BrainTrust Query: Are publicly held supermarket chains headed for extinction?

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Aug 01, 2006
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By David Livingston, Principal, DJL Research


My work takes me all over North America looking at supermarkets. When someone asks me which supermarket chains are best, my thoughts immediately turn to Thrifty (Vancouver Island, BC), WinCo, Hy-Vee, Schnucks, Woodmans, Publix, HEB, Wegmans, and Stew Leonard’s. (I could also name several more small regional operators.)

What do all of these chains have in common? They are either privately held or employee owned. The CEO generally is a large stockholder and a career grocer. Many of these chains have thrived and expanded in a retail world dominated by Wal-Mart, and their employee morale is generally high. When we discuss these chains on the RetailWire forum, they are typically praised by the BrainTrust panelists.



When we think of chains that have struggled over the years — closing stores, selling off assets, filing for bankruptcy, strapped with financial scandals, etc — A&P, Winn-Dixie, Ahold, Fleming, Marsh, Penn Traffic, Nash Finch, Albertsons, and Safeway come to mind for many of us. What do these chains have in common? They are all publicly held by stockholders. When these companies are discussed on the RetailWire, they are shown little mercy from many of the BrainTrust panelists. About the only time we hear any positive news on these companies is when sales or earnings have rebounded after difficult times. Employee morale is often low.



When a supermarket company is publicly held, it is at an immediate disadvantage. The CEO is usually a financial expert; not a grocer. It often seems that senior management is more concerned with selling the company’s story to stock analysts rather than selling groceries to consumers. When a supermarket is publicly held, everyone knows how much salary is given to senior management, and employees and stockholders generally agree it’s too much.

When a public company’s financial results are not up to expectations, the blame game soon begins. At these times, we’ve all heard the lame excuses: the weather caused sales to decline or Easter fell in the wrong quarter. Often these companies will make disastrous marketing decisions. Their mistakes are quite obvious to those with experience in the industry but the chain execs are in the dark due to lack of supermarket experience.

Also, operationally, being publicly held can have harmful effects. Huge acquisitions are made or entire divisions are shuttered simply because a company is trying to improve its stock price and not the company itself.

I don’t ever recall HEB having a financial scandal, Publix complaining about the weather, or someone who thinks Danny Wegman is pulling down too much salary. Why? Nobody probably gives it much thought. If HEB did have a financial scandal, most likely it would not affect anyone. When Ahold had a financial scandal, billions in market cap disappeared ruining a lot of 401ks. If Danny Wegman were making more than Larry Johnston or Steve Burd, it would not be newsworthy. But as soon as Albertsons and Safeway have a difficult year, everyone is appalled by their high salaries.


Discussion Question: How can publicly held supermarket chains overcome their inherent disadvantages relative to privately held companies?


Obviously being publicly held has not ‘poisoned’ all public supermarket chains. (There must be some good examples out there.) And being privately held certainly
doesn’t guarantee success. If you were a CEO of a publicly held chain, how would you fight against the tide and assure that stockholder and board pressure would not spoil your
competitive options?

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18 Comments on "BrainTrust Query: Are publicly held supermarket chains headed for extinction?"


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Len Lewis
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Len Lewis
14 years 7 months ago

I remember a time when supermarket chains were the darlings of Wall Street — recession resistant, profitable and largely immune to competitive pressures from outside. Shows you how long I’ve been around!

When you get down to it, there’s really no reason for a supermarket chain to be public these days. Capital is always available to good companies and why would you want the hassle of answering to shareholders and securities analysts who know absolutely nothing about the industry they purport to cover and go into fits when a company comes up a penny short on earnings per share — with no regard for the long term view? Where’s the benefit?

Most companies would be better off going private or establishing an ESOP of some type. You cant take the kind of risks you need to take in business today when you’ve always got outsiders looking over your shoulder.

Charlie Moro
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Charlie Moro
14 years 7 months ago

Great subject for discussion. I, as you, have seen a number of companies across the country that as private, public and going back and forth have challenges. The issue for me has always been the leadership qualities of the person at the top. There are merchants out there that inspire no one, and financial based leaders that you sense the organization would run through a wall for to achieve greatness. Danny Wegman is a great example of not just being financially sound or merchandising savvy, but as a person that inspires and places great people around him and lets them rise to the challenge. This is true in both public and private companies. The issue to me does not seem to be the transparency of the P&L but in the accessibility and communication of the vision and support of the person in charge.

Eliott Olson
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Eliott Olson
14 years 7 months ago

Fortune magazine has an article on how management rules have changed since the Six Sigma days of Jack Welch at GE. Well some of those old rules never applied to the supermarket industry as Larry Johnson found out. That does not mean that public supermarket companies cannot be managed. Public supermarket companies have come and gone but they will continue to as it is a good way to raise capital or to divest from a lifetime of work with no interested heirs.

Lewis Jones, Jr.
Guest
Lewis Jones, Jr.
14 years 7 months ago
I believe a great deal of the culture at Publix has stood the test of time and remained intact because they are private. Being associate owned via a very generous ESOP plan has made many associates owners instead of workers. In daily operations I see decisions made with the shareholders in mind. Instead of answering to investors who don’t really care about the workers, the leadership of Publix does care about the associates and continues to establish very sound yet aggressive operational goals and growth. Simply put, they don’t put their investors, (the associate owners) at risk. Is it any wonder that the stock is at 100% of its all time value and the company has zero debt? As for Kroger, they are doing better, but I point out that their recent QTR 1 net earnings were about the same as those at Publix for the same quarter. Point to consider is that Kroger’s sales were around $20 Billion vs. $5 Billion at Publix, respectively. Publix is 4 times as profitable. Yes, I am proudly… Read more »
Odonna Mathews
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Odonna Mathews
14 years 7 months ago

Whether public or private, the successful supermarkets need to first focus on the customer, Then everything else usually falls into place. If more companies would really ask, “Is this good for our customers?”, then different decisions would often result.

If a company is only financially driven, it is obvious to customers as well as associates. Engaged associates who understand and can articulate the company mission to shoppers are key and a continuing challenge. After all, these are the people the customers interact with in any retail environment.

W. Frank Dell II
Guest
14 years 7 months ago
Public vs. private is never a simple issue. Due to some public company scandals, new reporting rules make it more difficult to be a public company. The reason so many regional supermarket chains are successful has to do with senior management. Some would claim that the failure of some public companies has to do with the background of the senior executive. Accountants, Chief Financial Officers and Lawyers do not always make poor CEOs, but many don’t get it. The successful companies have a couple of characteristics. First, the CEO spends time in the store. Those that don’t quickly are out of touch with customers and that is when the problem starts. I remember a senior executive who took the company jet every Saturday to do his grocery shopping all over the country. He wanted to see not only what was happening in his stores but what others were doing. Sam Walton always spent time in both his and his competition’s stores. Second key; getting associates to understand that without customers, there is no business. When… Read more »
Ian Percy
Guest
14 years 7 months ago
David hits the mark dead center with this sentence: “It often seems that senior management is more concerned with selling the company’s story to stock analysts rather than selling groceries to consumers.” And the truth shall set you free! There is nothing inherently wrong or limiting about being a ‘chain.’ What’s wrong is the mind set of the people who run them. You’d think after all the history we have to look at, that managers and stockholders would have an epiphany like: “Maybe we should look beyond this Quarter’s results and today’s share price and have a vision of what could be possible if we were to change our thinking.” But nope, ain’t going to happen. It’s not that these people lack intelligence. Something weird happens when bright people meet as a group. The collective IQ plummets to a few points above a hockey puck and the dreaded “group stupid” disease sets in. I’ve seen incredibly successful people on a Board spend hours in the most inane discussions. And when’s the last time you went… Read more »
Mark Lilien
Guest
14 years 7 months ago

Kroger is around $23 today. It was $20 a year ago, $16 2 years ago, and $26 5 years ago. At one point in 2002 it was $12. Whole Foods is $51 today and although it was $68 a year ago, it was $40 2 years ago, and $17 5 years ago. In 2001 its low was $14. Delhaize, which is largely a US company, even though the official headquarters is in Belgium, operates Hannaford, Food Lion, and other US brands. Its stock has also done well. All 3 of these companies prove that public ownership isn’t poison. Mediocre managements always have excuses for poor performance. Great managements find ways to be successful. So the failures can blame public ownership, but privately-held grocers fail too.

Al McClain
Guest
Al McClain
14 years 7 months ago
I don’t completely agree with the premise that it is an overall advantage to be a privately held company. Sure, they have more freedom to do as they wish, and most of them probably offer a nicer work environment. On the other hand, private regional operators don’t have nearly the clout that the nationals have with suppliers, and can’t leverage scale that they don’t have. Publicly held supermarket chains that are doing well at the moment include Kroger, Ingles, Safeway, Ahold, Wild Oats, SuperValu, etc. Perhaps the issue is that public and private companies do different things well. Public companies need to leverage their size and their suppliers to their advantage. And, the fact that they report to shareholders and are evaluated by analysts could actually be a good thing, as it forces them to be very disciplined and get all their ducks in a row, at least on a quarterly basis. One public supermarket chain/wholesaler that has been on a roll of late is SuperValu, and many would chalk that up to the leadership… Read more »
Bernice Hurst
Guest
14 years 7 months ago
To answer the question about how public companies can redress the balance, I will simply point out that in the UK (where, admittedly, we only have a handful of public supermarkets and are obviously a much smaller country) they are making great efforts to address their audience. Decentralising, at least in part, and giving managers more autonomy to deal with local suppliers is the current name of the game. Balancing this with an ability to leverage bulk purchases through central buying is intended to achieve the best product and price offering for customers. (Not to mention inspiring loyalty and warm fuzzy feelings towards the supermarket giants.) The size of the UK makes local sourcing much easier, in spite of a sneering comment I saw recently from someone on your side of the Atlantic about the “craze” we follow. I believe that proportionately more shoppers here prefer to know more about their food than shoppers over there and I do not consider it a craze. More like common sense and good judgment. If supermarkets can achieve… Read more »
Karen Ribler
Guest
Karen Ribler
14 years 7 months ago

I don’t think that it’s about being publicly held. I think it’s about ignoring the location you are serving.

One survival tactic that comes to mind right away is to support decentralization wherever possible. The privately held companies are close to their customers. Their buyers cater to the marketplace; their store managers have the freedom to make decisions. They don’t house food; they sell it!

The larger chains lose the forest for the trees (the trees being dollars). The stores are generally sterile. The employees generally don’t seem to feel connected or happy to be selling food. Local products, tastes and events are missing from the shelves.

When Ahold respected its regional/local differences, had in place a balance of decentralization and centralization it was a leader. Centralize everything and the local pride and verve goes down the tubes.

Kai Clarke
Guest
14 years 7 months ago

This is a reflection not of the holdings of the company, but which leadership is growing and preparing the organization for change. Private ownership generally reflects a closely held group of individuals who are already focused on a clear concept for success (mission and vision statement). This is usually not the case in a public organization which has undergone organizational change as it transitions from a private to a public company. This, in addition to having a diverse team of individuals on the board of directors can be a 2-edged sword when it comes to managing excellence and organizational change. These are better managed in a smaller, clear cut management structure (which usually reflects a private organization) rather than that of a public organization. Given time, public organizations will either transition and create a team which reflects this, or perish.

M. Jericho Banks PhD
Guest
M. Jericho Banks PhD
14 years 7 months ago

Hey, David! Don’t forget Raley’s and Save Mart out here in NorCal. They’re larger than most of the chains (and Leonard’s, which isn’t a chain – ten stores required) you listed. Heck, Raley’s has even been ranked #1 in customer service by Consumer Reports magazine.

But, the privately-helds do make mistakes. Publix suffers from NIH syndrome (Not Invented Here); Wegmans is known to chase adventure vs. sales; HEB has taken unsuccessful fliers on “interesting” formats; Leonard’s has suffered serious legal problems; Tom Raley’s “history” is legendary; and Save Mart sponsors a NASCAR race in an area where they have no stores. But, they’re having fun, and perhaps a “culture of fun” seeps into the stores and translates into sales.

David Livingston
Guest
14 years 7 months ago
One thing I am careful to avoid is equating stock price or financial results with retail success. If Wegmans or HEB were bleeding cash, would we think any less of them? How would we know for sure anyway since they are private? Look at Sears/Kmart, the worst excuse for retail on this planet, yet their stock is doing wonderful and they continue to show profits. Not because of their retail expertise, but rather being able to sell their story to Wall Street. In today’s news, some Nash Finch executives are being allowed to walk away with millions as a reward for resigning. Imagine how that is harming employee morale at Nash Finch? If Nash Finch were a private company, three employees leaving would not be newsworthy. At Publix, even if they have a bad year, the price of their ESOP would probably not go down. It’s based on current results, and employees have no fear of losing their money. If they need to invest in the future, then that is what they do. The price… Read more »
Bobby Martyna
Guest
Bobby Martyna
14 years 7 months ago

My guess is that there may be a higher correlation between unionized chains and lackluster performance. When there is an adversarial relationship between store management and employees, there is often little motivation for unionized employees to improve the performance of the store or provide superior customer service — those actions simply reward management.

Now, it seems that more public chains tend to have unionized employees. Is that a coincidence?

Perhaps the treadmill for public chains is — profit pressures leading to payroll reductions leading to a fertile environment for unionization (or conflict where unions are already entrenched) leading to poor performance.

Privately held companies have the luxury of playing out a different sequence — higher wages leading to better customer service leading to higher profits.

The interesting perspective will be how private equity buyers will try to deal with this.

Jerry Gelsomino
Guest
14 years 7 months ago
When the big supermarket strike happened in California a few years ago, it gave customers a taste of the smaller, privately held stores which were the only one’s unaffected. These were stores, whether chains or small mom and pops, that cared about their customers. They employed cashiers that said hello and smiled at you. They hired the local kids in the neighborhood who packed your bags and helped carry them to the car. They donated to the local sports teams and proudly displayed pictures of the teams on the front wall. They were part of the neighborhood, not an invader. After the strike, plenty of people returned to the national chains, but probably only because of price, because the service and smiles were nonexistent for the most part. The statement that the executives are only interested in selling Wall Street runs rampant throughout retail, not only the publicly traded supermarket chains. How often do you hear of a merchant running a publicly traded company anymore? Too many retailers have lost the talent and desire to… Read more »
William Ososki
Guest
William Ososki
14 years 7 months ago
David Livingston has an interesting hypothesis, that is, that being a public company is the root cause of the decline of many publicly held supermarket chains. With an issue as broad as this, there are no doubt multiple causes, and being publicly held could be a contributory factor. However, two notable exceptions can be cited, Whole Foods and Wild Oats Markets, which are both public companies. Whole Foods continues to thrive, and Wild Oats after a couple of missteps, appears to be moving forward smartly. Your other correspondents have offered a variety of valid reasons for the march toward extinction by the large publicly held supermarkets. Another cause is simply that they have lost sight of the first job of any retailer, which is serving the customer with the products and services that he/she wants. Their business model is faulty. They are addicted to “back door money” such as listing fees, space rentals, exclusivity agreements and the like, all of which are obstacles to giving the customer what he/she truly wants. The better customer-focused companies… Read more »
Craig Sundstrom
Guest
14 years 7 months ago

I have to go along with those that are having trouble accepting the basic premise of this question (though I wouldn’t go so far as to say it’s untrue): the sample size seems too small, and has too many exceptions (not to mention the fact that many companies like Safeway have shifted from public>private>public over the years)…are supermarkets somehow different from other businesses in this private vs. public equation (?) if so, why, and if not, would one make this a general argument?

I think a different perspective would be that (relatively) small and privately-held regional players eventually turn into big, publically-held and (ultimately) unsuccessful players: the key is the size and phase in the life-cycle more than the type of ownership.

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