business news in context, analysis with attitude

In addition to our Special Alert last Friday reporting the news that Albertsons was up for sale, we also offered some commentary about the development, noting that it didn’t surprise us:

For one thing, the conventional wisdom among many of the retailers with whom we have spoken in recent months has been that current management at Albertsons is wearing out its welcome – that Larry Johnston’s honeymoon is coming to an end. The sense has been that while Albertsons has not been doing enough to establish itself as a compelling alternative to consumers – which is something that a lot of people seem to think that the former GE executive just doesn’t get.

But there’s another reason this doesn’t surprise us.

While we’ve been on vacation this week, a new Shaw’s store opened in our Connecticut town. (Shaw’s, as you know, is owned by Albertsons.) Now, our town has been waiting for this store for over a year. It used to be a Grand Union, was taken over by Shaw’s, and then was closed for remodeling. Then, they decided to tear the whole building down and rebuild it from scratch, leading many in the community to eagerly await what we assumed would be a showplace supermarket that would compete with an old Stop & Shop, an excellent Palmer’s independent supermarket, and a number of nearby stores including the estimable Stew Leonard’s.

And when it opened, many people viewed the new store with enormous disappointment. Because it was a model of 20th century supermarketing – not a store for the 21st century. There is little in the way of the
consumer-driven technological innovations that Johnston has been talking about lately. There wasn’t even self-checkout. (And in some categories, there wasn’t even as strong a selection as there was when it was a Grand Union – and that seems like an awful statement to have to make.)

Now, there may have been plenty of internal rationales for why this store couldn’t be made into anything more. But the customers we spoke to (hardly a scientific sampling, we admit) were profoundly disappointed by what they viewed as the mediocre end to a long period of construction. Shaw’s/Albertsons has lost the opportunity for a “wow!” moment, at least with this store. That’s a shame.

What this may add up to – and we suspect that today’s announcement confirms it – is that Albertsons ultimately may be plagued by a lack of vision. The company knew it had to compete, had to be more efficient. But it may have found it difficult to take that mission statement any further – couldn’t qualify and quantify what it wanted to be in consumers’ eyes, minds and hearts.

Our hope: that Albertsons will come out of this with new, vigorous leadership, as opposed to just competent management.

We got a lot of email on Friday responding this commentary.

A former Albertsons employee and current MNB user wrote:

This really shouldn't be a surprise to anyone. Since the merger with American Stores in 1999 there have been mistakes made over and over again. First, with the equal pairing of executives from both companies that left the Albertson's people running stores while the American executives positioned themselves to take over, and that they did. With the retirement of Gary Michael the writing was on the wall. All Albertson's people had to go. Now think back, who had the money and who was in debt? This is not to say that Albertson's didn't need to make some changes, but the American executives couldn't make money on a "T-Bill", and Albertson's was always known for profitability.

The hiring of Larry Johnson was the worst yet. A good CEO does not need to be an expert of the day-to-day operations, but they do need to supply vision and financial acumen. Larry doesn't appear to have either. He said "Swift" would deliver millions in cost cutting savings that would allow the company to be more "price aggressive." Why has the SG&A not gone down? It's because he has added faster "at the top and new programs" than he cut at the customer service and cost saving level. He sent hundreds if not over a thousand management and employees to Ed Forman's "Happy Camp" costing the company millions (Ed's very comfortable now) but none of them feel very "terrific" today. Next Larry applies Six Sigma to a retail environment. This has proved to be a winner in manufacturing situations but has no track record in retail. Spending millions on Six Sigma doesn't seem to be working. The approach that "if it isn't a winner right now.. sell it," is very short term thinking and thus market exits. The concept that you should turn 20% of your employees every year because you might find someone better is a joke. College degrees are required to be in management creates a nice sounding personnel file, but while all the college kids were in school many hard working employees were learning the business and how to meet customer's needs and maximize profits. Now, Larry admits he doesn't know how to compete in a competitive environment by hiring someone to tell him if he should sell all or pieces of the company.

An additional disappointment is in the Board of Directors who hasn't seen through him yet. Look at the stock price since 1999.

The grocery business is not a hard business, but you MUST WORK HARD AT IT EVERYDAY.

A tip for Larry.... Surround yourself with people that know, and are good at the grocery business as well as delivering groceries to customers, not people that are only into the mechanics of running the business structure.

MNB user Drew DeMoss wrote:

The Shaw's example you cited in today's commentary is very similar to a situation with a new Albertson's store in Frisco, TX. This store was built, surrounded by very upscale residential development. The store offered little customer service and a generic selection of meat, seafood and produce. They had one full year to win these affluent customers over with no direct grocery competition for several miles. As soon as construction began on a Kroger store (across the street) customers commented that they could not wait for another store to do their shopping. The Kroger store opened about three months ago and Albertson's is now a ghost town. How many other local opportunities has Albertson's squandered by focusing on profit dollars instead of what they offer to their customers?

MNB user Matt Weeks wrote:

You hit the nail on the head when you pointed out that Johnston just doesn't get it. He "talks the talk" but in spite of his GE experience and supposed familiarity with consumer-driven innovation, Six Sigma and the rest, he simply can't get his team to execute, and won't or can't clear the decks. So perhaps it had to come to this to allow him to get rid of three layers of old-guard who may have been sabotaging innovation and new thinking. Or maybe not. We'll find out.

There are several private equity companies who have the talent, experience and patience to take Albertson's and re-make it into the brand that it could be. Unfortunately for the employees and the annoyed customers, this may take another several years or more, and the company may be pared down to just one or two brands in order to be able to focus and define/re-define the brand. Albertson's itself may choose to abandon that flag and re-brand under one of their premium brands, or value brands. Fresh eyes will have to make those calls.

Tough going, but sometimes "consequences" are what is necessary to spur real change.

Another MNB user wrote:

I was witness to a lot of the goings on behind the scenes through the American Stores merger. Understanding that all mergers are never easy, this one has never made sense. Albertsons points to competition as their reason but they have never been able to recover from purchasing a larger company and then forcing their philosophy many times with illogical and disastrous results, on a system that did not believe in its vision. Your article hits a bulls-eye ... no vision and no confidence. The company is run much like a battleship with no destination, no plan and generally confused and disgruntled middle management. This only add more fuel to the issues that employees feel at store level.

Still another member of the MNB community wrote:

Could not avoid the irony, when reading your piece, of the names "Grand Union" and "Albertson's" being linked together in such a way. There is a statement made in that sentence, somehow……..

Two shopping traditions, fading into the sunset…

Another MNB user wrote:

I think your last and final statement, Kevin, is that they need vigorous leadership as opposed to competent management. The Joe Albertson era even going on to about 10 years ago had the initiative and vision to make things happen. Joe himself was vigorous (using your term) was in the stores constantly up to his death. J.L. Scott who followed was also vigorous but had the leadership competencies to carry the ball. Of course he saw greener pastures and by now has returned to the Idaho panhandle to watch things slip out of control.

Sad situation…and one that only time will heal if at all.

Disagree on one point.

It’ll take a lot more than just time to heal this thing.

Several MNB users had a “wish list” of potential buyers.

MNB user Tim O’Connor wrote:

It’s time for Tesco or Loblaws to show both shoppers and retailers how to do it.

MNB user Greg Seminara wrote:

My bet is that Tesco will be a strong contender for Albertsons. Tesco is the worlds # 3 supermarket retailer. They are dominating the UK and expanding aggressively in Japan/China. A Tesco senior manager recently indicated to me that they had a strong desire to enter the USA and had already looked at several deals in the past.

Tesco would not have anti-trust/overlap issues to deal with as they have no existing store presence in the USA. Tesco also maintains a relationship with Safeway. Another possibility could be a joint bid with Safeway.

A core question would be “ What added value could Tesco bring to Albertsons ? “

I also wouldn’t rule out Ahold as a potential suitor. They are back on the acquisition trail in Europe and the worst appears behind them. Ahold USA has little overlap with Albertsons except the stores acquired from Shaws. Still, Ahold is a long shot to digest a deal of this size, particularly with lingering Giant Foods/Tops issues.

While there are a lot of us who would love to see Tesco buy Albertsons, we wonder if that is a likely scenario. After all, Tesco already is in business with both Safeway and Kroger to varying degrees – buying Albertsons likely would create a lot of competitive issues.

It seems more likely at the moment that the company will be broken up for parts. It probably would generate more money for shareholders, and lessen the antitrust issues that need to be dealt with.

Short of that, the best bet seems to be that some sort of investment firm comes in and buys Albertsons. But to expect the likes of Tesco, Loblaw, Delhaize or Carrefour to ride to the rescue would seem to be a pipe dream.

MNB user Dan Raftery made an excellent point:

A better scenario would be spinoffs of several regional chains with enough stores to be contenders and each with its own local focus on merchandising. The national supermarket chain just doesn't work. The economics may look appealing to finance folks, but they probably don't even shop for their own groceries. They can't be expected to understand. Kroger is the only national chain that gets it. Geography rules. Boundaries are real.

Another MNB user wrote:

You are right on with your point. There is a huge difference in competent management and bold leadership. Albertson’s, like so many other food retailers is stuck in average mode, and someone I worked for years ago told me that average was nothing more than the best of the worst and the worst of the best, and that is not a place you want to be if you are going to survive in retailing today.

And MNB user David J. Livingston wrote:

I'm afraid many consumers have come to the same conclusion as you with regard to Albertsons. Recently I was at an Albertsons across from a new Wal-Mart. Labor had been cut to the bone. All perimeter departments were dark at 7pm. I did a price check and prices were 27% higher than Wal-Mart. Many of the overhead lights had been turned out making the store appear not only dark, but closed. Despite what you read, their new Super Saver format is a flop.

We can go on and on all day long about the shortcomings at Albertsons. One thing we do know is that in recent years, Albertsons was laughed out of New Orleans, Houston, San Antonio, south Texas, and Memphis. They are quickly losing market share to companies that are faster and smarter. However some of Albertsons divisions performed quite well until they fell into the wrong hands after being acquired. Shaws and Jewel are good examples. I hope that Albertsons is not simply sold to another generic-vanilla supermarket chain, but rather split up and operated as separate regional chains. I'd like to see them back in the hands of career grocers and not accountants. I will give Albertsons credit for finally realizing that the direction they were going was not getting them anywhere.

Talk about being damned with faint praise.
KC's View: