A fresh start for Boise’s Albertsons chain

The supermarket chain is smaller now but based once again in Boise, where the CEO says it's finding new life.

adutton@idahostatesman.com ©2013 Idaho StatesmanNovember 19, 2013 

The dimly lit ballroom of the Boise Centre erupted into applause as local Albertsons executive Susan Morris welcomed local business leaders with a declaration that Albertsons once again calls Boise home.

The company was a "diamond sponsor" of the Boise Metro Chamber of Commerce gala in October, its logo and name decorating the venue. Morris got more than a warm welcome as she told the audience how Albertsons plans to invest in the local community after a half-dozen years of separation from its roots.

Albertsons is now the biggest company based in Idaho, measured by revenue and by employment, dwarfing iconic Gem State companies like Micron Technology Inc. and J.R. Simplot Co.

THE EVOLUTION

Albertsons got its start almost 75 years ago in North Boise, where Joe Albertson opened a grocery store he called "Idaho's largest and finest." By 2006, Albertsons Inc. stretched from coast to coast, with about 2,500 stores and 240,000 employees under several banners, including Albertsons, Acme Markets, Bristol Farms, Jewel-Osco, Shaw's and Star Markets. It was the second-largest grocery chain in the U.S.

But expansion alone couldn't save Albertsons Inc. That year, the Albertsons empire gave in to pressures that included stiff competition from discount retailers like Wal-Mart and put itself up for sale. The company was sold in three pieces for $17.4 billion.

Stand-alone pharmacies were sold to CVS.

Some of the grocery stores, including all the Albertsons supermarkets in Idaho and the non-Albertsons chains, went to Minnesota-based Supervalu, a grocery wholesaler with a retail arm it sought to expand.

The Albertsons stores Supervalu didn't want — more than 600 of them, mostly in weak Albertsons Inc. divisions in the South and Southwest — were bought by a consortium of five companies led by a New York private-equity firm, Cerberus Capital Management. To manage them, the investors created a new Boise company called Albertson's LLC (with an apostrophe) on the same former Albertsons Inc. campus on ParkCenter Boulevard that Supervalu occupied, and they hired some Albertsons Inc. executives to run it.

Cerberus's investment partners were, and still are, four real-estate companies. They set Albertson's LLC on a mission to sell its money-losing stores and make profits on the rest. By 2013, they had pared the store roster to 190, earning millions for the investment firms by selling failed properties for their real-estate value.

All that time, Albertson's LLC was an Idaho company, but few people knew it. Albertson's LLC didn't send speakers to Chamber of Commerce meetings or grant interviews to Idaho news media. It had no stores here and preferred to keep a low local profile.

All of that changed in March. Supervalu had struggled — as Albertsons Inc. did — with falling revenue and shrinking profits, and it came to the same end: offering itself for sale.

Cerberus wanted to buy. The consortium that created Albertson's LLC bought all of the old Albertsons Inc. stores that Supervalu still operated — 877 in all, including the stores under other banners — for $100 million cash, and they took on more than $3 billion in Supervalu debt. What was left of the two Albertsons chains reunited under Albertson's LLC.

Then came a surprise. Instead of closing more stores, as some analysts expected, the new owners spent money on a burst of growth in their new holdings. Over the past eight months, Albertsons has hired about 900 new employees in Idaho.

Now that Idaho's Albertsons stores are under local management once more, along with hundreds of new stores, the company's Southeast Boise headquarters has grown, too. About 73 of the 110 corporate employees serving Albertsons' Intermountain division are based in Boise. For some, the acquisition meant moving back to the place where they began their careers.

They are part of the next chapter in Albertsons history — one where Boise is the heart of a national retail operation with revenues surpassing $21 billion, less than Albertsons Inc. made in 2006 but still more than twice as much as Micron, Idaho's largest publicly held company.

The organization that exists now is leaner. It now has 1,055 stores and a workforce of 112,000 — less than half its size in 2006.

And it's still growing. The company is about to close on a deal to buy United Supermarkets, a Texas chain of more than 50 stores and gas stations. Executives say the chain was an attractive investment for a few reasons, one being that it catered to a growing number of Hispanic shoppers through its Amigos stores. That's a concept Albertsons management sees taking off in other markets.

Albertsons says it now commands 15 percent of the market in places where it competes with other grocers.

"We always set very high goals," says Bob Miller, the CEO of AB Acquisition, the entity Cerberus created to hold both Albertson's LLC and the other ex-Albertsons Inc. banners. Asked if the new organization is where he hoped it would be at this point, Miller said, "I will tell you, we're doing very well. We expect to do better going forward."

Miller is used to running grocery stores. He was CEO of Fred Meyer in the 1990s, becoming a Kroger executive when Kroger bought Fred Meyer. He took a job as CEO of Rite Aid from 1999 to 2003. In 2006, he was named CEO of Albertson's LLC.

Miller says the former Supervalu stores were losing money, but now they're making it again. He expects sales to keep rising as the company makes changes, including remodeling stores and dropping the requirement that shoppers have an Albertsons customer-rewards card to obtain sale prices.

THIS TIME IS DIFFERENT, CEO SAYS

Miller says the 2013 deal is different from the 2006 one. The newly acquired stores "are in better physical shape" than the stores Albertson's LLC took over seven years ago, he says.

Supervalu spent money keeping its stores updated, he says, so they don't need a lot of work. The problem was they were poorly run, the shelves lacked the right mix of products, and employees "were not very happy, to say the least," Miller says.

Now the company is investing to fix up stores in every division, he says. Three of Boise's stores were among the first to be remodeled this year. He says the company bought new shopping carts for more than half the stores.

"We expect to spend a lot of capital next year," says Miller, though he won't say how much.

Some stores may be shuttered, though.

Miller says he has no plans to close any Idaho stores. But 2 percent to 3 percent of the company's supermarkets are failing, he says. Some could be remodeled, some sold. That's the approach any healthy retail business would take, he says.

"We're not here to close a lot of stores," he says. "We plan to do more volume and hire more people in Idaho."

WHAT REUNIFICATION MEANS FOR IDAHO

State officials are lauding the reunification.

"This is exciting not only from the perspective of restoring the foundation of a company that has rich history and legacy in Idaho, but it also allows us to highlight a nationally recognized name to other companies who may be looking to relocate to our state," Idaho Department of Commerce Director Jeffery Sayer told Business Insider in an email.

In some ways, the reunion of Albertsons and Boise is nominal. The out-of-state owners are one reason for that.

Another is that the company's many banners are run by eight division presidents — people on the ground in other states, not corporate managers in Boise. The Boise executives host weekly calls for the division presidents to talk about best practices, Miller says.

"They have the autonomy on merchandise, pricing," Miller says. "We believe [in] being local, quick to respond to trends and things customers want, making sure employees are taken care of."

Miller says stores will carry more locally made products. But that doesn't necessarily mean Idaho-grown.

There also is symbolic impact — and perhaps a return to greatness that's starting in the Boise office.

New York retail analyst Burt Flickinger says the return of Albertsons corporate control to Boise adds to the city's importance in the grocery industry.

"It's so great to have two of the market leaders headquartered in Boise," he says, referring to Albertsons and WinCo Foods. "The decline was when most of the corporate Albertsons moved to Supervalu corporate in Eden Prairie, Minn. ... and losing a lot of good Albertsons people who were in Boise."

THE FUTURE OF THE CHAIN: PROFITABILITY?

There will be a lot of pressure on the Boise managers to make money.

Besides the debt that came with the purchase, credit-rating agencies report $1.6 billion to $1.7 billion in underfunded pension plan obligations with the former Supervalu stores, Flickinger says. That means the total debt carried by Albertsons owners is about $5 billion, he says.

The organization now consists of Albertsons, Acme Markets, Jewel-Osco, Shaw's and Star Market grocery stores; Sav-on and Osco in-store pharmacies; and, any minute now, the United Supermarkets chain. Flickinger says those stores range between struggling and hugely successful.

Albertsons stores typically make sales of $250,000 to $450,000 per week. Stores with a beer and wine section are at the high end of that range, mainly because of a grocery-shopping idiosyncracy: People buy more food when they're buying alcoholic beverages.

Acme stores in Philadelphia have roughly the same revenues as Albertsons stores, while Shaw's and Star tend to be at the high end of the Albertsons sales range, he says.

But the most profitable members of the new conglomerate may be Jewel-Osco stores in Chicago that bring in $800,000 to $900,000 per week.

ELEPHANT IN THE AISLE: HIGH PRICES

In the Supervalu years, shoppers watched shelf prices surge to among the highest in the country, Flickinger says. That drove away the loyal cart-full-of-groceries shopper. Instead, the stores became a quick stop for shoppers picking up a carton of milk or some lightbulbs.

Supervalu took "definitely the wrong approach" to its pricing, marking up items to make more money on fewer sales, Flickinger says.

"We've done pricing studies of Albertsons versus WinCo over the last four to five years, and in virtually every pricing study on key items, Albertsons ... is from 28 to 32 percent higher than WinCo," he says.

Supervalu in 2009 hired a former Wal-Mart executive, Craig Herkert, to run the company. He vowed to stop the rising-price spiral. But he didn't, and in 2012, the company replaced him with another retail executive, Wayne Sales.

Now, Miller says he thinks Albertsons stores are hitting the right price point to win back regular customers.

"We've already lowered thousands of prices," he says. "We're going to also buy the highest quality, which is a factor."

If you take into account the promotional prices and advertised specials, he says, "We're in line, we're right where we need to be."

Not quite, says Flickinger. He praises Miller and his team as among the best minds in grocery retail and says prices are more realistic under the new ownership.

The sale prices are "much more aggressive and the discounts much deeper," Flickinger says. But Albertsons can't put everything on sale, and regular shelf prices had "gotten so high that they've still got a material amount to move down," he says.

Flickinger says his consulting business, Strategic Resource Group, did a price study at Albertsons in the Intermountain region in October. Checking the price tags on a wide range of products, including sale items, Flickinger found Albertsons prices still outpaced competitors WinCo, Wal-Mart, Costco and traditional grocery stores.

He thinks Miller can pull off a reversal.

"Bob, throughout his long distinguished career at Fred Meyer, has been a very successful prizefighter, a market-share leader," Flickinger says. "After 12 to 20 years of pricing problems being passed on to Bob and his team, [winning back customers and profits] is a multiyear task that's very challenging and requires quite a significant amount of capital."

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Audrey Dutton: 377-6448, Twitter: @IDS_Audrey

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