a merchant and as a “good employer,” A&P’s perception is even worse than what many believed was the nadir when the chain entered Chapter 11 in December 2010.
Yucaipa has accomplished most of its mission already. Now it seems the final chapter is at hand. With rumors swirling that several blocs of stores will soon be sold (apparently financial investment advisor Credit Suisse couldn’t find a single buyer to wholly acquire the semi-dilapidated retailer), all that’s left are the final steps toward closure.
Whether it’s barely breathing today or clinically dead in 12 months, RIP A&P.
‘Round The Trade
Ahold reported less than stellar fourth quarter sales (ended December 28), with its U.S. business being hit the hardest. Company-wide, the Amsterdam-based merchant saw net sales decline 1.1 percent to $10.2 billion (at constant exchange rates). In the U.S., its largest segment, the chain’s volume dropped 2.1 percent to $6 billion and ID sales also decreased 2.1 percent. Ahold’s full earnings report will be issued next month. The big global retailer said that “a contracting food market and the sales effects of Hurricane Sandy” impacted sales. Perhaps the most troubling part of the international retailer’s financial news was that its U.S. share declined, something that I can’t remember occurring in at least 25 years. Ahold also consolidated some of its European business. According to an announcement, Ahold Europe as a business division will no longer exist. The company will refocus its current Ahold Europe operations and its leadership on building the Albert Heijn business in the Netherlands and adjacent markets through its various formats and channels. Executive committee member Sander van der Laan will continue to lead Albert Heijn, and report to CEO Dick Boer. The company’s Czech Republic business will also report directly to Boer. Bol.com (Ahold’s European online offering) will continue to report to executive committee member and chief commercial officer Hanneke Faber and remains an important area of growth for Ahold according to the company. Boer noted: “The food retail industry continues to evolve rapidly and we see significant opportunities for growth to cater for the changes in the way that our customers shop. Today’s decision will bring management closer to running the business. By further strengthening the Albert Heijn brand in both the Netherlands as well as neighboring markets, combined with a growing omni-channel offering via Albert Heijn online, Albert Heijn pick-up points, and Albert Heijn to go, we will be better positioned to meet customer needs and accelerate future growth.” Ahold said it will continue to pursue other important areas of growth within Europe such as further strengthening the market position of Albert in the Czech Republic, the roll-out of Albert Heijn and bol.com in Belgium, and Etos and Gall & Gall in the Netherlands. At the same time, Ahold stated that it is continuing to look for ways to streamline and simplify the organization’s support functions across the company, as part of its Simplicity program. “This will ensure that the company can maintain and strengthen its successful market positions and continually reinvest resources in its customer proposition and organizational capabilities,” Ahold stated. The quick take on Ahold’s European reorg is that former Giant/Carlisle president van der Laan has been stripped of many of his duties and that chief executive Boer is taking a more hands-on approach to improving Ahold’s European business…a couple of thoughts about the recent FMI Midwinter Conference in Scottsdale, AZ: 1) it was the best Midwinter event that I’ve ever attended, with lots of time for business planning and social networking, and 2) for the most part, the business sessions were very strong with a very comprehensive view on how “big data’ is shaping the business and our lives. FMI CEO Leslie Sarasin and her revamped team have done an excellent job of improving the relevance of the large trade association since she was named top dog five years ago. Most of the speakers were good to very good, the notable exception being Dina Howell, worldwide CEO of Saatchi & Saatchi X, who not only bored me with her presentation style (her ears needed a personal sound check), but had the audacity to turn her forum into a long-winded, rambling lovefest for Procter & Gamble and Wal-Mart. Highlighting Wal-Mart at a conference dominated by supermarket executives is a sure way to turn a crowd off quickly. And by the way Ms. Howell, P&G sold its Pringles brand (which was profiled in the Procter portion of her speech) to Kellogg’s in 2012. My favorite speaker was former FBI director Robert Mueller, who provided retailers, wholesalers and suppliers with an update on the state of cyber-security. Mueller’s folksy style belied a very strong message: be concerned and be vigilant. That was my takeaway a few weeks earlier when Target Corp. announced a data breach in which at least 70 million customers who made credit and debit card purchases from November 27 to December 15 may have been affected (since then similar breaches have occurred at Neiman Marcus and Michaels). Barely a week after Mueller’s speech, a story in the Financial Times cautioned retailers that the FBI believes the cyber attacks on their consumer’s financial data will increase.“We believe POS malware crime will continue to grow over the near term, despite law enforcement and security firms’ actions to mitigate it,” the FBI noted. Scary stuff…back to Wal-Mart: the planet’s largest merchant is laying off 2,300 associates at its Sam’s Club unit. Most of the riffs will be in the stores and at the middle management level. Sam’s currently represents about 12 percent of the Bentonville Behemoth’s total annual revenue of $469 billion. And while the next Wal-Mart item is about a month old, it’s still hard for me to “digest” this story. The mass merchant was forced to recall batches of donkey meat in some of its stores in China, after the local delicacy was found to contain the DNA of other animals, including fox. Selling donkey meat is perfectly legal in the world’s most populated country, but selling fox meat is not. If those were my only two choices for dinner, then I definitely “don’t want to work on Maggie’s farm no more.”…at Weis Markets, the Sunbury, PA regional chain announced the launch of its “Three More Ways To Save” program, offering discounts on more than 2,000 products in every store department in all 165 Weis Markets locations in the company’s five state market area. “In January, our customers look to us for ways to stretch their dollars, not just on a weekly basis but over the long-term,” said Kurt Schertle, Weis Markets’ executive VP. “To meet these expectations, we’ve launched Three More Ways to Save, which offers an expanded range of everyday savings throughout every store department. Equally important, these are savings they can depend on over the long haul.” Components of the “Three More Ways to Save” promotion are: Lowest Price Guarantee where Weis is offering the lowest price in the market on four weekly items. If a competitor advertises the same item at a lower price, the customer will receive double the price difference with their purchase; Everyday Lower Prices in which Weis has lowered prices on more than 1,000 products throughout all departments. This program is long-term and has no end date; and Price Freeze, now in its 10th edition, in which the retailer has lowered prices for 90 days on thousands of seasonally relevant items that will remain at these prices through April 13, 2014. By the way, Schertle, who last September assumed some of the duties of departed former CEO Dave Hepfinger, is getting high marks from both Weis associates and the vendor community. Weis also received conditional approval to build a new supermarket in Martinsburg, WV on an 18.5 acre site that would be part of a new 151,000 square foot shopping center…as many of our readers know, Safeway’s recent sweeping budget cutting initiative included the elimination of charitable events including its hugely popular and successful Easter Seals annual golf tournament and fundraiser. Despite Safeway’s withdrawal from what was considered the Eastern division’s major charitable effort, the “show will go on.” This year, the committee has decided to expand the event to include the entire food industry including multiple supermarket VIPs so that participants will have the opportunity to network more broadly and they can raise more funds for Easter Seals. The mission of the tournament remains the same – to raise funds that ena
ble Easter Seals serving Maryland, Virginia and Washington, DC to provide urgent, direct services that support veterans searching for meaningful employment, lay the foundation so at-risk young children succeed in school and life, and enable seniors to stay in the community and out of institutions…and there was a lot of chatter out at FMI Midwinter about Cerberus Capital Management’s possible interest in Safeway. And that chatter was only exacerbated by Safeway’s last minute “no show” at the conference where CEO Robert Edwards was supposed to be part of a panel discussion about “Big Data” and several senior executives were scheduled to have individual sessions with top level CPG vendors. And don’t you think that the resignation of Supervalu chairman Bob Miller (who still serves as chief executive at sister firm New Albertsons/Cerberus) might be tied to that PE company’s heightening interest in the Pleasanton, CA chain?…the “on again/off again” status of a prospective new Whole Foods store in University Park, MD is “on” again as construction officially began last month on the $250 million mixed use development that will be built at the intersection of US-1 and East-West Highway. The Whole Foods unit will serve as the anchor of the project and will open late next year. It will be WFM’s first Prince George’s county store…if you listened to President Obama’s State of the Union address on January 28, you probably weren’t surprised to hear his “we must raise the minimum wage” rhetoric. As a follow up the next day, the Commander in Chief continued his income inequality message at a Costco store in Lanham, MD. President Obama stated that “profitable corporations like Costco see higher wages as the smart way to boost productivity and reduce turnover. We should too.” The president wants to raise the minimum wage to $10.10. He added: “I guarantee you if workers have a little more money in their pocket, they’ll spend more at Costco,” noting entry-level Costco employees start at $11.50 an hour, with average wages more than $20 an hour before overtime. The current federal minimum wage is $7.25. I’m not certain that most other retailers would agree with Barack Obama’s assessment…up north a bit, it’s no wonder that competitors fear Market Basket (Demoulas). The uber high-volume family-owned regional chain announced that it will offer a 4 percent discount on all purchases until December 27, 2014 as a strategy to increase sales and gain new customers. And we’re talking about a supermarket merchant which may already have the lowest everyday retails in the country. As one of its New England competitors noted: “Our best hope when dealing with Market Basket on a head-to-head basis is that we hope the family keeps on quarrelling which will further delay new stores from being built.” Apparently, that won’t happen either, as the company’s board of directors announced that it is not seeking to replace its embattled president Arthur T. Demoulas, who has been at odds with his first cousin Arthur S. Demoulas (who controls the board) and that several new store projects which were put on hold while the family conflict became more heated, are back on track..The Market Basket machine is indeed a powerful entity…we sadly report several deaths this past month, all from outside the industry. Passing on at the age of 106 (that’s not a typo), was Run Run Shaw, the legendary Hong Kong movie executive who practically invented the genre of Kung Fu movies and television shows. In addition to nurturing local talent including actor Chow Yun-fat and producer John Woo, legendary American director Quentin Tarantino has often cited Shaw as an inspiration (he used the Shaw Brothers logo in his two “Kill Bill” flicks). In their heyday, Shaw’s films were reportedly seen by 1.5 million people per week in movie houses in Southeast Asia many of which were owned by Shaw and his family. And just before presstime, the great Pete Seeger died. Not only was Seeger one of the early inspirational folk singers in the pre and post-World War II era (he was a disciple of the legendary Woody Guthrie), he was one of the most important public figures in raising social consciousness about racial and economic inequalities in America. Musically, his beanpole physique and 5-string banjo skills made him an unmistakable presence among his musical peers. He was inducted in the Rock and Roll Hall of Fame in 1996 and either wrote or co-wrote such classic folk songs as “If I Had a Hammer;” “Turn, Turn, Turn;” “Where Have All The Flowers Gone;” and “Kisses Sweeter Than Wine.” Politically, Seeger was involved in so many important causes, beginning with helping migrant workers in the 1930s to marching in support of the “Occupy Movement” in 2011. “Be wary of great leaders,” he often said. “Hope that there are many, many small leaders.” Seeger, who was chopping wood 10 days prior to his death, was 94. And two supporting actors from classic 1960s-1970s TV sitcoms have entered the gates of Nickelodeon-land. Dave Madden, 82, who played Reuben Kinkaid, the on-screen manager of the Partridge Family (1970-1974) band, died last month. Madden’s career spanned 35 years and also included major roles in “Laugh In” and “Alice.” Also passing through those gates was veteran character actor Russell Johnson, 89. Johnson’s career began in 1950 and he appeared in more than 160 TV shows and movies. However, by far his most famous role was as “The Professor” in “Gilligan’s Island (1964-1967).” With Johnson’s passing and the earlier deaths of other cast members Bob Denver (Gilligan); Alan Hale Jr. (The Skipper); Jim Backus (Thurston Howell III); and Natalie Schafer (Lovey), that leaves Dawn Wells (Mary Anne) and Tina Louise (Ginger) as the only surviving cast members from the corny but iconic series. And as many an aging male baby boomer might still ask: Ginger or Mary Anne?
