THE STRANGE SAGA OF ALBERTSONS AND WHAT IT MEANS

David Merrefield

The now concluded year-end holiday period brought with it a strange piece of business: the collapse of the Albertsons buyout deal, evidently at the last moment.

Actually, the Albertsons situation has been fraught with strangeness since the moment the big chain announced it would offer itself for sale, or, at least, would endeavor to sell off substantial assets. That decision was made known in September. At that time, Alberstons' top officer, Larry Johnson, asserted that the chain intended to "clarify its endgame" by jettisoning "even more underperforming markets in order to monetize their embedded real estate and business value."

Acknowledging that an "endgame" was at hand and that some company assets had their principal value in real estate perhaps set a strange tone for a sale effort. It also seems strange that a suitable profit level couldn't somehow be coaxed out of a company with a top line of some $40 billion. As we've seen many times, though, size alone doesn't guarantee success. Indeed, one of the more important lessons "embedded" in this saga could be that size simply is no longer of the importance it was once thought to be. All the merging that could possibly be accomplished wouldn't produce a single supermarket company with the mass possessed by Wal-Mart Stores.

In any case, in the course of time, a bid that involved Kroger Co. surfaced, among several others. They apparently went nowhere. Meanwhile, though, another bid that appeared to have a high probability of success materialized. It involved Supervalu, CVS Corp., the drug-store operator, and capital investors. The offer was thought by many observers to be worth about $26 per share, including a chunk of Supervalu stock. Incidentally, two news articles published in these pages in December cautioned that Albertsons was attracting nowhere near the $35-per-share price that its board was said to expect and that alternatives other than a sale of Albertsons in its entirety might be the result.

Sure enough, just before Christmas, the deal collapsed, evidently because Albertsons' board thought that dismembering the company and selling it piecemeal would produce a higher price than it would as an ongoing operation.

So what does this all suggest?

o As cited earlier, the Albertsons experience shows that the days of endeavoring to compete with Wal-Mart by larding on mass obtained by mergers is over. It not only doesn't work, but it's counterproductive.

o Seeking success by adding mass doesn't work because the way to compete with Wal-Mart is through local marketing efforts. In almost every instance, mass carries with it the price of ossification. That view is mentioned by several of the executives interviewed for SN's front-page news feature about expectations for this year. Indeed, Wal-Mart itself is perhaps the only food purveyor that has little need for local marketing since it possesses an unassailable price advantage.

o Finally, the deal's collapse may illustrate that the macroeconomic system is lurching toward a crude solution to overstoring through the elimination of Albertsons, the nation's second-largest supermarket retailer, as an ongoing enterprise.

Be any of this as it may, it's a sure bet that Albertsons' future is murky, not least because the deal's failure may spark stockholder challenges to a seemingly indecisive and ineffectual top management and board.