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Retail View: Mergers and acquisitions once again dominate discussions

December 2, 2015

During the week of Nov. 16, Delhaize named the management team that will run its merged companies next year, announced it had reached a deal to purchase Roundy’s and its supermarket brands, Acme was changing the store names of the dozens of A&P stores it bought earlier this year, and a bankruptcy court in California started divvying up stores among a half-

dozen competitors. When Haggen filed bankruptcy in early September, it auctioned off a number of its stores, enabling various retailers to enhance their portfolios.

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Mergers and acquisitions in the supermarket business are alive and well.

“The strong are eating up the weak,” is how The Produce News columnist and produce industry consultant Ron Pelger of RonProCon described it.

“We had lots of mergers and then kind of a lull, but they are back on again,” said Ed Odron, another longtime retailer who now operates as a consultant. “I’m glad I’m on this side of the fence and not worrying about my job.”

Pelger opined that it is very difficult to make a profit in the supermarket business, which might explain the spate of mergers and acquisitions that hit the industry time and time again.

“The supermarket or grocery business is not a business rolling in the money,” he said. “Average net profit is 1 percent. I tell this to people who are not in our industry all the time and they don’t believe it. For all the work that everyone in the industry does, it just isn’t very much profit.”

Pelger explained that his earlier statement about the strong eating up the weak is not meant to cast aspersions on companies that are acquired. “It doesn’t mean they are bad companies, but it is very difficult to make a profit in these times of higher operating expenses.”

He believes it is especially difficult for smaller chains to make it, which is one reason they are ripe for acquisitions or mergers.

Kroger-Roundy’s: A model that works Dick Spezzano, who offers his expertise in the produce industry through Spezzano Consulting Service, said while some mergers and/or acquisitions don’t work out as expected, that typically is not the case with Kroger.

Spezzano said Kroger is a very good retailer that tends to do it right, as it did with its last acquisition, , a couple of years ago.

“It appears that the Roundy’s acquisition was about the Mariano’s brand,” he said.

He explained that most Kroger stores tend to be in suburban or rural areas, as is the case with most giants. Mariano’s, on the other hand, operates 34 stores in the greater Chicago area.

“There is a lot of learning for Kroger [in that operation],” he said. “They will get a very good look at how that operation runs in an urban environment.”

The Roundy’s purchase includes three other supermarket banners, Pick ‘n Save, Copps and Metro Market, but Spezzano said Mariano’s is the crown . In fact, Robert Mariano is the chairman of the board of Roundy’s and launched his namesake banner in 2010. It has grown quickly and is very successful. Mariano previously was a successful retailer in Chicago as chief executive officer of the Dominick’s chain, which he sold to in the late 1990s.

The sale to Kroger follows that path, but Kroger has proven to be much more adept at acquisitions than Safeway. Spezzano expects it to follow the same business model as it has in the past, which means keeping the local store banners the same and creating efficiencies through eliminating backroom duplications in areas such as accounting and management.

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Odron mirrored those comments, saying, “Their business model works. Whatever they are doing, they seem to be doing it better than anyone else.”

He also noted that the company’s quarterly sales and profit performance is tops in the industry.

Odron agreed that the purchase of Roundy’s banners appears to be fueled by Mariano’s excellent performance. Odron said Dominick’s was a very good Chicago chain and “as I understand it, most of the people running Mariano’s are ex-Dominick’s people.”

Kroger, he said, does an excellent job of buying successful operations and keeping them intact.

Haggen bankruptcy: Opportunities created An acquisition that did not work out was the purchase of almost 150 Albertson’s stores by Northwest retailer Haggen earlier this year. Haggen had 18 stores in Oregon and before it expanded by 900 percent in purchasing 146 Albertson’s stores in five states. It began converting the stores in February of this year, but by early September, the firm filed bankruptcy.

The stores were auctioned off by the bankruptcy court with a handful of retailers able to greatly enhance their own store portfolios. Albertson’s, which fueled the Haggen expansion, bought back more than 40 stores in Washington, Oregon, California, Nevada and Arizona. Some of those are expected to fly the Safeway banner.

Smart & Final, which operates about 90 warehouse-type stores, has grown by more than a third with the addition of about 30 of the Haggen stores. Though that is a lot of immediate growth to contend with, Spezzano believes the company is well positioned to make it work.

“They have a good management team and a new warehouse that has the capacity to manage the new business,” he said.

Another winner in the Haggen sell-off appears to be Gelson’s Markets, an upscale, independent Southern California retailer with 18 stores in high-end neighborhoods throughout Los Angeles and Orange counties. Gelson’s picked up eight more stores via Haggen, including two in San Diego County. Company CEO Rob McDougall was quoted as saying that the retailer has been trying for years to get into San Diego and thinks it will succeed by cornering a niche market.

“I think we bring an offering down there that isn’t in San Diego, at least not to the level we do,” he said. “We’re more high-end. We really want to attract that foodie customer that is looking for the best quality.”

Sprouts also picked a few stores, as did some one- and two-store independents. Haggen will have another auction in January for 32 additional stores in the Pacific Northwest.

Spezzano believes the biggest surprise in the Haggen auction is that neither Stater Bros. nor Ralph’s (a Kroger company) picked up any of the stores. Those are two of the larger chains in Southern California and neither made a significant run at this opportunity to add properties.

Odron said Haggen’s expansion was doomed from the outset. He called Southern California “one of the most competitive retail markets in the United States,” and indicated that it was ill-conceived for the small Northwest retailer to jump in with both feet in such a big way.

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Fresh & Easy, the retailer founded by Tesco, the giant English retailer, is currently closing down its stores with very few buyers. That retailer learned a hard lesson about the difficulty of cracking the Southern California market.

Odron said the small footprint of its stores — many in the 15,000-square-foot range — is making it a difficult for them to sell to rivals in the business. While few retailers are building the giant 50,000- to 60,000-square-foot stores, most want something at least double the size of the average Fresh & Easy properties.

Delhaize and Ahold: Economies of scale With the Delhaize and Royal Ahold merger moving along, the East Coast is also experiencing some retail market share reallocation. Ahold, which is based in the Netherlands, is in the midst of taking over Belgium’s Delhaize in a $29 billion deal that will create one of the largest supermarket operators in the United States and the world, with more than 6,500 stores.

Both Ahold and Delhaize have many more stores in Europe, but each generates about 60 percent of its sales in the United States. The merged retailer will be operating four major U.S. store banners: Stop & Shop, Giant, and Hannaford Markets.

In announcing the merger, both companies pointed to the economies of scale as the impetus behind the move. The combined firm is expecting to lower its operating and purchasing costs to compete in the U.S. marketplace. The merger is expected to be completed in the spring of 2016.

A&P: Turn out the lights While Pelger understands the economies of scale, he cautioned that “bigger is not always better.”

As a longtime member of the A&P produce team, he has seen that retailer go through many phases over its long life, which is soon coming to an end. In November, , an East Coast division of Albertson’s, was busy changing the banners on 75 or so A&P stores that it purchased. Many of the rest of the A&P stores have not found a buyer yet.

Dick Del Gizzi, another longtime A&P produce man who currently works with Pelger at RonProCon, said it was a sad day to see the once mighty A&P fall. As the final A&P banners come down, he indicated it is a cautionary tale of what bad management can do to a thriving business.

Del Gizzi believes it is all about merchandising — an art that has been lost over the years. As he makes his store visits around the New England territory he patrols, he laments that produce departments aren’t pushing the product like they once did.

“I see a lot of downsizing in the stores,” he said. “We used to build big display and use the ‘wow’ factor to sell produce. You have to be aggressive in the produce department.”

Pelger agrees, noting that supermarket operators need to tear a page from Kroger’s playbook if they want to know how to do it right.

“Their stores are immaculate and very well-merchandised. They spread less product over a massive display,” Pelger said, thus cutting down on shrink but still giving customers the “wow” factor that Del Gizzi mentioned.

In any event, Odron believes the current era of mergers and acquisitions in the supermarket business

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will continue. He sees a lot of opportunities for those chains doing well to pick off some struggling ones.

“I wouldn’t be surprised if Kroger makes a play in Northern California,” he said. “There are several opportunities here.”

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