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[21 comments]

Albertsons reaches deal to acquire Safeway

March 7, 2014

One of the worst kept retail M&A secrets is now official. Safeway and Albertsons have announced an agreement under which AB Acquisition (Albertsons' owner controlled by Cerberus Capital Management, Kimco Realty, Klaff Realty, Lubert-Adler Partners and Schottenstein Stores Corporation) will acquire all of Safeway's outstanding shares in a deal valued at $40 per share.

"Robert Edwards and his team have done an outstanding job in positioning Safeway's core business for success, by investing in its stores and creating innovative strategic marketing programs that contribute to shareholder value," said Bob Miller, CEO of Albertsons, in a statement. "Working together will enable us to create cost savings that translate into price reductions for our customers. Together, we will be able to respond to local needs more quickly and deliver outstanding products at the lowest possible price, more efficiently than ever before."

The deal, which is expected to close in the fourth quarter this year, will create a company that operates 2,400 stores, 27 distribution centers, 20 manufacturing plants and employs over 250,000 people. No store closings are expected, according to the parties involved in the deal.

Mr. Miller will become executive chairman of the combined company and Safeway's current president and CEO Robert Edwards will continue in the same role with the larger organization. Banners will include Albertsons, Safeway, Vons, Pavilions, Randalls, Tom Thumb, Carrs, Acme, Jewel-Osco, Lucky, Shaw's, Star Market, Super Saver, United Supermarkets, Market Street and Amigos.

The deal between the parties includes a 21-day "go-shop" period in which Safeway will actively solicit and evaluate other bids. Prior to yesterday's announcement, it was widely reported that Kroger, the largest supermarket chain in the U.S., was considering making an offer for parts of Safeway. Kroger is said to be particularly interested in Safeway's business in the Washington, D.C. area, where it now runs Harris Teeter stores, offering only minimal coverage of the market.

FINANCIALS:     [NYSE:SWY] [ NYSE:KR]

Discussion Questions:

How do you see the merger between Albertsons and Safeway affecting the U.S. grocery industry? Is industry consolidation of this magnitude healthy for business and consumers?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Will Safeway and Albertsons become stronger or weaker as result of the merger between the two companies?

Comments:

Less competition usually means higher prices, which may be healthy for business, but is not for consumers. There used to be five major grocers in Los Angeles, now there will be two. Walmart does not have enough stores in LA to make a big difference, and Target doesn't offer the same selection as Vons or Albertsons. Consumers will lose, big business will win.

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Max Goldberg, President, Max Goldberg & Associates

The combined companies will bring them closer in size and clout to Kroger, which Kroger can't be too excited about, given Kroger's current ability to command CPG support and monies due to their dominant size and market coverage.

More interesting to me is seeing who becomes the "dog" and who becomes the "tail" between Albertsons and Safeway. Albertsons is still in the formation stages of their recent acquisition of stores from Supervalu and keeps their operation and customer proposition relatively simple.

Safeway, on the other hand, has a reasonably sophisticated approach to targeted marketing underway with their "Just for U" program, and an equally extensive private label program. With Safeway's Edwards staying in the role of CEO of the combined companies, one would get the early impression that Safeway may end up being the dominant partner in the early days of the merger.

Kroger may indeed feel the need to look for another "Harris Teeter" type acquisition to insure their spot as the number one traditional grocer, but those deals are not easy to find.

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Mark Heckman, Principal, Mark Heckman Consulting

 
11

Neither chain is noted for having great stores or great customer service. Both are big enough to have generated economy-of-scale savings. Don't see how merging two mediocre sets of stores in non-overlapping geographies helps either chain or their shoppers.

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Dr. Stephen Needel, Managing Partner, Advanced Simulations

 
12

As conventional grocers continue to lose share to more innovative stores (everybody from Aldi to Whole Foods to Walmart to Amazon), this sort of industry consolidation makes sense. While neither chain operates in my backyard, it's apparent to me that both companies failed to maintain past standards at their Chicago-based brands (Dominick's and Jewel). Merging may bring the combined company more market power, but not necessarily a better experience for shoppers.

This move will probably push Kroger toward its own buying binge. It would not be surprising to see regional and super-regional companies like Publix, Roundy's and others disappear over the long haul.

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Dick Seesel, Principal, Retailing In Focus LLC

This merger brings the share of market in only 3 companies to a potentially dangerous number for independents and regional chains. The buying power and back room synergies gained by the merger will come close to matching Kroger's and Walmart's efficiencies. The answer to how it affects the industry really lies in the strategy that this new entity employs. They can utilize their clout to gain market share in their current markets with pricing and targeted marketing. Or they may opt to maximize profit with their new synergies. Either way, these marketplaces will experience some change in the next 2 years!

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J. Peter Deeb, Managing Partner, Deeb MacDonald & Associates, L.L.C.

From the perspective of someone deeply involved with niche brands, specialty brands, and what some would call "small" brands, particularly in HBC, OTC, and non-foods, I think this is great for my clients. In my opinion, Safeway has never been a company to be on the leading edge for branded products that are not one of the fast-moving commodities in any given category. Early indications are that the new Albertsons company might stock more premium, specialty, and niche items for their customers.

Still, some questions. Do we know where the company will operate from? Will it be at the current Safeway headquarters in California, or will it be at Albertsons' in Idaho? And is Supervalu now completely out of the picture?

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David Biernbaum, Senior Marketing and Business Development Consultant, David Biernbaum Associates LLC

Safeway operates stores in many areas as does Albertsons, and to have this merger with no store closings is then a good move. Some of the other companies that may yet bid on Safeway could end up closing some stores for a variety of reasons. It will be better for the industry to have a stronger number 2 player in the industry. The new company being a bit larger may be more competitive too.

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Frank Riso, Principal, Frank Riso Associates, LLC

I am not impressed with this merger. While Cerberus is a very savvy investment banker, I think this merger represents two giants wobbling toward insolvency. I assume that Cerberus et al considered the retail site value of both Safeway and Albertsons locations in doing this deal.

I see little impact on business by this consolidation. And if the Safeway and Albertsons customers are enhanced by this merger, then consumers will benefit.

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Richard J. George, Ph.D., Professor of Food Marketing, Haub School of Business, Saint Joseph's University

I agree with Mark Heckman. The question is, who is the dog and who is the tail? As a shopper marketer, I am keeping my fingers crossed that it's Safeway.

Safeway has a progressive, disciplined approach to shopper marketing and I would love to see more of that across the board.

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Liz Crawford, VP, Strategy & Insights, Match Drive

Basically, Albertsons is saying they're giving the high end to Whole Foods and the Wegmans of the world and the low end to Aldi, Walmart and the Sav-A-Lots of the world. With the possible exception of Shaw's, they are going to fight for the middle. I'm not sure that is a good space to be - there isn't much store differentiation, pricing tends to be reactive and the shopper is faceless. Most important, the deal does nothing outwardly to address online opportunities.

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Ron Margulis, Managing Director, RAM Communications

Good competitive move vs Kroger. Improving customer service (not currently a strength of either entity) will be critical.

Christina Ellwood, Vice president, Marketing, Brickstream

This merger will have little effect on the supermarket industry. We still don't have a nationwide supermarket chain in this country. We have some large regionals, but no chain has stores in every state. Consolidation will lower overhead and supply chain costs, but won't really change store operating cost.

The issue facing the industry is not within, but outside. The traditional supermarket must take sales from the alternate formats and channels, as well as the eating-away-from-home market. Industry sales must increase greater than food inflation to regain share of stomach.

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W. Frank Dell II, CMC, President, Dellmart & Company

Below average operator + below average operator = a below average operator. Safeway and Albertsons both continue to pick up the rear when it comes to sales per square foot. At least it's working out for shareholders.

I'm sure with all the redundancies in distribution and store locations, we will see some closures. This will be healthy for everyone, particularly competitors who will have fewer locations to compete with, along with capturing the usual sales declines which often happen after an acquisition. Consumers already have better options, which is why this merger happened in the first place.

David Livingston, Principal, DJL Research

 
15

This will be interesting. Both companies have botched various attempts at growth. There is a lot of overlap in the West and both companies have very different cultures and different go to market strategies such as loyalty card vs. no loyalty card at Albertsons.

Also both store bases need capital as they are aging and many are in need of modernization and upkeep. I just am not so sure two poorly performing chains coming together will end in something strong. Also I am curious about which company will have control. Both have been very smug and arrogant in past mergers.

Though I can see why Cerberus wanted this. This gets them manufacturing, private label, and systems; all things they have been relying on Supervalu for. I wonder how this will impact Supervalu.

I don't see the huge CPG impact here once the company divests some stores and closes the ones that are poorly performing; store count will be below 2,000 stores.

'storewanderer'

From a consumer standpoint, the growing oligopoly in US grocery markets has potential benefit if the big players use their supply chain power to bring higher quality and lower prices to consumers.

There is always the threat of reduced competition from these mergers; therein lies the potential downside of this combination.

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Bill Hanifin, Managing Director, Hanifin Loyalty LLC

Admittedly most of the supermarkets I see are in my local area. When Mariano's entered the market, the closest Jewel went through a remodel in both physical plant and items offered. The result was a much better store and one that would fare well against any competition.

To me the real question is, now that that Albertsons has the stores, what are they going to do with them - invest in them as was being done with Jewel or operate as is? The first holds great promise. The second is, as many pointed out, simply a continuation of average is as average does.

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Steve Montgomery, President, b2b Solutions, LLC

Though he doesn't mention it here, David was quoted in the Tribune "they won't find a new way to sell groceries, but they will find new ways to save money," which I think sums it up well. This was a move by financiers, not merchants. Hopefully Albertsons is better now than a few years ago - Worst. Store. Ever. - when they retreated in defeat from California.
The local impact here in the Bay Area, where there is no overlap, is more likely to center on the loss of local control...will SaveMart/Lucky's play up the "they're owned by Idaho" angle? We'll see.

'notcom'

While I can appreciate Safeway's and Albertsons' hopeful dreams of a better future rather than a continuation of their declining recent histories, this merger is a pre-arranged convenience for several non-grocery parties who will profit from their financial guile.

It will affect the U.S. grocery industry by reducing the number of giant grocery chains to a troika environment of three -- Walmart, Kroger and Whole Foods -- and a few lower-cost operators such as Aldi and Sav-A-Lot and probably some grocery boutiques.

In my opinion, there is little hope that consumers will see lower prices because of this event or that the grocery industry will be healthier because of it in the future. However, I do see new gold in the teeth of Cerberbus and also Kimco and Klaff Realty, Luther-Adler and Schottenstein Stores as they pretend to embrace the grocer's apron ... at least for a while.

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Gene Hoffman, President/CEO, Corporate Strategies International

First of all, anyone who thinks this deal will go through without stores being closed or divested - well, call me, I have a bridge to sell you.

Second, anyone who thinks this will cause Kroger to change its behavior - I will be happy to offer you a free traffic study to snarl up your new bridge.

Kroger stores do about 30% more volume per store than the average throughput of Safeway and Albertsons, are more consistently run, have better data, and are stably managed. They are probably in no rush to do anything except wait to see what fill-in opportunities this may create for them.

There is no real mega consolidation here - two retailers who have underperformed for some time are now one bigger retailer. Two sets of inherited problems now need to be solved together by one set of management. It's a tall order. I wish them well. But no one is particularly threatened by this, except perhaps suppliers who aren't willing to say no to what will probably be some pretty aggressive negotiation.

And I will be surprised if Cerberus and its partners don't cash out a bunch of it through banner sales pretty early. The market for retail real estate may determine that as much as anything.

John Rand, Senior Vice President, Kantar Retail

Albertsons currently has a Monopoly game promotion in its stores. Coincidence? Perhaps. Remember when Lucky Stores moved all their folks to Sandy, Utah, and then abandoned them there? If I were a Safeway executive, I'd resist looking for real estate near Boise. This is not going to be pretty.

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M. Jericho Banks PhD, President, CEO, Forensic Marketing LLC

The other thing to look at is what will combined sales be of Albertsons plus Safeway and what are sales at Kroger and Walmart? This is still going to be a distant third.

And that doesn't factor in sales losses from stores they have to divest or operational closures.

I also don't think the assets Cerberus acquired from Supervalu are performing well based on my observations of Albertsons in OR, WA, CA, and NV lately....

'storewanderer'

Kroger is a pretty BIG company and for a company of its size, I think pretty well run! Albertsons is not terrible, but it is SUCH a HARD difficult business. Every Kroger store I have been in in the last several years was well lit, clean and attractive (even the old small ones!), with GREAT merchandise and Kroger has GREAT private label. Safeway and Albertsons both have good private labels, but some of their stores are not the greatest -- those will likely be shuttered. It is just such a difficult business, I hope they do okay. I do not think Kroger is worried about Albertsons-Safeway; I am certain Kroger is watching other high AND low end players, however.

William Passodelis, associate, ML Co.

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