Will Albertsons sink or swim following its IPO?

The wheeling and dealing continues at Albertsons Companies, Inc. Five months after the company, owned by a consortium led by Cerberus Capital, closed its deal to merge with Safeway and become the second largest supermarket chain operator in the U.S., it is planning an initial public offering.

According to reports, Albertsons will look to raise an as-yet unspecified amount of money on the heels of posting a loss in its latest fiscal year. The Wall Street Journal estimates the company would have a market cap of $16.5 billion if it is valued similarly to Kroger (seven times earnings before interest, taxes, depreciation and amortization).

Virtually all of the reports on the IPO included mention of the current competitive challenges faced by Albertsons as a rationale for raising capital through a stock sale. None, however, made clear how that would be accomplished as a result of the IPO. Opinions are that the only clear winner in a stock sale would be Cerberus Capital and its consortium partners including Kimco Realty Corp., Klaff Realty, Lubert-Adler Partners and Schottenstein Stores Corp. It is not yet clear how much of Albertsons will continue to be owned by the group following the IPO.

Albertsons Companies

Albertsons currently operates roughly 2,200 stores in 33 states and the nation’s capital under 18 different banners including Albertsons, Safeway, Vons, Pavilions, Randalls, Tom Thumb, Carrs, Acme, Jewel-Osco, Lucky, Shaw’s, Star Market, Super Saver, United Supermarkets, Market Street and Amigos.

BrainTrust

"I would be very cautious as an investor given the fact that the combined company has not yet demonstrated its ability to profitably compete as a merged unit."

Mark Heckman

Principal, Mark Heckman Consulting


"This is a good short-term move for the owners but maybe a long-term negative for the organization that is left to operate. You don’t see the synergies that Kroger has accomplished in their acquisitions due to the nature of the original Albertsons combination and the desire to swallow Safeway whole."

J. Peter Deeb

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


"I chatted with our food retail expert, Randy Evins, and he stated: "I am a bit worried for the good folks working at Albertsons/Safeway. This stock sale seem pretty quick."

Tom Redd

Global Vice President, Strategic Communications, SAP Global Retail Business Unit


Discussion Questions

What will going public mean for Albertsons Companies Inc. and the chains it operates? Do you see this as an overall positive or negative?

Poll

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Ryan Mathews
Ryan Mathews
8 years ago

What does it mean when any PE or VC firm stages a “liquidity event”? Oh yes, they get richer and the firm gets restructured, “right-sized” and generally loses money, share and employees.

Let’s look at the logic here. The company is reporting poorer-than-desired operating results so the answer is, sell it to the public and create an exit path for current investors. That’s attractive.

This isn’t to say the strategy couldn’t work in Albertsons’ favor.

If there was a bold strategic plan in place; a creative repositioning of their go-to-market offerings, dynamic new brand theory being developed and/or a litany of other approaches to rethinking the business then a capital infusion might usher in an Albertsons Renaissance.

But those are some mighty big “ifs.”

Will the company collapse? Probably not. There’s a lot to be said for market inertia. Is it too big and bulky as it stands? No question. Will an IPO even be successful? I guess we’ll see.

Gene Detroyer
Gene Detroyer
8 years ago

Opinions are that the only clear winner in a stock sale would be Cerberus Capital and its consortium partners including Kimco Realty Corp., Klaff Realty, Lubert-Adler Partners and Schottenstein Stores Corp. That is my opinion as well.

Is this really about raising cash? If so, how are they going to spend it in a very, very mature market to get an ROI that will satisfy Wall Street? I have no answer.

Hy Louis
Hy Louis
8 years ago

Positive for existing owners. They can cash out. For the most part, Albertsons and Safeway are ineffectual competitors and will continue to see their market share decline. This will be a big boom for Kroger and Walmart. We will probably see a lot of Albertsons stores closed and sold as competitors take advantage of the situation. Both Albertsons and Safeway have been closing stores by the bushel for years and I see no end to that trend.

Mark Heckman
Mark Heckman
8 years ago

I would be very cautious as an investor given the fact that the combined company has not yet demonstrated its ability to profitably compete as a merged unit.

Further, while I understand the inherent financial benefits to Cerberus and other investors to publicly fund raise, the chain’s performance does not warrant a valuation equal to that of Kroger. In fact the jury is still out as to whether many of the underperforming Safeway brands like Shaws, ACME and Randalls will be a detriment to the mother ship in terms of overall financial performance.

Albertsons has surprised me in the past with their ability to survive and even thrive with a battered brand. Perhaps they have one more trick up their sleeve and will be able to pull the IPO off. But as Mark Cuban often says on NBC’s Shark Tank … “I’m out!”

J. Peter Deeb
J. Peter Deeb
8 years ago

I could not agree more with the contributors above! This is a good short-term move for the owners but maybe a long-term negative for the organization that is left to operate. You don’t see the synergies that Kroger has accomplished in their acquisitions due to the nature of the original Albertsons combination and the desire to swallow Safeway whole. Wall Street and the shareholders who buy in will want to see a return on that investment and managing this complex company will be very difficult, with very few market leadership positions and the myriad of competitors that must be dealt with.

Joseph Peter
Joseph Peter
8 years ago

Going public is going to have a negative effect on this company, as it’s going to cause the owners to only look at the bottom line for “shareholder value” and overlook things like store displays, lighting, innovative LED and green rollouts and customer service.

As a retail designer, I am not impressed with the so called “fresh” remodels at these new Albertsons Jewel-Osco stores I’ve seen in Chicagoland. They took a finely designed store and turned it into a plain white box. They have said to the newspapers that they are creating fresh, new modern stores … but to a designer, I see the red flags.

For example, in these former Safeway stores that were remodeled with the highly innovative “Lifestyle concept,” they took out all track lighting/recessed lighting in produce and liquor and replaced it with standard Kmart strip lighting. Those areas are two of the best departments for highlighting the colors of the products. All end caps were removed of high intensity lighting and it was not replaced. End stands used to pop, now all products are washed out in a white surgical fluorescent light.

Why is this such a big deal? Well, other main-line grocery retailers like Mariano’s, Meijer, Caputo’s, even Walmart in Chicago, have stuck by their guns and maintained their spot lighting in produce, as they know that the right color temperature and highlighting makes the produce look better. What’s even more disappointing is that these lighting changes in their produce areas bring the produce area back to a 1970s-style strip lighting effect. The team at Jewel Osco didn’t even use LED, they are using bare-bones warehouse lighting. Such backwards thinking!

It’s examples above that will be used to tell shareholders, “we are improving shareholder value,” when in reality they are doing a disservice to the whole business model by downgrading the overall shopping experience for customers by cheapening the store design.

I personally used to shop at Jewel-Osco because the stores, especially the Kinzie and Des Plaines store in the Chicago West Loop, when it opened in 2008, had the most innovative lighting, great product displays and great customer service. As soon as Mariano’s opened (about the same time new Albertsons took the helm at Jewel-Osco), everything declined at that location and I switched to the Greektown Mariano’s with fresh displays, decorative track lighting and awesome customer service. I went back to check out the Jewel when they “remodeled.” They removed all track lighting and replaced it with fluorescent strips and then put in a juice bar — oh boy! I will stay with Mariano’s and Meijer.

Joseph Peter
Joseph Peter
8 years ago

I will also add that I have a great friend that moved to California to work for Safeway corporate. When he arrived there, he was told by Safeway upper management (pre-merger) to design innovative LEED standard modern stores focused around the customer. He was able to design innovative displays, try new building materials, design each store to cater to the community, etc.

By the time he was given the boot out the door due to the Albertsons/Safeway reorganization, the design teams were being told to strip the stores down to everything basic, no more high-end design. They were told this would improve shareholder equity and value.

I cringe every time I do go to Jewel (rarely) and I get the receipt that says, “You’re in for something Fresh.” What a crock of baloney!

Oh and one last thing, the shopping bags say, “Shop Local, Shop Jewel-Osco.” Jewel is far from being a local company anymore, with all decisions now coming from Boise. An IPO will make this even worse.

If you want to shop local, shop Mariano’s, even though Roundy’s is based in Milwaukee. Bob Mariano is a local Chicago native doing everything possible to give Chicagoans the food they want.

Tom Redd
Tom Redd
8 years ago

I chatted with our food retail expert, Randy Evins, and he stated:

“I am a bit worried for the good folks working at Albertsons/Safeway. This stock sale seem pretty quick. I can only speculate what it really means for the combined companies. It feels like Cerberus is planning to exit and the cash raised from the stock sale would move the burden of running the company from their investors to a more ‘self-sufficient’ model.

“Problem is, where will Cerberus be when that runs out? They could be gone and it’s a fire sale.

“That said, both companies, Albertsons and Safeway, have had mgmt challenges for years. Albertsons’ move from Lucky to Albertsons brand in the late 90’s was sketchy and cost them an est. 40% of their business. Safeway has had trouble for years in non-Safeway branded companies, Randalls in Texas and Dominick’s in Chicago in particular. Randalls is still around and struggling and Dominick’s is gone. I don’t feel too bad for the leadership folks (they will get their share of the stock in the IPO), it’s the real workers in the stores that’ll ultimately pay the price.”

Randy and Tom

Craig Sundstrom
Craig Sundstrom
8 years ago

A cynic might argue they want to unload it before everyone finds out what a mess it really is. Judging by the comments here, they’re too late.

David Livingston
David Livingston
8 years ago

This will be another Roundy’s. I see big hype at the start and then the stock will plummet with quarter after quarter of sad new.

Safeway and Albertsons perform at sales per sq. ft. levels well below their peers, Albertsons being the worst of the two. Outside of Northern California and Hawaii, their stores struggle. As same store sales and profit continues to plummet, most likely the stock will as well.

There really is no future in operating 1990s-style plain vanilla grocery stores with skeleton crews and rattletrap equipment. Based upon the M&A research activity with my colleagues, it appears several stores are on the market. The only way to make money with declining stores is on the expense side. For Safeway and Albertsons to increase sales while their is an onslaught of new competitors coming after them, it would be the biggest comeback since Lazarus.

Barry Grammer
Barry Grammer
8 years ago

The Albertsons in most of my area still seem to be scrambling to cut costs. Employee relations will need to be as good as ever and that will be difficult considering recent changes in the way they handle ground level labor. The big happy smile everybody has come to expect seems to be fading due to “morale denting” policy changes happening in some, but not all of its stores in my area. Appears to me to be a weekly adjustment to conserve with “benefit” type cuts, that seem benign on paper, but are big morale killers when being introduced at the same time as the new push for employees to take up the slack in security needs and customer relations.