On Jan. 10, Minneapolis-based Supervalu announced a definitive agreement under which it will sell its Albertsons, Acme, Jewel-Osco, Shaw’s and Star Market stores and related Osco and Sav-on in-store pharmacies to AB Acquisition LLC, an affiliate of a Cerberus Capital Management LP-led investor consortium that also includes Kimco Realty Corp., Klaff Realty LP, Lubert-Adler Partners and Schottenstein Real Estate Group, in a transaction valued at $3.3 billion. The long-anticipated announcement came roughly six months after the retailer began a review of “strategic alternatives” for its business, which the company initiated in response to a reported decline in sales and earnings during its fiscal third quarter that sent stock shares down 47 percent (click here to read more about what happened).
The sale will consist of the acquisition by AB Acquisition of the stock of New Albertsons Inc. (NAI), a wholly owned subsidiary of Supervalu, which owns the banners, for $100 million in cash. NAI will sell to AB Acquisition subject to approximately $3.2 billion in debt, which NAI will retain, Supervalu said. (To read more about the transaction, click here.)
Supervalu will continue operating its three divisions, said Mike Siemienas, spokesperson for Supervalu. With the sale, Supervalu will focus on its three core businesses: the wholesale business, which supplies nearly 2,000 independent stores; Save-A-Lot, which the company views as its “growth vehicle” — and which is in the process of increasing private label penetration from 57 percent to 70 percent, according to the company’s third-quarter 2013 earnings call; and five “very strong” regional banners: Cub, Farm Fresh, Shoppers, Shop ‘n Save and Hornbacher’s.
“With those three, Supervalu will still be an approximately $17 billion company,” he told Private Label ⇨ Store Brands.
According to Siemienas, the banners Supervalu is selling will continue a relationship with Supervalu on a wholesaling level.
“As far as where the private brands are offered and what brands are offered, at this point, there aren’t any changes expected,” he explained.
Jim Wisner, president of Libertyville, Ill.-based Wisner Marketing Group, said Supervalu essentially went back to where it was before its acquisition of Albertsons several years ago.
“Basically, we went back to 2006,” he said. “Supervalu is back to what it was then: predominantly a wholesaler with Cub, Save-A-Lot and a couple of other scattered things. In total, I think it’s a much more attractive company now.”
And although some industry observers are skeptical that Supervalu wants to continue its commitment to the retailing game, Ben Ball, senior vice president of Dechert-Hampe, Northbrook, Ill., believes the company will keep its remaining banners.
“They have operated Cub Foods for years in their core Twin Cities market area,” he said. “And they appear to still believe in the Save-A-Lot concept.”
Ball added that he expects the private label programs across the company’s remaining banners to look pretty much the same as they did before the sell-off.
“The stores Supervalu kept are the ones that fit with the price/brand image their current private label offerings fit into,” he explains.
As for the banners being sold, Supervalu said AB Acquisition-owned Albertson’s LLC will reunite its stores with the Albertsons stores purchased from Supervalu. And if history is any judge, the new owner will make plenty of cuts to turn around the acquired banners, Wisner said.
“If you look at what they did with Albertsons — which was kind of clever — they actually just leveraged the value of the assets they bought and shrunk that thing from 600 stores to 200 stores, [and] very strategically sold off markets, sold off stores, got it down to a core operating group that could be reasonably successful, [keeping] the stores competitive in their current marketplace without really breaking a whole lot of ground,” he said. “I would anticipate they will undertake a very similar strategy with the assets they purchased from Supervalu.”
Neil Stern, senior partner with Chicago-based McMillanDoolittle, says he also expects AB Acquisition to use a similar strategy from the previous acquisition — to sell some assets immediately and others over time.
“There are other strategic buyers and private equity firms that are interested in selected assets,” he explained.
Many of the banners AB Acquisition purchased could fare better under different ownership, Wisner pointed out. Therefore, it makes sense that AB Acquisition might turn the banners around and sell them off.
For example, Wisner believes one historic retail giant would be able to reenter the Chicagoland market by purchasing Jewel-Osco.
“Kroger left [decades ago] when they sold their stores to Dominick’s,” he explained, noting that the Cincinnati-based company is the only logical retailer on the list of potential buyers. “This is a big gap in their network — a rather sizable gap. While they’ve still got stores all through central Illinois and Indiana and everywhere else, they’re really not up here. I think it would be an excellent fit.”
Ball agrees that Jewel could be an attractive buy for Kroger.
“The most marketable chain as an ongoing retail concern is Jewel,” he said. “Kroger is glaringly absent from the Chicago landscape. Jewel would make a logical entry point for them — but they may question whether the real estate is worth what Cerberus is likely to want for it.”
And if Kroger does end up buying Jewel, it likely will overhaul the chain, as performance and reputation have been “dropping like a rock,” Wisner said, leaving the Jewel name with a lot less equity than it had years ago. This means the retailer likely would implement its typical store design — found across most Kroger banners — and private brand program rather quickly before the chain suffers even more loss of market share.
But for the time being, AB Acquisition might want to get a little more serious with its store brand strategy if it wants to improve the acquired chains’ performance. Stern noted that a good private label program offers a chance for both financial stability and ongoing differentiation for the banners.
First, it should consider developing a premium-tier store brand for at least the Jewel banner, and probably the Star Markets and Albertsons banners, as well, Ball said. He noted that Supervalu — and thus, the banners being sold — currently offers Culinary Circle, but he believes the premium brand isn’t on par with some of the better premium own brands in the market such as Costco’s Kirkland Signature or Loblaw’s President’s Choice. Nor has Supervalu done much to market the brand inside or outside stores.
“Jewel/Supervalu do very little to support that brand, at least in my area,” Ball said.“In fact, I don’t think I have ever even tried one of the products, and I shop in a Jewel 100 yards from my house at least three times a week. What does that tell you?”
Wisner agreed, noting that Culinary Circle and its marketing both fall flat in comparison to other premium store brands.
“From a quality standpoint, I don’t think it stands up with other premium brands,” he explained. “It looks like, in many cases, product selection was done by people who had no experience buying products or [didn’t know] what constituted quality in many of the categories. … It’s not like picking up Wegmans’ Asian Classics or Italian Classics, or Target’s Archer Farms. It’s well-designed, but … they don’t do a whole lot with it.”
Supervalu — and thus, AB Acquisition — also should do a better job promoting the Wild Harvest brand, Wisner said. He noted that although the brand is quite impressive, its marketing efforts really aren’t.
“It really [is] one of the better natural/organic brands from a concept and development standpoint — graphics and packaging and everything,” he said. “But they haven’t sold it to customers.”
Another brand in need of a marketing boost is Essential Everyday, Wisner noted. Although the brand’s selection and rollout have been impressive, he said Supervalu positioned the brand wrong, offering a value-tier name on what was developed to be a group of national-brand-equivalent (NBE) items.
“If I say that name, what is that telling you? That this is stuff that’s kind of OK to use when nobody’s looking? … It’s old-school private label,” he said.
And marketing and merchandising materials seem to be positioned just as inappropriately, Wisner suggested.
“The advertising doesn’t really position it as anything different than an old-school private label,” he said. “The language, the messaging and everything [are] right out of the ‘80s. They don’t talk about [how they] manage to and develop quality — there’s no substantiation of any quality expectations.”
In contrast, Rochester, N.Y.-based Wegmans Food Markets relies on a corporate chef who tells the stories around product creation when advertising its own brand products, both NBE and others, Wisner explained.
Wisner believes that if Supervalu and AB Acquisition are planning to go forward with its Essential Everyday brand, then they need to create an emotional connection between the brand and shoppers.
“In this day and age,” he explained,” “to have a successful brand, you need to [create] that connection.”
— R. Hofbauer