Done Deal: Albertsons Sold
By George Anderson
The second go-round proved a charm as Supervalu, CVS and an investment group led by Cerberus Capital Management, that includes Kimco Realty, Schottenstein Stores Corp., Lubert-Adler Partners and Klaff Realty, have announced a successful bid to acquire all of Albertsons’ holdings for $17.4 billion.
With the deal, Supervalu will become the second largest supermarket operator in the U.S. It will acquire the operations of Acme Markets, Bristol Farms, Jewel-Osco, Shaw’s Supermarkets, Star Markets, and Albertsons stores in the Intermountain, Northwest and Southern California regions. All in-store pharmacies in those stores will also be included in the deal.
Jeff Noddle, chairman and CEO of Supervalu, who will be chairman and CEO of the newly expanded company, said in a released statement: “Today we have put in motion a series of actions that will dramatically transform Supervalu. We will realize a sizeable increase in our retail footprint and supply chain network, strengthening our ability to effectively compete in today’s challenging grocery industry. The combination of operations will create a premier food retail powerhouse of 2,656 stores from coast to coast, tripling the size of our current retail operations. By adding prestigious supermarket nameplates across the country, each with strong market presence in their respective regions, we will have the critical mass and footprint to leverage the combined operations to become a more profitable business.”
Mr. Noddle, who made a point of saying his company has successfully added retail banners in the past, said, “This acquisition is a strategic fit with Supervalu’s approach of operating a diversified portfolio of regional banners – locally managed and branded – with strong prevailing market shares. We are also, of course, thrilled to join forces with a highly skilled employee base and look forward to building on our combined strengths, cultures and historical roots.”
Earlier this month, Lehman Brothers Inc. analyst Meredith Adler went on record as supporting Supervalu in its bid for Albertsons. Calling the attempt to acquire large chunks of Albertsons “bold and transformational,” she added in a letter to investors: “The state of the grocery industry requires such bold actions given its fundamentally slow growth and the intense competition coming from many directions.”
CVS will add 700 stand-alone Sav-On and Osco drugstores in southern California, the Southwest and Midwest to its current operations. It will also takeover distribution center in La Habra, California. CVS will also acquire Albertsons ownership interests in the drugstore real estate.
Stores in Northern California, Florida, the Rocky Mountains and the Southwest will be taken over by the Cerberus-led group.
Moderator’s Comment: What will this deal mean for Supervalu, CVS and the businesses they will eventually takeover from Albertsons? Will it change the
competitive balance in the retail food and drug industries? –
George Anderson – Moderator
- SUPERVALU, CVS And a Cerberus-Led Group
Agree to Acquire Albertsons for $17.4 Billion – Supervalu/Business Wire - Albertson’s to Be Bought by Supervalu for $9.8 Bln
– Bloomberg News - CVS Corporation to Acquire Approximately 700 Stand-Alone Sav-on and Osco Drugstores in $2.9 Billion Transaction
– CVS News Release
One variable in this acquisition by SuperValu will be the distribution efficiencies that they may be able to gain with this purchase. When the leadership at SuperValu takes over the retail operations and improves the sales in the stores they should be able to significantly improve margins with their distribution expertise.
I am more sanguine about the drugstore components of the sale. It appears that these marketers have done a better job on average than their food counterparts. The only advice that I would give to the new owners is to avoid what Albertsons did, namely, focusing on Wall Street, rather than Main Street. Keep in mind that rebranding is tricky at retail. Customers don’t really care about who is the parent company. If the new owners rebrand they need to make sure that the new brand is much better than the one being shuttered. There has to be an improved value proposition for the customer.
If the new owners focus on solving customer problems first, then the financial benefits should follow.
To Ian Percy’s point, people will be the critical variable in the success (or failure) of this acquisition. Having observed how Jeff Noddle operates for the past 15 years, I’m convinced he wouldn’t have entered negotiations without a comprehensive plan on how to integrate the businesses. That includes labor and capital resources, as well as brands and other intellectual capital.
As far as looking into the crystal ball, I see about 20% of all Albertsons stores being closed and maybe 10% of those going to SUPERVALU converted to Save-A-Lot formats. SUPERVALU may experience supply contract terminations in Philadelphia and to a lesser extent Greater Chicago, but nothing too serious.
Perhaps the most interesting part of this is what the Cerberus-led group, which will acquire stores in Dallas/Ft. Worth, Northern California, Florida, the Rocky Mountains and the Southwest, does with its locations.
BTW, Noddle and his team won’t have to worry that much about integrating Albertsons information systems with their own. Both Albertsons and SUPERVALU use data warehouse technology from Teradata (Disclosure: Teradata is a customer of RAM Communications).
I think that this will prove to be very good for the strong regional groups such as Jewel, Shaw’s and Bristol Farms. I expect that SuperValu will run these groups much less centralized than Albertsons did and much less so than Safeway does theirs. In my opinion this will play to their strengths and help them going forward.
In Jewel’s case, I think it makes the most sense to support their local strength and market share by highlighting the differences between them and Dominick’s. Safeway has destroyed so much of their market share and sales by forcing the Dominick’s to become Safeway stores with Safeway brands operated from CA.
CVS should also do very well with their new stores, especially on the west coast and in the Chicago area. They seem to have a good track record with acquisitions and this should be no different.
When the “For Sale” sign first went up, I did not regard Supervalu as one of the most obvious candidates for this acquisition. But having a wholesaler’s mentality could come in very handy when dealing with new markets and disparate operations, as most wholesalers must do this daily, to adequately service their retailer community.
Also, in tandem with CVS, they do have the financial prowess and more importantly, the infrastructure to enhance each of the operational divisions of Albertsons in time. Not to say that this endeavor will not be challenging, as Supervalu will be navigating in many new markets while attempting to assimilate cultures, synergizing operations, and blending and shedding personnel to ultimately accomplish the acquisition.
It will be interesting to see how they move forward. Will they follow the more de-centralized approach of Kroger, that allows their operating divisions some level of autonomy and identity, or will they follow the Safeway model, which is a more centralized control approach? Clearly, the performance of the two models should prompt Supervalu to opt for a more decentralized approach, but they may feel they can do a better job of centralization than others have done in the past.
It is also unclear as to how much of the Albertson’s executive team will remain in some capacity and how if the Boise headquarters will be retained for as a regional office. All of these details will ultimately determine the fluidity of this process and how seamless this transition appears to the consumer. Retaining store volumes, especially for ACME and the Southern California markets where market share is reasonably good, is also critical. Conversely, if I am an Albertsons competitor, I would use this opportunity to create a full court press to capture transitioning customers.
On the drug side, I believe CVS did an admirable job of converting Eckerd Drug stores post acquisition, here in Florida where I reside. Stores were quickly converted and new programs were introduced, employees were trained and the business moved forward. If they can replicate that process with Savon and other Albertsons pharmacy properties, it should be for a fluid transition.
Time will tell if this acquisition will be a great boon for Supervalu and CVS, or just a good move, but I think it has a good chance to be good for the industry and good for the consumer.
We’ve heard of ‘trophy wives’ and trophy ‘boy toys’ – is there such a thing as a trophy acquisition? You know – great visuals but not much below the surface.
So let’s see – we have roughly 7 different purchasers buying 6 different retail entities. Got to be some interesting dynamics there. This piece – and most coverage about Albertson’s – have talked about size of footprint, supply chain efficiency, increased competitiveness, number of stores, and banners & brands. Anyone come across anything about people? Isn’t it the enthusiasm and eagerness of people that make any retail enterprise work? I’ve never once shopped at my local Supervalu because I admire the size of their national footprint.
One article “Intercultural Synergy in Mergers & Acquisitions” states the failure rate is between 40% and 80% – unless you define failure as decrease in shareholder value and then it’s 83%. BusinessWeek reported that half of all acquisitions end up annoying and then losing customers.
The secret is to put the integration of people before the integration of property; the ecological before the economic. My hope is that someone is acting on this irrefutable truth: it’s people who will make this work and it’s people who will destroy it.
First thing we will probably see is the closing of Albertsons in Oklahoma, Texas, Louisiana, and Florida. The best locations will be gobbled up by existing players. The rest will go dark to become the next Big Lots, etc. This process will probably be repeated in other markets where Albertsons has fallen off the market share roster such as in Denver. Normally when a supermarket chain is acquired, an immediate 15-20% loss in sales can be expected. This is probably not going to be the situation in Chicago with Jewel due to the lack of strong competition. Super Valu probably views Dominick’s as an ineffectual competitor. There maybe some musical chair games played with store closings to please the FTC.
CVS will gain some added locations and the real estate firms will get some new boxes to play with. Overall, the market will get healthier for everyone since a lot of low sales per square foot supermarkets will be eliminated from the national landscape.
When Mr. Noddle walked away from a chunk of the Kmart business and handed it all to Fleming, many pundits openly criticized the move, but not for long. Since then, Supervalu has been transforming itself into a distribution company which also happens to be a wholesaler and a retailer. After the dust from this acquisition settles, the industry will be watching an increasingly efficient flow of goods in the supply chain. The key to success will be the amount of attention given to servicing debt versus to returning these retail jewels to their local market luster.
With Wal-Mart having done plastic surgery on the face of U.S. food retailing, it’s not surprising that a strong want-to-be competitor wouldn’t want to send a smaller retail army up against the world’s biggest retail war machine, Wal-Mart. Thus, acquiring most of Albertsons’ stores gives SuperValu bulk for that battle in new geographies, not to mention new bragging rights everywhere.
But challenges come with expending of its cash and stock. As George Washington learned in his failed attempt to defend Long Island and New York in 1776, (just as SVU must now defend Chicago and Philadelphia) good officers and leaders, not just a sufficient number of soldiers and supplies, are essential on each battlefront to prevail.
Thus acquiring Albertsons’ stores is one giant accomplishment; the cohesive assimilation of the heart and soul of once-proud Albertsons’ best talent will also be a necessary challenge. But the two organizations are not entirely foreign to each other. A similar merger of Albertsons and SuperValu when both were equally strong in their respective operations was developed in the early ’80s. ABS would have run all the corporate stores and SVU would have handle procurement and distribution. So as that retail analyst, Yogi Berra, might say, “It’s deja vu all over again.” Only now SVU has both kettles of fish to cook by itself.
With this acquisition SuperValu weans itself away from being just the foremost retail support company on the land into a major retail food chain. One has to admire SVU’s strategic repositioning, and we wish them the best.
As for CVS, they get additional pharmacies, which is good; the remainder of the consortium prepare to capitalize profitably on real estate and financial opportunities made possible by SVU’s latest grand strategy.
We express our admiration for Jeff Noddle for his very bold thrust into creating a nationwide retail supermarket chain.
May its essentiality be proven. Meanwhile, observers wonder what evil lurks in the hearts of the mindful men and women in Bentonville. Whoever said food retailing wasn’t exciting?
CVS and Supervalu have much stronger management teams
than Albertsons’. They both have proven expertise
melding acquisitions profitably. The financial and
real estate players in the acquisition group will do
fine, as long as there is no sudden negative change in
real estate or the capital markets in the next couple
of years. Some of the real estate will be put to more
lucrative uses instead of supermarkets. Albertsons’
board and management should be ashamed that they
couldn’t do better, but they should be praised for
admitting it and selling the company before more
damage occurred. Too bad the board didn’t just
replace itself with more capable people who would’ve
replaced the management with more capable people. You
can’t have everything.