Steering Through the Storm

The biggest industry news stories of the year for the most part revolved around how food retailers coped with the recession.

For many that meant slashing prices and ramping up private-label promotions and selection in an effort to keep cash-strapped customers coming into their stores. The focus for some was on retaining market share with lower prices, even if it meant taking a hit to their profitability.

For a handful of operators, that simply wasn't enough. With the credit crisis that accompanied the recession, obtaining needed financing became impossible for regional stalwarts like Bashas' and Bi-Lo, which were among the operators that took a trip to bankruptcy court in 2009.

Despite the restricted access to capital, a few companies managed to make acquisitions in 2009, including Associated Food Stores of Salt Lake City, which picked up 34 Albertsons locations, and Weis Markets, which acquired the 11-store Giant of Binghamton, N.Y., chain.

Turnover in the top offices of industry companies was driven in some cases by performance in the recession.

Discounters, however, including dollar stores and limited-assortment retailers, were in their element when the chips were down.

In 2009, retailers also turned to a variety of technology applications, such as business intelligence and price optimization, for help in coping with the recession. Technology also proved helpful in dealing with the uptick in retail crime and employee fraud brought about by the bad economy.

Retailers Turn Up the Volume on Value

CONSUMERS might have been struggling in 2009, but they couldn't complain too much about the deals they were getting in the supermarket.

All across the country, supermarkets took advantage of declining food costs and sharply lowered their pricing, introduced new pricing strategies and took other measures to communicate a value message in order to attract pressured shoppers.

Both Pleasanton, Calif.-based Safeway, which had spent the last several years revamping its stores and assortment to the more upmarket Lifestyle format, and Minneapolis-based Supervalu, which was in the midst of rolling out a “premium fresh and healthy” remodeling program, had to shift gears and suddenly call attention not to their new amenities but to sharply reduced prices instead.

Early in the year, Safeway began reducing prices for loyalty-card holders, but later expanded the effort, market by market, with promotional cuts of as much as 30% and a new EDLP strategy on thousands of high-volume items.

The moves paralleled similar pricing initiatives at Supervalu's Albertsons banner, which wrapped its value message in a “Big Relief Price Cuts” theme. Supervalu debuted the cuts — up to 20% on thousands of items — at its Jewel-Osco banner in Chicago in April, and then rolled it into Southern California.

“Value-driven purchasing has led to the prevalence of the consumer ‘stock up’ mentality on staple products,” a Supervalu spokeswoman told SN, “and it is our belief that lowering prices on these key items will help increase customer visits to our stores, drive long-term loyalty and increase referrals to our stores.”

Both chains have since rolled the price cuts out to additional markets across the country.

“In this environment, shoppers are looking for value, and can find strong value in alternative stores, such as supercenters, limited assortments stores such as Aldi, dollar stores and other low-priced supermarkets,” Jon Hauptman, a partner with Willard Bishop consulting, Barrington, Ill., told SN shortly after both Jewel and Safeway's Dominick's chain rolled out their price cuts in the Chicago market.

Cincinnati-based Kroger Co., meanwhile, which had already repositioned itself as a price-oriented operator, remained highly aggressive on price all year, driving some of the best sales gains among traditional supermarket operators, but taking a hit on margins.

Earlier this month, the company reinforced its commitment to capturing and retaining market share through low prices, despite the profit squeeze. In the third quarter, the company managed to post same-store sales gains, excluding fuel, of 1.3%, and saw a substantial increase in tonnage — volume rose 8.5% — but the gains came at a cost to gross margins, which were down 26 basis points in the period.

“Maybe none of us have ever seen a selling environment quite like what we're experiencing right now,” David Dillon, Kroger's chief executive officer, told analysts in a conference call earlier this year. “And we're intent on making sure that it turns into a good opportunity for us.”

Like Kroger, Ahold's Stop & Shop and Giant of Landover, Md., banners had taken a structural approach to reducing prices before this year's recession with their Value Improvement Program, a comprehensive initiative that included SKU reductions, cost cuts and shelf-price reductions.

The chains amplified that pricing message during the past year with a more well-integrated campaign that ties together in-store, online and print advertising, and more clearly defines the values achieved through loyalty cards and promotions.

Analysts said companies like Kroger and Ahold that were proactive in seeking better price positioning will be more successful long-term.

“They ended up inoculating themselves to some extent against the recession,” said John Rand, director of retail insight-grocery at Cambridge, Mass.-based Management Ventures Inc. “We analyzed the differentiation operators — those who have a consumer value operation that was not price oriented vs. the ones who had been more aggressive about installing price in their brand — and there is a huge difference in their recession performance, and our studies show that is probably going to have a lasting effect for at least a couple more years.”

The combination of widespread price cuts, limited-time promotions and new loyalty offers was only part of the story across the industry, however, as supermarkets and other retailers turned increasingly to private label to help reinforce their pricing message. They did so by expanding their private-label offerings, executing more private-label promotions and featuring private label more prominently in advertising.

— Mark Hamstra

Credit Crisis Spurs Bankruptcies at Regional Chains

THE THEORY that supermarkets would thrive — or at least survive — during an economic downturn was put to the test in 2009 as at least five large operators in the industry filed for Chapter 11 bankruptcy protection.

Affiliated Foods Southwest, the cooperative wholesaler based in Little Rock, Ark., actually turned that Chapter 11 into a Chapter 7 liquidation, and turned over its membership to Associated Wholesale Grocers of Kansas City, Kan. Penn Traffic Co., Syracuse, N.Y., is seeking to sell itself off after filing Chapter 11 last month for the third time in 10 years.

The other industry bankruptcies of 2009 included Bashas', the regional supermarket operator based in Chandler, Ariz., that filed Chapter 11 in July after multiple rounds of staff cuts and store closures; Bruno's, based in Birmingham, Ala., which was days away from launching a new marketing campaign when it filed Chapter 11 in February; and Bi-Lo, which filed Chapter 11 a few weeks later.

Mike Proulx, who was president and chief operating officer at Bashas' at the time of the filing but left the chain during the reorganization, blamed the bankruptcy at least in part on the banking implosion of last year that severely limited access to credit markets.

He also cited “the stagnation of growth in Arizona, which resulted in over-storing among grocery operators,” and a long-running battle between the chain and the United Food and Commercial Workers Union, which appears to have been settled (see Page 4).

Bashas', which operates 158 stores, said when it filed bankruptcy that it planned to emerge in the first quarter of 2010.

The credit crisis appeared to play a role in some of the other industry bankruptcies as well.

“In a normal credit environment we would have expected to refinance the maturing term loan on reasonable terms in the ordinary course of business,” Michael Byars, Bi-Lo's chief executive officer, told SN shortly after the filing. “Unfortunately, the current credit environment is very challenging.”

During bankruptcy, regional rival Food Lion, based in Salisbury, N.C., offered $425 million to buy Bi-Lo, but the offer was not included in Bi-Lo's reorganization plans, which were filed last month. Current plans call for Bi-Lo, which is owned by Dallas-based investment firm Lone Star Holdings, to continue operating as a going concern.

Bruno's, a sister chain to Bi-Lo under previous owner Ahold USA and under Lone Star, was liquidated, with several stores going to its Keene, N.H.-based supplier, C&S Wholesale Grocers, which is operating them through its Southern Family Markets retail group.

Affiliated Foods Southwest said it had traditionally provided loans to its member retailers but got caught holding the bag when the banking crisis hit.

“Unlike most other cooperatives, one of the advantages of this company over the years was that we afforded members the opportunity for financing, which we felt gave them a competitive advantage over other independents,” explained Al Miller, a company spokesman. “We would provide the money for them to add new stores or expand and then sell those loans to a lending institution and recover the capital. But when the banks tightened their loan policies earlier this year, they pulled the loan lines for the capital we needed to pay for inventory to support our stores.”

After AWG picked up much of its membership, AFS shuttered several of its company-owned stores and is seeking to liquidate the rest of its assets through Chapter 7.

Penn Traffic, meanwhile, reached an agreement to sell 22 of its stores to Price Chopper Supermarkets, Schenectady, N.Y., for $54 million, and was reportedly in talks last week for additional store sales.

Once a regional powerhouse, Penn Traffic succumbed to a weak economy in upstate New York and increasing competition from Wal-Mart supercenters and others, as well as a revolving door in key management positions.

— Mark Hamstra

Few Deals Done in Difficult Credit Market

THE WEAK credit market made for a slow year on the industry acquisitions front, although a few deals did manage to get done.

The biggest was the purchase of 34 Albertsons stores in Utah from Supervalu by Associated Foods Stores, Salt Lake City. The specific terms of the transaction were not disclosed, but Supervalu said it netted $150 million from the sale.

AFS, a cooperative wholesaler that also operates 22 other corporately owned locations, is converting the acquired Albertsons stores to the newly created Fresh Market banner.

The sale, which sources said had been in the works before Craig Herkert was named the new chief executive officer at Supervalu, was expected to be the first of other possible asset divestitures by the Minneapolis-based wholesaler and retailer, although no other deals have materialized yet.

In August, Weis Markets, Sunbury, Pa., acquired 11 Giant supermarkets in the Binghamton, N.Y., area, for $35.8 million in cash. Giant, which is unaffiliated with the two Giant chains owned by Ahold, was a self-distributing independent. The stores added about $16.2 million to Weis' revenues in the first month of ownership, Weis reported in a filing with the Securities and Exchange Commission.

“This acquisition is an excellent strategic fit for our company. Giant Markets is the market leader in Broome County where they have excellent locations, modern stores and a strong market presence,” Jonathan Weis, vice chairman of Weis Markets, said in a statement.

Other deals that took place during the year — other than the bankruptcy-related asset sales described in the other story on this page — included:

— The purchase of the 14-store Whites Fresh Foods banner, based in Johnson City, Tenn., by diversified operator Houchens Industries, Bowling Green, Ky., for undisclosed terms.

— The purchase of 16 convenience stores under the Pick-A-Dilly banner by Quincy, Ill.-based Niemann Foods, from Big River Oil, Hannibal, Mo.

— The acquisition of the eight-unit Numero Uno Markets chain in Los Angeles by a joint venture between Breco Holdings, a Houston-based investment firm, and Nogales Investors, Los Angeles.

— The acquisition of the Balducci's chain by Angelo, Gordon & Co.; the chain closed four stores, including its last two in Manhattan, where the specialty retailer got its start, before selling its remaining six stores to the New York-based investment firm.

In addition to those outright acquisitions, some investment firms bought a stake in food retailing this year, or increased their holdings significantly.

Among them was Boston-based Berkshire Partners, which agreed to invest in Berkeley, Calif.-based discount chain Grocery Outlet to help the privately owned banner expand.

“I think the limits of credit are quite severe for mainline food retailers, but I can see a number of private equity investors who are interested in more specialized formats,” Bill Bishop, principal at Willard Bishop, Barrington, Ill., told SN in October, when the investment was announced.

Yucaipa Cos., the California investment firm controlled by Ron Burkle, also increased its stake in the industry during the year, with a $115 million investment in Montvale, N.J.-based A&P, giving it a 27.6% stake. The investment was part of a plan to inject more than $400 million into A&P through private stock sale and a debt offering.

It was also revealed early this year that Yucaipa had acquired a 7% stake in Whole Foods Market, Austin, Texas.

Perhaps more telling than the deals that were completed during the year were those that were not.

Ukrop's Super Markets, the legendary Richmond, Va.-based independent, has been seeking a buyer for several months, sources told SN. Among the interested parties were Ruddick Corp., Matthews, N.C., parent of the Harris Teeter chain, and a private equity firm. As of last week, talks were still ongoing, sources told SN.

In addition, reports surfaced in the last few weeks that Marsh Supermarkets, Indianapolis, has been put on the market by its owner, Boca Raton, Fla.-based investment firm Sun Capital.

— Mark Hamstra

New Faces in Top Executive Posts in 2009

MINNEAPOLIS-BASED Supervalu announced in May that 33-year company veteran Jeff Noddle, who had engineered one of the largest acquisitions in industry history with the 2006 purchase of Albertsons, would step down as chairman and chief executive officer, to be succeeded by Craig Herkert, a former Albertsons executive who had recently been overseeing Wal-Mart's operations in Latin America and Canada.

“As we approach the end of year three of our company's transformation and as I begin planning for retirement, the time is right to lay the groundwork for continuity of leadership through the next phase of our journey,” Noddle, 62, said in a prepared statement at the time.

Herkert's appointment was one of several top-level executive changes in the industry in 2009, some of which appeared to have been prompted by the difficult operating environment.

Others included the surprise departure of Eric Claus as CEO of A&P, Montvale, N.J., shortly after California-based investor Yucaipa Cos. increased its stake and as the performance of A&P's Pathmark banner continued to slide.

“The company's performance has not met our expectations, and based on these results the company felt a change of leadership was warranted and appropriate,” Christian Haub, executive chairman of A&P, told analysts in a conference call.

At Bashas', Mike Proulx said in September that he would step down as president and chief operating officer after 40 years with the Chandler, Ariz.-based chain, which had filed Chapter 11 bankruptcy weeks earlier.

He was succeeded on an interim basis by Darl Andersen, the chain's retired chief financial officer, who returned to Bashas' in mid-August to serve as chief restructuring officer in the reorganization.

In November, Bill Coyne, who had been president and CEO of Raley's Supermarkets, West Sacramento, Calif., stepped down as some said the retailer was struggling to find its way in the weak economy. He was succeeded on an interim basis by Dave Clark, who had recently been brought in as chief operating officer of the regional chain.

“What Raley's needs to do is rethink how it does things if it hopes to play in this environment, and that's going to be tough,” George Whalin, an industry consultant, told SN.

Other changes appeared to have been made simply to better position their companies for the long term.

At Ahold, a reorganization of the Stop & Shop and Giant-Landover division that split the Stop & Shop banner into two regional groups led to some executive changes, with Carl Schlicker being named CEO for all four U.S. divisions: Stop & Shop New England, Stop & Shop Metro New York, Giant-Landover and Giant-Carlisle. He continues to report to Larry Benjamin, chief operating officer of Ahold USA.

Named as presidents of each of the four divisions were: Robin Michel, Giant-Landover; Rick Herring, Giant-Carlisle; Mark McGowan, Stop & Shop New England; and Ron Onorato, Stop & Shop Metro New York.

The moves were made to better position the company for local market conditions and to respond to acquisition opportunities, the company said.

At Associated Wholesale Grocers, longtime executive Gary Phillips retired as president and CEO and was succeeded by Jerry Garland, an 18-year AWG veteran who previously had spent 24 years with Kroger Co., Cincinnati.

— Mark Hamstra

Dollar Stores Lead a Surge Among Discounted Formats

WHILE MOST traditional food retailers survived the recession with aggressive price promotions to lure cash-strapped consumers, those shoppers also seemed to succumb to the lure of the discount format for their consumables needs.

The strong sales performance of the dollar-store format — exemplified by the successful initial public offering of Dollar General — illustrated this trend.

Earlier this month, in its first quarterly earnings report since its return to public ownership, the Goodlettsville, Tenn.-based chain posted a 9.2% gain in same-store sales.

Led by Safeway veteran Rick Dreiling, who took over as chairman and chief executive officer of the chain following its 2007 acquisition by private equity firm Kohlberg Kravis Roberts, Dollar General vowed ongoing strong growth. Through the first nine months of its current fiscal year, net income for the 8,700-store chain totaled $252.2 million, and sales were up 13.1%, to $8.6 billion.

Other dollar banners also reported success, including Charlotte, N.C.-based Family Dollar, which just weeks ago initiated an aggressive campaign to position itself more directly against traditional supermarkets.

“We are introducing a campaign that tells our customers pretty directly that we have exactly the same items and quality as the grocery store — we just price them lower,” R. James Kelly, president and chief operating officer, told analysts in a recent presentation.

The chain, with some 6,700 locations, generates estimated consumables sales of 65% or more of total volume.

Likewise, Dollar Tree, Chesapeake, Va., posted same-store sales in the high single digits throughout the year, and continued a torrid expansion pace that brought it to over 3,700 stores in 48 states.

Other discount formats also excelled, with limited-assortment banners Aldi — which opened its 1,000th U.S. location in 2009 and made aggressive plans for further expansion — and Save-A-Lot both reporting strong gains during the year.

Craig Herkert, the new CEO of Supervalu, Minneapolis, which owns and licenses the Save-A-Lot banner, signaled that the format has potential for rapid growth.

“We will approach Save-A-Lot with a new and heightened sense of urgency,” he said in a recent conference call with investors.

Warehouse clubs and supercenters, including Wal-Mart Stores, Costco and BJ's Wholesale, also reported strong gains in food sales throughout the year, despite some declines in discretionary purchases of general merchandise.

— Mark Hamstra

Technology Helps Retailers in Recession

IN 2009, technology's biggest role in food retailing may have been as an advisor helping retailers cope with the economic downturn.

Even before the year began, retailers who responded to SN's annual technology survey said that their most important technology applications were the ones that help address the top-line and bottom-line survival of a retail business, such as business intelligence, category management, inventory management and profit analysis.

Business intelligence (BI) applications — used to support better decision making — ranked first on the list of applications surveyed retailers said were high priority in 2009. “We are seeing an increased number of queries about BI, especially after the economic downturn,” said Shilpa Rao, solutions manager of merchandising in the retail practice of Tata Consultancy Services, a Mumbai, India-based firm with offices in New York.

But economic pressures also meant that retailers had fewer IT resources at their disposal, forcing them to focus on the most essential applications. In January, at the National Retail Federation's Annual Convention & Expo in New York, a panel of chief information officers was asked to name the system that they would fight the hardest to retain. Doug Rutledge, CIO for Fresh & Easy Neighborhood Market, El Segundo, Calif., named two: one that “aligns stock with sales and space” and one that “aligns hours with work.”

The former system, developed by Fresh & Easy's U.K. parent, Tesco, is a computer-based store ordering application that generates orders based on each store's POS data. While computer-based ordering has found greater adoption by European retailers, some major U.S. companies are beginning to use it. For example, this year, Winn-Dixie Stores' most significant software project is the implementation of a computer-generated ordering application, the SuperStore forecasting and ordering system, from SAF, Dallas.

The other must-have system mentioned by Rutledge is Fresh & Easy's labor scheduling application. Price Chopper Supermarkets, Schenectady, N.Y., also regards labor scheduling as a one of a few “corporate A” initiatives that received senior management approval, enabling the chain to invest in centralized, Web-based labor technology from Logile, Irving, Texas. “Labor is a huge part of whether we're profitable or not,” said Greg Zeh, Price Chopper's vice president of information systems.

Rutledge also mentioned that he was looking at task management, which ensures that store employees carry out corporate assignments. Other retailers have the same idea. Giant Eagle, Pittsburgh, is working on ways to improve the performance of Center Store employees “by predetermining the tasks that need to be accomplished, who is going to perform the tasks and how much time should be devoted to each task from start to finish,” said Brian Ferrier, director of retail business systems, Giant Eagle.

Along these lines, Giant Eagle earlier this year completed an initial implementation of a store-specific, endcap optimization system, from Galleria Retail Technology Solutions, Chicago, for several Center Store categories, on its way to a complete rollout.

Another system found to be valuable in a recession is price optimization. Among the food retailers that have selected price optimization systems this year: Price Chopper (DemandTec's system); Big Y, Springfield, Mass. (Revionics); and PCC Natural Markets, Seattle (KSS Retail). “Price optimization is becoming an accepted part of a retailer's standard application portfolio,” said Nikki Baird, analyst and co-founder of Retail Systems Research, Miami.

Organized retail crime, which has bedeviled the industry in recent years, gained more attention this year in part because the recession created a bigger market for stolen goods. Nearly three-quarters (73%) of 115 retailers from various channels surveyed this year by the National Retail Federation, Washington, reported their level of ORC activity had risen over the past 12 months, an increase of 11% from 2008.

Seeking help from federal lawmakers, retail executives urged them to pass legislation — four bills are currently under consideration — making organized retail crime a federal crime and stepping up restrictions on online auction sites used to fence stolen retail goods. Retailers are also turning to technology-based solutions. For example, Redner's Markets, based in Reading, Pa., employs a searchable video surveillance system, from 3VR Security, San Francisco, in 13 of its 51 grocery and convenience stores that has helped capture ORC thieves.

Technology is also being deployed to deter employee fraud, another problem stoked by the recession. This year, Big Y implemented a service, from StopLift Vision Systems, Bedford, Mass., that analyzes video feeds from overhead cameras to determine whether cashiers are deliberately not scanning products — or “sweethearting.” Raley's, West Sacramento, Calif., completed a rollout of a video-analysis system from Agilence, Camden, N.J., that targets sweethearting and theft, while also identifying non-fraudulent operational miscues, continuously but inadvertently perpetrated by cashiers.

Data security continued to make news in 2009 as retailers grappled with the fallout from high-profile card data breach cases of the past few years, notably the Hannaford Bros. case. Dissatisfaction continued to be expressed about the Payment Card Industry (PCI) Data Security Standard that retailers are required by the card industry to follow.

Responding to retailers' concerns, the PCI Security Standards Council commissioned a study by PricewaterhouseCoopers, New York, to assess the potential of end-to-end encryption, tokenization, and “chip and PIN” systems to improve the security of payment card data and possibly be included in the PCI standard. Meanwhile, payment card processors like Heartland Payment Systems and RBS WorldPay announced end-to-end encryption programs, and First Data announced a tokenization program, designed to improve the protection of consumer payment data handled by retailers.

In-store shopping devices made progress this year. Stop & Shop/Giant-Landover, based in Quincy, Mass., continues to lead the industry with its Scan It! handheld shopping unit. The device, which allows shoppers to scan and bag as well as receive targeted promotions, is available in about 250 Stop & Shop and Giant Food stores. Scan It! users account for 7% of transactions and 10% of sales in those stores, said Stephen Vowles, senior vice president, Stop & Shop/Giant-Landover.

Meanwhile, other shopping systems are being tested around the U.S. Bloom, a division of Food Lion, Salisbury, N.C., is “encouraged” by the early results of a test of a mobile shopping device, known as PAT (personal assistant technology), in one store in Fort Mill, S.C. The device, from Springboard Retail Networks, Toronto, is an 8.4-inch touchscreen tablet that is attached to the front of each of the store's shopping carts; it allows shoppers to locate products, view a digital sales flier and look up recipes, and it enables loyalty shoppers to access online shopping lists and favorite recipes.

One of the major impending changes in store technology — the GS1 DataBar bar code — spurred a lot of activity among food retailers this year. On Jan. 1, 2010, their POS systems will be expected to scan and process the GS1 DataBar, which is smaller, yet contains more data than the traditional UPC bar code.

While the DataBar has forced retailers to invest time and money in equipment upgrades, it is expected to offer a number of advantages. In its initial application on loose produce, the DataBar promises more accurate and productive scanning (especially of organics), yielding better sales, inventory and shrink data. On coupons, the DataBar is expected to reduce fraud and offer greater validation capabilities.

However, because processing the coupon DataBar is far more complex than processing the produce DataBar, retailers have been given an additional year to prepare their systems for the coupon DataBar; beginning on Jan. 1, 2011, manufacturers will be able to feature only the DataBar — and not both the DataBar and the UPC-A bar code — on coupons.

In whatever form bar codes take, the detailed transactional data that bar-code scanning makes possible is being increasingly shared by retailers with their suppliers. According to a white paper released by the Grocery Manufacturers Association, most U.S. grocery retailers and mass merchandisers with more than $5 billion in annual sales are sharing store sales and other data directly with their suppliers free of charge.

Food Lion has developed two major data-sharing programs, Vendor Pulse and Shopper Insights. By sharing its store and shopper data, Food Lion is following in the footsteps of Wegmans Food Markets' New Ways of Working Together program that aims to foster more productive trading partner collaboration.

Another important data-sharing program developed this year is the Food Marketing Institute's online recall portal. Originally launched in January, the portal was redesigned and reintroduced in September as the Rapid Recall Exchange.

— Michael Garry