Albertsons, your friendly neighborhood grocery, is losing hundreds of millions of dollars

Albertsons in December opened this Albertsons Express fuel center and convenience store across the parking lot from its full-size store at ParkCenter Boulevard and Apple Street. It marks a change in strategy for Albertsons, which under Supervalu had sold its 11 Treasure Valley convenience stores in 2011.
Albertsons in December opened this Albertsons Express fuel center and convenience store across the parking lot from its full-size store at ParkCenter Boulevard and Apple Street. It marks a change in strategy for Albertsons, which under Supervalu had sold its 11 Treasure Valley convenience stores in 2011.

When Albertsons announced two years ago that it would buy Paul’s Markets, customers of the 60-year-old Homedale company were concerned.

Laura Sawyer Rambow, who shopped at the Paul’s Kuna store, wondered whether the friendly service she had come to expect would continue at stores rebranded as Albertsons in Homedale, McCall and Boise. She liked Paul’s doughnuts and other pastries.

“Albertsons in Kuna still has awesome doughnuts. They stayed the same,” said Rambow, who visited the store one day last week with her grandchildren and picked up chocolate cake doughnuts and a maple bar.

Keeping customers satisfied has been an enduring goal of the grocery chain founded in Boise by Joe Albertson in 1939. But a lot of things have changed in the past five years. In 2013, Albertsons moved out of the shadow of Supervalu, which lost money for most of the years it owned a big part of the chain. In 2015, Albertsons bought Safeway, creating the second-largest supermarket chain in the United States. Albertsons now has more than 280,000 employees and 2,323 stores under 21 banners across the country.

Yet the supersized deals, which reunited pieces of the old Albertsons Inc. chain in 2013 and swallowed the Safeway whale two years later, have not made Albertsons profitable. The Boise company has suffered hefty losses since 2014, while bigger competitors such as Kroger, the chain that operates Fred Meyer and other stores, and Wal-Mart Stores Inc. are in the black.

The reason? Debt. To pay for their takeovers, the owners of Albertsons assumed old debt and borrowed anew. When Albertsons took on Safeway’s 1,325 stores, it also added $8.9 billion in debt to its books.

In its last fiscal year, which ended last February, Albertsons reported profit of $655 million on its operations before interest and taxes. But $1 billion in interest payments on its more than $12 billion debt overwhelmed that, leading to a net loss of $373 million. That compares with losses of $502 million loss a year earlier and $1.2 billion the year before that, according to financial statements that combine results from Albertsons and Safeway before the companies joined.

In the first three quarters of the current fiscal year, through Dec. 2, the company reported a net loss of $342 million. Sales were flat at $45.9 billion.

Albertsons, along with other grocers, has been hampered lately by low food prices, which are good for customers but crimp profits.

Since 2016, we have seen unprecedented deflation in the grocery industry — the longest period in 60 years — and deflation typically drives a promotional environment,” Albertsons’ chief financial officer, Bob Dimond, told the Idaho Statesman.

Will debt overwhelm the company?

The persistent losses raise a question: How long can they go on? The company’s history this century offers reason for concern.

Joe Albertson’s company, Albertsons Inc., broke apart in 2006 after years of losses. Supervalu tried to find success by cherry-picking. It acquired all of the company[’s supermarket banners, including the Albertsons-brand stores in the best-performing Albertsons regions (and including all 32 Idaho stores), but it gave up seven years later and sold those stores it had not closed or sold – all the Idaho stores survived – for much less than it paid for them.

In the 2006 breakup, a private-investment consortium led by private equity firm Cerberus Capital Management bought about 660 stores carrying the Albertsons name that Supervalu didn’t want, mostly in the South and Southwest. Cerberus hired Bob Miller, who spent 30 years at Albertsons before serving as CEO of Fred Meyer and Rite Aid, to run them quietly from the old Albertsons Inc. headquarters on ParkCenter Boulevard. But from 2006 to 2013, Miller closed some money-losing stores — including about 100 right away — and sold most of the others.

There were two chains under the Albertsons banner during those years, and both shrank. Thousands of employees lost jobs as unprofitable stores closed. Supervalu trimmed its Boise office staff from more than 2,000 in 2006 to about 1,000 in 2012. By that year, Supervalu’s stock had lost 83 percent of its value. Supervalu fired its CEO. Its loss in the fiscal year ending in February 2013 totaled $1.5 billion.

The Cerberus consortium, apparently thriving with its 190 remaining Albertsons supermarkets, put an end to Supervalu’s misery by buying the surviving 877 stores Supervalu still had. Performance improved. Sales at stores open at least one year grew 1.6 percent in fiscal 2013 and 7.2 percent in fiscal 2014. In 2015, the first full year including Safeway, those “same-store” sales increased 4.4 percent.

Then they stalled, falling 0.4 percent in 2016 and 1.9 percent in the first three quarters of fiscal 2017, which will end Feb. 24.

The company blames low prices for meat, eggs and dairy products for the decline.

“The supermarket business is pretty challenging for so many of the big companies,” said Bob Goldin, an analyst with the Chicago firm Pentallect. “And now with Walmart’s resurgance, it doesn’t make it easier.”

One of Albertsons’ banners, Jewel-Osco, dominated the Chicago area 10 years ago, along with Dominick’s, a Safeway company. “Then the club stores came in,” Goldin said. “Mariano’s, part of Kroger, came in. Then Whole Foods came in, and Aldi, along with Heinen’s from Cleveland. It has become an intensely competitive market.” And Dominick’s has gone out of business.

Since 1991, traditional grocery stores and other food retailers have seen revenue decrease by 29 percent, according to a study published in November by research firms International Data Corp and Precima.

New stores open, e-commerce rises

There are bright signs.

In an conference call with analysts last week, CEO Miller said same-store sales have climbed in the first six weeks of the current quarter, and he expects that trend to continue. Executives expect meat, eggs and dairy prices to rise this year.

Miller said in July that the company is on track to achieve $800 million in annual savings from synergies resulting from integrating Safeway into Albertsons. The company also expects an additional, one-time savings of $100 million this year, he said Tuesday.

He contends that the company’s focus on decentralized decision-making and customer service is setting the stage for long-term success in an industry notorious for its low profit margins.

“Our team continues to focus on making our stores the favorite local supermarket in the neighborhoods we serve,” Miller said. “Our e-commerce and digital marketing teams are very focused on meeting consumers changing needs.”

The company has an aggressive remodeling campaign. More than 200 stores were upgraded in 2016 and 170 last year.

Albertsons bought meal-kit maker Plated in September and has begun selling kits in some of its Northern California stores, with other regions to follow. It is also expanding “click-and-collect” – customers place orders online and pick them up at the store. Eighty stores offered that service in 2017, and Miller said 500 will be added this year.

The company beefed up its home delivery service by striking a deal with Instacart in November. Albertsons plans to bring that service to 1,800 stores by midyear, Miller said.

And while Albertsons is still closing individual stores here and there, it is opening even more. It opened 18 stores and remodeled 119 in the first three quarters of this fiscal year. In the Treasure Valley, the company is replacing a small store on Broadway Avenue with a bigger one, and remodeling a former Shopko store at Eagle and Fairview roads. Both stores will have more variety in fresh food and will offer in-store dining. The existing Broadway store is the only one in the Valley that hasn’t been remodeled.

The company is still growing through acquisitions, too. In November, it paid $100 million for 45 percent ownership in El Rancho Supermercado, a Texas-based Hispanic grocer with 16 stores.

Analysts: No alarm bells yet

Analysts consulted by the Statesman said they generally like what Albertsons is doing. The remodeled stores have a greater emphasis on fresh fruits, vegetables, meat and seafood that is paying off with increased sales, said Burt Flickinger, founder of Strategic Resource Group in New York.

“That’s the difference between success and failure in the food industry,” Flickinger said. Perishables make up 40 percent of Albertsons’ sales.

Sales of frozen foods, dried goods and canned products have declined and will keep falling, Goldin said.

The biggest change in the remodeled stores has been expansion of fruits and vegetables cut up by store employees and placed in containers, said Dimond, the CFO.

Natural and organic foods are especially important to people with young children, said Diana Sheehan, director of retail insights for Illinois-based Kantar Retail..

“Albertsons’ focus has actually been ahead of the curve in that space,” she said. “I think they’re able to capitalize on something that has been a strength for them in the past.”

Flickinger said Supervalu had little experience running grocery stores, charged too much, failed to focus on perishables and took a centralized approach to management that prevented store managers from innovating.

Albertsons reported sales of $20.1 billion in 2013 and $27.2 billion in 2014. After adding Safeway in early 2015, sales for the combined company totaled $58.7 billion in 2015 and $59.7 billion in 2016 an amount roughly equal to Idaho’s entire gross domestic product. The company is Idaho’s largest, with revenues three times those of Micron Technology Inc. and a workforce eight times as big.

While Micron employs 6,800 people in Idaho, Albertsons said in 2014 that it employed around 3,000 Idahoans, and said in 2016 that its headquarters staff in Boise had grown from about 120 to 600 after the Supervalu and Safeway deals. A spokeswoman declined to provide current Idaho employment figures.

When will Albertsons sell stock?

Private equity owners typically sell their investments eventually. In July 2015, Albertsons’ owners announced their intent to take the company public through a stock offering. Then they decided to delay the offering, although the equity firm has continued to update its prospectus filings with the Securities and Exchange Commission, indicating it still wants to sell. (Those filings include financial data, such as profits and losses, that publicly traded companies must disclose, but that most privately held companies keep to themselves, as Albertsons did until 2015.)

Albertsons has proposed to sell 65 million shares between $23 and $26 per share on the New York Stock Exchange under the symbol ABS. The current owners would keep 410 million shares. The public would own 14 percent, at least at first. Cerberus, its partners and top managers would own the rest.

There was speculation that last summer’s purchase of Whole Foods by Amazon put the brakes on Albertsons’ plans to go public. The company hasn’t commented.

Analysts say recent losses are likely not the reason the Cerberus consortium is delaying. Other events in the industry have taken away the thunder that a stock offering by Albertsons would bring, said Sheehan, the Kantar Retail analyst. Among them: Two years ago, Kroger bought Roundy’s, a Milwaukee-based company with more than 150 stores. And then there was Amazon’s move.

“Albertsons needs sustained, strong performance paired with a comprehensive strategy that makes them look very attractive to investors without a big interruption with something unexpected happening in that industry,” Sheehan said.

Still, the debt looms. It totaled $12.3 billion in 2016, an increase of $111.6 million over the previous year. It decreased to $11.7 billion through the first three quarters of the current fiscal year.

Sheehan calls the debt “a bit of a liability” but says that it is surmountable.

“For them to gain ground on that debt, they’ve actually got to outperform the market in core markets for a few quarters,” Sheehan said. “At that point, they’ll be fine. If they don’t, there could be challenges.”

John Sowell: 208-377-6423, @JohnWSowell.

The Albertsons banners

Albertsons stores operate under these names: Albertsons, Albertsons Market, Safeway, Jewel-Osco, Vons, Lucky, Pavilions, Randalls, Tom Thumb, Carrs, Sav-On, Acme, Shaw’s, Star Market, United Supermarkets, United Express, Market Street, Amigos, Haggen, Andronico’s Community Markets and Pak ‘n Save Foods.

Who owns Albertsons

A consortium led by Cerberus Capital Management, a New York private equity firm, owns the company. Cerberus manages a portfolio with more than $30 billion of capital and is currently in negotiations to buy ailing German bank HSH Nordbank AG.

The other owners are:

Kimco Realty Co. of New York owns interest in 507 shopping centers in the U.S.

Klaff Realty of Chicago, with investments worth more than $17 billion, focuses on retail and office holdings.

Lubert-Adler Partners of Philadelphia has investment in multifamily housing, retail businesses and hotels.

Schottenstein Stores Corp of Columbus, Ohio, owns more than 50 shopping centers and operates discount department stores, warehouse shoe stores and furniture stores.