Nothing Is Forever

Back in September, when Albertsons issued the press release headlined above, it scarcely required any translation. What it was saying was simple: “Other people can use our real estate so much more profitable than we can that they will pay us enough for the stores where it makes sense to stop operating supermarkets.”

It is easy to take pot shots at management and, perhaps, had a more experienced retailer been at the helm (the CEO of Albertsons is a guy from GE who lost out in the competition to replace Jack Welch as CEO), Albertsons might have been able to develop a merchandising strategy out of its malaise. But perhaps not.

After all, there is Winn-Dixie, which is not only operating under the protection of the bankruptcy courts but, despite regular pronouncements of progress, continues to hemorrhage money, and its prospects for survival as an independent chain are quite slim. Its major focus has been selling off stores. It has sold or is trying to sell over a third of its pre-Chapter 11 store count.

And Marsh, which has a good reputation as a solid chain quite innovative in certain areas and famous as the laboratory for the Marsh Super Study, has canceled its dividend and put itself up for sale. It also sold the former Atlas Supermarket’s Northside site — where David Letterman once bagged groceries — which was a linchpin of Marsh’s retail plans as it intended to convert the store to its Arthur’s Fresh Market concept. This expresses once again that the real estate value was exceeding the value Marsh could derive from operating a supermarket.

It is nice to think that the chains’ management teams all just happen to be bad merchants, but it isn’t true. If you look at the chains that are really considered the top competitors today — regional powerhouses such as HEB, Publix, and Wegmans — they share an important trait: They are privately held.

This gives them operational advantages as they are neither burdened by the costs of operating a public company (Sarbanes-Oxley and all that) nor do they have to worry much about Wall Street perceptions on quarterly earnings.

The traditional downfall of being private, a lack of access to capital, is less true today with the enormous amount of money available in private equity funds, wealthy real estate holders willing to provide substantial tenant inducements and a generally more sophisticated financial system that gets capital to those with good ideas and the ability to execute.

It is also true that privately held companies can be successful merchants, open new stores and appear successful — and, in fact, be profitable — but not be maximizing the return on capital employed in the business.

It is a subtle distinction but an important one. A family can own a building worth $10 million free and clear without any mortgage, operate a business and be happy with annual profits of $500,000 a year. It is enough for the family, and they get to continue the family business and hold the building and the business for potential future appreciation.

A publicly held company that did the same thing would find itself subject to a takeover bid. The return on capital would put the company on every screen on Wall Street.

There is more food retailing square footage for sale today than in a very long time, a sign that the return on capital in supermarket operations just isn’t there. The conventional, plain Jane supermarket just isn’t a viable business concept anymore.

One can blame Wal-Mart or Costco or Whole Foods, but the success of these entities is a function of tying into the changing demographics and psychographics of the American consumer. The change that matters is on both ends of the income scale. American Demographics did a review of census data that says it all:

On the one hand, we have a society in which 36 percent of all the children born in 2004 were born to unwed mothers. Life for most of these children will be a financial struggle. And the growth of unwed motherhood is accelerating. Now you know why Wal-Mart, Aldi and dollar stores are booming.

On the other hand, the census reports there are almost 12 million consumers who have an individual — not household — income of over $90,000 a year. This number has increased by 16 percent in the past five years. Since high earners tend to marry high earners, you’ve got an enormous concentration of buying power. Now you know why Whole Foods is booming.

The reasons behind these shifts are complex, but technology and international trade are a big part of it. Prior to radio and records, thousands of people were itinerant tenors, traveling from city to city to perform in little meeting halls and what not. With the advent of recording, broadcasting and free trade, we can all listen to Pavarotti. There is no need for middling tenors. So the income inequality, which was limited because even the top tenor in the world couldn’t entertain more than an opera house could hold, has dramatically switched. The top tenors get virtually all the income and the itinerant tenors have disappeared.

As we look ahead to 2006 and the rest of the century, the deli, with its emphasis on fresh foods and cooked items, is well positioned to serve the moneyed people, and, with thought, can be well positioned to serve those working two jobs or time-starved single mothers who may be on a budget but still have to feed the family. It would be useful for supermarket executives to think about how many itinerant tenors they have seen recently. It is a valuable reminder that nothing is forever, and the retail concepts that once ruled the world, like the dinosaurs, are not destined to rule forever.