Meijer Says No, Tesco is Mum
By George Anderson
The rumor mill has come full circle.
Various reports over the past year have said Tesco had sent a team of executives over to the U.S. to scout for possible acquisitions.
That was followed by news of a conference with analysts where Tesco CEO Terry Leahy said the company had no plans to buy its way into the North American retail market.
The story had appeared to end there until The Grocer came out with a report, citing unidentified sources, that said Tesco was on the verge of completing a deal to buy a 49 percent stake in Meijer. A Tesco company spokesperson wouldn’t deny or confirm a deal had been made but said that Mr. Leahy had never completely ruled out the possibility that Tesco would do business in the U.S.
On the heels of The Grocer report and it subsequently being picked up by various news organizations, Meijer responded by sending a memo to employees stating that the rumors were false and “we are not negotiating with any company for the sale of any part of our company.”
So that’s the end of the story, right?
Moderator’s Comment: Is Tesco looking for a point of entry into the U.S. consumer market? What challenges would it face in the U.S. that it doesn’t in
other markets where it has stores? –
George Anderson – Moderator
Where there’s smoke, there’s generally fire, although some things just smolder out by themselves. Speaking just as a reporter, if a company told me they wouldn’t confirm or deny something, then volunteered that the company had never ruled out the action I was asking about, I’d send in the dogs in a heartbeat. In terms of allocating time and resources against a story such as an acquisition: A flat out denial, I figure, means there’s a 50% chance it’s true. A “won’t confirm or deny” means “70% chance it’s true.” Adding “we never said we wouldn’t do this” raises the likelihood to 80%-90%. So the next time any of you are playing spin with a journalist, keep that in mind.
What Meijer once had was clear differentiation as a super center. Today, due to some really odd strategic mistakes, they are on the path to be the same as, or more like, Wal-Mart. I can’t for the life of me understand how they could make such a critical error in judgment. It’s almost like well defined and distinctly different Target suddenly taking a different direction to emulate Wal-Mart. It doesn’t make sense.
Today, their new stores are not faring as they’d like. They are not of the quality of their previous market entries in almost every area. In fact, by comparison they are less of an entry to either Wal-Mart in their super center format. It’s certainly curious how they convinced themselves that the model that took them to an incredible sales per unit was simply not working. In fact, it was working quite well. Due to their inept changes, it now seems in question.
Whether or not Tesco makes this move, Meijer is now vulnerable and will be for some time unless they correct their current sttategic direction.
The laughable item about the whole story was that Tesco would invest at a 49% stake. That had to be for domestic consumption.
When a company is negotiating a sale the first thing they do is send out a memo to employees saying the opposite. Meijer certainly has been stretched to its limits by Wal-Mart, forced to cut back on labor, eliminating meat cutters and going with a Wal-Mart style meat department, and taking out salad bars. They seem to be moving more towards a Wal-Mart style of supercenter. So far it appears that produce, bakery, deli, and liquor are the only food departments Meijer has not compromised. Meijer is having a rough go of it with Wal-Mart typically edging them out when going head to head. So I would expect Meijer to be looking for a hand up but not a hand out. Still Meijer is the the oldest pro at supercenters and a 49% stake in Meijer would provide Tesco with a practice field to take on Wal-Mart. The biggest challenge is that probably 95% of Americans don’t know who Tesco is, but by buying a household name in the Great Lakes region such a Meijer, that problem will be taken care of. Meijer also has the advantage of not having anti-Meijer movies being made and having negative press printed about them. They are another big-box supercenter that gets to fly under the anti-big-box radar.
First of all, with all the consolidation/private equity money chasing retail grocery, this is a great opportunity for Tesco to entertain entering the US market. The numbers in the Tesco/Meijer story reflect Tesco’s willingness to pay 2.7x to 3.5x the current valuation of national chains such as Kroger, Albertsons, or Safeway on a dollar sales basis. Meijer is a great Midwestern brand, is well respected in the industry, and has been an innovative supermarket operator within a very large footprint. But not all had been rosy. In reaction to competition, Meijer underwent a top to bottom “retail transformation” initiative that cut 4% of SG&A in past two years. Trick is to keep the innovation and freshness of the stores while still delivering on the SG&A front.
Tesco had also considered making a partial bid for Albertsons but decided to pass (for same proposed investment in Meijer, Tesco could have controlled nearly $20B of grocery business at Albertsons). Compared to Albertsons’ acquisition of the Northeast regional grocer Shaw’s in March 2004 ($4.6B in sales), Tesco’s offer reflects around a 40% premium (suggesting a much higher intrinsic value in the brand, operations, quality of earnings).
The Tesco stake could also provide the family-owned company a longer term solution to succession planning, deeper pockets for store growth and continued ability to compete successfully against Wal-Mart, Kroger and Target.
With Ahold and Delhaize, Tesco would become the latest major entry into the mainstream US grocery market, joining privately held Aldi and Trader Joe’s (Albrecht brothers) and French Casino Group representation through Smart & Final.
Might be interesting to review Tesco’s strategic tenets according to CEO Terry Leahy:
– Be flexible in your approach to each market
– Act locally, no one size fits all
– Keep focus, relentless execution day in and day out
– Operate multi-formats in order to reach the entire market
– Build capability and not scale
– Branding the store, building long lasting relationships with the consumer
Regardless of outcome, these are very interesting times for the US grocery industry. Smart money is finding underperforming assets, brands as platforms to launch further expansion, and new growth formats.
Tesco is significantly dependent on their innovative and very successful loyalty relationship with dunnhumby. Last I heard – which may have changed – dunnhumby had an exclusive U.S. relationship with the Kroger Co. Perhaps that’s changed, but how would Tesco fare here without this valuable partner?
Is Tesco looking to enter the U.S.? YES. After all, Wal-Mart entered Tesco’s territory in the U.K. via acquisition of ASDA.
If Tesco were to buy 49% of Meijer, what challenges would they face? None … if they consider such an event as an investment rather than an opportunity to tinker and prove Tesco’s methods are better than Meijer’s fine operations. But if Tesco were to think the latter, the ensuing friction could effect the excellent rhythm of today’s Meijer. BUT, buying 49% without additional plans would not seem prudent.
Thus another thought/rumor: Maybe Tesco wants to eventually totally acquire Meijer’s, expand it throughout the U.S. and then go head-on-head with W-M. They may feel confident that they could out merchandise W-M based on their success in the U.K. vs. Asda/W-M. It’s only a rumor but the plot thickens.
Meijer has been going through some really tough times since 2001. They have always been an innovator, but now they seem to be reinventing themselves every year or two and playing follow the leader with Wal-Mart. It seems that they are ripe for some type of large company trying to convince their private organization to sell.
I used to do design work for Meijer from 1999-2002…we did some of the greatest designs ever for Meijer…extensive visual merchandising displays, bright lighting (HID), and very architecturally significant stores.
In 2002, Meijer went through a huge cost cutting regime that made their stores look very similar to Wal-Mart…in fact, with each new prototype they release, they are looking more and more like Wal-Mart….Personally: It’s kind of difficult to see a company that was once so unique and so visually stimulating, now taking a very bland approach to retail. I think the most downgrading change they did was replace their HID high bay lighting fixtures, in many stores that were only 2-4 years old, to fluorescent strip lights (similar to lower-end retailers). The foot-candles and lighting levels in their stores are considerably less and the merchandise no longer sparkles. It was basically like they were tweaking a very good store lighting program when they should have been spending their money in other places.
I personally don’t understand why Meijer doesn’t continue their successful 1990’s store design and marketing techniques. During the 1990’s, they were a very unique player and could co-exist with Wal-Mart and Target and be somewhere in the middle. The Meijer store environment NOW seems to be as cheap as Zayre, Ames, Hills, Venture and many other stores that lost their direction and became bland and eventually went out of business.
This reminds me of the old joke about the hypochondriac’s tombstone which read, “See? I told you I was sick.” If there are 50 different Tesco rumors over the the next 5 years, and Tesco eventually buys something, the rumor-mongers will say, “See? I told you so.” If Tesco is smart, they’ll come into this country if the price is right. If a chain is being given away, and Tesco sees a specific low-risk turnaround strategy, they’d be reasonable to explore the deal. But if the price isn’t a giveaway, why bother to enter a market that is so troubled? It doesn’t pay to buy any business unless (a) the price is a great value and (b) you know you can get it to be more profitable than any other business alternative on the horizon. To repeat another phrase, “Deals are like busses. If you miss one, there will be another in 15 minutes.”
I gotta tell you, no matter how much truth there turns out to be, I just love this story. First Lee Scott opens his trap and bawls that Tesco is beating Asda in the UK and taking unfair advantage of the poor little Americans. Then Terry Leahy goes to India, where the government has openly declared that they do not love big supermarkets, but insists he’s only seeing his suppliers…Now Meijer denies that it’s selling shares to Tesco. What a load of wonderful publicity. What a brilliant seasonal tale of threats and promises, opportunities and challenges. What a hoot.
Meijer’s value just went up. And if Target wants Meijer, as rumored, the bidding war begins. Tesco has good taste,
Wal-Mart has always spoken very highly of Meijer. Seems to be more than one party interested! Hmmmmmmmm