Kroger to merge with Albertsons?

[storewanderer]

Back in 1999, the buyers of divested Lucky/Albertsons Stores "agreed" to operate the stores for at least 10 years. Stores (especially the ones sold to Certified Grocers - including some that were corporate run Sav Max Foods.. oh there we go again with selling stores to a wholesaler who fails...) started closing after a year. Ralphs started closing stores before a year was up (a store in Jackson was the first to close; a new Raleys was built next to it and it was doing almost no sales).

So you can't "force" C&S to promise to run the stores for 20 years. There are too many factors. Will the landlords even agree to keep leasing the store for C&S for 20 years?

A block of the divests sold to Haggen were "poorly performing stores" for Albertsons/Safeway. I think it was about 30 of the stores. Junk like the Los Osos Vons, both of the Klamath Falls Safeways, some other small junk run down Vons units, mostly pretty obvious. Many of these would have closed anyway even if they hadn't been divested.

Simply put, the consensus is that wholesalers like Supervalu, Fleming, Unified, and AWG have failed to operate their own corporate stores.

I’m surprised the Safeways in Klamath Falls were divested instead of the Albertsons. But Albertsons is stronger than Safeway in Southern Oregon.

Supervalu had a decent tract record on corporate stores except the whole Albertsons thing... AWG saved Homeland from going out of business and Homeland has actually had a pretty nice growth period after being divested by AWG so I sort of like how things have worked out for Homeland after AWG got rid of it.

The issue in Klamath Falls was you had the smaller downtown Safeway (since reopened as Holiday with city incentives) which had a Lifestyle remodel that did okay but it was a very small/outdated facility. Then just a few minutes away at the busiest intersection in Klamath Falls Safeway built a big late 90's store that did almost no volume at the time Haggen got it. That store never got a Lifestyle remodel and when it opened, the downtown store probably should have closed, but did not. Meanwhile within less than a mile of the new Safeway you had a large busy Fred Meyer, then in the mid to late 00's Wal Mart Supercenter happened, Sherm's Thunderbird who previously ran out of an old Mayfair built a brand new building. The Albertsons in Klamath Falls was a couple miles away from that bloodbath and kind of isolated out on its own. Everyone was doing high volumes in Klamath Falls except the two Safeways. Now Holiday is the one hardly doing any volume but it is surviving; the larger Safeway got subdivided or something.

[ClownLoach]

Report says that the proposed divestitures should be fine with FTC based upon past precedent:

https://www.supermarketnews.com/retail- ... ure-report

I hope that regulators know that if this is approved they'll be sitting on 100 - 120 dark boxes in So Cal, 70 in Arizona, 25 in Nevada, 15 in Nevada, etc. even after all of the divestitures. Plus it will certainly lead to higher prices.

I'm pretty skeptical about the merger and opposed to it, but I think the California figure you're giving here is not even close to reality. Kroger has recognized that their strategy after acquiring Fred Meyer of "shrinking to grow scale" backfired. They now find themselves with a fleet of stores especially in California that are "maxed out" and literally cannot scale up to allow any more sales volume. Most of their remaining Ralphs stores are losing sales to competitors with growth capacity because they culled too many locations in areas that are now growing in population density drastically with new zoning standards that are replacing single family and duplexes with 5 story mega complexes. In fact I wouldn't be surprised if their only sales increases in some locations stem entirely from price increases because transaction comp growth is zero due to these bad conditions. Long Beach, CA is a great example where they closed multiple Ralphs locations that they desperately need today and cannot replace; they have stores that are operationally on the edge of broken because they cannot process one more carton of freight or ring one more transaction on the front end. If they had the additional stores of their focus competitor Albertsons they would at least be able to make a strategy to get their customers to balance out where they might currently drive past a Vons to get perceived better deals at Ralphs, now they'll shop that converted Vons and they better balance transactions opening capacity to grow. This lack of capacity is a real and serious problem that has caused them to lose more than half their sales volume in constant dollars since 2005 and allowed Albertsons-Vons to become the conventional #1 chain in Southern California with Stater Bros as #2.

It is crystal clear that any closure resulting from this merger will mean the 100% forfeit of the sales and profit dollars at said location, thus rendering such consolidation as unnecessary and problematic. Thus no cost savings or profit improvement from closures at all in California. The fact is that there are a tiny handful of fringe market stores, probably less than a dozen I can name in all of SoCal, where I would anticipate closures and those would happen with or without a merger (such as Ralphs in Santa Barbara and San Luis Obispo counties where they clearly don't want to be there and run garbage, dead stores while Albertsons rules with an ironclad grip). Nowhere near 120+ stores would close. There is more than enough expenses behind the scenes and in distribution and such to reduce overhead and thus give them tons of savings from merging, closing stores in California is not necessary at all. Arizona and Nevada might be different but both are substantially over stored and again closures need to organically happen merger or not. I do believe them when they promise no closures, there's no reason to spend good money and then throw it away which all closures here would be.

Kroger could have built more stores in CA over the years. They chose not to. And to add insult they closed many stores too.

In CA what I see this merger doing is taking what are essentially a bunch of shrinking/failing grocery chains and moving them all under one owner. This is the last round but the shrink will continue. Customers have voted with their feet and new ethnic competitors with better pricing/service levels open new stores what feels like weekly in SoCal. There was a point in 1999 when Vons, Albertsons, Ralphs, and Lucky were all very viable strong individual chains with collectively nearly 1,000 stores between them in SoCal. Now what I think we are looking at here is you will have all of these joined together and they will just keep on shrinking. As you point out there are some bright spots for the Albertsons banner in some growing areas (most of these were large stores planned by Lucky) as they have large stores that were under utilized for 20 years and now finally those areas have enough people around to get those stores finally doing the business they needed to be doing 20 years ago, and I'd argue a lot of areas around Los Angeles are bright spots for Ralphs as they run some extremely high volume stores that are stable from a volume perspective and Vons is in the same position in a lot of spots.

I am also not confident Kroger will somehow work miracles and get a healthy, growing, operation going in CA either. Kroger does well in most other markets and generally enjoys strong customer loyalty, but CA, specifically Ralphs, has been a very sore spot. And the quality of the Ralphs store has deteriorated so much from what it was 20 years ago (most of the decline was right after the strike), yet Ralphs still has prices quite a bit higher than other parts of Kroger, so the price to quality ratio at Ralphs is poor, while much of the rest of Kroger gets that ratio pretty spot on.

I do not believe Kroger knows how to run a smaller format store well, if at all (aka Ralphs, QFC). The benefit to them of this merger is that they get operators who do know how to run stores in the 30K to 50K range profitably. This is why I seriously wonder if the Albertsons format will be the go-forward in that size range versus the usually now cluttered and overly crammed Ralphs version that has no circulation space for the customer. I learned long ago that surprisingly reducing clutter, displays, pallet stacks and island fillers actually increased my sales and basket size in small stores because I was giving my customers back their space to shop. They can basically let Kroger do what it does best and run superstore size buildings while the Albertsons leadership is given the regions like SoCal where more modest size buildings are the norm. They also need to address the issues that are causing or allowing the price disparity between regions and narrow those gaps. If it's an internal inefficiency that causes higher prices in LA than Phoenix it is unacceptable for a company of that size. External I understand, but not internal.

[ClownLoach]

When a Brand is tarnished it spreads like a cancer and that cancer "travels".

Every location functions like an ambassador.

What I have experienced in a store in the Coachella Valley CA. will affect my decision when I face that same name in Elmira N.Y.

The Name is what matters. People don't know or care about corporate or franchise entities.

I have worked for a company that managed to tarnish their brand, what I found was it generally is on a regional basis. One region may be well run and operated and the reputation is good overall for the company, but then you'll hear about "those stores in XX state" which are bad. Overall it is like a stock price somewhat, the company wide brand equity, and there are indexes these days that measure this for all to understand. That measure, which is usually called NPS or Net Promoter Score, is the one that really matters.

[ClownLoach]

Report says that the proposed divestitures should be fine with FTC based upon past precedent:

https://www.supermarketnews.com/retail- ... ure-report

I hope that regulators know that if this is approved they'll be sitting on 100 - 120 dark boxes in So Cal, 70 in Arizona, 25 in Nevada, 15 in Nevada, etc. even after all of the divestitures. Plus it will certainly lead to higher prices.

“Based upon past precedent”
The Feds should only allow the deal if C&S is willing to operate the stores for at least 20 years. I think at least 10% of the combined company needs to be divested (500 stores).

They should know that C&S is basically a successor to Fleming. Fleming struggled to operate corporate retail successfully, or they lost interest. In 2000, Fleming put its corporate retail on the sale block. Fleming’s corporate retail operations were ABCO Foods in Arizona; Baker’s in Omaha; Rainbow Foods in Minnesota; Sentry Foods in Wisconsin; and Thompson Food Basket in Central Illinois.
ABCO was ultimately parted out to Safeway and Bashas’ in 2002.
Baker’s was sold to Kroger in late 2000 after winning a bidding war with Albertsons.
Rainbow was almost sold to Albertsons in 2000 after winning a bidding war with Safeway and Kroger (but ABS backed out at the last minute for some reason). Ultimately, Rainbow was sold to Roundy’s when Fleming went bankrupt 20 years ago.
Sentry was parted out to independents in Wisconsin, while Thompson Food Basket was ultimately shut down.

The Feds could likely remember the Haggen disaster, Cerberus’ immediate sale of Cub Foods in Chicago/Jewel in Springfield IL (was done to circumvent FTC action during Supervalu’s 2006 acquisition of Albertsons’ strong assets), the Raley’s failure in Las Vegas, Ralphs’ failure in NorCal acquiring Albertsons/Lucky divests, Smith’s near-failure in Montana/Wyoming acquiring Albertsons/Buttrey divests, etc.

Back in 1999, the buyers of divested Lucky/Albertsons Stores "agreed" to operate the stores for at least 10 years. Stores (especially the ones sold to Certified Grocers - including some that were corporate run Sav Max Foods.. oh there we go again with selling stores to a wholesaler who fails...) started closing after a year. Ralphs started closing stores before a year was up (a store in Jackson was the first to close; a new Raleys was built next to it and it was doing almost no sales).

So you can't "force" C&S to promise to run the stores for 20 years. There are too many factors. Will the landlords even agree to keep leasing the store for C&S for 20 years?

A block of the divests sold to Haggen were "poorly performing stores" for Albertsons/Safeway. I think it was about 30 of the stores. Junk like the Los Osos Vons, both of the Klamath Falls Safeways, some other small junk run down Vons units, mostly pretty obvious. Many of these would have closed anyway even if they hadn't been divested.

All of this is the great coin toss. On one side, the legally accepted answer to retail mergers has been divestitures to, well, someone else, and that is the approved remedy. To state that it is not a legally valid remedy now would run counter to the law as it has been established for decades and basically enable Kroger to win immediately on appeal and possibly enact a plan with less divestitures than a straight agreement with the Justice Dept would give.

On the other side of the same coin (past precedent) very few merger divestitures have been productive or held up aside from the best examples like the many stores divested to Stater Bros in the Albertsons-ASC merger.

What will be interesting is if the Justice Department has to say that basically there have been too many mergers now and as a result there aren't any remaining qualified buyers like Stater Bros was almost 25 years ago. State the precedent of wholesalers not working out (and the obvious that the stores they're getting are handpicked from the rubbish bin, the stores that would have been obvious merger closures with only a few viable locations aka true overlapping boxes). Then say that the precedents of the past will stand; it's Kroger's job as buyer to find actual "Stater Bros quality" acquirers for all overlaps where there truly will be no question as to their intent or ability to change to a productive and profitable format that will be open for a long time and a future pain in the rear for Kroger to fight for share with.

Give them the list of stores that must be divested and tell them once they have "approved" buyers for each one then they can have their merger. And the other aspect should be that Kroger becomes responsible for addressing the costs of the divestitures which become barriers to entry. For example, and this is going to be a bad one, let's say Raley's wanted to buy all SoCal divests and thinks their format would work in the market. The stores are cheap as we know and Kroger could be forced to sell them a DC and Office. But the barrier to entry is the cost to remodel the stores and resupply them with their branded inventory. So even if a store is sold for $1 it might represent a $10M or more required investment by the new owner to make it work. Multiply that by the planned 60 or so California divests and the real cost to a buyer who intends to do it right could exceed $600M. When they buy 60 stores and can't afford the $600M investment you get instant Haggen. There may be potential buyers who might be regionals like Save Mart or Raley's in California who would like to expand and pick up a few markets of divested viable stores, but the high cost of the conversion work is what stops them. Heck, the needed inventory and Capex could be why even bigger companies like Ahold Delhaize didn't bite. Tell Kroger this is going to turn into them "paying others to take the divests off their hands" by giving them enough money to make the store viable so it stays open for decades. They must remove the barriers to entry which are the real reason there aren't other regionals chomping on the opportunity to grow elsewhere. Instead of one lame acquirer like C&S there might be half a dozen or more that could make it work. Maybe Stater Bros would bite on more SoCal stores if they didn't have to worry about the capital outlay, and so forth.

The cost of this forced investment gets deducted from the price they pay the shareholders of ACI. They were going to deduct the sold stores from the price anyway, just make a larger deduction to cover those costs.

And if there still aren't "A" tier qualified operators who come forward to buy every market as needed then they can't have their deal. Put a deadline on it too, give them 6 months to rectify all Justice Dept and FTC challenges since apparently they can't "force" an acquirer to run the stores for XX years. Tell them on the last day of those 6 months the lawsuit for injunction gets filed and the merger is dead. Then put the responsibility on their shoulders to write the checks necessary to get the merger closed the right way, not the easy way.

[SamSpade]

Off Topic

“Based upon past precedent”
They should know that C&S is basically a successor to Fleming. Fleming struggled to operate corporate retail successfully, or they lost interest. In 2000, Fleming put its corporate retail on the sale block. Fleming’s corporate retail operations were ABCO Foods in Arizona; Baker’s in Omaha; Rainbow Foods in Minnesota; Sentry Foods in Wisconsin; and Thompson Food Basket in Central Illinois.
ABCO was ultimately parted out to Safeway and Bashas’ in 2002.
Baker’s was sold to Kroger in late 2000 after winning a bidding war with Albertsons.
Rainbow was almost sold to Albertsons in 2000 after winning a bidding war with Safeway and Kroger (but ABS backed out at the last minute for some reason). Ultimately, Rainbow was sold to Roundy’s when Fleming went bankrupt 20 years ago.
Sentry was parted out to independents in Wisconsin, while Thompson Food Basket was ultimately shut down.

... you forgot Fleming's Food 4 Less operations along the Wasatch Front in Utah.
Associated picked up some of these to their Maceys format (similar in size but a much more full-service operation) and 2 were opened as "Super Saver" by Albertsons, later "Lucky," as they are today.
I thought they folded as a result of the KMart bankruptcy in 2001? They were the supplier for Harmons in Utah though they successfully swapped to Associated without too much visible change beyond house brands on the shelves.

[veteran+]

When a Brand is tarnished it spreads like a cancer and that cancer "travels".

Every location functions like an ambassador.

What I have experienced in a store in the Coachella Valley CA. will affect my decision when I face that same name in Elmira N.Y.

The Name is what matters. People don't know or care about corporate or franchise entities.

I have worked for a company that managed to tarnish their brand, what I found was it generally is on a regional basis. One region may be well run and operated and the reputation is good overall for the company, but then you'll hear about "those stores in XX state" which are bad. Overall it is like a stock price somewhat, the company wide brand equity, and there are indexes these days that measure this for all to understand. That measure, which is usually called NPS or Net Promoter Score, is the one that really matters.

And perhaps that is the reason for Brand Equity getting diminished and diluted so easily nowadays with these brilliant MBA E-Suite charlatans.

[veteran+]

Off Topic

“Based upon past precedent”
They should know that C&S is basically a successor to Fleming. Fleming struggled to operate corporate retail successfully, or they lost interest. In 2000, Fleming put its corporate retail on the sale block. Fleming’s corporate retail operations were ABCO Foods in Arizona; Baker’s in Omaha; Rainbow Foods in Minnesota; Sentry Foods in Wisconsin; and Thompson Food Basket in Central Illinois.
ABCO was ultimately parted out to Safeway and Bashas’ in 2002.
Baker’s was sold to Kroger in late 2000 after winning a bidding war with Albertsons.
Rainbow was almost sold to Albertsons in 2000 after winning a bidding war with Safeway and Kroger (but ABS backed out at the last minute for some reason). Ultimately, Rainbow was sold to Roundy’s when Fleming went bankrupt 20 years ago.
Sentry was parted out to independents in Wisconsin, while Thompson Food Basket was ultimately shut down.

... you forgot Fleming's Food 4 Less operations along the Wasatch Front in Utah.
Associated picked up some of these to their Maceys format (similar in size but a much more full-service operation) and 2 were opened as "Super Saver" by Albertsons, later "Lucky," as they are today.
I thought they folded as a result of the KMart bankruptcy in 2001? They were the supplier for Harmons in Utah though they successfully swapped to Associated without too much visible change beyond house brands on the shelves.

And let's not forget their activities in Florida.

[storewanderer]

And let's not forget their activities in Florida.

What did Fleming do in Florida?

Fleming quit delivering to Kmart and that was one of the straws that drove Kmart to filing bankruptcy. It was going to happen anyway but when Fleming suspended deliveries that made it happen.

[ClownLoach]

And let's not forget their activities in Florida.

What did Fleming do in Florida?

Fleming quit delivering to Kmart and that was one of the straws that drove Kmart to filing bankruptcy. It was going to happen anyway but when Fleming suspended deliveries that made it happen.

Was Kmart paying their bills? If not then Fleming should have stopped delivery. If they were then Fleming should have been sued out of business by Kmart.

[storewanderer]

And let's not forget their activities in Florida.

What did Fleming do in Florida?

Fleming quit delivering to Kmart and that was one of the straws that drove Kmart to filing bankruptcy. It was going to happen anyway but when Fleming suspended deliveries that made it happen.

Was Kmart paying their bills? If not then Fleming should have stopped delivery. If they were then Fleming should have been sued out of business by Kmart.

Fleming was the source for all consumable goods for Kmart- this included all groceries, cleaning supplies, pet products. This excluded drug/HBA. Kmart was no longer self distributing any consumable items.

Kmart was to pay Fleming weekly. Kmart missed a scheduled payment, and Fleming stopped delivering. This was on January 21, 2002.

Kmart then filed bankruptcy on January 22, 2002. Kmart could not continue without consumable goods.

January 24, 2002, Fleming resumed shipping to Kmart once the bankruptcy court approved payments.

February 2003- Fleming and Kmart terminated their supply agreement, a contract rejection occurring as Kmart was still being bankrupt.

There is a lot more to the story there. Fleming involved itself with Kmart on the pie in the sky premise that Kmart would convert 1,200 or something of its stores to Super Kmarts. Instead when Kmart went bankrupt they closed half of the supercenters and many of the closures were those stores converted to Super Kmarts. This program wasn't going to work, the old dismal Kmarts were not going to make good conversions to include grocery, Fleming was a terrible wholesaler, and the entire idea and getting with Fleming was a very bad idea. In this regard Supervalu was very smart to let Fleming entertain Kmart; both were in the running to support Kmart in that supercenter conversion initiative.

April 2003- Flaming goes bankrupt

June-August 2003- Flaming essentially goes out of business as a grocery wholesaler, C&S wins the bid for most of the assets, but C&S quickly parceled many of the assets off to other wholesalers, and also did some asset trades with Supervalu in some regions (this is very important- who's to say C&S doesn't engage in similar sell off/trade transactions with divests from Kroger/Albertsons).