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With Tesco, SuperValu Reviewing Strategic Options, Big Changes Coming to Grocery Ownership

Next Year Likely To See 'Big Revolving Door' for Grocery Stores
December 12, 2012
The grocery store segment of the retail real estate industry is facing a substantial amount of dislocation going into 2013. Two major chains last week confirmed what analysts had been suspecting for much of the year, that they were reviewing their strategic alternatives after posting disappointing financial numbers.

Admitting that its bid to crack the U.S. grocery store market has failed, Tesco plc., the largest retailer in the U.K. and one of the world’s leading international retailers, dismissed the CEO of its 199-store Fresh and Easy U.S. chain and appointed Greenhill to review its options for its U.S. stores. See our story Tesco Throws In the Towel on U.S. Retail Expansion

And now SuperValu Inc. confirmed that the company continues to be in active discussion with several parties regarding the sale of all of its stores or some of its individual brands, which include: Acme, Albertsons, Cub, Farm Fresh, Hornbacher’s Jewel-Osco, Lucky, Sav-A-Lot, Shaw’s / Star Market, Shop ‘N Save, and Shoppers.


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"The real question is if Walmart will buy them and just convert to Walmart Xpress stores, or if they try to chop it up and sell," said Garrick Brown, director of Research for Cassidy Turley. "I think it could go either way."

"The big winners are the mid-priced and unionized guys in California, Arizona and Nevada -- Safeway, Vons, Stater Brothers, Bashas, Raley’s/Bel Air and the like -- just in that there is one less competitor to fend off,” Brown said. “But should Walmart take them all, I think their sense of relief will be short-lived.”

In a report to be released later this week, Brown goes into detail on his observations.

Tesco is the world’s second largest retailer, topped only by Walmart. It is the Walmart of Europe with immensely deep pockets. It thought it had a sure-fire strategy for entering the U.S. as one of the first players to launch the small format grocery revolution. Tesco launched its American concept, Fresh & Easy, in 2006 focusing first on the Phoenix market and then rapidly expanding to Las Vegas and Southern California, Brown notes.

“Then the recession hit. Fresh & Easy never met investor expectations and was the victim of a mix of factors. It launched at the wrong time, it launched in the wrong place (nearly all of its initial markets were among those worst-hit by the housing crisis and ensuing economic downturn). Its format needed some tweaking upon opening and some within the commercial real estate world noted that its initial site selection may have had some issues,” Brown noted.

“Rumors are circulating in the brokerage community that Tesco may sell the entire enterprise to archrival Walmart,” Brown noted. “We know of no official talks that are ongoing, however, the move would make sense and we are aware of talks that have occurred on occasion in regards to some individual locations possibly changing hands. A sale to Walmart could give Tesco investors the quick exit that they seem to be demanding, while turning the Walmart Xpress concept into a major player overnight in the Western United States.”

SuperValu too still seems uncertain how it will turn around its prospects.

Ajay Jain at Cantor Fitzgerald & Co.’s Research Division put the question bluntly to SuperValu’s recently appointed Chairman and CEO Wayne C. Sales (that’s right his name is a homonym for what the company hopes to achieve) at the company’s second quarter earnings conference call in October.

“I’m sure you know there’s a very big contingent of investors that doesn’t think SuperValu can survive at the rate that things are going, and maybe that there’s nothing substantive that’s going to come out of the strategic review. So my question is, is there anything specific that you think that skeptics are just completely missing,” Jain asked.

“Yes. I think we often forget about our strengths in terms of -- we’re still a $37 billion organization. We have a diverse portfolio of businesses, from the independent business to the hard discount business that has clear points of differentiation; the network of stores that we have across the country, where over 50% of them have had capital investments over the past 10 years; and you look at the #1, #2 market position that we have still in a number of our markets, we are still in the top 5 for all of our suppliers,” Sales answered. “When you look at the fact that we have about $8.6 billion worth of addressable costs in the organization and we’re targeting between 8% and 12% of that to improve our efficiency and to fund the investments that we need to make.”

But it’s not just organizational cost cutting that is worrying analysts. Some are concerned that SuperValu can’t sufficiently cut its store product pricing.

“Supervalu’s (SVU) weak second-quarter results underscore the challenges of undertaking accelerated price investments that cause significant near-term deterioration in both identical store (ID) sales and gross margins,” according to Fitch Ratings. “We remain skeptical of SVU’s ability to sufficiently narrow the price gap with its competitors to drive longer term improvement in ID sales and believe the company may not have the financial wherewithal to sustain the needed investments,” Fitch said. “In addition, the profit deterioration in each of SVU’s operating segments is likely to constrain asset sale proceeds that result from the company’s strategic review. We rate SVU’s issuer default rating ‘CCC’, given our concerns around the company’s long-term viability.”

Fitch went on to add that the business's weak trends may reduce interest in the grocery chains and in the multiples investors may be willing to pay for them.

"We continue to believe that the sale of the business as a whole is highly unlikely, given the very weak core retail business and the unwillingness of market participants to take on these businesses as significant price as well as other investments would be required to turn these operations around," Fitch added.


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