When Whole Foods wanted to buy Wild Oats we wrote about the FTC’s bizarre definition of the ”health and wellness” grocery market in pieces such as these:
With FTC Now Reviewing Sysco/US Foods Merger, The Definition Of ‘Market’ Becomes Crucial
Whole Foods To Acquire Wild Oats: Circling The Wagons As Others Sell Organics
FTC May Block Whole Foods From Buying Wild Oats
Whole Foods Suffers From CEO’s Bizarre Behavior
Whole Foods & Wild Oats Finally Tie The Knot
Just as the FTC was ignoring the big competitive threat of Wal-Mart, Kroger, Safeway, and Costco while focusing on a battle between two small players, now the FTC is worried about a monopoly among conventional supermarkets just as the food market is fracturing. This letter gives us good reason to look at the situation:
I would deeply appreciate your perspective on the Haggen purchase of nearly 150 Albertsons and Vons bannered stores in The West.
How on Earth can the management team of a 16-store boutique niche marketer possibly hope to profitably operate these stores (using a third-party distributor no less) in what is one of the most competitive markets in the USA?
What venture capitalist would risk money on such a silly proposition?
How can the FTC honestly claim that the grocery market must be forced to remain competitive when Ralphs, Wal-Mart, Trader Joes, Costco, Gelsons, Bristol Farms, Whole Foods and countless ethnic retailers crowd the market? If there is one thing this grocery market doesn’t lack, it is aggressive competition.
There must be more to this story… it just doesn’t make sense. Can you shine some light on this?
Cargo Data Corporation
Roger is not the only person trying to figure this one out. The Los Angeles Times had Shan Li, its California economy reporter, write a piece titled, Haggen chain to buy 146 Vons, Pavilions, Albertsons, Safeway stores:
A supermarket David is gulping down a Goliath.
Next spring, Southern California shoppers will see a new name replacing some of their old grocery standbys: Haggen Inc.
The tiny Pacific Northwest chain is buying 146 Vons, Pavilions, Albertsons and Safeway stores, including 83 in California. The Federal Trade Commission ordered them sold as part of the merger of Albertsons and Safeway earlier this year.
That translates into an eye-popping 811% expansion for the Bellingham, Wash., company, which currently operates 18 stores in Oregon and Washington.
‘This was a once-in-a-lifetime opportunity,’ said Bill Shaner, the newly appointed chief executive of Haggen in the Pacific Southwest. ‘They are great stores in a very dynamic marketplace. The chance to grow the brand was very unique.’
The chain did not disclose financial details. Some analysts pegged the deal at $1.4 billion to $2 billion.
Landing in the highly competitive Southland grocery market will be a challenge for Haggen, especially as traditional grocers are squeezed by local favorites like Trader Joe’s and deeper competition from the likes of Wal-Mart Stores Inc. and Target Corp., which have both expanded their grocery offerings, analysts said.
Shan Li also quoted industry analysts including the storied Burt Flickinger of Strategic Resource Group and the Pundit:
‘It’s certainly no slam-dunk,’ said Jim Prevor, a food analyst and founder of PerishablePundit.com. ‘The core business of operating a conventional supermarket is really a threatened being.’
Shaner said Haggen has distinguished itself with a heavy emphasis on fresh produce and quality meats and seafood. That focus will be reflected in the new stores once they are re-branded as Haggen starting in 2015, he said.
‘Haggen is between an Albertsons and Vons and what you might see to some extent in a Whole Foods,’ Shaner said. ‘You will see a little tweak in assortment, a little tweak in the quality of the offerings.’
The company will also keep existing store employees and managers, Shaner said, expanding its worker base fivefold to 10,000.
Observers said that expanding the company to 164 stores in five states will give Haggen the muscle to negotiate more effectively with suppliers and make a real push into new territories.
‘You really need a minimum of 100 stores … to have the buying power and market share to have a meaningful impact in the marketplace both with competitors and consumers,’ said Burt Flickinger III, managing director of Strategic Resource Group.
But Haggen will face the challenge of introducing its unknown brand in places such as Los Angeles, where shoppers have different preferences and a multitude of supermarkets to choose from. Competition is fiercer than ever before, with newer rivals such as dollar stores increasing their produce aisles and online retailers such as Amazon.com testing grocery delivery.
‘Haggen means something locally, but it’s a name unknown for most of these new areas,’ Prevor said. ‘That means very substantial expenditures to build a brand in those areas.’
At the same time, the chain must now deal with operating a vastly bigger organization. There is a danger it will run into trouble exporting its culture to the larger group of stores and will lose some of the uniqueness that has made it successful, analysts said.
‘It’s a brilliant or bankrupt strategy,’ Prevor said. ‘When you are talking about basically increasing the business from one tiny geography to a massive scope down the West Coast, you run the real risk that they will fail.’
But Flickinger said the chance to expand so rapidly with one swoop probably was too tempting to pass up.
‘It is arguably the best opportunity to expand cost effectively and in the West Coast for the last 15 years,’ he said.
Burt certainly has it right. For an ambitious retailer with private equity backing, this is an unusual opportunity. Haggen does a great job — especially with fresh — and we can certainly wish the team well in this expansion.
That being said, the correct way to look at this is that Haggen is just the vehicle being used. What this is really about is a Florida-based private equity firm, Comvest Partners. Comvest acquired a majority stake in Haggen in 2011. Just in December 2014, presumably in conjunction with this deal, Haggen hired Bill Shaner to serve as CEO in the Pacific Southwest. Mr. Shaner had a long career with Supervalu and, most recently with the Save-a-Lot division, where he was Executive Vice President and Chief Operating Officer.
So the way to think about this may be that a private equity firm bought these stores and hired an experienced executive to run them.
So why get Haggen involved at all? That is mostly due to the FTC. In this case, persuading the FTC that this divestment of stores will create a viable competitor for Albertsons/Safeway is the key to the whole thing.
The FTC might feel that a private equity firm just hiring a CEO might not be viable and that, in two years, all the stores will be furniture stores or real estate plays. Here, with a buyer committing to rebrand the stores with a proven concept, the FTC is much more likely to bless the divestment.
What happens then, though, is not clear at all.
Bringing an unknown brand into new geographies is always difficult, and Albertsons and Safeway know exactly which stores are highly profitable, so they can be expected to compete aggressively in those areas, including opening new stores themselves.
Supervalu will supply the existing 18 Haggen stores and the additional 46 stores in the Pacific Northwest. It also will provide IT and other support for the whole chain.
Unified Grocers will lose the supply contract for the existing 18 Haggen stores but will pick up 100 stores that Haggen is taking over in California, Arizona and Nevada.
Charlie’s Produce is opening a new southern California division to expand along with Haggan and has the primary produce-supplier appointment for all the stores.
Financial terms were not disclosed but Albertsons/Safeway needed this deal to finalize their merger, so they probably gave a concessionary price.
So, to answer Roger’s questions:
1) Nobody is really expecting Haggen’s management team to suddenly run a giant supermarket chain across the west. The existing team will expand in the northwest, and a new team is being brought in for the new western states.
2) Comvest Partners thinks the risk/reward ratio is worth the risk. If this works, they will have a big supermarket chain and probably do rollups on smaller local chains.
3) If it doesn‘t work, the price was probably cheap enough that Comvest feels protected by the real estate value.
As far as why this is all necessary, it is because the FTC has an antiquated perspective. It was 21 years ago that we wrote an article in sister publication, PRODUCE BUSINESS, titled “Death By A Thousand Cuts”, in which we said that there is an antiquated perception of the “big issue” being supermarkets competing against supermarkets. The truth is that all these operations are at risk from competition from Amazon Fresh, Aldi, Trader Joe’s, Costco, Wal-Mart Supercenters and many more formats.
What the FTC is really doing is a shame: It is weakening Albertsons/Safeway in the battle against new formats. Albertsons/Safeway had to sell these stores at a discount because the only buyers that could be considered were those who the FTC would deem viable as supermarket operators. The people at Comvest and Haggen will be the beneficiaries of the limited scope of the FTC’s vision and will laugh all the way to the bank.