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WSJ.com - Albertson's May Not Be Panacea for Kroger
Kroger, the nation's largest traditional supermarket chain by revenue, has put in a preliminary bid for Albertson's Inc., the No. 2 traditional grocer, people familiar with the matter have said. Together, the two chains operate about 5,000 stores and rang up $95.4 billion in sales last year, according to data from the Food Marketing Institute.That's close to the $115.1 billion of groceries Wal-Mart sold last year, FMI data shows. But Kroger could have to sell off as many as 45% of Albertson's food stores to pass regulatory hurdles, according to analyst Robert Summers of Bear Stearns Cos., greatly trimming potential revenue of the newly combined companies.
...A deal would help Cincinnati-based Kroger in its drive to control large portions of the grocery market in big, fast-growing cities. Buying Albertson's, based in Boise, Idaho, would give Kroger a large presence in Chicago under the Jewel-Osco name and move it into New England under the Shaw's banner and Philadelphia under the Acme name. It would boost its market share in Southern California, Dallas/Fort Worth, Las Vegas and Salt Lake City. Kroger has said that stores in markets where it controls a major chunk of the grocery business are generally more profitable.
...
“We have not found that consolidation has significantly helped grocery retailers,” says Paul Weitzel, vice president of Willard Bishop Consulting, a retail-marketing consulting firm. “A lot of the big chains went after scale to compete against Wal-Mart, and what they've found was that scale does not always mean efficiencies.”
Kroger's results have worsened for each of its past two fiscal years, with the company posting a loss of $100 million, or 14 cents a share, for the year ended Jan. 29. The company has struggled to propel sales....
Meanwhile, Whole Foods Market Inc. has become one of the nation's most successful chains by portraying itself as a healthier and more sophisticated, albeit pricier, grocer.Aware of these trends, Kroger is rolling out high-end stores called Fresh Fare to capture upscale customers and low-priced stores under the Food 4 Less name as shoppers move away from the middle of the grocery market. It is also culling shopping data from customer loyalty cards -- a tool Wal-Mart doesn't have.
Several big grocery acquisitions fell short of expectations when buyers, eager to cut costs, homogenized stores. Safeway Inc. turned off shoppers when it replaced well-known brand names with its more lucrative store label after it bought Chicago's Dominick's chain in 1998. Safeway tried to sell the chain four years later after writing down millions of dollars in losses.
Selling 45% of Albertson's stores will roil some in-store marketing vendor contracts, especially those that have stronger relations to Kroger than Albertson's.
update: more from the Sun-Times
The Jewel-Osco stores dotting the Chicago region will likely have new but separate owners after parent company Albertson's sells its assets, analysts say. ... The Sun-Times reported Sept. 13 that drugstore chain CVS Corp. was a likely bidder for the Osco stand-alone drugstores.Albertson's 694 stand-alone drugstores “make an eerily perfect geographic fit” for CVS' national ambitions because they would fill in gaps in California and other Western states, said Carol Levenson, an analyst with Gimme Credit, a New York-based research firm.
Walgreen, the Deerfield-based drugstore giant, also is believed to be interested in bidding for some of the Osco drugstores.
The Jewel grocery stores in the Chicago area represent a prized asset, and will likely be sold separately, analysts believe.
Chicago has Albertson's highest persons-served-per-store, at 20,783, compared with Albertson's chain median of 10,000, according to Summers' report. The Jewel grocery stores have nearly 40 percent market share in the Chicago region.
and from the Denver Business Journal:
The deal faces intense anti-trust scrutiny because of the dominant market share the combined company would have, analysts said. To deal with those concerns, the merged company might be forced to sell some assets to smaller rivals.
Grocery-industry watchers are concerned about significant overlap of stores in Colorado, California and Arizona as well as Dallas, Seattle, Salt Lake City and Portland, Ore.
Update 11/7/05
LA Times thinks Albertson's is up for sale because of the strike in SoCal:
Although it operates in 37 states, Albertsons' move partly reflects its problems in Southern California, where the company — along with Kroger and the region's third major grocer, Safeway Inc., which owns Vons and Pavilions — has struggled to regain ground lost during their labor strike and lockout.The three companies also are under growing pressure from a shift in shopping habits. Many consumers have abandoned conventional supermarkets for the food aisles of Wal-Mart Stores Inc. and other mass-market discounters and for specialty grocers such as Whole Foods Market Inc.
Five years ago, Kroger, Albertsons and Safeway controlled nearly 60% of the Southern California grocery market, but their share had dropped to 52% by the end of last year.
All three chains have struggled to regain sales lost during the Central and Southern California labor dispute, which began Oct. 11, 2003, and lasted until Feb. 29, 2004. The effects are still evident in the performance at Albertsons, the nation's second-largest traditional grocery retailer, behind No. 1 Kroger.
In its fiscal year ended Feb. 3, the company earned $444 million on sales of $39.9 billion. Four years earlier, its profit was $765 million on sales of only $35.2 billion.
Two years ago, Albertson's stock traded at about $20 a share — about where it was trading when the company put itself up for sale Sept. 2.
Given the subpar performance of Albertsons' diversified stable of food and drug stores, analysts said they were skeptical that anyone was interested in buying and running the company as it now stands. Instead, they expect the company to be broken apart as one or more buyers pick the pieces they want and sell or shutter the parts they don't.
“Albertsons today is a troubled company,” analyst Meredith Adler of Lehman Bros. said in a report last month. Albertsons' decision to sell, she wrote, is “a recognition that it cannot be turned around as one single entity.”
Yet Boise, Idaho-based Albertsons, with 2,500 stores nationwide, still has substantial value.
Besides its namesake grocery stores, of which 270 are in Southern California, the company owns the upscale Bristol Farms brand, the Sav-on Drugs chain, which has 332 stores in Southern California, and a raft other brands including Jewel-Osco, Osco Drug, Acme, Shaw's and Star Markets.
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“How many times do assets like these come on the market?” asked analyst Andrew Wolf of BB&T Capital Markets. “Once every 50 years?”...Besides Kroger — which has not confirmed reports that it is considering making an offer for all or part of Albertsons — other potential bidders reportedly include Yucaipa Cos., the investment firm of Los Angeles billionaire Ronald Burkle, who made much of his fortune buying and selling supermarket chains. A Yucaipa spokesman declined to comment last week.
Others reportedly interested in the company: A group that includes investment firms Thomas H. Lee Partners, Bain Capital and Warburg Pincus, and another that includes Kohlberg Kravis Roberts & Co. and Apollo Management.
Meanwhile, major drugstore chains — including Walgreen Co., CVS Corp. and Rite Aid Corp. — reportedly are mulling over bids only for Albertsons' drugstore operations...Kroger, with annual sales of $56 billion, probably would face “big antitrust hurdles” if it tried to buy Albertsons because of expected objections from the Federal Trade Commission, said Wolf of BB&T Capital Markets....Some analysts have speculated that Kroger may seek only parts of Albertsons, perhaps by joining forces with one of the investment groups.
...There also is speculation that the investment firms bidding for Albertsons might be more interested in the chain's real-estate holdings. That could lead to the closure of some stores as those sites are redeveloped.
Update 12/14/05, looks like the sale will be over soon
Update 12/16/05, apparently SuperValu is the winner, and is going to close/sell off most of the stores
update 12/23/05. Guess not!
Tags: Albertson's, /Chicago, /Kroger, /supermarket
