Albertson’s LLC has had a transformative year. The private-equity owned company is investing in elevating its growth trajectory. A significant step in this direction was made when the group acquired the remaining Albertsons stores – and rights to the Albertsons name – from SuperValu Inc, along with the Jewel-Osco, Acme, Shaw’s and Star Market chains. Last week’s acquisition of United Supermarkets builds on that foundation and comes as further evidence the firm, and its financial backers, are committed to driving growth through M&A. Katy Askew reports.

The Albertsons supermarket chain has something of a turbulent history.

The first Albertsons supermarket was opened in 1939 in Boise in Idaho. In the coming decades the company expanded its footprint organically through store openings that saw it develop into a grocery chain that covered 23 states.

However, the Idaho-based supermarket group overstretched itself financially in the 1990s and early 2000s, when it took on a significant debt burden to finance an acquisition spree that saw it briefly propelled to the number one spot as the US’s largest supermarket chain, with over 2,500 stores in 40 states.

Albertsons struggled to integrate these new businesses and sales came under pressure from growing competition in the US grocery market, notably from the likes of Wal-Mart Stores and Costco.

The resultant fire sale saw the business split into three and stores were sold off to Supervalu, to a Cerberus Capital Management-led consortium of investors – which would then form Albertson’s LLC – and to CVS Pharmacy.

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Cerberus-baked Albertson’s LLC took on 661 stores and the distribution centres of five Albertsons divisions. The company licenced the rights to the Albertsons name from Supervalu, which acquired the majority of the remaining stores.

The five divisions taken on by Albertson’s LLC were widely believed to be the weaker operating units and commentators expected Cerberus would look to sell the stores off piecemeal. However, the performance of the Albertsons stores under the leadership of Albertson’s LLC defied these expectations and stands in sharp contrast to the fortunes of the Albertsons stores that were snapped up by Supervalu.

Supervalu has been in trouble for some time and, last year, the group revealed it was conducting a strategic review of its business in response to falling sales and profits. The company’s top line had come under pressure as the post-financial crisis price sensitive environment meant warehouse stores such as Costco and Wal-Mart stole share from the group, which instead decided to protect its margin.

Supervalu was forced to shutter under-performing stores, but this failed to answer to the significant pressure building to return value to shareholders via its strategic review.

It came as little surprise, then, when Supervalu agreed to sell five of its supermarket chains, including Albertsons, to Albertson’s LLC in a deal worth US$3.3bn. The agreement, announced in January, saw Albertson’s LLC expand its store base by around 877 stores and included the group’s Albertson’s, Acme, Jewel-Osco banners.

Commenting on the move, analysts at Cantor Fitzgerald emphasised the strong track record that Cerberus-baked Albertson’s LLC boasts. “We do believe that the Cerberus consortium is uniquely positioned to monetise the Albertson’s stores owned by Supervalu based on its own track record of real estate acquired as part of the Albertson’s break-up in 2006.”

Albertson’s LLC, then, has bounced back. And it would appear the firm is going from strength-to-strength.

The company announced last week it has entered into an agreement to acquire family-owned Texan supermarket chain United Supermarkets for an undisclosed sum.

The move beefs up Albertson’s hand in Texas, a key market – but one that has seen a number of store closures as the group has trimmed under-performing outlets.

In contrast to former incarnations of the Albertson’s name, it is clear Albertson’s LLC is not just focused on growth – but on quality growth. And the 50 stores operated by United Supermarkets represent a quality proposition.

The company operates supermarkets under three differentiated banners – United Supermarkets, Market Street and Amigos – appealing to conventional, upmarket and hispanic consumer segments. As the US economy picks up, conventional supermarkets have seen a return to growth. Speciality stores have remained buoyant despite the downturn, as has been demonstrated by the consistent run of strong results from the likes of Whole Foods Market. Meanwhile, hispanic foods are viewed as a significant growth opportunity by much of the US food industry, with expansion propelled by demographic factors such as a growing population and improved economic standing. The future seems bright for United’s formats.

Commenting on the acquisition, Albertson’s LLC chief executive Bob Miller emphasised the “tremendous job” United management has done to establish the group as a quality grocery retailer, “perpetuating a remarkable culture of service and commitment to fresh, quality foods”.

“Our team feels there is an exceptional opportunity to invest in and grow their brands,” Miller added.

United will operate as a distinct division of Albertson’s LLC under CEO Robert Taylor. Speaking last week, Taylor was also quick to emphasise that the acquisition would increase investment behind the business. “We are all very excited to be joining the Albertson’s family, which will provide us tremendous opportunities to invest in our stores and grow,” he said.

Neil Stern, senior partner with McMillan Doolittle, confirms the appeal of United Supermarkets is the fact it is a growth business. “United seems to have formats that can be grown and that is what makes them attractive,” he suggests.

According to Stern, the drive to nurture and grow businesses sets Cerberus apart from many other private-equity groups, who are more likely to focus on cost cutting than investment. “Cerberus has been interested in not just making deals but actively running and improving the companies. This does make them a bit different than other PE firms but the end goal remains the same. How do you create value from the assets that you have? Investing is as viable an option as cost cutting at times.”

In a short space of time, the group has more than doubled the number of stores it operates. However, the decentralised nature of its business and a strong performance culture mean the integration process seems to have been relatively seamless. And the company is unphased by the prospect of shedding assets where appropriate.

It therefore seems likely that more deals could be on the horizon for Albertson’s LLC.

Indeed, retail hungry Cerberus was linked to a potential buyout of upmarket grocer Harris Teeter, prior to the agreement that will see Kroger take on the chain for $2.44bn.

If the company is looking for further M&A, it seems it may have to look no further than Supervalu. The agreement that saw Albertson’s LLC regain control of the entire Albertson’s franchise also seems to pave the way for a full takeover of the larger Supervalu – Cerberus agreed to buy 30% of remaining Supervalu shares on completion. 

Wherever Cerberus looks for acquisition opportunities, as the appetite for M&A returns in the US further consolidation in the grocery sector certainly seems on the cards as chains jostle for growth in what remains a flat market.