By Any Measure, It Was Another Spectacular Quarter For Kroger
Kroger’s achievements over the past five years are nothing short of incredible, especially when you consider the competitive and economic challenges all food retailers have faced in recent years.
Like a metronome, Kroger continued its torrid pace by posting third quarter earnings of $428 million (a 23 percent gain) and a same store sales increase of 5.4 percent (excluding fuel) for the period ended November 7. That latter number marked the 48th consecutive quarter that the Cincinnati, OH-based juggernaut has produced positive same store revenue, an astounding figure. Not surprisingly, its stock price has surged over the past five years (in December 2011, Kroger shares were trading at approximately $10.30 per share; Kroger’s current share price is in the $41 range which includes a 2-for-1 stock split earlier this year).
On so many levels, Kroger has adapted to the many changes the industry has seen over the past decade. It combines a very high level of consistency at store level (no easy task when employing more than 400,000 associates and operating 2,600 supermarkets nationally) with customer-focused research and a dynamic leadership team that seemingly is devoid of egos and who truly want to sell more stuff.
And here’s an additional differentiator: although primarily centralized, Kroger has been able to utilize its agility and nimbleness at its 21 operating division’s, which allows local managers to remain creative and competitive as conditions in specific markets change. As comparative examples, that “localized” approach is one that is now being integrated into Albertsons’ 13 operating divisions, while Ahold, which touts the flexibility of its four operating divisions, has struggled to achieve the same level of individuality.
For its fourth quarter, Kroger expects ID sales growth (excluding fuel) of 4.0-4.5 percent and is targeting a fiscal 2016 growth rate of approximately 5.0-5.25 percent.
With very manageable debt and strong cash flow, Kroger has made no bones about pursuing acquisitions. In 2014, it purchased Harris Teeter for $2.44 billion. Thus far, the marriage has worked wonderfully with Kroger allowing the upscale Mid-Atlantic and Southeast chain to remain largely autonomous.
Kroger’s recent $800 million acquisition of Roundy’s presents a different type of challenge. Unlike HT, Roundy’s has struggled in recent years with its core supermarkets in Wisconsin, while investing heavily (and not yet profitably) in its expansion in the Chicago market (Roundy’s posted a $9 million loss for its most recent operating period ended October 3).
Having witnessed Kroger successfully turn around its business in Richmond and Tidewater, I’m confident that it can improve Roundy’s core supermarkets in the Badger State – Pick ‘n Save, Copps and Metro Market – by instilling focused operational discipline, leveraging its buying power and providing improved data that will ultimately make the shopping experience at those conventional supermarkets better.
A key component of the deal was retaining Roundy’s CEO Bob Mariano, whose talent has helped Roundy’s become an emerging force in the Chicago market with the company’s eclectic Mariano’s supermarket concept. With Mariano’s vision and Kroger’s corporate expertise and deep pockets, this partnership could pay big dividends.
Based on its current growth rate, achieving $60 a share is certainly possible. Kroger represents an incredible story in an industry where successes are usually measured with a thimble.
All Unsold A&P Stores Now Closed; Chain Gets Two Month Bankruptcy Extension
It’s been a busy month in bankruptcy court for A&P. Faced with underwhelming sales of its stores, A&P requested and was granted a two-month extension to remain under Chapter 11 protection. Now, The Tea Company will have until March 16 to solicit bids for any unsold stores and until May 16 to gain approval for the sale of those supermarkets. This will allow A&P more time to accrue additional funds for its creditors.
Officially, all A&P, Pathmark, Super Fresh, Food Basics, Waldbaums and Food Emporium stores that were not previously sold, closed on November 26, ending the 156 year run of what once was America’s premier supermarket chain.
In an attempt to accelerate the process, A&P has engaged the services of A&G Realty Partners to act as a third party sales agent for 55 remaining unsold grocery stores. As a part of that proposed deal A&P will receive an upfront fee, be relieved of rent payments and split the proceeds of any store sales with A&G. (there are other closed A&P stores that are not part of the A&G deal).
In other developments, Key Food successfully bid $1.75 million for the name and intellectual property rights for the Food Emporium brand. Another metro New York independent, PSK/Foodtown, has offered $1 million for the Pathmark name and other intellectual property assets related to that brand. Both Key and PSK/Foodtown acquired multiple A&P stores at auction in October.
A&P has also sued real estate firm Lee & Associates for failing to disclose it had made two winning offers for stores on behalf of an unqualified bidder. Lee & Associates, a large commercial real estate firm, outbid Bogopa (Food Bazaar) for a Food Basics store in North Bergen, NJ and a Pathmark unit in Brooklyn (offering $6.8 million and $5 million respectively). It was later disclosed that Lee was reportedly bidding for Francisco Gin, who operates several metro New York stores under the Golden Mango banner. A&P alleges that Gin was not financially able to qualify as a bidder and was not identified as a bidder by Lee & Associates when it made bids for him. The Tea Company is seeking at least $1.8 million in damages from Lee, its president James Wacht and Gin. Bogopa was ultimately granted approval to acquire those two units.
Claiming it would raise about $28 million for its creditors, A&P has asked the bankruptcy court to approve sales of 10 currently sub-leased stores to other non-grocery operators, including TJX Companies and Big Lots.
With all unsold stores now closed, expect more deals to be made in the next few months as union restrictions lapse and many of the stores fall under the control of landlords, many of whom will be looking to make more reasonable deals to protect and enhance their shopping centers.
As I have stated earlier, I still believe that a year from today about 60 stores will remain dark – unsold due to the horrific physical condition of stores and intense market competition.
What a sad and shameful ending for a once iconic company and a piece of Americana.
‘Round The Trade
And speaking of the Tea Company, former A&P chief executive Eric Claus has been named the new CEO of Save-A-Lot. Claus, 59, will join the Supervalu unit early next month. He most recently served as chairman and CEO of Red Apple Stores, a Canadian-based chain of value retail stores. Ritchie Casteel, the current Save-A-Lot CEO, will remain with the company as president and report to Claus, Supervalu said. Casteel will continue to oversee day-to-day store operations while working with Claus on Save-A-Lot’s market development, store growth plans and preparation for the possible IPO spin-off or sale of its extreme value unit. “I’m very pleased that Eric is joining our Supervalu team to serve as CEO of Save-A-Lot,” said Supervalu CEO Sam Duncan, who will be stepping down in February. “He has a great background in food retailing, and is a smart and charismatic leader. His strengths in and experience with the hard discount format as well as his history leading retail companies will be important as we look to finish our fiscal year strong and as we continue to position Save-A-Lot for the future.” Born in Canada, Claus has more than 30 years of retail experience including serving as president of A&P-Canada in 2002 and as CEO of the entire Tea Company in 2005. He exited in 2009 after Pathmark gained control of the chain. I can attest that Eric Claus is the real deal. He was the only A&P CEO in the past 40 years who actually tried to implement positive change by upgrading stores, opening communications and improving the culture. Clearly, that wasn’t the skill set that the morons at Yucaipa were looking for. As Claus enters the Supervalu ring, veteran Janel Haugurth is exiting. Haugarth, who has been with the Eden Prairie, MN-based wholesaler/retailer for nearly 40 years, departs as EVP and president of the SVU’s independent business and supply chain services. She will be replaced by Mike Stigers, current president of Supervalu’s Cub Foods unit (he also served as president of Shaw’s). It’s becoming pretty clear that the dynamics and culture are changing at Supervalu. The organization is really going to miss Sam Duncan who led a historical turnaround in the three years he’s been CEO and with SVU eyeing a Save-A-Lot IPO or sale, the company will be much smaller. Several observers have openly asked how much longer Casteel will be part of the equation (he was a Duncan appointee) and Haugarth was one of the few management holdovers from the glory days of SVU (and the inglorious ones, too) who arguably supervised the company’s most valuable component…Wal-Mart reported that third quarter comp stores sales at its U.S. stores increased 1.5 percent (excluding fuel), marking the fifth consecutive quarter that same store revenue rose at its domestic units. Overall, the Behemoth posted an 8.8 percent decline in earnings. Total company revenue for the period ended October 31 was $117.4 billion. I’m still hearing that the Bentonville, AR merchant is putting the screws to its vendors in an attempt to gain more trade funding. While Wal-Mart claims these additional trade dollars would be used to lower retail costs, many suppliers believe the pressure is building internally because the world’s largest retailer is attempting to subsidize the huge costs associated with raising its minimum wage to $9 an hour for all associates…new The Fresh Market (TFM) CEO Rick Anicetti revealed to financial analysts his approach to improve the company’s recently flagging results. Drawing upon his experience from the conventional supermarket world (he was formerly chief executive of Food Lion), Anicetti, who joined the 168 store retailer in late September, noted that margins could be enhanced by 2-3 percent by focusing on labor and shrink and also by concentrating on promoting fewer items. He added that pricing will be a big component of TFM’s new arsenal and it will establish KVIs (Key Value Items) and implement zone pricing. “The Fresh Market is a unique brand with enormous untapped potential and I am excited about the opportunity to guide the company’s future direction,” Anicetti said in a statement. “As our management team and board conduct a comprehensive strategic and financial review of the business, we are simultaneously moving forward aggressively with a number of initiatives to strengthen our foundation, increase productivity, drive store traffic, and regain operating momentum. With the holiday season fast approaching, we are making changes as quickly as prudently possible to our productivity, price optimization and brand differentiation to help stabilize traffic trends and drive sales during this key shopping period,” he added. As for its third quarter results, the Greensboro, NC-based upscale merchant reported total sales of $433.1 million, an increase of 3.3 percent from the same period last year, while comp store sales dipped 3.7 percent and traffic also decreased 3.7 percent. Net earnings were $10 million, a significant decline of 32.9 percent from the corresponding quarter last year. Additionally, COO Sean Crane, who stepped in earlier this year as interim chief executive when former CEO Craig Carlock exited, has now left the company. And there has been no further word on the progress of TFM founder and board chairman Ray Berry, who led the company’s effort to go public in 2010 and still owns a 4.1 percent stake in the upscale merchant, to take the company private again. There’s a lot of moving parts at the struggling company and we’ll keep you posted as we learn more.
Local Notes
Ahold and Delhaize Group announced its new proposed executive committee effective upon completion of the proposed merger of the two large European retailers which have substantial U.S. holdings. The merger is expected to become official in the second quarter of 2016. Board members will include: CEO Dick Boer; deputy CEO and chief integration officer Frans Muller; CFO Jeff Carr; COO-Europe Pierre Bouchut; COO-USA. Kevin Holt; COO-USA James McCann; chief sustainability, transformation and communications officer Marc Croonen; chief ecommerce and innovation officer Hannaka Faber; chief legal officer Jan Ernst de Groot; and chief human resources officer Abbe Luersman. The management board will be responsible for the overall management and decision making for the new company and will have fiduciary responsibility toward the supervisory board and shareholders. The future executive committee will be charged with the day-to-day management of the company. Ahold also released its third quarter earnings last month. Corporately, Ahold was helped by currency conversions as the dollar remained very strong against the euro. At its AUSA unit, identical store sales (excluding fuel) increased 0.4 percent and underlying operating income in was up by 6.8 percent to $227 million. “As part of our program to improve our customer proposition, we are continuing the roll-out of our new produce department format, launching it to another 149 stores during the quarter, bringing the total to 316 stores. We are encouraged by the volume uplift that we see in the converted produce departments. With the exception of Stop & Shop New England, volume market share grew in comparison to last year. Our online business Peapod improved the capacity usage at its newest distribution facility and achieved double-digit sales growth,” Ahold stated in its earnings release. However, there was one curious paragraph in that announcement in which Ahold acknowledged its sales trends continued to improve in part due to an “adjustment made as a result of a business disruption at one of Stop & Shop’s New England division main competitors.” The earnings announcement failed to elaborate on the “adjustment,” but when reading the agate type in one of its financial tables (Ahold USA net sales in dollars), the disruption factor created by Demoulas Market Basket’s rapid recovery from its work stoppage of last summer could be clearly seen – Ahold USA’s sales declined $81 million this period against its short-term windfall gains of last summer. In the post-release earnings call with financial analysts, Boer said that the company would open a couple smaller format bfresh units over the next year while it evaluates the overall concept as a potential expansion format in metropolitan areas. A second bfresh recently opened in Fairfield, CT. Ahold USA has also announced some merchandising department operational changes. Effective January 4, AUSA will utilize SAS Retail Services to develop an in-store activation program which is designed to improve new items “speed to shelf,” plan-o-gram activation and refresh/remodel execution to its commercial organization and its entire store network. The Carlisle, PA based retailer will begin implementing a new long-term manufacturer out of stock policy for all national brand suppliers. This new policy will supplement AUSA’s product discontinuation policies and is essentially a warning and find system that national brand manufacturers will be responsible for if they are out of compliance. And just before presstime, we learned that the Northeast’s largest supermarket retailer will be working with Interactions, a unit of Daymon Worldwide to create the company’s own “In Store Selling & Sampling Program.” Interactions will manage and execute AUSA’s in-store demos, sampling programs and special events and will begin on March 1. At its Giant/Landover unit, AUSA will be closing its pharmacy distribution warehouse in Baltimore County effective at the end of next month. The cuts were prompted by Giant’s decision to expand its existing relationship with pharmaceutical distributor McKesson Corp. About 89 associates will be impacted…up the road apiece in Sunbury, PA, Weis Markets reported strong third quarter sales for the period ended September 26. Overall sales rose 4.1 percent to $711.9 million while comparable store revenue increased by a healthy 4.0 percent compared to the third quarter in 2014. However, Weis announced it would delay its third quarter earnings data “in order to complete a review and analysis of self-insurance reserves to determine if any adjustments to its historical financial statements are necessary.” The retailer said it expects to file its Q3 report on Form 10-Q prior to December 1. “Because the review is ongoing, no assurances can be given as to the definitive date on which the Form 10-Q will be filed,” Weis stated. Specifically, it added that while researching alternative methods to calculate retained claim liability for the company’s self-insured workers’ compensation and general liability insurance programs, it was determined that adjustments would be necessary to the prior application of actuarial methods used to estimate the obligation of future payments resulting from claims due to past events. “Although we are not yet in a position to estimate the amount of any required adjustments, our current expectation is that the principal line items impacted in the company’s consolidated financial statements are accrued self-insurance, deferred tax liabilities, retained earnings, and operating, general, and administrative expenses.”…C&S Wholesale Grocers will spend at least $15 million to expand its current distribution center network in the Lehigh Valley region of Pennsylvania. About 600 people will be hired to work in the 265,000 square foot former Walgreens warehouse in Bethlehem, PA. C&S operates three other distribution centers in the region. C&S will utilize its existing Lehigh Valley facilities to supply Safeway’s 125 eastern division stores when Safeway’s existing distribution center in Upper Marlboro, MD closes this month (C&S has managed and supplied those stores from that facility since 2000, but parent company Albertsons actually owns the depot). In addition to servicing Safeway’s general merchandise needs from Bethlehem, other current C&S distribution centers in North East, MD (perishables) and York, PA (grocery) will also supply Safeway’s Baltimore-Washington stores….we have selected two winners -Giant/Landover and Safeway – for our “new store of the month” award. The transformation of the old and crappy Super Fresh unit in Odenton, MD to a beautiful new Giant was very impressive, especially with its new look fresh departments. With the Fort Meade area growing and becoming more upscale, the Odenton location should prove in time to be a rewarding one for the Landover, MD-based division of Ahold USA. And after working on the project for five years, Safeway finally cut the ribbon on its new Rockville, MD unit. That store, like several other recently opened Safeway stores, is housed on the bottom floor of a newly opened mixed use project on Rockville Pike, adjacent to a Metro station. This store will be a winner given the demographics of the area and a creative store design which, among other things, places the produce department directly up front….tips of the hat go to two industry buddies of mine – Stanley Pearlman and Mark Tarzwell. Pearlman, CEO of NAFCO and Congressional Seafood, has relocated his distribution center to a free-standing location near his old warehouse in the Maryland Wholesale Seafood Market in Jessup, MD. The new 88,000 square foot facility is a beautifully designed, state-of-the-art warehouse focusing on food safety and seafood sustainability. Tarzwell, who has had many high profile industry jobs in a 45-year grocery career, was recently named COO of Ateeco, Inc., maker of Mrs. T’s Pierogies. He will report directly to president Tom Twardzik…a special note of recognition to Alan Wilson, CEO of McCormick &a
mp; Co., who will be stepping down from his leadership post on February 1 after eight years at the helm (although he will remain executive chairman of the board). He will be replaced by Lawrence Kurzius, currently president and COO of the Sparks, MD-based spice maker. Not only was Wilson’s performance excellent when measuring core metrics such as financial results and acquisitions, he also provided a continuation of the strong leadership that McCormick has enjoyed for many years. I had the opportunity to sit with Alan after he addressed students at Saint Joseph University’s Academy of Food Marketing last year. Not surprisingly, his intellect was off the charts, but his candor and selfless perspective about his specific role at McCormick was also refreshing. One thing that I clearly recall was his mindset about the chief executive job. He believes that these high pressured positions have a shelf life of no more than 10 years, noting that new blood is needed to spawn new ideas and potentially re-energize the culture…we have several obituaries to report this month. It is with great personal sadness that I report the death of Allen Toussaint, the legendary New Orleans songwriter and singer who passed away on November 9 after suffering a heart attack following a concert in Madrid, Spain. I had the pleasure of seeing Toussaint many times, including his annual performance at Jazzfest in New Orleans. His skill (as a singer and piano player) and recognition of his native culture made him a unique entertainer. Primarily a songwriter, Toussaint wrote hundreds of tunes, including many that helped define the New Orleans rock, jazz and funk style of the 1950s, 60s and 70s that were made famous by other artists. Those included “Working in a Coal Mine” (Lee Dorsey); “Mother-in-Law” (Ernie K. Doe); “Get Out of My Life Woman” (Paul Butterfield); “Fortune Teller” (Rolling Stones); and “Southern Nights” (Glen Campbell). Toussaint, 77, was inducted into the Rock and Roll Hall of Fame in 1998 and had been scheduled to perform a benefit concert on December 8 in New Orleans with Paul Simon. I’ll miss his gentlemanly manner and his awesome talent. Also passing away was one of my favorite character actors, Robert Loggia. Born Salvatore Loggia to Sicilian parents on Staten Island, Loggia, 85 made his film debut in 1956 in the movie “Somebody Up There Likes Me” (incidentally, that was Paul Newman’s first starring role). He had more than 230 film, theater and television roles and was nominated for an Academy Award as a supporting actor in “Jagged Edge” (1985). Other notable movies include “Big” (1988), “Scarface” (1983) and “Prizzi’s Honor” (1985). He also played jailed veteran mobster “Feech” La Manna in four episodes of “The Sopranos.” My condolences also go out to the Nolte family on the passing of Charlie Nolte, 79. Charlie was one of the first people I met when Dick Bestany and I acquired Food World in 1978. He was a partner/owner of the then-large food brokerage company The Leaman Company. Charlie Nolte was a true professional – smart, honest, hard working and a true gentleman. He will be missed….as we close out our 37th year in the business, I have much to be grateful for. I want to thank our many readers and advertisers for their continued support and friendship. May you all have a happy, healthy, merry and wealthy holiday season.
