Ralphs Asserts Independence, Says It’s Financially Fit Despite Parent’s Woes
Ralphs Grocery Co. Chairman Byron Allumbaugh spent much of Thursday trying to put distance between the supermarket chain and its financially troubled owner Campeau Corp.
“We are a totally separate corporation with our own bonds, with our own banks,” said Allumbaugh on Thursday, a few hours before he made the same point before a room of 400 concerned suppliers. “We are about as bulletproof and stand alone as you can be.”
Along with Ralphs’ bullish executive, industry analysts say the Southern California supermarket chain is financially fit and insulated from Campeau’s woes. But some speculate that Ralphs might be sold off if Campeau deteriorates and that the grocery chain will face even stiffer local competition down the road.
Ralphs, which became part of the Campeau retailing empire as part of the takeover of Federated Stores in 1988, estimates that it will cut net losses to $31.7 million in 1989 from $72.6 million in 1988. And the Compton-based chain said it expects sales to grow to $4.5 billion by 1994 from an estimated $2.6 billion last year.
Analysts say Ralphs generates enough cash to make payments on its nearly $1 billion of debt and to remodel and open new stores in the never-ending race to capture a share of the $23 billion that Southern Californians spend annually on groceries.
For example, Ralphs has $40 million on hand to pay off $11.3 million in debt due at the end of this month, says Andrew Leinoff, a senior securities analyst at McCarthy, Crisanti & Maffei in Montpelier, Vt.
“Ralphs has been doing everything that it needs to do to be successful,” said Leinoff, who noted that the chain also plans to spend $100 million on remodeling and building new stores. “It’s more than enough to fund their expansion and competitive position.”
Ralphs might have also gained some breathing room thanks to a recent round of supermarket industry restructuring that has left some of its competitors, such as Vons, with a lot of debt. Furthermore, the merger of Alpha Beta, which is owned by American Stores Corp, and Lucky Stores has been delayed after the state attorney general opposed the combination on anti-competitive grounds. The case is now before the U.S. Supreme Court.
“The whole industry is moving ahead more cautiously than they have been because of all the debt,” said one supermarket industry executive.
But Ralphs relationship with financially troubled Campeau has tainted its image and worried suppliers. Allumbaugh, who sits on the Campeau board, has continually denied rumors that Ralphs will file for bankruptcy and that Campeau will siphon off cash from the chain.
“We will not be dragged into it,” said Allumbaugh of Campeau’s financial predicament. “It’s important that our suppliers and our customers understand that.”
Ralphs officials say the company is structured so the bankruptcy of sister companies Allied and Federated stores, both owned by Campeau, would not include the supermarket chain. Campeau itself has stated that Ralphs is not included in any potential bankruptcy filing plans, executives say.
Allumbaugh also disputed speculation that Ralphs would be sold if Campeau filed for bankruptcy. In a filing with the Securities and Exchange Commission late Wednesday, Campeau’s advisers said Ralphs could fetch up to $1.6 billion in a sale.
“They have no intention of selling Ralphs because we are such a major asset to them,” Allumbaugh said. “Selling Ralphs would also trigger a huge tax liability to Campeau.”
Analysts say whatever happens with Campeau the chain will have to tangle with bolder competitors who will have digested acquisitions and paid off debt within a few years.
“In three years, they might have to spend more to remain competitive with Vons and American Stores,” said Leinoff.
Sarah A. Stack, retailing analyst at Bateman Eichler, Hill Richards, said, “Vons has gained market share in the past two years because of its success in remodeling stores and opening new types of units,” such as Pavilions and Tianguis.
“But Ralphs and Lucky have not demonstrated that they can garner market share by diversification in format,” Stack said.
However, industry officials say Ralphs will remain a major industry player.
“They are one of the most experienced food retailers in America,” said Jack Brown, chairman of Stater Bros. supermarkets. “We have not seen any weakness.”
