By Doug Porter
The collapse of the Haggen grocery store chain just over month ago was a sad moment for neighborhoods and thousands of employees throughout California. More than two dozen stores in the San Diego region will soon be (or already are) closing, leaving some vacant properties behind and about a thousand employees wondering about paychecks as the holidays approach.
Now, thanks to reporting by the Seattle Times, we know the inside scoop on how this deal came down, and it ain’t pretty. Private equity investors flipped the real estate for cash, handed operations to an overwhelmed management team and will see their risks marginalized by the bankruptcy courts.
It’s all legal; another example of greed run amok. They win, we lose. And we’re supposed to accept this as the “natural order” of things in a market economy.
To Promote Competition…
The opportunity for Comvest Partners, the private equity company that owned the Haggen chain, to acquire 146 stores came about as the result of a Federal Trade Commission order in connection with the $9.4 billion merger of Albertsons and Safeway (Vons).
The purpose, according to an FTC press release was “to remedy the lessening of competition” caused by the merger.
Comvest bought the Haggen chain in 2011, firing top management and installing Clarence Gabriel as president and CEO. Subsequently Haggen closed 18 of its 30 locations in Oregon and Washington. Not a good sign for a company on the verge of a huge expansion.
According to the Oregonian:
Most recently, he operated a retail and supply chain consulting firm after serving as an interim CEO of Movie Gallery Inc., which – two CEOs later – filed for bankruptcy and liquidated its stores last year.
Gabriel also has held senior positions at Albertsons and Pepsi-Cola North America.
Later on, he was replaced by a three-member executive team, according to news reports at the time. John Clougher, the company’s current CEO, ended up sharing duties with Bill Shaner, who was brought on to oversee operations in the Pacific Southwest. Shaner left the company in early September, following the initial bankruptcy filing.
Comvest’s Easy Money
The Seattle Times report on the Haggen deal says the capital needed for the rapid expansion was raised by flipping real estate within the same time frame as the acquisition was announced.
That standard move from the private-equity playbook raised hundreds of millions of dollars and allowed the investment firm, Comvest Partners, to make a big bold bet without sticking its neck out too much. But it didn’t prevent the Bellingham-based chain from quickly foundering, putting thousands of jobs in danger.
“This is a fairly common practice among private equity funds,” says Jay Maddox, principal with Avison Young, a real-estate-services company. Maddox, who has advised clients in numerous Chapter 11 bankruptcies, says that in the Haggen case, the upfront sale of the properties “reduced the private equity fund’s risk exposure substantially.”
In December 2014, the same month it struck a $300 million deal to buy stores that Albertsons and Safeway needed to jettison in order to consummate their $9.4 billion merger, Haggen inked an agreement with Spirit Realty Capital, a real-estate investment firm based in Arizona.
Comvest sold 20 properties to Spirit for $224 million and leased them back. Another 39 locations were flipped via Brokerage Holliday Fenoglio Fowler. The total amount of capital raised through these transactions is unclear, according to the Seattle Times, but they were able to document that the $300 million needed to consummate the deal.
These kinds of quick cash transactions are standard operating procedure in the private-equity playbook these days. The stores being sold and leased in this particular deal were on high-value real estate and generally operating in the black.
A Disastrous Merger
A Terrible Marketing Campaign
The Haggen management thought their road to profitability was to upscale the locations they were acquiring. Their concept, abetted by the tenure of CEO Clougher’s time with Whole Foods, was to upscale the “mediocre” locations they were acquiring.
They had no clue.
From the Los Angeles Times:
…Analysts said Haggen’s failure had long been expected by experts in the supermarket industry. They pointed to the pricing problems that have plagued the stores since Haggen opened. Industry experts said the company failed to do its own market research, instead relying heavily on Albertsons and Safeway — their seller and rival — as a guide to how to price products.
“Nobody thought they could pull this off,” said David Livingston, founder of supermarket research firm DJL Research. “This isn’t just David and Goliath. This is David and Goliath and Goliath is handing David a faulty slingshot.”
Things were complicated further by accusations that Albertsons deliberately sabotaged the transition of its properties to Haggen. There’s a $1 billion lawsuit filed by Haggen, claiming Albertsons used what it knew about the timing of store transitions to run ad campaigns and discounts to steal away customers to stores they would continue to own.
From the Seattle Times:
Haggen also says that Albertsons gave it misleading price information about products on the shelves before the transition, resulting in the prices that turned off many customers as soon as the rebranded stores opened their doors.
“The practical result of this deception was a consumer walking into a brand new Haggen store and finding the same item on the same shelf, but now priced higher than it was immediately before store conversion,” the lawsuit says.
Moreover, says the suit, Albertsons gave Haggen muddled inventory data, and understocked some stores to ensure disruption while overstocking others with perishable products. In a few instances, Albertsons charged purchases to a soon-to-be converted store and had them delivered to another store it was keeping, the suit alleges.
While Albertsons says those claims are without merit, a securities filing made recently disclosed that another purchaser of a small number of stores has made similar claims.
Albertson’s is in turn suing Haggen, claiming that it hasn’t been paid for $41.1 million in merchandise. A former Haggen employee has filed a whistle-blower lawsuit after she was forced into retirement for pointing out price discrepancies between the shelves and the scanners.
The Employees Got the Shaft
As I write this, the San Diego Workforce Partnership and America’s Job Center is holding a job fair for Haggen grocery store workers who got shafted as their company collapsed in late September.
Through the efforts of the United Foodservice and Commercial Workers (UFCW) some ex-employees are being given preferential treatment at Albertsons and Vons locations. But the bottom line for most of these folks will be part-time jobs or jobs in other companies with less pay and benefits.
The UFCW has filed grievances with Haggen, Vons and Albertsons alleging violations of collective bargaining agreements. Under the present stacked-against-workers reality, they can expect to see rulings long after the lives of those unfortunate enough to stay with Haggen through the transition are ruined.
And before you go into the “well, they had a choice” mantra, consider this reporting from The Los Angeles Daily News:
Seven days.
That’s how long the employees of the soon-to-be Haggen stores had to decide. They were told they could stay with their old companies and transfer to another Vons or Albertsons store, or they could stay at their current store and be employees of Haggen, a company with an exciting new concept, while retaining all their seniority and other benefits.
“They made it all sound so great,” said one employee who stayed at Haggen in Woodland Hills.
“No one left,” said another, speaking of her coworkers at a former Vons store in Paso Robles. “They told us they had enough money to keep operating for two years.”
As it turns out, the incoming bosses could have promised free unicorns and nobody would have known better.
The FTC order concerning the merger gave Haggen the right to meet with employees “to meet personally with the employees of Albertsons and Vons, outside the presence or hearing of any of their own employees or agents.”
The sellers were also forbidden to make any counteroffer to employees opting for employment with Haggen. Furthermore, the FTC said employees who accepted jobs with the buyer were not allowed to apply for jobs at Albertsons or Vons for one entire year. (This requirement has been lifted since the bankruptcy.)
UPDATE: 10News is reporting about a 32-year employee who’s already been stiffed on her health insurance and accumulated vacation time.
The Next Bosses
The Gelson’s Markets, along with Smart and Final, have submitted bids for some locations thru a November 9th auction.
Gelson’s is looking for a few stores in high-end zip codes. Employees at those locations will be hired at similar wages.
Smart and Final is a deep discounter, and they’re looking at locations in not-so-upscale neighborhoods. The company’s reputation is that of an employer who encourages churn and burn with its workforce; that usually means sub-par wages and mediocre benefits.
There are Haggen locations that will simply shutter. And the employment situation is made even more distressing by the news of Fresh and Easy closing all its locations, including eight in San Diego County.
While news accounts about the grocery business usually mention the ultra-competitive nature of the business in Southern California, they (usually) fail to mention that the business model for the “middle” of the industry has no future.
The Albertsons and Safeway chains built their stores around offering tens of thousands of items. The average chain store has 38,718 items on its shelves.
The market is splitting into high-end stores with lots of offerings (and sales!) and discounters with a more focused inventory (and lower everyday prices). In San Diego, the high end is Ralphs, Whole Foods, Sprouts, Baron’s, etc; the low end is Smart and Final, Costco, Walmart, Trader Joes, etc. Then we also have a proliferation of ethnic grocery stores like Zion, 99 Ranch, Pancho Villa, etc, along with boutique shopping opportunities, ranging from farmers markets to craft oriented specialty stores.
The future for “middle” stores like Albertsons, which depend on both larger inventory and getting prices high enough to support it, looks bleak. So there’s a historical trend going on here and these companies will be forced to re-invent themselves to survive.
The lesson to be drawn from the debacle of Haggen’s stores is that they became mere real estate transactions rather than retail operations that served a community. A bunch of money was easily raised, the deal went south because they didn’t care, the fat cats will get fatter and the employees will get screwed. And those fat cats won’t likely being paying the taxes to support the social safety net those employees will fall into.
It’s a morality tale for the 21st century. The bad guys are winning.
(h/t to Assm Lorena Gonzalez for tweeting the Seattle Times story)
Two other stories of note…
Highway to Hotness
From the Union-Tribune, in case you were wondering about last month’s weather:
San Diego experienced the warmest October on record with an average monthly temperature of 74.4 degrees. That’s 7.7 degrees above average, says the National Weather Service.
The balmy reading at San Diego’s Lindbergh Field broke the previous October average of 72.2, set in 1983. The third warmest October — 71.8 — occurred last fall.
New GOP Debate Format
Credit: Daily Kos
Finally a bit of levity, via Cheers and Jeers by Bill in Portland Maine @Daily Kos.
Here’s his scenario for the new debate format being drawn up by the whiny Republican presidential candidates:
Rush Limbaugh: Thank you for joining us for the fourth Republican debate. I’m Rush Limbaugh with my co-moderators Sean Hannity and Mark Levin. Mark, I see you have a spoon of chocolate pudding ready, so why don’t you ask the first question.
Mr. Levin: Thank you, Rush. Governor Huckabee, my question to you is: would you like some pudding? Would ya, huh huh? Brrrrrrroom Brrrrrrrroom…here comes the big pudding airplane into the big Huckabee hangar! Open wide…. Attaboy! Mikey eats the pudding!
Gov. Huckabee: Nom nom nom! Yummy pudding tasty! Jesus loved pudding and I love Jesus so I LOVE PUDDING! Impeach Obama!
[Audience standing ovation]
On This Day: 1920 – Railroad union leader & socialist Eugene V. Debs received nearly a million votes for president while imprisoned. 1974 – George Harrison began his first tour in eight years. He was the first former Beatle to attempt a nationwide solo tour. 1983 – President Ronald Reagan signed a bill establishing a federal holiday on the third Monday of January in honor of civil rights leader Dr. Martin Luther King Jr.
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Doug Porter
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I am one of those customers that walked in on the day the store open and was shocked to see the higher cost of the items I had bought the week before. I have shopped at that location through various names, food baskets, luckys, and so on. I live 2 and one half blocks for the Haggen located in North Park thus I have supported whatever store was in that building for over 40 years. On opening day I rushed over to see what wonderful deals would be available. The answer was simple None. I came home with a very small bag. The store was cleaner than it had been under the Albertsons’ ownership but not enough to be willing to shop there. I also noticed they do not take the card that supplies young mothers with milk for their babies. BIG mistake. I spoke with seniors in the neighborhood and they were also shocked at the prices. I then started shopping at other neighborhood stores. Many of the employees were people I knew by name and spoke to on a regular bases, and I did miss them but not enough to shop there on a regular bases. With me it wasn’t the higher cost that bothered me though I didn’t like it, it was the feeling of being taken advantage the bug the hell out of me. If I am going to be robbed I prefer they use a gun and not my debit card. Every time I bought something I had that feeling. I am sorry to see it close because I know those employees will not all be rehired. I wish they had wanted to fix the mess they made. Where are we now?? To date no one has purchased that locations. Some of the employees are still looking for work. Yes I will purchase items as they offer discounts but not with their lousy 10/15 Percent. Big business has a write off and they community lost a store. SAD
Maria, I could have written that comment myself. I agree with every word, the exact same thing happened here in Paso Robles and to me. It brings tears to my eyes thinking about our friends who got laid off.
The simple fact is, these stores were awful. They were being promoted as a less expensive Whole Foods but higher end than a regular grocery store. Neither was the case. Their selection was mediocre and nothing you couldn’t get at a regular grocery chain, yet were WAY over priced. While it is horrible that all these employees are/will be out of work, all the stores closing is nothing surprising. I’m amazed they survived it this long.
It was always a real estate deal from the beginning. They will make money on the deal after liquidation. If they sell off the remaining stores at the average of the Stalking Horse bids of $2.56M per unit, that’s another $307M. They still own 24 location outright. If form holds true, that could net them another $200M. After liquidating inventory, fixtures, and furniture ( I estimate that to be another $36M ) they will gross close to $850M. That’s almost a billion dollars folks. That should cover expenses with plenty to spare. Don’t cry any tears for the greedy SOB’s at Comvest Partners. They will be just fine.
Heck, they put way more effort into the Liquidation effort that they ever put into running the business. That should tell you all you need to know. Now, the communities they are abandoning and the workers who are scrambling to find new jobs are left to hold the bag.
My last day with Haggen will be November 7th, and I wish them good riddance. I have been in the business for 35 years, or since John Caple was a ten-year-old. Somehow, he became Chairman of the Board with absolutely no retail experience at all. But, boy, can he sure sell off the parts like nobody else.
One last comment about the FTC, by the way. The Asset Protection agreement signed by Albertsons and Haggen stipulates that store management could not be transferred from a location that would be divested to a location that was not included in the sale. I notified the FTC that this stipulation had been violated by Albertsons through their own website, and you know what they did? They sent me a standard form letter advising me how to avoid being a victim of fraud. How’s that for your government hard at work to protect us? Obviously, my complaint went right into the trash can.
What a massive failure on multiple fronts. I would advise anyone reading this to vote with your feet, and shop at food retailers who have been proven to be good stewards for the community. Also, please know that your tax dollars fund the FTC and their incompetence. Government meddling once again has left the tax payer out in the cold.
The FTC is by just about any measure, owned by the people it’s supposed to regulate. And thanks to revolving doors between Gov’t and industry, it’s led by people who think the “right way”. So I don’t know if you can say the FTC’s rulings are the fault of government per se or the people who have bought the regulators.
Even without knowing all the behind-the-scenes stuff that this story delivers so well, it was a foregone conclusion when the cockamamie deal was announced that Haggen wouldn’t make it. Almost like someone planned it that way.
When they opened on Balboa Avenue, after a whirlwind 36-hour changeover, they didn’t have the store brand item I wanted, even though it was an advertised special. Then, in their ad circulars, I saw that their prices were even higher than Albertson’s was! I never shopped there again.
Mr. Porter calls it exactly right: the deal went south because the fat cats didn’t care; they’ll get fatter and everyone else gets screwed.
Thank you for sharing the multi-faceted “back story” of Haggen’s.
“The bad guys are winning.” Yes, it feels like that, in so many ways.
None of this would have happened without the FTC divest mandate. They have a dismal, decades long track record of meddling in areas in which they have absolutely no competence. Without the mandate, none of it would have been possible. The naive outlook that fatcats took advantage of workers completely ignores this reality. There is plenty of competition in this industry, as is obvious to anyone who lives and shops in the real world.
The Lawyers. The Lobbyists. The Laws. The Revolving Door between Industry and Regulator. The P.R. and Advertising. The Distance between Consumer and Producer. The fact that the producer is the last actor in this inverted chain, and ought to be the first and most important.
This deal smelled rotten right from the beginning. For a chain of 18 stores to come in and purchase 146 stores with no distribution center made no sense. They would not be able to compete price-wise because they would have to pay a profit to their suppliers.
Unfortunately the employees will not have the means to sue the investment company responsible for this debacle. It sure would be nice to see them have to forfeit all of the money they realized. But alas, they would just use their accounting to hide all of their profits.