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Supermarket Wars

By Ronald Holden

Business wires over the past weeks have hummed with dispatches from the produce aisles and the meat counters: Kroger and Albertsons have agreed to a $25 billion merger, to create a 5,000-store behemoth with 700,000 employees. To sweeten the deal, Albertsons agreed to pay its shareholders a one-time dividend of $4 billion.

Not so fast, said attorneys-general in half a dozen states. They have anti-trust concerns, and saddling Albertsons with a $4 billion payout won't help. We'll have to wait and see. But how did we get to this point in the first place? Virtually all the players have local connections: Albertson's (with its original apostrophe), Fred Meyer, QFC, Safeway, and Haggen.

The background.

ALBERTSON'S

Joe Albertson opened his first store in Boise in 1939. It employed about 30 people; sales in the first year came to $170,000, with a net profit of almost $10,000. Pretty good, right? Revenues hit $1 billion by 1975. In 1977, a memorable TV jingle: "It's Joe Albertson's Supermarket, but the [produce/meat/bakery etc.] department is mine." Catchy. Well, it hasn't been Joe Albertson's for a long time. No more apostrophe, for one thing. When Joe Albertson passed away in 2003, his supermarkets were the nation's 6th largest chain, with 500 stores in 17 western and southern states. Six years later, Albertson's bought out the parent of Jewel, Osco, and Sav-On Drugs, and became the country's second largest chain. But its size was no protection against the churn of the retail food marketplace.

Joe Albertson, courtesy of Boise Daily

By 2006, having sold off 1,100 stores to Super-Valu and 700 pharmacies to CVS, its remaining 700 stores were taken over by a private-equity outfit, Cerberus Capital Management.

HAGGEN

A surprisingly good chain of supermarkets called Haggen was launched in Bellingham, with innovative practices like presenting fresh seafood on ice, a floral department, an in-store Starbucks drawing local shoppers as well as Canadian day-trippers. The family-owned chain grew to a baker's dozen stores, not counting those on the Seattle periphery branded as Top Foods. (The Seattle market already had Larry's, Metropolitan, Albertsons, Safeway, QFC, and Fred Meyer stores.) In 2009, to run the growing empire, they hired Jim Donald, former CEO of Starbucks, no less. Then, in 2011, the Haggen family (led by brothers Don and Rick) decide the time had come to sell. From the ranks of suitors they picked a private equity outfit from Miami called Comvest. But what should have been the family's proudest moment-a clean exit from the dog-eat-dog grocery business-turned out to be the beginning of a nightmare.

Don Haggen (passed away 2011), courtesy of ProgressiveGrocer

Comvest installed its own CEO, C.J. Gabriel, a retail exec a year away from retirement, who started things off by dumping the Top Foods concept. Haggen then cashed in its real estate holdings, spinning off the sites occupied by 15 of its stores to a California outfit, Merlone Geier Partners, in return for about $200 million. Still, at this point, it looked like a pretty good payday for the Haggen family. But then Gabriel retired and was replaced by a troika of Comvest executives, who proceeded to close or sell off one store after another, until, whoa! In a huge shakeup of the supermarket business that had nothing to do with Haggen at the outset, Safeway made an offer to buy Albertsons.

Not so fast, said the Federal Trade Commission, always on the lookout for mergers that might reduce competition and raise prices. The FTC required that nearly 150 west coast stores (mostly Albertsons) be excluded from the merger and go back on the market. And here's where Comvest got in way over its head. Sure, they say, we'll take 'em and turn 'em into Haggen stores. To go from a small chain with a dozen units to a regional powerhouse with 150? Definition of hubris, of overreach. But private equity, like the honey badger, don't care. It's not their circus, it's not even their money. In fact, to make the deal work, most of the proceeds from the real estate sale were committed to taking over the new stores.

It didn't take long for the whole venture to go south. Haggen lawyers (well, Comvest lawyers) went to court to claim that Albertson's sabotaged the deal with mis-priced inventory, rigged invoices, poisoned supplier relationships; it asked for more than $1 billion in damages. To underline its point, Haggen filed for bankruptcy protection a week later. As it happened, a vulture-buyer was waiting in the wings: none other than archrival Albertsons, itself now part of another private equity firm, Cerberus Capital Management.

Whatever paltry percentage of equity the Haggens retained in their family company probably evaporated because Comvest certainly got taken to the cleaners in this boneheaded deal. Who got screwed the most? Well, not the suits, you can be sure. Instead, it was the thousands of laid-off hourly workers (checkers, clerks, warehouse staff) who had no idea what was going on, and had no one to look out for them. Their union, the United Food & Commercial Workers, was no help at all. The FTC did put out a statement after the dust settled saying, essentially, "We're sorry things didn't work out the way we hoped." American capitalism at work, a "We're sorry" chorus and curtains for the Wagnerian opera called "The Death of Haggen."

SAFEWAY

Founded in American Falls, Idaho, in 1915 by a Baptist minister, S. M. Skaggs, Safeway was also a self-service store like Kroger, with a cash-only policy that kept prices low. Within a decade, there were nearly 1,000 stores in the chain. Charles Merrill (found of the Merrill Lynch brokerage house) bought a majority interest in Safeway and steered it to a listing on the New York Stock Exchange. The company grew to be the largest grocery chain in the western United States, then began selling some of its stores to remain profitable. And in 2014, it sold itself to longtime rival Albertsons, which had been acquired by the private equity firm Cerberus Capital Management.

An early Safeway in Idaho

FRED MEYER

Born in 1886 in Bavaria, Fritz Grumeyer was three years old when his family brought him to Brooklyn, where his father opened a grocery store. At the age of 19 he worked as a prospector in the gold fields of Alaska, then moved back to the Lower 48, first to Seattle, and, in 1909, to Portland. He modified his name a bit, and as Fred G. Meyer opened a "self-service" drug store in downtown Portland. In 1931, he created the first iteration in North America of "one-stop shopping."

Fred Meyer, courtesy of Meyer Memorial Trust

The Fred Meyer chain grew to nearly 100 stores across nine western states, After Meyer's death, in 1978, the leveraged buyout firm Kravitz Kohlberg Roberts took over the chain, and, in 1998, sold its assets to Kroger.

QFC

Jack Croco got his start in Boise working for Albertson's. He moved up to Seattle in 1955 to manage the Washington division, then started his own supermarket, Lake Hills Thriftway. Croco merged his operation with Vern Fortin's Quality Food Centers in the Roosevelt district in 1960. By the time Croco retired, the QFC chain had dozens of stores in the Northwest; Fred Meyer bought the chain in 1997, and 18 months later the combined company was purchased by Kroger.

KROGER

In 1884, Bernard Kroger, son of German immigrants, opened a grocery store in Cincinnati. Like all groceries at the time, customers ordered from clerks who stood behind counters and fetched the items one by one. Some three decades later, Kroger introduced a new concept: self-service shopping.

Kroger store 1947 in Kentucky

By then there were dozens of Kroger stores around Ohio and surrounding states. Then it began acquiring other regional chains. In 1998 Kroger merged with Fred Meyer-then the fifth-largest grocer in America and the parent of QFC.

FREE PARKING

Regardless of what the feel-good commercials and warm lighting would have you believe, the supermarket business is cutthroat. Real estate is expensive, labor is unreliable, meat and produce are perishable, margins on canned goods extremely thin. Stores do everything they can to earn a customer's loyalty, because nothing is as valuable as a customer who spends their precious time and money in your store every week. What draws them in? Wide aisles? (Not necessarily; Trader Joe's aisles are notoriously narrow but its customers are fiercely loyal.) Smiling butchers? Crisp produce? Freshly baked bread? A pharmacy? (Sure, but tough to manage.) Less-expensive house brands? (Maybe. Safeway has a VP just for its private label supply chain.) Flowers! That's it, let's put a huge display of fresh flowers at the entrance! (But if everybody does it, it's no big deal anymore.)

Is it any wonder, then, that supermarkets get bought and sold like cattle at auction?

And what's the value of a supermarket, anyway? Surely not its inventory-that's turning over regularly. Even if there's millions of dollars of goods on the shelves and in the back rooms, it can be sold off in a month or two. Customers? A store's fan base is a fickle asset indeed; smaller neighborhood markets in most communities can't compete with 100,000-square-foot stores surrounded by acres of free parking. In fact, that leads to the understanding of a supermarket's primary value: its real estate footprint. The store itself may be marginal, but if it's sitting in the middle of a square block of parking, it's a gold mine. And gold mines are magnets for private equity.

ONE OF THE GOOD GUYS: ENDEAVOUR

A decade ago, the owners of the Metropolitan Market chain, the Halvorsen family, were looking for a safe harbor in the swirling waters of the grocery wars. They were still digesting the acquisition of Larry's Markets (five of their six stores, an excellent inventory of fine wines) when they turned to a regional private equity firm, Endeavour, which was quietly assembling a stable of similar, local supermarket groups: New Seasons in Portland, and Lazy Acres, New Leaf, and Bristol Farms in California. With its financing assured, Met Market continues to grow. A store last year in Tacoma, another store coming up shortly in the Crown Hill section of Ballard. Endeavor created an umbrella for its supermarkets called Good Food Holdings. Then, as good private equity outfits are wont to do, Endeavor spun off GFH to South Korea's biggest retailer, E-Mart.

Terry Halvorsen of Metropolitan Markets

November 2022

 Next month: Who's really pushing for the supermarket mega-merger? Hint: it's got nothing to do with groceries.


Ronald Holden, the author of Forking Seattle, is also a long time contributor to SeattleDining.com.


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