The $9.4 billion deal orchestrated by New York private equity firm Cerberus will merge Safeway, the nation’s second-largest supermarket chain, with Albertsons, the country’s fifth-largest, and most likely will result in closing stores, changing or tossing familiar products and laying off employees, industry experts say.
“It is going to get worse before it gets better,” said Mitchell Marks, a business consultant and professor in the College of Business at San Francisco State University.
Even if a neighborhood store stays open, shoppers may find it no longer carries some of their favorite foods, and the Safeway loyalty card program could be in question. Meanwhile, employees of Pleasanton, Calif.-based Safeway are caught in the middle of a complicated business deal, and that may hurt their productivity as they are left to wonder whether they’ll still have jobs after the merger is completed at the end of the year.
Safeway and Albertsons executives have said they have no immediate plans for store closures and the companies will continue to operate independently until the end of the year.
On Thursday night, the window during which Safeway could solicit a better offer closed and Safeway said Friday morning that no one else was interested in buying the grocery chain. With that deadline behind them, the companies can now put into motion the buyout plans they first announced March 6: combining the century-old Safeway chain with Cerberus-owned Albertsons stores.
The deal first awaits approval from shareholders, and, more critically, from the Federal Trade Commission, which will, in as little as a month, determine whether Cerberus can merge the two chains and how many stores it needs to shed to meet federal antitrust rules. In neighborhoods where an Albertsons is down the street from a Safeway, for instance, one of those stores could close - which could drive customers to take their shopping bags elsewhere.
“If their favorite store is Albertsons, and the FTC’s decision is to close their local Albertsons store, consumers are going to look around,” said Dale Achabal, executive director of the Retail Management Institute at Santa Clara University.
Industry experts say store closings are almost certain in California, where Safeway and Albertsons have a combined 678 stores, about three times the number in its second-largest market.
“California is a place where they have a lot of market power,” said Samina Karim, professor in the School of Management at Boston University.
The two chains overlap in Southern California, and while Northern California does not have any Albertsons stores, Safeway stores there could still be sold or closed as Cerberus works to weed out the less profitable ones. Other areas where Cerberus may be closing stores: Washington, Oregon, Colorado, Arizona and Texas, where each chain has a large footprint, and where each has considered the other a top competitor.
Cerberus will make changes in products and programs to cut costs, which could help lower prices in stores but also create confusion for shoppers, analysts said.
Safeway and other conventional grocers have at times struggled to keep stores profitable because they carry dozens of brands of everything from baked beans to hummus and toilet paper. But that variety is why shoppers such as Steve Wiseman of Lafayette, Calif., prefer Safeway over the niche grocers.
“I shop at Trader Joe’s, but their inventory is limited,” he said. “Safeway was getting the rest of my business because generally I can find most things there.”
But Wiseman may not find everything he needs there after the merger. Most likely, some private-label products will be eliminated to avoid duplication - no need for both a Safeway- and Albertsons-brand olive oil or peanut butter.
Consumers also may see changes to Safeway’s loyalty card program. Albertsons canceled its loyalty program after it was bought by Cerberus in 2006. Safeway’s Just for U program, with about 6 million members, is considered one of the best in the industry.
When asked by investors on a call this month whether Cerberus would change the loyalty program, Safeway CEO Robert Edwards said there were “no decisions yet on how the combined company might operate going forward.”
The merged company will have about 2,400 stores, almost double the size of Safeway today, and just slightly fewer than rival Kroger’s roughly 2,600 stores. The operation will have about a quarter-million employees. It will be so large, experts say, that Cerberus simply can’t keep all those workers.
“You certainly don’t need two corporate headquarters, so there are going to be a whole bunch of people gone in human resources, in marketing and in IT systems,” Achabal said.
Until employees get word of just how this deal is going to shake out, their performance may suffer, said Marks, an expert in the psychology of business acquisitions. Worried about their livelihood, some employees may take longer breaks, take more sick days or be distracted at work, he said.
“Cerberus does not have a full understanding what they’re going to do, so people fill in the blanks with rumors,” he said. “These people have every right to be worried.”
Grocery executives have said the Safeway headquarters in Pleasanton will remain intact for the time being. Albertsons’ headquarters is in Idaho.
Even without government intervention, Cerberus will have strong motivation to close stores that aren’t as profitable, and sell stores that have high real estate value to make back some of the cash it spent on the acquisition.
“They just spent $9 billion,” Marks said. “They have to reduce that dent.”