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Albertsons success will have a multiplier effect

Tim BradyAlbertsons’ upcoming Initial Public Offering marks its reintroduction as a publicly traded company and its resurgence as the esteemed grocer that many Idahoans remember so well.

Following the path set by Joe Albertson, which focused on clean stores, fresh, quality offerings and exemplary customer service, the company grew to be one of the most respected and profitable grocers and one of Idaho’s largest employers. In 1989, as the nation’s sixth largest food-drug retailer, Albertsons reported the highest net earnings of any grocer in the country. In the 10-year period from 1988 to 1998 alone, the company’s sales grew 250 percent, while the market capitalization increased almost 700 percent.

Despite its prior successes, the company struggled through the early 2000’s. The nearly $12 billion acquisition of American Stores in 1999 saddled the once fiscally conservative company with a burdensome debt load. Some argued Albertsons had lost its focus, attempting to regain lost profit margins at the expense of sales growth and the customer experience. In 2006, with debt continuing to increase and the share price at less than half of its prior highs, Albertsons was acquired by Supervalu, CVS Pharmacy, and a group of investors led by Cerberus Capital. The company was split up geographically with Supervalu retaining the highest performing stores (including Idaho’s Albertsons stores), CVS retaining the stand-alone pharmacies, and Cerberus taking 661 low-performing stores under the Albertson’s LLC banner.

While Supervalu continued to struggle with its acquired stores, Cerberus, along with a number of former Albertson’s executives, including current CEO Bob Miller, staged an impressive turnaround at Albertsons LLC. They sold unprofitable stores and invested heavily in those with the highest potential. In January 2015, following a series of strategic divestments and acquisitions, LLC purchased publicly traded Safeway stores in a transformative acquisition that gave the new company pro-forma revenues of $57.2 billion and consolidated the headquarters of the nation’s second largest grocer to Boise.

The merger and IPO bring meaningful direct and indirect economic benefits to the Treasure Valley. Boise has already gained new jobs as the company consolidates Safeway’s California headquarters with its Albertsons headquarters. At least a few hundred high paying jobs will be moving to the Boise headquarters, including the company’s pharmacy operations group.

Some of these positions will be management-level. The employee will likely spend a percentage of that income on housing, transportation, and entertainment, which in turn creates demand for more jobs and more spending.

Steven Peterson, clinical assistant professor for the College of Business and Economics at the University of Idaho, estimates 2.6 jobs are added to the economy for each new management-level position brought to Boise. One new employee at a salary of $112,000 would be expected to generate almost three times that amount in total economic output for the state. These estimates are from an IMPLAN input/output economic model of the Treasure Valley.

Assuming 250 additional management-level positions, an additional 410 jobs will be created in the Treasure Valley representing a total payroll increase of $45 million. That’s expected to bolster total economic output by a full $105 million considering all multiplier effects.

Terry Heffner, branch manager of Guild Mortgage in Eagle, has seen the tangible benefits already. He observes most housing relocations have been high salaries, buying $300,000+ homes.

There is also ancillary stimulus provided when a large food retailer like Albertsons establishes or re-locates its national headquarters. Product manufacturers, brokers, distributors, and other members of the value chain usually desire proximity to company decision-makers and tend to migrate alongside the company.

Jonathan Bunten, managing partner of Recorgroup, a rapidly growing food brokerage company, said the Albertsons acquisition of Safeway has added relevance to the Boise market within the consumer packaged goods community. He believes the Treasure Valley will continue to see a halo effect from the deal.

The success of Albertsons as a publicly traded company and one of Idaho’s fastest growing employers will depend heavily on the execution and integration of the recent Safeway acquisition. The company’s “Operating Playbook,” found in the most recent S-1 filing for the IPO, lays out its game plan, which includes concepts like “Operate Stores to the Highest Standards,” “Deliver Superior Customer Service,” and “Offer an Attractive Value Proposition to Customers.”

These concepts seem to align closely with those of founder Joe Albertson, who believed in pricing right on every item, every day, and serving customers with tender loving care.

Timothy A. Brady is a CFA Charterholder and Investment Advisor with Rathbone Warwick Investment Management in Boise, Idaho. He is a member of the Chartered Financial Analyst Institute and the CFA Society of Idaho.

 

About Timothy A. Brady