Albertson’s Feeling Growth Pangs
Bigger isn’t always better, as executives at Albertson’s Inc. supermarket chain have learned the hard way after its difficult and costly acquisition of food and drug rival American Stores.
Now the nation’s No. 2 food retailer is taking steps to trim down, closing or selling 165 of its 2,541 stores in 25 out of 36 states in which it operates and eliminating up to 20% of its administrative and management jobs.
The moves announced Wednesday are expected to be only the initial steps in a sweeping plan that analysts say could involve more cost cutting, a retreat from some markets and some changes in strategy for the struggling chain.
Albertson’s officials declined to disclose which of its stores will be affected, but analysts speculated that at least some of them would be in California, where the company has 775 supermarkets and drugstores.
Although the company has struggled to gain footing in California, analysts don’t expect the bulk of the closures to be here, given its continued growth. Instead, they think the company will focus more of its attention on the state.
“I would be surprised if too many of them came from Southern California. They just need to remodel what they have to make them more productive,” said George Dahlman, an analyst with Minneapolis-based U.S. Bancorp Piper Jaffray.
As many as 1,600 of Albertson’s 8,000 non-store employees could be eliminated through corporate buyouts and layoffs.
Larry Johnston, Albertson’s new chief executive, says the cuts were long overdue and necessary to revive stagnant or slipping profit at the chain after the company’s 1999 acquisition of American Stores, the parent of Lucky supermarkets and Sav-On drug stores.
“We took our eye off the ball as we focused on the daunting process of putting these two huge companies together,” Johnston said in a conference call.
He suggested that although the company has gotten through most of the major roadblocks related to that acquisition, this announcement would be the first step in a broad corporate restructuring.
Indeed, analysts expect Johnston, a former General Electric Co. senior executive and the company’s first CEO from outside the grocery business, to make some sweeping changes.
“He’s indicated many times there are no sacred cows” at Albertson’s, said Asma Usmani, an analyst with St. Louis-based Edward Jones. “He’s going to right the company and make it a lean, mean machine.”
The news lifted Albertson’s stock $2.73 to close at $31.55 on the New York Stock Exchange.
Most of Albertson’s problems can be blamed on its 1999 acquisition of American Stores, analysts say. The deal, one of the supermarket industry’s most ambitious, doubled the size of the chain to more than 2,500 stores but saddled it with redundant jobs, systems and real estate that management has struggled to integrate.
Carrying this higher overhead had meant the company was unable to be as competitive on price as its rivals Safeway Inc. and Kroger Co.
And when Southland shoppers began seeing higher prices for packaged goods and fewer weekly bargains on meat and produce at Albertson’s stores last year, many balked. Store traffic and sales slowed.
Former CEO Gary Michaels, who retired this year, had said the company planned to cut costs, fix its operations problems and run more sales promotions. And analysts said prices were beginning to come down.
But they say the company was doing a poor job of telling customers about its lower prices. Its store displays were confusing and sales and promotions less effective than those of its competitors.
Johnston has given few details to analysts about his plans to overhaul the company, but some speculate that there could be more layoffs, closures, or even a retreat from some markets where Albertson’s is not competitive, said George Thompson, a grocery analyst with Prudential Securities in New York.
