Does Costco need a new approach?

This post is part of the 10 Items or Less blog.

“We’re glad that fresh food is difficult.”

The above quote, one of my favorite remarks I’d written down over the last 12 months of covering the rapidly evolving world of food retail, came last September from Costco CFO Richard Galanti, who, as is often the case in analyst conference calls, was under light interrogation about the big club’s ability to withstand competition from Amazon without having a significant strategy to sell food online itself.

Events since then would indicate that Galanti’s message was heard loud and clear by Costco’s Seattle neighbor, which in June acknowledged as much by committing $13.7 billion to acquire one of the best in the fresh-food business, Whole Foods Market. Galanti is, of course, correct: Fresh food is hard, and Amazon’s investment underscores its steep learning curve.

In the meantime, the event cast a shadow over Costco, which, despite its well-earned reputation as a world-class store operator, and recently-announced sales results that ought to make Whole Foods kale-green with envy, has seen its stock dive by more than 9 percent since the Amazon-Whole Foods announcement on June 16.

Those are eye-popping sales results in the current environment, but the market barely noticed. With that in mind, Barclays analyst Karen Short this week fashioned a research note in the form of an “open letter” to Costco, urging the company to consider some new ideas to reignite valuation.

“Given the potential that long-term concerns will overshadow near-term results, the only solution near term, in our view, is to convince and communicate to investors that you have a real and defensible strategy in an ever-changing world,” Short said.

Short made several recommendations for Costco to consider, the most intriguing of which is a counter-offer for Whole Foods. According to Short’s analysis, Costco could bid up to $60 per share for Whole Foods — that’s more than $19 billion — and still be marginally accretive, given Costco’s minimal debt and large cash reserves.

Short’s additional suggestions revolved around improving Costco’s relatively modest e-commerce efforts, particularly in food: acquiring an online consumables retailer; exploring a click-and-collect option; or perhaps partnering with Ocado, the British e-commerce facilitator that’s reportedly been looking to make a deal in the U.S.

Such an arrangement would be an incremental sales generator and make money if Costco bumped prices by 3 percent to help pay for operations expenses and set a minimum order size of $100, Barclays argued. Ocado tends to lower fees as order sizes rise, Short added, which would be less of an issue for Costco than for competing retailers, given Costco’s typical big basket.

Regardless of which of these avenues Costco chooses to pursue (Short suggested “two or three” of them) the implication is that now’s the time for Costco to go to school.

Remembering the good old days

For a while there, all was looking peachy for Albertsons LLC, but lately it’s been one thing after another.

If the news reports are accurate, the successful acquirer of United Supermarkets, the Supervalu/American Stores brands (Jewel, Acme, Shaw’s), Safeway, and significant chunks of Haggen and A&P prior to 2016 has since swung and missed at Price Chopper, Sprouts Farmers Markets, Whole Foods and, most recently, Strack & Van Til, not to mention the New York Stock Exchange, where rough trading conditions for food retailers over the last two years have continually delayed an IPO. Reports this week indicated that effort is on indefinite hold, although that seemed pretty obvious.

In the meantime, there have been indications that not all of Albertsons acquisitions have gone quite as well as might have been hoped, particularly the A&P stores that significantly extended the reach of the Acme brand. Acme, we reported last month, has reinstalled Jim Perkins as president. Before being promoted to a national focus Perkins was noted for his work in reviving Acme, which was in a freefall when Albertsons bought it. That was way back in 2014, a period few of us would have considered as the good old days in retrospect.

Not to speak for Kroger, but the relative go-go times of 2014 are probably missed in Cincinnati as well. Back then, Walmart was something of a benign ally, and the influence of hard discounters wasn’t quite as acute. Those formats, as well as Amazon, all look like bigger threats to Kroger today.

Kroger has acknowledged the changing landscape in words, and lately in deeds: It’s suing Lidl for allegedly copying its private brands, and this week announced it was hiring an Aldi veteran, Liz Ferneding, to take over its own discount division, Ruler Foods. As noted in that story, it’s unusual when Kroger reaches outside its own organization for talent, particularly at the division president level, but, hey, it’s not 2014 anymore.