Albertsons May Find Itself Going to Pieces When Sold

The Southern California grocery industry, upended two years ago by a bitter labor dispute, is poised for another round of shopper-rattling turmoil.

The catalyst this time is ailing Albertsons Inc., which has put itself up for sale and reportedly drawn interest from several parties, including Kroger Co., whose Ralphs grocery chain is among Albertsons’ arch-rivals.

Although it operates in 37 states, Albertsons’ move partly reflects its problems in Southern California, where the company -- along with Kroger and the region’s third major grocer, Safeway Inc., which owns Vons and Pavilions -- has struggled to regain ground lost during their labor strike and lockout.

The three companies also are under growing pressure from a shift in shopping habits. Many consumers have abandoned conventional supermarkets for the food aisles of Wal-Mart Stores Inc. and other mass-market discounters and for specialty grocers such as Whole Foods Market Inc.

Five years ago, Kroger, Albertsons and Safeway controlled nearly 60% of the Southern California grocery market, but their share had dropped to 52% by the end of last year.

All three chains have struggled to regain sales lost during the Central and Southern California labor dispute, which began Oct. 11, 2003, and lasted until Feb. 29, 2004. The effects are still evident in the performance at Albertsons, the nation’s second-largest traditional grocery retailer, behind No. 1 Kroger.

In its fiscal year ended Feb. 3, the company earned $444 million on sales of $39.9 billion. Four years earlier, its profit was $765 million on sales of only $35.2 billion.

Two years ago, Albertson’s stock traded at about $20 a share -- about where it was trading when the company put itself up for sale Sept. 2.

Given the subpar performance of Albertsons’ diversified stable of food and drug stores, analysts said they were skeptical that anyone was interested in buying and running the company as it now stands. Instead, they expect the company to be broken apart as one or more buyers pick the pieces they want and sell or shutter the parts they don’t.

“Albertsons today is a troubled company,” analyst Meredith Adler of Lehman Bros. said in a report last month. Albertsons’ decision to sell, she wrote, is “a recognition that it cannot be turned around as one single entity.”

Yet Boise, Idaho-based Albertsons, with 2,500 stores nationwide, still has substantial value.

Besides its namesake grocery stores, of which 270 are in Southern California, the company owns the upscale Bristol Farms brand, the Sav-on Drugs chain, which has 332 stores in Southern California, and a raft other brands including Jewel-Osco, Osco Drug, Acme, Shaw’s and Star Markets.

Several analysts have estimated that Albertsons is worth $20 to $28 a share, and its stock closed Friday at $24.98. At $25 a share, all of Albertsons would be worth more than $9 billion.

“How many times do assets like these come on the market?” asked analyst Andrew Wolf of BB&T; Capital Markets. “Once every 50 years?”

Although Albertsons has said it won’t comment on any aspects of a sale until an agreement is reached with a buyer, there has been no shortage of reported suitors. Wall Street is speculating that final bids, and perhaps a decision by Albertsons, could arrive by December.

Besides Kroger -- which has not confirmed reports that it is considering making an offer for all or part of Albertsons -- other potential bidders reportedly include Yucaipa Cos., the investment firm of Los Angeles billionaire Ronald Burkle, who made much of his fortune buying and selling supermarket chains. A Yucaipa spokesman declined to comment last week.

Others reportedly interested in the company: A group that includes investment firms Thomas H. Lee Partners, Bain Capital and Warburg Pincus, and another that includes Kohlberg Kravis Roberts & Co. and Apollo Management.

Meanwhile, major drugstore chains -- including Walgreen Co., CVS Corp. and Rite Aid Corp. -- reportedly are mulling over bids only for Albertsons’ drugstore operations.

None of the conjectured bidders has publicly confirmed an interest in Albertsons.

Kroger, with annual sales of $56 billion, probably would face “big antitrust hurdles” if it tried to buy Kroger because of expected objections from the Federal Trade Commission, said Wolf of BB&T; Capital Markets.

In California, state Atty. Gen. Bill Lockyer also would “scrutinize the transaction very closely ... to protect competition and consumers,” Lockyer spokesman Tom Dresslar said. Kroger runs 274 Ralphs stores in Southern California and it owns the Compton-based Food 4 Less discount grocery chain.

Some analysts have speculated that Kroger may seek only parts of Albertsons, perhaps by joining forces with one of the investment groups.

If Kroger bought Albertsons whole and then sold a number of California supermarkets to satisfy antitrust concerns, one possible buyer might be Safeway, assuming Safeway wouldn’t face antitrust problems of its own. A spokesman at Safeway’s Pleasanton, Calif., headquarters declined to comment.

There also is speculation that the investment firms bidding for Albertsons might be more interested in the chain’s real-estate holdings. That could lead to the closure of some stores as those sites are redeveloped.

All of this means Southern California shoppers could see a number of their local supermarkets change hands or close their doors, and would again have to adjust their shopping habits.

That’s what happened during the labor dispute, when the United Food and Commercial Workers union struck Vons and Pavilions. Ralphs and Albertsons, which were negotiating jointly with Safeway, then locked out their union workers.

The work stoppage sent millions of Southern Californians not only to Wal-Mart, Costco Wholesale Corp. and other discounters, but also to smaller grocers such as Stater Bros. Holdings Inc., Trader Joe’s and Arden Group Inc.’s Gelson’s Markets. Many converted for good, despite two years of price cutting and other promotional efforts by the three companies.

Kroger Chief Executive David Dillon told analysts in September that Ralphs’ same-store sales in Southern California were still down from the last full quarter before the strike began.

Dillon’s comments were just the latest evidence that the problems facing Albertsons are endemic to the old-line grocery business and portend further consolidation in the industry, analysts said.

“It’s a foregone conclusion that, five years from now, we’re going to end up with fewer traditional supermarkets,” said George Whalin, president of Retail Management Consultants in San Marcos, Calif.

*

(BEGIN TEXT OF INFOBOX)

Checking out

Albertsons’ decision to sell the company partly reflects the slide of traditional supermarket chains in the hotly contested Southern California market, where Albertsons’ two main rivals are Kroger’s Ralphs and Safeway’s Vons and Pavilions stores.

Southern California market share*

Others: 36.9%

Ralphs: 18.1%

Vons/Pavilions: 17.4%

Albertsons: 16.8%

Stater Bros.: 10.8%

*As of 2004

Sources: Bear Stearns, Trade Dimensions