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« September 2006 Table of Contents

Case Study: Albertsons stores’ new owners likely to upgrade seafood

Experts forecast short-term stability, long-term improvements

When two new owners bought and took over more than 1,760 Albertsons grocery stores in a $17.4 billion deal, they set the stage for potentially big upgrades to the stores' seafood departments.

Supervalu, CVS and an investment group led by Cerberus Capital Man­age­ment of New York purchased Al­bertsons grocery stores, drug stores and distribution facilities in early June. Cerberus named its new holdings Albertson's LLC, operating out of the former Albertsons headquarters in Boise, Idaho.

Cerberus, which buys under-performing operations and controls companies worth a combined $30 billion, acquired 661 stores. Supervalu, based in Eden Prairie, Minn., acquired more than 1,100 stores, becoming the nation's third-largest grocer, behind Wal-Mart and Kroger, and ahead of Safe­way, according to Retail Forward.

Officially, both companies are mum about what's in store for their seafood departments. Insiders say the new owners probably don't yet have plans, so changes aren't expected for several months. But the long-term view is another story.

Improving perishables like seafood must be on Supervalu's and Cerberus' to-do lists if Albertsons' new owners hope to steer the chain and banners like Acme, Jewel and Shaw's into a bright, profitable future, say grocery industry experts.

"You're going to see [Albertsons] coming back strong in perishables," says Phil Lempert, editor of supermarketguru.com and food editor for the Today Show.

"Perishables is the ground on which a lot of grocers [including Albertsons] need to be improving their offering," says Jim Hertel, senior VP of Willard Bishop, a grocery consulting firm in Barrington, Ill. "They still have, from the shopper's point of view, advantages relative to price-oriented discounters, and [perishables], especially in the area of prepared foods, are where they can develop superior and unique offerings."

Robert Miller, most recently the CEO of Kroger's Fred Meyer division and now CEO of Albertson's LLC, has stated publicly that the chain plans to substantially improve the perishables departments in quality and selection. There are no details about what that means for the seafood departments at the 600-plus stores now owned by Albertson's LLC, says Stacia Levanthal, Albertson's spokeswoman.

Cerberus acquired the stores and distribution centers of the Albertsons Dallas/Fort Worth, Florida, northern California, Rocky Mountain and Southwestern divisions, which saw combined 2005 sales of $10.4 billion.

Within days of the purchase, Albert­son's LLC closed 100 stores: 16 in Colorado, 37 in northern California, eight in Florida, 16 in Colorado and 30 in Texas, Louisiana and Oklahoma.

The closings hardly represented a dramatic loss of volume, since those stores were doing so poorly, says one national seafood distributor. They represented 16.2 percent of the chain's total stores, but only 9.7 percent of total sales.

Increased sales from a more promotional, aggressive merchandising strategy will more than make up for that volume, says the distributor. The new organization immediately narrowed seafood product selection, offering deeper promotional discounts, and pocketing lower gross margins than the former owner, he says.

The new Albertson's is also expected to improve service by staffing service seafood counters, says the seafood distributor. Albertsons has had a combination of service and self-service departments, but service seafood counters were not always staffed, says the distributor.

"The reason Cerberus and Super­valu were able to buy Albertsons is that Albertsons was not doing a good job," he says.

Seafood purchasing and merchandising are likely to become regional, say distributors. The old Albertsons regime in 2005 was combining divisions to consolidate purchasing.

"Our headquarters will be in Boise," Miller wrote in a June 2 letter to vendors, "but the bulk of the merchandising decisions will be made in the divisions, the regions and, in some cases, the stores."

In seafood purchasing, that may mean stability.

Albertsons could not effectively centralize seafood purchasing and merchandising from its Boise headquarters, so it put in place a network of direct-store-delivery vendors, seafood distributors who worked closely with each division but have a fair amount of autonomy over seafood procurement and merchandising, says Tom DeMott, a former seafood merchandiser for chain grocery stores and now COO of Encore Sales Co. in San Ramon, Calif.

Albertsons relies heavily on DSD vendors, and that is unlikely to change, he says.

"I would expect that when it comes to chains like Shaw's, Jewel and Acme, whatever you see going on in seafood is going to be driven by their local people more so than by any centralized programs," says DeMott. The same goes for Albertson's LLC, he says.

Supervalu is known for its ability to appeal to customers' regional tastes. It and the new Albertson's must restore customers' image of Albertsons, Jewel, Shaw's and Acme as their "neighborhood market," says Hertel.

"[Supervalu] is quite good at it, and that's part of the philosophy [CEO] Jeff Noddle is bringing to the acquisition. So that's one of the things people can look forward to," says Hertel.

Supervalu now owns 2,500 grocery stores in formats ranging from extreme value up to high-end gourmet. It operates full-service grocery stores under the banners Jewel, Shaw's, Star Market, Albertsons, Farm Fresh, Shop 'n Save, Acme, Shoppers Food & Pharmacy, Save-A-Lot, Sunflower Market, Biggs, Bristol Farms, Cub Foods, Farm Fresh, Hornbacher's, Scott's and Shoppers Food and Pharmacy.

What Supervalu and Albertson's LLC should do, say experts, is master seafood basics and grow the category to reflect the expanding Hispanic population that buys more seafood than traditional American-Anglos.

"The seafood case needs to expand two to three times in size, and the meat case needs to decrease," says Lempert. "If I was in charge of Albertsons, that's what I would do.

"You can't beat Wal-Mart on price or Whole Foods on health. You have to find a new identity."

Willard Bishop's Hertel agrees. The Albertsons deal may represent a big opportunity to improve the seafood departments and grow sales, but Supervalu and Albertson's have some higher-priority concerns before turning their attention to seafood, he says.

For one, they must improve their pricing image with consumers. When they focus on perishables, probably within about 18 months, expect to see changes made first in produce and meat, then in the seafood and deli departments, says Hertel.

SFlb Contributing Editor Lisa Duchene lives in Bellefonte, Pa.