The Best Laid Schemes

The supermarket landscape began changing in as-yet unpredictable ways in early 2013 as two of the more aggressive initiatives of the mid-2000s – Supervalu's acquisition of Albertsons and Tesco PLC's launch of Fresh & Easy Neighborhood Market – appeared to be reaching unsuccessful conclusions.Supervalu's concept was simple, but ambitious: Unite one of the nation's largest wholesaling operations with 1,100 supermarkets stretching from California to Maine to create an unprecedented powerhouse in the grocery industry.But the execution proved to be too much for Supervalu to handle, and the attempt ended in January when the company agreed to sell the chains it gained through the acquisition of Albertsons in 2006 to a consortium led by Cerberus Capital Management. The purchase price was $3.3 billion, roughly one-fourth of the $12 billion that Supervalu paid seven years ago.Ironically, Cerberus will unite the 877 stores in the Albertsons, Acme, Jewel-Osco, and Shaw's/Star Market chains with the 192 Albertsons locations it already owns in Texas, Colorado and four other states in the lower half of the U.S. Those stores are all that's left of the 655 stores the group obtained in 2006, when it agreed to acquire the less-attractive units in the Albertsons portfolio for their real estate value; the Cerberus consortium for both deals comprises Kimco Realty Corp., Schottenstein Real Estate Group, Lubert-Adler Partners and Klaff Realty, LP.With the sale, Supervalu basically reverts back to its status before the deal: a top wholesaler with 191 supermarkets under the Cub Foods, Farm Fresh, Shoppers Food & Pharmacy, Shop 'n Save and Hornbacher's banners, and about 1,280 Save-A-Lot extreme-value stores. (Both store totals are slightly lower than in 2006.) Former chief executive officer Craig Herkert, who was ousted in July 2012, had christened Save-A-Lot as the company's crown jewel one year earlier. (See "Supervalu Dumps Herkert" and "Supervalu Keeps Whittling …")Wayne Sales, who took over for Herkert, was replaced as CEO even before the deal closed by Sam Duncan, a former CEO at OfficeMax and ShopKo who also logged 19 years at the pre-2006 Albertsons.Robert Miller, a former executive vice president of retail operations at the old Albertsons who has been serving as CEO of the Cerberus-owned Albertsons LLC (which boasts several other veterans of the old national chain among its top executives), will bridge the two companies: He will remain CEO of the united Albertsons while taking on the chairman's post at Supervalu. (Cerberus expects to amass a stake of 20% or better in the scaled-down Supervalu by the time the deal closes.)"In 2006, we acquired a set of stores that lacked investment and were in tough shape, but with our great associates taking care of our customers every day we have grown into a solid regional supermarket chain with growing sales," Miller said in a media release. "I believe we can be successful again.""The transactions represent the successful culmination of the in-depth strategic review process we commenced this past summer," Sales said in a separate release. "Following the sale, Supervalu will have three strong, market-leading business units with more consistent cash flows and improved EBITDA growth potential."Meanwhile, U.K. retailing giant Tesco officially confirmed in December that it is considering the sale of all or part of its Fresh & Easy chain. "Whilst the business has many positives, its journey to scale and acceptable returns will take too long relative to other opportunities," Tesco CEO Philip Clarke explained in a media release. "I have therefore decided to conduct a strategic review of Fresh & Easy, with all options under consideration."Tesco appointed investment-banking firm Greenhill to conduct a review of options for the small-format grocery chain, which operates 199 stores in California, Arizona and Nevada. Clarke said the company had received "a number of approaches" from parties interested in acquiring Fresh & Easy or in partnering with Tesco to further develop the business.Fresh & Easy's launch in November 2007 met with great fanfare overall but some trepidation among U.S. supermarket retailers, because Tesco's skill in conquering Europe had many industry analysts and retail-business reporters guaranteeing similar success here. U.S. king Walmart even responded to the threat by testing its own small-grocery format in 2008.Despite those expectations, Fresh & Easy's initial product mix and focus on healthy perishables didn't connect strongly enough with shoppers – although, to be fair, rolling out a decidedly upscale concept just as a global recession hit was a unexpectedly daunting task. In 2009, Tesco redirected marketing efforts to emphasize the chain's low prices, but the effort evidently did little to lure more shoppers.Tesco now is trying to convince the shoppers that it did gain to remain loyal during the evaluation process, promising that closing stores is not one of the options it is currently considering.

The Best Laid Schemes

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