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Shopping Centers Today -> October 1999
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Industry Weighs Implications Of Grocery Mergers
by Jon Springer
Given a calculator, a scorecard and a few hours, one could record all the supermarkets that have changed hands in the United States over the last few years. But gauging the effects of rapid-fire grocery consolidation at the property level wouldn’t be as easy.
Owners and managers of grocery-anchored shopping centers say it may take some time before they truly understand the implications of the market shake-up that is the result of these supermarket mergers.
Just since August 1998, Albertson’s has acquired American Stores; Kroger bought Fred Meyer; Safeway bought Carr-Gottstein, Dominick’s and Randall’s Food Markets; Royal Ahold announced intentions to take over Pathmark; and Food Lion shelled out $3.3 billion for Hannaford Bros. Federal Trade Commission-mandated spin-offs of stores — almost 150 in the Albertson’s deal and more expected in the Ahold-Pathmark merger — stir the mix up even more by introducing new players to preserve competition.
Moreover, experts say, there is still a long way to go, as regional chains decide whether to muscle up and face competition or succumb to being overpowered themselves.
Potential pitfalls
While developers for the most part see consolidation resulting in financially stronger and more efficient tenants, the process of merging companies can have unexpected consequences. The differing philosophies, personnel and merchandising strategies that a new owner can bring to a business all may affect the shopping centers where the supermarkets are located. Deals in progress can be interrupted, and projects under construction delayed, as the supermarkets go about the business of positioning themselves in the marketplace.“You can get pinched pretty good if you’ve got a deal pending or something in progress,’’ said William Gerrity, president and CEO of GMS Realty, a Carlsbad, Calif.-based grocery center owner. “But long-term, I think consolidation is good for the industry.’’ Supermarkets are consolidating for many of the same reasons as other retailers — it is the fastest and most cost-efficient way to grow a company. Grocery executives often refer to their business as a “zero-sum game’’ — one that grows no faster than the U.S. economy — so taking over a competitor gains them instant entry to new markets and allows streamlined operations, all of which helps realize the earnings growth that Wall Street expects.
“The cornerstone to success in the food retailing business will continue to be taking market share,’’ wrote analyst George E. Thompson of Prudential Securities in a report this August. “This results not only in top-line growth but also in significant economies of scale and, equally important, in the ability to buy in an increasingly efficient manner.’’
The supermarket industry also has realized that entering new markets without the help of an established player is virtually impossible today. Food Lion, for one, learned that the hard way a few years back in a disastrous attempt to enter Texas. The dozens of empty storefronts Food Lion left behind when it departed reminded developers of the difficulties as well.
Safeway continued its shopping spree with the recent purchase of Houston-based Randall’s for $1.8 billion.
Pleasanton, Calif.-based Safeway saw an easier route to Texas this summer when it shelled out $1.8 billion in stock and debt to acquire Randall’s Food Markets, a highly successful independent operator of 115 grocery stores in Houston and Dallas. At press time, the deal was expected to close later this year.
For Houston-based center owner Weingarten Realty Investors, a Safeway-Randall’s deal would mean that Weingarten’s single biggest tenant would change hands. Martin Debrovner, vice chairman of Weingarten, expects the deal will be good for his firm — particularly if Safeway retains Randall’s sensitivity to the local market.
“Randall’s is a wonderful operator — one of the premier in the city of Houston, and in Dallas-Fort Worth with their Tom Thumb stores,’’ Debrovner said. “I don’t think that will change. If anything, they’ll become more formidable, especially when their competition is Albertson’s and Kroger, both of which have deep pockets.’’
Safeway brings to the table better credit than its predecessor, he added, which bodes well for the company over the long term. “All of a sudden you’ve got Safeway — an A-rated company, in place of a company where the major shareholder was a venture capital firm,’’ Debrovner said. “Long-term, you knew that wasn’t going to be your anchor tenant.’’
FTC rulings spark uncertainty
Since Safeway is new to the Texas market — as it was in Chicago with last year’s acquisition of the Dominick’s chain — the deal should pass antitrust provisions without trouble. But elsewhere, FTC rulings to spark competition have made supermarket mergers full of uncertainty for both tenants and developers.Strip center owners waited nearly a year as the FTC sorted through the Kroger-Fred Meyer and Albertson’s-American Stores mergers, both of which were announced last summer. The Albertson’s decision, rendered in June, reassigned 147 stores to new owners.
For some center owners, the merger therefore had opposite effects: losing a national player to a regional one and taking a hit in the creditworthiness of their anchor tenant.
“Without reading the FTC’s mind, I think they required [Albertson’s] to divest some of their high-quality stores,’’ said Gerrity. “I think the FTC did a trade area survey and cherry-picked some good stores in an attempt to remix the competitive balance. In some markets, that meant a strong or dominant Albertson’s was the one to be sold and weaker Lucky’s the one held.’’
A company-owned Albertson’s store at one GMS property in the Los Angeles area was divested, with Certified Grocers of California the likely buyer (the deal had not closed as SCT went to press). “In our case, Von’s wanted the store badly but the FTC said no to Von’s and yes to Certified because it brought one more player to the trade area,’’ Gerrity said. “There was a lot of pushing and pulling on these sites.’’
While Gerrity said he believes Certified will do fine in the former Albertson’s site, new operators taking up the divested stores will all have to work hard to gain acceptance, said Peter J. Larkin, president of the California Grocers Association, a Sacramento, Calif.-based trade group.
“All of the new owners want to put their best foot forward,’’ said Larkin. “They want to show their customers what it means to be a Stater Bros., a KV Mart, a Raley’s or a Ralph’s. They’re going to do everything they can to win the loyalty of their customers.’’
Bigger not always better
The argument that smaller operators will be at a disadvantage due to their size doesn’t hold water, said Bill Coyne, general counsel for Raley’s Inc., a Sacramento, Calif.-based grocer that picked up 27 former Albertson’s and Lucky stores in New Mexico and Nevada as a result of divestiture. “The largest advantage to the big companies of a merger is the overhead and administrative costs, eliminating duplication in backroom services such as the legal department or real estate,’’ Coyne said. “But we’ve been able to combat their buying power through our own buying cooperatives. We also think that it’s easier to operate at the size we are. We can respond quickly to our customers’ needs.’’Strip center owners and their tenants on the East Coast meanwhile are waiting to see what the FTC will have to say — if anything — about Royal Ahold’s pending acquisition of Pathmark. Netherlands-based Ahold wants to fold Pathmark in with its Giant-Carlisle division, which operates Edward’s Supermarkets — a major competitor to Pathmark in the New York metro area. The deal is expected to close in the fourth quarter.
The proposal has already drawn fire from a nonprofit antitrust group in Washington, D.C., which argued that the FTC should seek an injunction against the entire merger. According to the American Antitrust Institute, 45 of Edwards’ 67 stores compete directly with a Pathmark. In addition, Pathmark competes with other Ahold-owned stores including Stop & Shop, Super G and Giant.
A group calling itself the Consumers’ Alliance for Supermarket Competition (CASC) has rallied against the merger. Believed to be funded by a supermarket chain competing with Ahold, CASC did not respond to requests for interviews for this article. Other local chains are anxiously awaiting the potential to gain new sites as a result of divestiture. “We see it as an opportunity as much as a threat,’’ said Edward Glackin, vice president of real estate for King Kullen, a 49-store independent chain in Westbury, N.Y.
Developers wait and see
Developers are also watching closely, including one that feared a strip center project under construction was in danger because of its proximity to its anchor’s soon-to-be-partner. “It’s a situation where a developer can be stopped dead in his tracks, totally in limbo,’’ said Jay Epstein, a partner in the Washington, D.C., law firm of Rudnick & Wolfe.Drew Alexander, chairman of Weingarten Realty Investors, said it can be an “awkward’’ situation, but that developers often have no choice but to wait it out. Are there steps one can take to avoid it? “None that I know of.’’
Some disputes are inevitable, but maintaining a good relationship with the tenant can go a long way toward resolving them, said Joe Edens, chairman of Columbia, S.C.-based Edens & Avant.
“Whatever happens, you don’t want to get into a position that’s adversarial. Everything you do should be done in a spirit of cooperation,’’ Edens said. “From our experience, once a lease is executed the tenant wants a product delivered to them, and the less troublesome, the better.’’
Partly as a result of ongoing upheavals in the supermarket industry, strip center owners — and their anchor tenants — are becoming more careful with respect to the strength of their locations. Montvale, N.J.-based A&P pulled out of Richmond, Va., and Atlanta in the last year to concentrate only on markets where it can be the leading grocer. Similarly, Jacksonville, Fla.-based strip center real estate investment trust Regency Realty boasts of its efforts to own only those centers anchored by the No. 1 or No. 2 grocery tenants in its trade area.
“Where people get hurt is when they’re pioneering a new market or taking a second location in a market to protect their position,’’ said Gerrity. “At the end of the day, it argues toward having the strongest location possible, not just to your targeted grocer but to the industry as a whole. If it’s a fundamentally sound grocery location, it’s going to survive any situation.’’
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