Albertsons, Safeway grocery chains to merge

Sale of Maryland's second largest supermarket chain to transform industry, analysts say

(Kenneth K. Lam / Baltimore…)
March 06, 2014|By Heather Somerville, San Jose Mercury News

The days of the conventional supermarket are numbered.

Safeway Inc.'s announcement Thursday that private equity firm Cerberus Capital Management would acquire the company in a deal valued at about $9.4 billion is the latest sign from the troubled grocery industry that supermarkets have fallen out of style.

The deal combines Safeway with Cerberus' Albertsons chain, creating a dominant grocery franchise on the West Coast. It also creates a grocery network of more than 2,400 stores and 250,000 employees. Safeway has more than 20 stores in the Baltimore area. The company is the second largest supermarket chain in the region after Landover-based Giant Food.

No store closures are expected, according to the company.

The sale of the nation's second-largest grocery chain will reshape the industry and transform Safeway into a neighborhood grocer that more closely resembles Trader Joe's, according to analysts and industry watchers.

"The supermarket was built on the principle of, if you're 8 years old to 80, we carry everything in the store for you," said Frank Dell, president and chief executive of consulting group Dellmart & Co. and a 30-year industry watcher. "I just don't see bigger as being better anymore."

Smaller neighborhood markets that tout locally sourced meat and organic produce and attract customers with friendly service, ambience and one-of-a-kind items are pulling customers away from mainstream supermarkets, experts say. Analyst Scott Mushkin of Wolfe Research said Arizona-based Sprouts Farmers Market is "firing on all cylinders" with huge sales growth.

Trader Joe's has earned a loyal following with its private label. The small-format stores have a limited selection, but shoppers know it's the only place they can get Trader Joe's brand couscous or kale chips, which industry experts say keeps them coming back.

Safeway has private label products, including organics, which last year reached an all-time high of 28 percent of total grocery sales. But Trader Joe's small and clean stores, lower prices and helpful staff have made it the rising star of specialty grocers.

"When I go into a Trader Joe's, I never want to leave," said Phil Lempert, editor at Supermarket News and a longtime industry analyst. "I want to work there. I want to wear the shirt and ring the bell."

Pleasanton, Calif.-based Safeway, on the other hand, has been panned for neglected stores and ranked by industry publications as having among the worst customer service in retail.

Even Wal-Mart has pivoted, from big-box to neighborhood market stores about a quarter the size of its Supercenters that emphasize groceries. Between discount retailers, drugstores, the local farmer's market and theWhole Foods or Trader Joe's around the corner, traditional supermarkets have lost 15 percent of the grocery market, and are expected to cede even more by 2016, according to industry reports.

"At one time, the supermarket was the place to shop four times a week," Dell said. "Then along came Costco, and along came this little guy named Sam Walton. Then when I see them open a Trader Joe's in this town, a line forms around the block."

A Safeway deal with Cerberus is not final and neither will comment on the matter. Bloomberg has reported that supermarket company Kroger Co. has contacted Safeway and Cerberus about joining the deal; Kroger declined to comment.

If a sale is finalized, some Safeway stores and distribution centers would probably be closed or sold, industry experts say. Karen Short, an analyst with Deutsche Bank, said she expects Cerberus would spin off most of the Safeway stores in Colorado, Texas and Arizona states where Safeway is outperformed by competitors.

Cerberus already owns several grocery chains, including Lucky in the San Francisco Bay Area, so buying Safeway would create antitrust issues and probably force Cerberus to spin off several stores in California, said Samina Karim, a corporate restructuring expert at Boston University.

"Cerberus would be the dominant grocery holder in California," Karim said. "They are judging which locations make the most sense to hold onto."

Under a Cerberus deal, the remaining Safeway stores and Albertsons stores which Cerberus bought in two buyouts, in 2006 and 2013 could be combined to form regional grocery operations throughout the Western U.S., transforming Safeway stores into neighborhood-style markets with local flair and more selective offerings, according to some experts.

"Do you really need 100 brands of olive oil staring at you?" Lempert asked. "We want fewer choices in certain things."

If Kroger bought into the deal, it also would probably have to close stores to meet antitrust regulations.

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