Albertsons Considers Selling; Tesco and Others Consider Buying
By George Anderson
On Friday, Albertsons released a statement from the company’s chairman and CEO, Larry Johnston, in which he said the retailer was “exploring strategic alternatives to increase shareholder value, including a possible sale of the company.”
Company executives and large shareholders have, reportedly, been frustrated by the chain’s inability to maximize its stock price in the face of tough competition from Wal-Mart and others.
The possibility of a sale did give a boost to those unhappy with Albertsons’ stock price, however, as share prices were up by 26 percent at one point in Friday’s trading before finally settling up at 11.19 percent.
Many see Albertsons’ exploration of a sale as a real estate play.
Barbara Walchli, a portfolio manager of the Rocky Mountain Equity Fund which owns stock in Albertsons, told The Idaho Statesman, “What I’m seeing is that management is clearly frustrated by industry conditions and competition coming from Wal-Mart, and they are trying to unlock the value of the real estate of the company.”
With the announcement that Albertsons is looking into selling, the speculation about buyers has begun.
Most seem to think it is unlikely that a single buyer would step up due to cost and/or regulatory hurdles.
Burt Flickinger III, managing director of the Strategic Research Group said, “In all likelihood, it would probably be a financial buyer more than a strategic buyer because companies that would have had some interest in the past, most notably Ahold and Safeway, are selling their operating companies rather than buying companies,” he said.
Companies that might have a strategic interest in purchasing Albertsons include Target and Tesco.
“Target has an excess amount of cash (from sale of Marshall Field’s and Mervyn’s), and it’d be a very complementary combination,” said Mr. Flickinger. “It would go from Target to a primary national player overnight and give Target great locations.”
Tesco has been identified as a possible suitor because as Neil Stern, a senior partner with McMillan Doolittle, told The Scotsman, “Tesco is the premier retailer in the world right now and they’re not represented in the United States. They have proven that they can compete with Wal-Mart.”
Recently, Wal-Mart’s CEO, Lee Scott, suggested in a published interview that the British government should look into Tesco’s business practices to determine if the company was operating outside that nation’s fair labor practices.
Moderator’s Comment: What do you believe will be the likely result of Albertsons’ exploration of strategic alternatives for its business? What would
the buyer(s) have to do to avoid repeating what has brought Albertsons, under its current management, to this point? –
George Anderson – Moderator
It’s been difficult keeping up with what Albertsons’ strategy is or is not. It spends big-time on technology, with little real fruit evident. It buys Bristol Farms and Shaw’s. It launches Extreme, Inc. It rolls out a Hispanic format. It goes with aggressive pricing, and 10 for $10. It enters markets. It leaves them. Larry Johnston promises Wall Street more than can be realistically delivered. Within all this, there have been good ideas, but with so much going on at once (the labor strike in the middle of all this, along with Wal-Mart’s growth), it seems they never had any traction. I don’t see anybody coming in and buying the whole thing. I agree that Target and Tesco might grab some units. Investors, if they look clearly at ROI and what’s been going on in the marketplace (and they don’t always do that), will likely turn away from too much involvement. This could take months or years to play out, of course, somewhat like the death of Francisco Franco, who is still dead.
Finally. If you’re not in business to win, get out. You’ll make your shareholders happy and give new energy to the biz and service of your customers. It’s been years, maybe even a decade, since I’ve been in an Albertsons and found myself anything but underwhelmed.
Target would take the merchandising/brand experience route, but I’m not sure their inventory practices fit with grocery all that well yet. Have you been to one of their stores that recently added food? They get it better than W-M did in the beginning, but they’ve got a LONG way to go. TESCO could take us all to new heights, challenging W-M…I’d move to a market with both retailers to watch that one play out! Worth the price of admission and likely the only thing to give customers retail back….there’s no excuse for what W-M serves up every day.
Albertsons has maintained a philosophy – that if it cannot be a strong #2 or #3, like recently in Jacksonville, they would pull out of a market altogether. In one close-up of how this has played out, Albertsons adopted the idea that rather than improving its own doughnuts, for example, it opted to bring in Krispy Kreme’s and sell them as a jobber item in their front lobby. So throwing in the towel rather than digging in and fighting is no strange act for Albertsons.
In my thirty years of management in the grocery business, my prediction (for whatever it’s worth) is that Albertsons for-sale doesn’t attract top dollar in an environment that is long on speculation but short on cash. Like any business in such a predicament, I look for Albertsons to find they cannot sell their operation as a whole, which bodes poorly for them as this is how it would garner the most cash. Rather, I can see multiple negotiations in as many markets, where competing chains will divy up Albertsons’ DCs and retail locations to best suit their needs. I see Wal-Mart taking some; Kroger and Target and others dipping in; some using the opportunity to spawn specialty or ethnic satellite chains under new banners that, up until now, have been purely location opportunity prohibitive.
In hindsight, many things will be said about this division and death of one of the country’s leading chains. Ultimately it is pure physics, so to speak, of the grocery business at heart, drawing into the strong gravity field the weak links of the business. Or rather, it isn’t so much that Albertsons has been weak so much that the competition has gotten so much stronger. And like the doughnut example, rather than adapt and improve, Albertsons has unfortunately reached for the towel – albeit in a larger, final heave.
I have been doing business with Albertsons for about 8 years now. Albertsons is well known for being a heavy maintenance company, lots of deductions and unhappy employees.
I think Larry Johnston is not a good fit for a grocery chain, even though he had a good track record from GE. This is such a different business with a lot of perishables or goods with limited shelf life. One cannot really implement Six Sigma in a company such as Albertsons. The daily grind there is probably a lot more intense than GE (jet engines and appliances have no shelf life problems).
Albertsons should have focused on keeping the customers happy, the vendors happy and the employees happy, rather than Wall Street.
After all, happy customers would entail happy employees and the company would survive. Most Wall Street number crunchers have never run a business with so many intricate parts and details. All they care about are the numbers – build financial models and put the numbers in and grind them out; look at short term returns and long term is usually something like 3 years.
Well, it may be too late now. Maybe Albertsons is trying to be a copycat of Kmart — turned itself into a real estate business; sell stores and build up cash in the bank. Then, Wall Street will be very impressed with how many assets it has. Overall, it’s a sad story. Sometimes I wonder why people keep messing businesses up — look at A&P, Safeway etc.
I would love to see Tesco buy this dog. They will need a US headquarters point and I certainly hope it wouldn’t be Boise because they need to shed the entire organization above DM level.
Boise has an attitude like they’re the biggest dog on the block. They have no sense of urgency, no competitive spirit, really; no vision and no future. When it’s easier to go to market (and cheaper) with a Wal-Mart or a Walgreens than with Albertsons, you’ve got problems.
While I’m a bit out of the fray, Albertsons’ announcement doesn’t surprise me. As a vendor, it struck me that Albertsons was much more concerned with dreaming up crazy fees, assessments and charges back to vendors than selling groceries. Unlike Publix, HEB and even SWY, they always seemed to be running a financial game on the backs of suppliers rather than knowing and serving their customers.
The more delicious irony would be seeing Tesco file a complaint with the FTC/Justice Department about Wal-Mart’s tactics and market share. It would serve Scott right after his bonehead comments in UK.
Albertsons has been an accident waiting to happen. They are like all publicly held grocers – it’s all about Wall Street and not about running a supermarket. They will be better off selling the divisions in pieces to companies interested in running grocery stores. Albertsons has ruined some once well-respected chains, like Shaws, Jewel, Acme, Star Markets, etc.
Albertsons has been in a retreat mode for several years and was laughed out of New Orleans, Memphis, San Antonio, Houston, and the Rio Grande Valley – I mean they closed all of them. Now they are running away from Florida, being no match for Publix and Wal-Mart. In order to grow, they had to acquire regional chains, but it has only backfired on them because Albertsons does not have the wherewithal to compete with Wal-Mart and the privately held regionals like Roundy’s, Publix, HEB, and Wegmans. So, really, they have no choice but to sell out. Their bonds have been downgraded so borrowing will be tough. Employee morale is at the bottom. Managers have been assigned 2-3 stores. Overhead lights have been turned out in the stores. Pricing is about 27% higher than Wal-Mart. As an analyst, I have seen first hand over the past couple of years the tell tale signs of a company on the edge. Those things don’t show up on the balance sheet until its too late.
Jewel Osco is the market leader here in Chicago, so if anything negative happens to Jewel, it will be to Dominick’s advantage.
Jewel stores are always busy and crowded in the Chicago grocery market, but I have never been to freestanding Albertsons and see how they compare to Jewel….from what I understand Jewel Osco is what is keeping Albertsons afloat.
Poor Mr Scott. What a delicious irony ‘twould be if Tesco were to leap into the American market. Albertsons’ past wouldn’t matter two hoots as they were put onto a new path to build market share. What a war that could be.
Increased financial player buyout money is available and will find a home. Investors will buy the company if the price is right and flip the real estate to as many logical bidders as possible. Continued operation as a middle of the road traditional supermarket/drug chain is unlikely. Going forward, will each major market support (by allowing decent return on investment) more than 1 or 2 traditional supermarket/drug combo chains? I doubt it. Each major market’s structure will be warehouse (Costco, BJ, Sam’s), WM and Target, dollar stores and limited assortment low price supermarkets, 1 or 2 traditional supermarket/drug combo’s, convenience stores, and 1 or 2 upscale chains (Whole Foods, Trader Joe’s). Independents and others will exist via unusually cheap long-term leases negotiated years ago or owned real estate.
What Albertsons needs to do is to hold a growth idea contest, and encourage participation from customers, employees and stockholders. The best 10 ideas to grow their business should be rewarded by contributing sponsors, so that the total cost of the promotion is minimal, and everybody wins.
When are we ever going to learn that “stock price” is a resulting reward, not a goal or purpose? The goal is seamless and engaging – a flow of products and services that thrills customers and employees alike. The goal is to discover and deliver on innovations customers don’t even know they want; innovations that allow one to break out of the suicidal price war game so many are in and claim uncontested and profitable territory.
My advice is stop talking about stock price and shareholder value – ban the words for just six months and, instead, focus on finding the flow again. Talk to the employees and customers instead.
Albertsons selling–hardly a big surprise. I live in Boise and can tell you that they have forgotten two basic rules of retail: #1–take care of your customers or someone else will (Wal-Mart) and #2–give the customer value. Too bad–I’m sure Joe must be rolling in his grave!!
Top heavy in Boise and the red tape is daunting. Too many levels of employees, too many departments and, due to the confusion, not much gets done. Lots and lots of meetings that waste time, money and sap energy.
Technology is the end all and be all to the extent that it seems mgmt forgets the bottom line – customers and employees who can serve them happily as well as afford to buy the product they are supposed to be selling. Some of the technology just doesn’t make sense sometimes… one IT senior manager, when shown that a new $$$$ package he is implementing actually slowed down product prices on the shelves (five day price turnaround rather than the two day price turnaround one of the newly acquired chains employs) actually stated “well, to take one step forward, sometimes you have to take two steps backward”!!! What????
The focus seems to be to create artificially thrilled employees rather than a team of employees who are fairly treated and who work together to sell groceries efficiently.
The chain on the east coast has always made money but that is starting to slip since Albertsons bought them. It isn’t a matter of Wal-Mart moving in; it is a matter of unhappy customers who wait in line for precious minutes due to shortages on the registers, a few new outsourced supporting companies who can’t deliver what this east coast chain formerly had in place (affecting the customer adversely), employee turnover worsening and a penchant for improving store technology that wasn’t broken and that doesn’t sell groceries any faster or any more efficiently.
Most working duel income middle class families don’t have the time to shop at Wal-Mart even if it means they save some money. They like where they’ve always gone; they like the same name; they like to know where the fairly priced product is on the shelves. They like to see the same friendly faces each week. They like a clean and neat store (ABS stopped ‘blocking’ the aisles to save a few dollars in the stores, very messy now) and they like the look of appetizing, freshly made food for those busy nights (something Publix and Roche Bros and Hannaford excel at) — it isn’t rocket science!
Albertsons either does not know how to compete or is not willing to compete.
This paradox has resulted in its current state of affairs.
The paradigm in the grocery market place has been changing for years.
With Wal-Mart coming into more markets and increasing its market share, the old ways of doing business are gone forever.
The Grocery business is a simple business. Tech helps in the right areas, such as distribution and inventory control, but can be overdone. It can bog your managers down.
In the end, it’s taking care of your customers, associates, and your business. The comment by bmartin concerning pricing strategies is a very good example of why it’s not
a simple business for Albertsons at this point in time. The more complex you make it, the harder it gets.
There are a lot of excuses out there why Wal-Mart is trampling Albertsons (and other conventional grocery stores). I think it is the lack of willingness to compete, which will be the ultimate demise of them all.
What I think will happen is: A private investment firm will buy Albertsons. They will sell off all non-core assets (any stores or divisions that do not have an acceptable ROI), cash out as much value through leasebacks etc. as possible on real estate. Eliminate the unions from the equation of the new private company. Take 2 or 3 years to get earnings up. Take the new reformulated company public.