Safeway’s New Owner Not Afraid to Make Changes

The private equity firm that struck a $9.4 billion deal to buy Safeway has proved it’s not afraid to make big supermarket purchases – and then turn around and make big changes.

In 2006, Cerberus Capital Management bought more than 600 Albertsons grocery stores, including more than 170 in Northern California. Today, following dozens of store closures and the sale of dozens more, not a single Albertsons is left in Northern California.

That bloodbath is the first thing that comes to mind for many grocery store labor leaders and industry veterans, when they think of Cerberus and what the buyout might mean for the San Francisco Bay Area. Safeway, for decades, has been the region’s dominant supermarket, and the Pleasanton, Calif.-based chain is also one of the largest employers in the East Bay.

“They can do one of two things with Safeway: They can run it like a grocery chain, or they could dismantle it and sell it for profits,” said Mike Henneberry, spokesman for the United Food and Commercial Workers union Local 5, which represents Bay Area Safeway employees. “I’m hoping (the latter is) not the case, but that has not been Cerberus’ track record in Northern California.”

Cerberus’ deal, announced Thursday, will merge Safeway with Albertsons, which still has stores in Southern California and in other states, to create a grocery conglomerate of 2,400 stores and 27 distribution facilities. The deal is expected to be finalized in the fourth quarter of this year, although other buyers could still make a bid for the company.

After about two decades as an independently run, public grocery company, under the direction of a single chief executive for most of that stretch, Safeway now finds itself under the control of a $25 billion private equity firm from New York.

Albertsons executives have said emphatically there are no plans to close Safeway stores and business will proceed as usual, but the road ahead is likely to be a bit bumpy. Some stores are expected to close and jobs to be lost, while others may be improved, according to supermarket industry veterans and analysts.

Less than a week after Cerberus took ownership of Albertsons in 2006, the company announced it would close 37 stores in Northern California, resulting in 2,000 jobs lost.

Although he doesn’t expect Cerberus to do to Safeway what it did to Albertsons in 2006, “they could be of a mind to at least bust up a portion of the stores,” said Bob Reynolds, a grocery industry veteran and analyst with Reynolds Economics.

The acquisition poses antitrust issues and needs the approval of the Federal Trade Commission, which may require Cerberus to divest some stores. Competitors such as Trader Joe’s and Wal-Mart will benefit from any closures or sales, industry watchers say. Cerberus, for instance, sold an Albertsons in Walnut Creek, Calif., to Trader Joe’s in 2006.

“Kroger, Wal-Mart, WinCo – they’re really looking forward to this, and they plan to pick up some market share,” said David Livingston, a supermarket industry analyst and market researcher.

Cerberus also said it had no plans to close Albertsons stores in 2006. But Albertsons spokeswoman Chris Wilcox said the company had several underperforming stores in the San Francisco Bay Area, and received an unsolicited bid from Save Mart to buy the remaining stores.

“We knew that even with our best efforts, we would be unable to put (the stores) on a path to profitability,” she said. She added that Albertsons doesn’t expect to close any Safeway stores, and the merger with Albertsons will “offer customers an enhanced shopping experience and lower prices.”

Some Safeway locations may also get some long overdue improvements, such as cleaner stores and better customer service, analysts said. Cerberus took over several grocery stores throughout the country, when it bought supermarket group Supervalu last year in a $3.3 billion deal.

“Cerberus’ intent is to put a shine on Safeway,” said analyst Scott Mushkin, a grocery industry expert with Wolfe Research. “It’s food service, it’s saying ‘Hi’ to people when they come in, keeping your stores clean. It’s not rocket science.”

While sales at Albertsons have improved on Cerberus’ watch, the firm has been blamed for the demise of other companies – including Mervyns, which filed for bankruptcy in 2008. Mervyns had its own financial problems when Cerberus bought it in 2004, but the equity firm has been blamed for stripping Mervyns of its real estate assets and saddling it with more debt. Cerberus no longer owned Mervyns when the retailer filed for bankruptcy protection.

“The investor group that included Cerberus made significant investments to turn around Mervyns, but the company, like many retailers, fell victim to the Great Recession,” a Cerberus spokesman said.

Some expect Cerberus to change Safeway in other ways, too. Safeway is emerging from more than two decades under the leadership of Steve Burd, the former CEO who spent much of his career focused on bringing organics and health services to the conventional supermarket.

Now, the grocer is in the hands of a savvy private equity group that is perhaps best known not for its supermarket holdings but for its stake in gun and car companies and military contractors. Cerberus owns the country’s largest gun company, Freedom Group, and in 2003 bought two of the largest rental car companies – Alamo and National. Then, in 2007, it bought Chrysler, the car company that two years later required a taxpayer bailout.

“Cerberus has a track record of buying to operate, rather than buying to flip,” Reynolds said. “But they are financial people. They don’t come from a grocery operating background.”