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GROCERY RUN

How will new owners divvy up Albertsons’ portfolio of stores?

By Steve McLinden

Albertsons once marketed itself to shoppers as “your store.” The Boise, Idaho-based supermarket and drugstore retailer could soon be directing that sentiment toward a consortium of new owners, if its $17.4 billion sell-off plan gains shareholder approval this summer as anticipated.

With the deal’s completion nearing, speculation about the fate of Albertsons’ real estate, store brands and headquarters abounds; landlords, grocers and consumers are trying to sort out this latest phase in the industry’s ongoing consolidation.

In a complex transaction announced in late January, several buyers’ groups led by Supervalu, CVS and a partnership between Kimco Realty and Cerberus Capital Management divvied up the grocery store empire launched in 1939 in Boise by Joseph Albertson. Minnesota-based Supervalu is acquiring 1,124 of Albertsons’ top-performing supermarkets, while shopping center REIT Kimco and hedge fund Cerberus will be buying 655 predominantly second-tier Albertsons stores. In a more cut-and-dried third leg of the deal, Woonsocket, R.I.-based CVS, the country’s largest drugstore chain, is buying Albertsons’ 700 freestanding Osco and Sav-on drugstores.

When the dust settles, Supervalu will replace Albertsons as the second-largest U.S. grocery chain, with 2,656 stores, behind Kroger’s 3,700. Wal-Mart remains the largest volume seller of groceries in the U.S., selling more than the next five biggest chains combined.

Best known for its deep-discounting Save-A-Lot stores, Supervalu is getting mostly premium sites in the deal, and it probably possesses the expertise and efficiencies to make them profitable and top-line, says Jon Hauptman, a vice president at Willard Bishop Consulting, a Chicago retail-marketing and consulting firm. “I believe Supervalu will be successful in these because they operate in a fairly decentralized manner,” Hauptman said. “They excel by having their finger on the pulse of the local consumer. They recognize that retailing is a local phenomenon.”

Supervalu will enter 54 new markets after the deal, nearly tripling its store count in the top 25 U.S. markets, according to Trade Dimensions, a Wilton, Conn.-based research group.

Only a minority of the stores will keep the Albertsons name, sources say.

The morning of the Jan. 23 announcement, Supervalu CEO Jeff Noddle told CNBC that his company likes to operate under various brands to better serve customers on a regional basis. Supervalu “got the best of the best” in the Albertsons acquisitions, Noddle said. “We carefully selected the markets that we wanted. … [O]ur partners are taking the other markets,” he said. “The markets we are buying have leading market shares, including Chicago, Boston, Southern California, Las Vegas and the Pacific Northwest.”

In Chicago alone, the company will get 124 additional stores, for a total of 155 and a market share of 33.8 percent. Albertsons’ 94 stores in the Los Angeles, Long Beach and Glendale region will yield Supervalu nearly 12 percent of the market there, Trade Dimensions says.

Supervalu spokeswoman Haley Meyer says it is too early in the process to disclose specific plans for the Albertsons stores. But David Livingston, a supermarket site analyst, speculates that most of the Shaw’s and Star Markets units Albertsons owns, which number about 200 throughout Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island and Vermont, are likely to stay under the Shaw’s name, and the dozens of Chicago-area Jewel stores Albertsons owns will keep their name too. Acme supermarkets, which number 134 in Delaware, Maryland, New Jersey and Pennsylvania, will likely also retain their brand name, says Livingston, who is managing partner of DJL Research, a Wisconsin-based retail consulting firm. “Those are all regionally accepted brands.”

Though the fate of the Kimco-Cerberus-acquired sites is less certain, “we do know that Kimco is really good at getting a lot out of their real estate,” said George Whalin, president of Retail Management Consultants, San Marcos, Calif. “They’re a company that really understands second-tier properties. We’ll see a good number of these locations change hands, get repositioned … and become something else.”

Any way it shakes out, the Albertsons banner is expected to grow increasingly scarce, says Livingston. Many of the Kimco-bought locations will eventually be marketed to Big Lots, Dollar General, Goodwill Stores and similar second-generation discounters, he says. “When it’s all said and done, there are not going to be too many Albertsons stores left,” Livingston said. “Kimco got their stores so cheap — close to salvage value — that they can probably afford to go dark in some for a while.”

William Gerrity, president and CEO of Carlsbad, Calif.-based GMS Realty, says he, too, is confident that Kimco’s new “excess real estate” properties will find their way back into the mix. “Retail real estate has been dynamic, and Kimco does a very efficient, professional job of retenanting those types of spaces,” he said. “Each property has to be looked at on an individual basis. But I would be surprised if there is any blanket strategy for the non-Supervalu stores.”

REITs have been busy evaluating their exposure in the Albertsons sell-off, including Regency Centers Corp., which owns, operates and develops grocery-anchored centers. In some instances, the changeover may create new revenue opportunities, says Mary Lou Fiala, Regency’s president and COO. “Some of these stores will be subleased, but if we get the real estate back, we may see a significant upside in rents as these roll over,” she said. “Whether Supervalu takes them over or Kimco puts someone in them, it’s still an opportunity for a grocer. The way we view it, these are strong grocer locations, and the real estate has inherent value.”

Of the 32 Albertsons stores in Regency properties, “27 are quality locations, and the rest we had on our disposition list,” Fiala said. Sales average over $400 per square foot in those 27, while the trade-area average household income exceeds $75,000 annually, she said.

At press time site analyst Livingston was performing site-analysis services at Albertsons locations in several states. A number of large chains are interested in the more viable Dallas-Fort Worth Albertsons sites, he says. “Kroger should take some, Minyard is looking for growth, and Tom Thumb may take a few where they see opportunities in more-middle-class areas,” Livingston said.

The purchase by CVS, which presently operates about 5,000 stores, is easier to analyze, sources say. CVS has grown primarily by acquisition in recent years, while competitor Walgreens has grown organically, Hauptman says. The Osco and Sav-on drugstores CVS is buying for $2.9 billion are mostly in the West and Midwest. Expect those to be rebranded and remerchandised relatively quickly after the deal closes, says Hauptman. “CVS runs very good stores, and this acquisition gives them a truly national reach,” he said. “We now have two powerful chains that are exceptionally well run and fit in more markets.”

The fate of Albertsons’ varied name brands and headquarters presence is still up in the air. “That will be entirely up to Supervalu and their cost-cutting decisions,” said David Petso, a Boise-based financial analyst and a critic of the Albertsons deal. “It’s clear Supervalu won’t need two headquarters.”

Petso says he does not believe that the company had to be liquidated. “It was still worth $26 a share on real estate alone, plus cash flow was solid, so it certainly wasn’t in danger of going out of business,” he said. In recent years the community and company were ill-served by a leadership group “that never conducted a single board meeting” in Boise, says Petso. “Their legacy will be, ‘We came to town, brought the company down, then sold it … and walked away with millions.’ ”

By contrast, Albertsons stockholders may fare better owning Supervalu stock. They stand to get $26.29 per share — $20.35 in cash and $5.94 in Supervalu stock — and will own 35 percent of the company’s stock when the deal closes. Also part of the Cerberus partnership were Klaff Realty and Lubert-Adler Partners (both of which joined Cerberus also in the buyout of Mervyns); and Schottenstein Realty.

Supervalu says it has yet to decide how many of the 2,500 corporate employees in Boise will remain, though Cerberus, known for its buyouts of the National and Alamo rental car companies, says it will consider putting Albertsons executives in posts in finance, human resources, legal or other departments.

Albertsons CEO Larry Johnston promised that Supervalu would maintain a strong Boise presence, but Petso says only regional offices are likely to remain. “Some key people could easily be located here instead of Minnesota,” Petso said. “I suspect it won’t be an immediate horrific impact on Boise, it will just slowly shrink by attrition.” The presence there of large food-buying operations such as Heinz and Conagra, however, will not be necessary, he says. “And those, like the headquarters positions, are good-paying jobs.”

That one of the industry’s “big three” was broken apart and sold off came as little surprise to Hauptman. His Willard Bishop projects that less than half of all grocery dollars will be spent in supermarkets in the near future. “This doesn’t mean the end of supermarkets as we know them, but it does mean the survivors will have to operate differently than in the past,” he said. “Supermarkets can continue to grow and thrive by focusing on quality, freshness, service and product assortment.”

Retail consultant Whalin concurs. “Stores like Costco, Trader Joe’s and Whole Foods have proven that you don’t need stores in every neighborhood,” Whalin said. “People will drive to them because they differentiate themselves.”

Though the grocery store landscape has changed, “Kroger has posted solid comp-store sales, and Safeway is showing double-digit growth in stores where it’s reinvested significant capital,” said Regency’s Fiala. “There are still many opportunities out there for strong grocers.”