BOISE, Idaho -- Albertson's here acquired a major challenge in June when it closed its deal to merge with American Stores Co., Salt Lake City: How to integrate the operations of these two large and far-flung chains.
Gary E. Michael, Albertson's chairman and chief executive officer, has said the sheer size of the new company should produce great economies of scale. With approximately 2,500 stores in 38 states, Albertson's is now the second-largest supermarket chain in the nation, behind only Kroger Co., Cincinnati.
"The premise of the merger is to take two entities and create more value than the sum of the parts -- one plus one equals three," Michael told an industry association gathering in May on the eve of the merger.
Before the merger, Albertson's had been estimating considerable synergies from the deal: $100 million in the first 12 months, $200 million in the second full year and $300 million per year thereafter.
Then, when the deal closed in June, Michael said he now expected the synergies to be even greater, although he did not give a dollar figure. While the company has remained vague about the size of these unanticipated efficiencies, at the beginning of this month it did say they were large enough to increase remodeling efforts scheduled for next year by 30%.
Gary Giblen, New York-based managing director for Banc of America Montgomery Securities, San Francisco, was impressed that Albertson's was directing its new-found wealth toward remodeling.
"The question all along has been whether or not Albertson's would slash capital spending and use the free cash flow to pay off debt more quickly, but it's clear now that, rather than cutting back on spending, it will use the money to do more projects, which shows its dedication to building the business for the long-term."
Craig Olsen, Albertson's executive vice president and chief financial officer, said the chain's store-development teams "have found efficiencies in capital spending and opportunities to accelerate our remodel program for 2000 and 2001." Chain officials said Albertson's plans 240 remodels over the next five years.
Industry analysts said it is normal for companies to discover additional synergies once they begin the consolidation process.
Jonathan Ziegler, a San Francisco-based equity analyst for Salomon Smith Barney, New York, said Albertson's could do "only so much from the outside looking in, and once it got inside American Stores, it's not surprising that if found more savings than originally anticipated. I felt all along that it was low-balling its projected synergies."
Analysts, however, also told SN the company has many important issues to resolve about what the identity of the new, bigger Albertson's will be.
Ziegler said the company could be wasting advertising money if it intends to eventually reflag the acquired stores. Many analysts said they expected an eventual reflagging.
"They're still advertising Lucky like crazy, and they're still advertising Albertson's like crazy," he said. "They've really got to come to a conclusion about how they're going to position the combined company."
Ed Comeau, an equity analyst at Donaldson, Lufkin & Jenrette, New York, said both Albertson's and American faced stiff challenges before they joined forces: "[At Albertson's] you have a management team that's had difficulty improving its own business, let alone the business of an acquired company that has had severe difficulty building its sales momentum."
Some aspects of the deal that have been called an asset by company management have been called into question by analysts.
For example, by acquiring American, Albertson's took a big leap into the freestanding pharmacy business, although the company had operated pharmacy departments in its supermarkets. Now, it has 783 Osco and Sav-on drug stores spanning the country from New England to southern California.
"Pharmacy is a business that's exploding, with demographics and medical factors fueling sales," Michael said. "As the U.S. population continues to age, this rapid growth in the pharmacy business will continue."
Ziegler noted American's drug stores were not industry leaders. "[Albertson's] is new to the drug-store business, and these stores are not Walgreens," he said. "There will be some challenges to getting those [stores] straightened out. Gary Michael's been out in the stores, and I think he's got a vision of what he has to change.
"But is it going to happen in six months?" asked Ziegler. "No, it's going to be a long process."
Another challenge Albertson's faces is its recent, unexpected changes in management. In December 1998, Teresa Beck, president of American Stores, who had been scheduled to become a member of the office of the chairman following the merger, opted out of that position, although she did agree to serve on Albertson's board.
Then, simultaneously with the closing of the deal, Dick King, Albertson's president and chief operating officer, who was also set to join the office of the chairman, resigned.
"The management changes at Albertson's make it more of a question mark or more of a challenge about how well they can execute the integration," said Giblen. Giblen added, however, he thought in the long-term the changes would improve the company.
The analysts also said the company will face strong competition in California. "How they build the customer base and market share without getting hammered by either Safeway or Vons remains to be seen," Comeau said.