Kroger Owners Go Shopping; Albertsons Owners Go Shoplifting

Supermarket Wars, Part 2

By Ronald Holden

There's still no conclusion to the lawsuits, objections, legal filings, and posturings in the supposedly friendly takeover of Albertsons by Kroger, and we may not have a resolution for a year or so. But here's a look at what we know so far. First things first, it's not (really) about the groceries.

Please exit via the gift shop

There's a reason guided tours of museums end at the sliding double-doors of the gift shop: they want you to buy a few souvenirs. Merch, it's called, at concerts and ball games. Cruise ships have dozens of boutiques peddling overwrought jewelry and overpriced art works; Vegas has scores of Hard Rock-wannabes stuffed to the rafters with branded hoodies. Wherever people congregate, there's a marketplace for something, even if it's not a traditional tourist bazaar in an exotic foreign land.

Which is why I'm surprised it's taken so long for people to focus on the one place more people go, and more often, than any other: the market itself. It's where American shoppers go often and spend more money than for any other recurring purchase outside of shelter.

But what about watching the game on TV? That's something a lot of Americans do at the same time, no? Well, broadcasting has its own rules. Generally speaking, major sports events are the biggest draws; it's easier (and cheaper) to sit in your living room and watch the Superbowl, say, than to fly to the host city, pay through the nose for a hotel room and meals, plus the exorbitant cost of the tickets themselves. In return, you just have to watch the commercials, right?

We're not talking here about an audience of couch potatoes in homes and bars across the country. We're focusing on people who congregate in defined places (like supermarkets), engaged in specific activities (like shopping for groceries). How do you reach that market, and how do you do it efficiently?

Turns out, there's more than one way to skin that cat, starting with ads on the shopping carts themselves. Then there's the floor, where you can print all manner of graphics. Coupons on receipts, posters between shelves, endcap displays, free samples, and digital screens in the checkout aisle.

Industry gurus will tell you that the average shopper visits a food store more than six times a month, which gives you an idea of how valuable a venue grocery markets can be. And not just for food purchases, either. Finance, insurance, automobiles, real estate, education, entertainment … the list goes on. Relative to (say) commercial messages on the internet or on cable TV, ads in grocery stores are seen as more trustworthy, the environment of a market as safer and more reliable.

Now, if you own the supermarket, your traditional objective is to steer customers into buying more of the stuff you already sell. Nothing wrong with that. But (dear store owners), what you really want to do is sell the store itself, sell its users, its audience to the folks who will pay you handsomely for access to that audience.

If you look at it that way, (dear store owners) your objective is not unlike a restaurant owner's: Butts In Seats. Except that it's Shoppers Pushing Carts. The more traffic you get, the more you get paid. So sure, discount the sticker price of ground beef, slash the tags on pickled peppers, run a special on eggs. You're driving shoppers from the street into your parking lot, and from there into your store, you're increasing attendance. The more customers you have onsite, the more attractive your store becomes to the digital marketers who have products and services to sell. So...lots of stores, lots of eyeballs.

It used to be, the big play in supermarkets had more to do with real estate than with food: supermarkets needed big parking lots and broad access for the 40-foot trailers bringing fresh merchandise. That's still important, though less so in an era of smaller cars, delivery services, and easier drive-up options.

The trend is to force shoppers to become their own checkers, which is a mixed blessing. Fewer checkers means lower labor costs, but also (paradoxically) increases the amount of time shoppers spend in the store, often frustrated with the checkout equipment. (God help you if you try to check yourself out of a Safeway with a "take 30% off" sticker.) Most supermarkets have wide aisles and narrow checkout counters. Compare that to the Trader Joe's model: narrow aisles but spacious checkout counters with plenty of staff (that seems to know exactly where every item is shelved).

There's a name for this; the industry calls it "walled garden" media. Omnichannel digital marketing is another, fancier term. The companies that dominate the field are not traditional Mad Men agencies but new and nimble outfits that use proprietary technology to turn the jumble of data (from shoppers' purchases) into information that's useful to an advertiser. Backward-looking sales figures aren't going to help determine what's going to sell in the future, obviously. And "Big Data" isn't limited to a single brand or a single sales channel. The flood of unstructured data from the internet alone is staggering: on the order of 2.5 quintillion (billion billion) bytes of new data every day. Lurking in those bytes is valuable information: what are competitors selling; what are industry newcomers up to; what new customer needs might be emerging; what's in all those blog posts; what's in those research papers, patent filings, and industry conferences?

So the players who are mining the data and shipping it to your marketing team, they're the ones who need access to your customers. But your supermarket is so much more than a generator of data for store owners, it's also a target. The same folks who mine the data that the stores are sending to them are busy selling your customer habits to other companies. Not to steer them toward the toothpaste section in your store but to tell the makers of toothpaste who's buying. And if perchance there's an overlap between the buyers of toothpaste and the buyers of canned chili, well, now you're talking.

As it happens, two of the leading companies in this field, Skai and Tictuk, are both Israeli. Skai, founded as Kenshoo in 2015, even has an office in Seattle.

* * *

On the face of things, the Kroger-Albertsons deal is far more than a $25 billion acquisition; it's more like a merger of rivals. But wait! The government's watchdog, the Federal Trade Commission, is very skeptical of deals like this because, they say, eliminating rivalry hurts competition, and competition benefits consumers by keeping prices down, encouraging innovation, and offering shoppers more choices.

The FTC's review process is notoriously slow, easily taking a year or more for a deal of this size. If it's approved, it's a great payday for the private equity suits at Cerberus Capital who bought Albertsons (and Safeway and Haggen, etc.) back in 2015. They paid $17 a share, and Kroger's offer is $27 a share, so they'd be making bank on their investment.

Not so fast. Albertsons has decided that right now, right now (before the FTC even begins its review) is the perfect time to pay a $4 billion dividend to its shareholders. (That's about $10 a share, by the way.) It doesn't even have $4 billion in the bank. There's maybe $2.5 billion on hand, and the suits would borrow the rest. Why? Why now?

Because that's what private equity does: it tears companies apart and picks over the bones like a flock of vultures. Look, ma: free money! Obviously, taking $4 billion off the table (and putting into Cerberus's pockets upfront) reduces the value of Albertsons, down to $27 a share.

Does it matter that the extraordinary dividend would hurt Albertsons, jeopardize its ability to run a business in an industry which requires strong cash reserves in order to operate? To buy inventory? To weather uncertain times? Bah!

* * *

But here's what's raising eyebrows, at the FTC and elsewhere. Nearly a third of the company's stock is held by one party, the private equity fund called Cerberus.

Cerberus decided, for some reason (ahem), that right now would be a good time to pay themselves a bonus of, well, four billion simoleons. Then they'll sign over the company (Albertsons, along with Safeway and half a dozen smaller supermarket chains) to the new guys at Kroger.

Not so fast, said everybody else who wasn't getting the bonus, including the attorneys general of California, Illinois, and the District of Columbia. Without that cash reserve, they say, in a lawsuit that's currently pending before a state judge in Seattle, Albertsons won't be able to compete effectively while the FTC considers the merger. A weaker Albertsons would be at a disadvantage going into the merger, which is, of course, exactly what its current owners want; they want out. Out, because that's what private equity does for a living: take over a sprawling, poorly managed enterprise, shed the rough edges, and wait around for a buyer. If need be, start selling off chunks (real estate, for example, or non-essential operations).

But, again, Albertson's doesn't actually have $4 billion in ready cash. According to Securities & Exchange Commission filings, the $4 billion will be paid with $2.5 billion in cash on hand; Albertsons will have to borrow the rest. (Huh?) Albertsons planned to pay out the dividend in early November, but the lawsuit in King County superior court was halted by Judge Ken Schubert.

"Corporations proposing a merger cannot sabotage their ability to compete while that merger is under review," argued Washington State AG Bob Ferguson.

The cycle is obvious: private equity buys a company (Haggen, Safeway, whatevs), strips it of its physical assets (e.g., the underlying real estate), pays itself a huge "dividend"--then starts shedding employees and raising prices. Then, just before it goes under, it "sells itself" to another private equity outfit.

Cerberus owns about 150 million shares of Albertsons, almost one third of its common stock, which is currently going for about $20 per share.

The dividend proposed by Cerberus amounts to a whopping $10 per share. Which is about 15 times the company's current earnings per share. In other words, Cerberus wants to give the company away...to its owners. Why would a company on the verge of being acquired by a larger rival want to do this? First, because the regulatory process takes a long time, over a year. But doesn't Albertsons need that cash to finance its operations? Of course it does! So why would Albertsons want to empty its piggy bank before the merger? One, the current owners get a huge payday upfront. And two, the weaker Albertsons gets, the more attractive it becomes: it can even argue that Kroger is obliged to come in as a white knight to "rescue" Albertsons, which can then portray itself, in this weakened state, as a "flailing" or "failing" company.

"Here, Cerberus, take all my cash!" "It's not enough." "I can get more; I'll pawn my wife's jewels! I'll get a second mortgage!" "Well, maybe, but make it quick. We ain't got all day."

Dude, what happened to your piggy bank? You get robbed? Yeah, my boss came and emptied the safe. Can you describe your boss? White male, early 60s? Sounds like 95 percent of the suits at Cerberus HQ in Manhattan (at 875 Third Avenue, by the way, halfway between a Whole Foods and a Trader Joe's).

Click here to read part 1.

December 2022

Ronald Holden, the author of Forking Seattle, is a longtime contributor to SeattleDining.com