Roundy’s IPO: What’s the Point?
Not going to happen. That was the basic reaction of RetailWire BrainTrust members to reports earlier this year that Roundy’s was looking for a buyer. Most expressed doubt that any chains from a possible list of suitors, including Dominick’s, Kroger, Schnuck’s and Supervalu, would actually be interested in acquiring the chain. They were right.
Now comes reports that Roundy’s has chosen to go in another direction. The company will pursue an initial public offering in the hopes of raising $230 million.
According to various reports, Roundy’s owner, Willis Stein & Partners, is looking at the IPO as a means, pure and simply, to help recoup its investment in the grocer. So, why would someone invest in the company that some say is in decline?
David Livingston, RetailWire BrainTrust member and principal at DJL Research, told the Milwaukee Journal Sentinel that Roundy’s faces increased competition and loss of market share from Sendik’s, Target, Walmart, Woodman’s and others in its home market of Wisconsin as well as in Illinois and Minnesota where it also operates stores.
Discussion Questions
Discussion Questions: Will going public help make Roundy’s a stronger retail company? What will it take to put Roundy’s on a stronger path to growth?
Admittedly not familiar with the four different banners Roundy’s operates in WI, but I do shop at one of their Mariano’s Fresh Market locations in Chicago and it seems to be a big hit with customers. That being said, it is a concept that may not translate will to all markets.
The article indicates Willis Stein & Partners are looking to going public as a way to recoup their investment. This would indicate that the money raised is not going to be reinvested in the existing network or in new locations so I don’t see how this action would make Roundy’s stronger. In addition, being public means the company will be subject to the short-term mentality of the market.
Roundy’s is losing market share but continues to be in a position of relative strength here in Milwaukee. The IPO allows its equity investors to “cash out” or (alternatively) to retire debt in order to make Roundy’s a more attractive acquisition target someday.
The IPO will hopefully make some information public, particularly whether the operating margins of the Metro Market and Mariano’s stores are indeed higher “as advertised.” If not, Roundy’s is not pinning its growth on a winning expansion strategy.
Roundy’s going public would be like a desperate trip on gossamer wings — thin, cloudy and cobweb-like. It can’t make Roundy’s stronger and, for new investors, it would be like buying a lottery ticket. The whole purpose for going public is to save Willis Stein’s current investment.
When a formerly successful company is put up for sale, it signals something dubious. Just reflect upon Supervalu’s purchase of Albertsons when in decline.
What will it take for Roundy’s to be successful? Most likely the closing of Walmart, Target, Woodman’s, Sendik’s or a possible merger with one of them.
This is just buying Roundy’s more time. Take a look at the prospectus. Sales, same store sales, sales per square foot are dead flat over the past 5 years. Debt ratios are at Supervaue-esque levels and dangerously high. Sales per square foot relative to the market and national averages are about 20%-25% below norm. Bankruptcies and pull-outs normally occur when stores hit the minus 30% below market average. Just nine years ago they were at 25% above norm. Not quite at Winn Dixie-esque levels yet but rapidly getting there.
Walmart has about 15 stores planned for Roundy’s core Milwaukee market and Walmart has specifically targeted Roundy’s highest volume stores. Woodman’s ($1.5 million+ per week stores) has another store planned and each Woodman’s will target clusters of 4 to 5 of Roundy’s stores. Roundy’s sales per sqare foot levels remain about where they were 10 years ago.
As far as market share goes, just 9 years ago they had about 47% with 39 stores in a 5 county metro area. Now they have about 68 or so stores but market share is only about 53% in my calculations. That’s about to nosedive once Walmart and Woodman’s wade into them like a fat guy in a small hot tub. We will soon see their good stores become average stores, average stores become poor stores, and poor stores become closed stores. There is nothing they can do about it. Sure Target, Sendiks, Whole Foods, Fresh Market, El Rey, Costco, and Aldi will keep opening and make small cuts. But Walmart is making sport of Roundy’s just like they have to other high debt, low sales per square foot retailers throughout the country. Luckily Roundy’s still has a positive cash flow for the time being.
The new Mariano’s stores they built in Chicago are doing high volumes (FYI – fabulous looking) but with their lower pricing structure, high labor, and high shrink, I’m guessing they are bleeding cash. On top of that, Walmart and Meijer are not backing off with their new Chicago plans. Roundy’s is rolling the dice on Chicago; it’s a long shot that’s been in the works for 9 years. They need a Supervalu bankruptcy at Jewel, Safeway to turn the lights out at Dominick’s, and the Chicago political machine to slow Walmart and Meijer for Mariano’s stores to work.
Some other steps I predict will be that they will sell their distribution centers and outsource their supply chain similar to what A&P, BI-LO, and Marsh have done. This again buys more time.
You cannot sell what you do not have…value. Roundy’s has nothing to offer and nothing that people will want to sell. Who wants to purchase a bankrupt or almost bankrupt company? What does a Roundy’s purchase offer someone?
Going public requires and underwriter. Good luck with that.
I did notice on the balance sheet they had over $700 million of Goodwill, which is most of their assets. Their liabilities are about 3 times their real assets. Think of it as living in a house that is underwater with the bank. You live in a pretty house that cost you a million, its now worth $300,000 and undesirable neighbors keep moving into the neighborhood. You are able to pay the mortgage for now but you are about to lose your job. Sure would be nice if someone handed you some free cash to bail you out.
Simple answer … the Roundy’s IPO could put them on a stronger path to growth, however, it will all come down to execution of a solid strategy to differentiate them from their competitors, a clear value proposition, and exceeding their customer’s expectations.
I think that it will be a good investment to buy stock in this grocer. I was just at the Mariano grocery store in my town of Palatine, IL and I believe this is owned by the investment firm that owns Roundy’s. Everything is good at this Mariano store, the employees, food: I even bought fresh squeezed orange juice and beet juice. There is hot food to go, and I would rate it an excellent investment seeing that it stays the same as the private owned company.
It is a tough business, the grocery store business. I counted about 10 to 12 stores in my area and I think that the Mariano division leads the pack as the cutting edge! I like the way that the employees make you feel at home when you come in the store and they are also nice. I was privileged to be the first customer to purchase a product in the store when it opened!