BrainTrust Query: Are publicly held supermarket chains headed for extinction?

By David Livingston, Principal, DJL Research

My work takes me all over North America looking at supermarkets. When someone asks me which supermarket chains are best, my thoughts immediately turn to Thrifty (Vancouver Island, BC), WinCo, Hy-Vee, Schnucks, Woodmans, Publix, HEB, Wegmans, and Stew Leonard's. (I could also name several more small regional operators.)

What do all of these chains have in common? They are either privately held or employee owned. The CEO generally is a large stockholder and a career grocer. Many of these chains have thrived and expanded in a retail world dominated by Wal-Mart, and their employee morale is generally high. When we discuss these chains on the RetailWire forum, they are typically praised by the BrainTrust panelists.

When we think of chains that have struggled over the years -- closing stores, selling off assets, filing for bankruptcy, strapped with financial scandals, etc -- A&P, Winn-Dixie, Ahold, Fleming, Marsh, Penn Traffic, Nash Finch, Albertsons, and Safeway come to mind for many of us. What do these chains have in common? They are all publicly held by stockholders. When these companies are discussed on the RetailWire, they are shown little mercy from many of the BrainTrust panelists. About the only time we hear any positive news on these companies is when sales or earnings have rebounded after difficult times. Employee morale is often low.

When a supermarket company is publicly held, it is at an immediate disadvantage. The CEO is usually a financial expert; not a grocer. It often seems that senior management is more concerned with selling the company's story to stock analysts rather than selling groceries to consumers. When a supermarket is publicly held, everyone knows how much salary is given to senior management, and employees and stockholders generally agree it's too much.

When a public company's financial results are not up to expectations, the blame game soon begins. At these times, we've all heard the lame excuses: the weather caused sales to decline or Easter fell in the wrong quarter. Often these companies will make disastrous marketing decisions. Their mistakes are quite obvious to those with experience in the industry but the chain execs are in the dark due to lack of supermarket experience.

Also, operationally, being publicly held can have harmful effects. Huge acquisitions are made or entire divisions are shuttered simply because a company is trying to improve its stock price and not the company itself.

I don't ever recall HEB having a financial scandal, Publix complaining about the weather, or someone who thinks Danny Wegman is pulling down too much salary. Why? Nobody probably gives it much thought. If HEB did have a financial scandal, most likely it would not affect anyone. When Ahold had a financial scandal, billions in market cap disappeared ruining a lot of 401ks. If Danny Wegman were making more than Larry Johnston or Steve Burd, it would not be newsworthy. But as soon as Albertsons and Safeway have a difficult year, everyone is appalled by their high salaries.

Discussion Question: How can publicly held supermarket chains overcome their inherent disadvantages relative to privately held companies?

Obviously being publicly held has not 'poisoned' all public supermarket chains. (There must be some good examples out there.) And being privately held certainly doesn't guarantee success. If you were a CEO of a publicly held chain, how would you fight against the tide and assure that stockholder and board pressure would not spoil your competitive options?