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Safeway, Albertson's Combine to Take On Fast-Changing Grocery Industry

Posted by Dale Buss on March 7, 2014 03:20 PM

Cerberus is buying Safeway and blending it in with the Albertson's supermarket chain it already owns. But the transaction seems more like the end of an era rather than the beginning.

That's because the intended $9 billion merger of Albertson's and Safeway will be a play meant largely to shore up the combined operations defensively against sea changes that have been sweeping the food-retailing business that simply don't favor traditional chains such as the two that Cerberus will own.

The rise of grocery availability at Walmart, Target and other discounters; the spread of dry goods through drug stores and dollar stores and other new formats; the rising popularity of Trader Joe's, Whole Foods and their organic, natural, locally-produced and private-label ethos; the fact that online CPG sales finally seem to be gaining traction; and the strength of club stores in the grocery trade—all are conspiring against the merger of two of the long-time giants of the business.

The other remaining giant, Kroger, has sniffed around Safeway in the past and still could mount a bid to compete with Cerberus', some analysts say. At the least, Kroger might want to buy some of the operations that would be shed as Cerberus combines the two chains seeking economies of scale.

For now, Cerberus is attempting to create a dominant grocery store franchise on the West Coast that would have more than 2,400 stores and 250,000 employees—without closing stores, at the moment. It would continue Cerberus' consolidation of the supermarket business; last year, the private-equity group acquired Albertsons and Jewel-Osco from Supervalu for $3.3 billion. 

The effort to create one larger, more stable brand will bolster its chances to survive an increasing push by Walmart—already the largest grocer in the US—to infiltrate more suburban and urban areas through its smaller Neighborhood Market stores. 

"This merger will improve our competitive position," Safeway CEO Robert Edwards said on a conference call. "Our customers will benefit from significant cost savings and a stronger management team."

Unfortunately, some sad history may be cautionary in that regard. Cerberus is the same company that couldn't shoot straight in the auto industry in its attempt to transform Chrysler, which it bought from Mercedes-Benz and then helped run into the ground before the 2009 federal bailout and Fiat's purchase of the automaker.

Also, if "Safeway" and "buyout" seem familiar in the same sentence, that's because it's happened before. In 1986, the company was taken over by the trailblazing LBO group, Kohlberg Kravis Roberts. The investment eventually returned KKR $7 billion for its $129 million investment, but in the process Safeway dropped tens of thousands of employees from its payroll and came to symbolize the microcosmic economic devastation wrought by debt-levered acquisitions during the era.

That likely won't happen this time. But neither is there a guarantee—in such a dynamic and fast-changing but low-margin industry—that the new Safeway-Albertson's combination will succeed for long.

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