the grocery bizPosted: March 26, 2014
No doubt you’re aware of the announcement that was made the first week of March about the sale of the Safeway grocery chain to Cerberus Capital Management. My immediate reaction was that a grocery chain being owned by a private equity firm is not a Good Thing. I was not much comforted by all the love and light being spouted by the analysts, including on KQED’s Forum, talking about how the chain would now be able to run smaller, more friendly stores with merchandise tailored to each local community.
I can’t help but agree with Thomas Lee in the San Francisco Chronicle, who wrote, “As a general rule in business, companies that attract the pockets of large private equity firms, especially ones named after a mythical three-headed hellhound, are in deep trouble.” I have to agree.
It is true that privately held companies have more flexibility because they are not beholden to the stockholders. And privately held companies can and do deliver a good shopping experience and quality products. Witness Trader Joe’s and In-n-Out burger. But a privately held company focused on managing a single business well is not the same as a private equity firm. Cerberus is, after all, the firm that once owned Chrysler.
As Lee writes, “Private equity’s primary goal – perhaps its only goal – is to make money for its investors within five years or so, not necessarily to ensure the survival of Safeway.” He says, “Of course, Cerberus would prefer to generate profits the old-fashioned way: running the business well.” But, of course Lee tell us that if that doesn’t work, Cerberus has the option to “Sell! Sell! Sell!” Sell store real estate. Sell manufacturing and food processing plants. Sell distribution facilities.
The mantra that is constantly being repeated is that the grocery business is changing. That is true. The truism that Safeway is being squeezed by the likes of Costco and Wal-Mart on one side and specialty retailers like Trader Joe’s and Whole Foods on the other is in fact true. I, myself, am a contributor in my own small way to the sale. I shop at our regional grocery chain, Nob Hill. I shop at our local Rocca’s market. I make my weekly stop at Trader Joe’s after church. I pick up oranges and sometimes veggies at Kachy’s, our local Latino produce market. I buy guacamole and marinated meats at the upscale Latino chain, Mi Pueblo. And sometimes I pop in and pick up a couple of things at Safeway.
So there you have it. Guilty. Guilty. Guilty.
The sale isn’t likely to close until the end of this year after the regulators have had a chance to mull this over. It will obviously a while after that before we know what the long-term effects are.
At some point we’ll find out.