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mrpayroll
11-07-05, 10:55 AM
http://www.latimes.com/business/la-fi-super7nov07,0,6831823.story?track=tothtml

November 7, 2005

Albertsons May Find Itself Going to Pieces When Sold

A buyer would be likely to keep only part of the assets, selling or shutting the rest, analysts say.

By James F. Peltz, Times Staff Writer

The Southern California grocery industry, upended two years ago by a bitter labor dispute, is poised for another round of shopper-rattling turmoil.

The catalyst this time is ailing Albertsons Inc., which has put itself up for sale and reportedly drawn interest from several parties, including Kroger Co., whose Ralphs grocery chain is among Albertsons' arch-rivals.

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.

Several analysts have estimated that Albertsons is worth $20 to $28 a share, and its stock closed Friday at $24.98. At $25 a share, all of Albertsons would be worth more than $9 billion.

"How many times do assets like these come on the market?" asked analyst Andrew Wolf of BB&T Capital Markets. "Once every 50 years?"

Although Albertsons has said it won't comment on any aspects of a sale until an agreement is reached with a buyer, there has been no shortage of reported suitors. Wall Street is speculating that final bids, and perhaps a decision by Albertsons, could arrive by December.

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.

None of the conjectured bidders has publicly confirmed an interest in Albertsons.

Kroger, with annual sales of $56 billion, probably would face "big antitrust hurdles" if it tried to buy Kroger because of expected objections from the Federal Trade Commission, said Wolf of BB&T Capital Markets.

In California, state Atty. Gen. Bill Lockyer also would "scrutinize the transaction very closely to protect competition and consumers," Lockyer spokesman Tom Dresslar said. Kroger runs 274 Ralphs stores in Southern California and it owns the Compton-based Food 4 Less discount grocery chain.

Some analysts have speculated that Kroger may seek only parts of Albertsons, perhaps by joining forces with one of the investment groups.

If Kroger bought Albertsons whole and then sold a number of California supermarkets to satisfy antitrust concerns, one possible buyer might be Safeway, assuming Safeway wouldn't face antitrust problems of its own. A spokesman at Safeway's Pleasanton, Calif., headquarters declined to comment.

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.

All of this means Southern California shoppers could see a number of their local supermarkets change hands or close their doors, and would again have to adjust their shopping habits.

That's what happened during the labor dispute, when the United Food and Commercial Workers union struck Vons and Pavilions. Ralphs and Albertsons, which were negotiating jointly with Safeway, then locked out their union workers.

The work stoppage sent millions of Southern Californians not only to Wal-Mart, Costco Wholesale Corp. and other discounters, but also to smaller grocers such as Stater Bros. Holdings Inc., Trader Joe's and Arden Group Inc.'s Gelson's Markets. Many converted for good, despite two years of price cutting and other promotional efforts by the three companies.

Kroger Chief Executive David Dillon told analysts in September that Ralphs' same-store sales in Southern California were still down from the last full quarter before the strike began.

Dillon's comments were just the latest evidence that the problems facing Albertsons are endemic to the old-line grocery business and portend further consolidation in the industry, analysts said.

"It's a foregone conclusion that, five years from now, we're going to end up with fewer traditional supermarkets," said George Whalin, president of Retail Management Consultants in San Marcos, Calif.


Checking out

Albertsons' decision to sell the company partly reflects the slide of traditional supermarket chains in the hotly contested Southern California market, where Albertsons' two main rivals are Kroger's Ralphs and Safeway's Vons and Pavilions stores.

Southern California market share*

Others: 36.9%

Ralphs: 18.1%

Vons/Pavilions: 17.4%

Albertsons: 16.8%

Stater Bros.: 10.8%

*As of 2004

Sources: Bear Stearns, Trade Dimensions


I know that 4 years ago I did most of my shopping at Vons, etc. But now most of my grocery shopping is done at Costco and if we had a Walmart in the area, I would be shopping there.

Target has much lower prices than the grocery stores and they are now starting to stock 'cold storage' items.

Soon there will be one large grocery story chain and then the smaller independent rivals.

Chris

kvrdave
11-07-05, 11:11 AM
It was Joe Albertsons supermarket, but the produce department is closed.

JasonF
11-07-05, 11:32 AM
Here in Chicago, the two big grocery store chains are Jewel, which is owned by Albertsons, and Dominick's, which is owned by Safeway. In terms of pharmacies, it's all Osco (again, owned by Albertson's) or Walgreens, with CVS making significant inroads over the last 5 years or so. Kroger doesn't have any presence here.

I grew up in D.C. and neither Kroger nor Albertsons had any presence -- it was all Safeway or Giant (a local chain). Although I think there was a Kroger in Charlottesville, so maybe they've made their way north to the D.C. metro area over the past decade.

Mordred
11-07-05, 11:33 AM
The reason Albertson's isn't doing well here is that it's way overpriced.

For one of her business classes, my wife did an analysis of HEB (a poopular grocery store big in Texas). As part of that, she surveyed her class about where they primarily shopped. Out of 20 responses, 1 answered Albertson's. Everytime I go in, the place is completely dead.

DVD Polizei
11-07-05, 11:36 AM
So, my question is, why can't Albertson's and Kroger use their large buying power to match these lower prices. Kroger is certainly not a small company. And neither is Albertson's. When you sell $40 Billion worth of product, and only make 10%, there's something wrong.

Kroger and Albertson's could start their own large wholesale outlet chain like CostCo, but what I see from these two companies, is a refusal to shape their company to modern demands. If you ask me it's the leadership. In Kroger's case, they have purchased more than what was necessary. They love to buy companies that washup, but don't consider the operating the costs associated with 10 stores when they could have just one large store, servicing the same area.

Kroger recently finished the overhaul of Interstate Fred Meyer here in Portland, costing millions of dollars. And guess what, the store is massively over-priced in almost all of their produce and food. I have doubts they will make anything off their revamping of a store that was actually doing just fine. In fact, the layout is worse than what it was.

X
11-07-05, 11:39 AM
In Northern California Albertson's is pretty ghetto, even compared to Safeway.

There's no way I'd buy a piece of meat that they packaged. And whenever you hear about someone finding a foreign object like a hypodermic needle in their store-packaged food you always know it's going to be Albertson's where it occurred before the story even gets to that part.

al_bundy
11-07-05, 11:43 AM
So, my question is, why can't Albertson's and Kroger use their large buying power to match these lower prices. Kroger is certainly not a small company. And neither is Albertson's. When you sell $40 Billion worth of product, and only make 10%, there's something wrong.

Kroger and Albertson's could start their own large wholesale outlet chain like CostCo, but what I see from these two companies, is a refusal to shape their company to modern demands. If you ask me it's the leadership. In Kroger's case, they have purchased more than what was necessary. They love to buy companies that washup, but don't consider the operating the costs associated with 10 stores when they could have just one large store, servicing the same area.

Kroger recently finished the overhaul of Interstate Fred Meyer here in Portland, costing millions of dollars. And guess what, the store is massively over-priced in almost all of their produce and food. I have doubts they will make anything off their revamping of a store that was actually doing just fine. In fact, the layout is worse than what it was.


Grocery is a very low margin business on most products. 10% sounds too high. The only reason Wal Mart makes money on it is because they can push so much volume.

DVD Polizei
11-07-05, 11:45 AM
Well, as a person who's worked in grocery in the past, and talked with the buyers, all I can say is, if you believe the "very low margin" story, then you might as well believe the car dealership that just told you they only made $19 off the car you bought from them. :)

X
11-07-05, 11:45 AM
Grocery is a very low margin business on most products. 10% sounds too high. The only reason Wal Mart makes money on it is because they can push so much volume.I believe a grocery chain's margin is around 2%. They just turn it over quickly.

movie diva
11-07-05, 11:46 AM
Like mrpayroll, I do the bulk of my shopping at Costco, only go into Vons if I need somthing right then and there, they got screwed with the strike.

DodgingCars
11-07-05, 12:19 PM
Albertsons is our corner store, so that's where we do 99% of our shopping. The Vons down the street is much nicer, but Albertsons is within walking distance.

DodgingCars
11-07-05, 12:21 PM
they got screwed with the strike.

Which is "funny" because I always tell people that while the unions we losers in that strike, so were the grocery stores. They both tried to play hardball (though, I think the Safeway CEO was mostly to blame here -- he wouldn't negotiate at all) and they both lost...

Well.. maybe not Kroger. :)

mrpayroll
11-07-05, 12:24 PM
Which is "funny" because I always tell people that while the unions we losers in that strike, so were the grocery stores. They both tried to play hardball (though, I think the Safeway CEO was mostly to blame here -- he wouldn't negotiate at all) and they both lost...

Well.. maybe not Kroger. :)

Or Jons or Stater Brothers, etc.

Chris

kvrdave
11-07-05, 12:31 PM
Well, as a person who's worked in grocery in the past, and talked with the buyers, all I can say is, if you believe the "very low margin" story, then you might as well believe the car dealership that just told you they only made $19 off the car you bought from them. :)

I agree. Even places like Home Depot typically have things marked up 30% over their costs. Lots of things are much more.

al_bundy
11-07-05, 12:38 PM
when you account for all the overhead it's around 2% profit margins

Michael T Hudson
11-07-05, 03:25 PM
The reason Albertson's isn't doing well here is that it's way overpriced.

For one of her business classes, my wife did an analysis of HEB (a poopular grocery store big in Texas). As part of that, she surveyed her class about where they primarily shopped. Out of 20 responses, 1 answered Albertson's. Everytime I go in, the place is completely dead.

Same issue with Randalls. However HEB does not have to deal with the Unions.

Sonicflood
11-07-05, 05:37 PM
I believe a grocery chain's margin is around 2%. They just turn it over quickly.

Keep in mind that they sell shelf space too. If you want your product at eye level, the manufacturer pays (up front) for it! This is pretty much standard & a BIG source of revenue for stores.

Sonic

BKenn01
11-07-05, 06:18 PM
Grocery is a very low margin business on most products. 10% sounds too high. The only reason Wal Mart makes money on it is because they can push so much volume.

I think you may be confusing net profit with gross margins. Grocery stores and Wal-Mart make way more than 10% gross margin.

As for why these chains are having trouble competing with Wal-Mart. 2 words, labor costs. Most grocery stores are unionized. Wal-Mart is not. Union labor is far more expensive.

al_bundy
11-07-05, 07:04 PM
is this for all items, or just the high margin prepackaged foods that are timesavers?

DodgingCars
11-07-05, 07:39 PM
Keep in mind that they sell shelf space too. If you want your product at eye level, the manufacturer pays (up front) for it! This is pretty much standard & a BIG source of revenue for stores.

Sonic

Yep.. This goes for pretty much all retail stores (major chains).

BKenn01
11-07-05, 09:21 PM
is this for all items, or just the high margin prepackaged foods that are timesavers?

Al, I have been in the C-store biz for 20 years. I dont know the exact margins grocers operate on, but I can say on most items they make decent margins 25 to 50% (thats gross margin, which is % of retail) possibly better.

No, they dont make it on most sale items, such as the 32oz jar of Miracle Whip when its $1.49. They are probably losing money on that, but its like $2.99 off sale. The key is buy extra and sell some purchased at low cost at regular retail. They play lots of games. They use loss leaders well.

But dont pity them, they are doing alright.

JP5683
11-08-05, 03:50 AM
My dad works for a small 'regional' chain (Only in CA and NV- Scolari's)...

Ralph's is closest here. But it's a 'Fresh Fare' store and wayyyyy expensive. If I just want a couple of items I'll go there. Otherwise, it's Costco or Albertsons.

There are a couple of independent stores here that are way ghetto, and they stock a lot of ethnic products, but there produce and meat are cheap and great quality.

Where my dad works was one of the stores not on strike, so they were swamped. Also where they are located, there is no major stores within 10 miles, and it's a densly populated area, so a lot of people walk to the store. And lots of people take carts home, or go on the bus/taxi.

I don't know much about profit margains, but I know they throw out a lot of perfectly good stuff, especially from the deli.

It was kind of ironic, that during the strike, stores couldn't sell stuff, and gave a lot to the food banks, and the workers on strike got stuff from the banks...

ChiTownAbs, Inc
11-08-05, 06:51 AM
Sometimes the parts are worth more than the whole.

Sonicflood
11-08-05, 09:57 PM
Sometimes the parts are worth more than the whole.

http://www.nostalgiacentral.com/images_movie/usa/wallstreet.JPG
"break it up & sell off the pieces!"


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