Tuesday, January 11, 2011

A 'New York State of Mind': 'The Insider' On Walmart, Apollo Global Management, Tesco's Fresh & Easy and the NRF in New York City

The photograph pictured above, "A New York State of Mind," is by Mandy Wiltz. Click here to learn more about the photo and photographer-artist Mandy Wilz.

The Insider - Heard on The Street

"Some folks like to get away,
Take a holiday from the neighborhood.
Hop a flight to Miami Beach or to Hollywood.
But I'm takin' a Greyhound on the Hudson River line.
I'm in a New York state of mind.

I've seen all the movie stars in their fancy cars and their limousines.
Been high in the Rockys under the evergreens.
I know what I'm needin', and I don't wanna waste more time.
I'm in a New York state of mind.

It was so easy livin' day by day
Out of touch with the rhythym and blues
But now I need a little give and take
The New York Times, the Daily News

It comes down to reality, and it's fine with me cause I've let it slide.
I don't care if it's Chinatown or on Riverside. I don't have any reasons.
I left them all behind.
I'm in a New York state of mind..."

-'New York State of Mind.' Billy Joel
[The full lyrics are here. Listen to the song here.]

A 'New York State of Mind' - Walmart in the 'Big Apple'

As a student and analyst of Walmart Stores, Inc., particularly as it pertains to food and grocery retailing, 'The Insider' picked a good day to be in New York City - although I'm glad to be headed out since I didn't bring my extra-heavy jacket and another mega-blizzard is on the way.

The 'Big Apple' of American cities in the Empire State is buzzing today over the 'Big Apple' of the retail world's plans to open stores, ranging from large to small, in New York City. A good newspaper headline about the issue, which is one I've yet to see is: 'Gotham retailer invades Gotham City.'

Here's the scoop: Walmart has launched a new website [here] dedicated to promoting its plans to open stores in New York City, along with gaining support for those plans from residents of the 'Big Apple.'

The website includes an online petition, which the retailer is asking New Yorkers to sign, as a way to show their support for Walmart stores in the city.

The website, along with much activity on Walmart's Facebook page and Twitter feeds, is part of an aggressive multi-platform advertising and public/community relations campaign the Bentonville, Arkansas-based 'Big Apple' of U.S. and global retailers is launching to win support for its proposal to open numerous stores of various sizes in a number of the New York City's boroughs.

Walmart has also decided skip tomorrow night's New York City Council meeting, where the retailer's plans to open stores in the city, along with the potential impacts of those plans, will be discussed.

Walmart Stores, Inc. has in principle the support of New York City Mayor Michael Bloomberg, who has said the retailer will bring new jobs and affordable goods to the city.

But the mega-retailer has angered New York City Council Speaker Christine C. Quinn, who's quoted (italics) in a story by the New York Times regarding the Walmart's decision to skip tomorrow's council meeting as saying: "If you’re [Walmart] proud of who you are, if you’re proud of your product, if you think you’re the best thing since sliced bread, why wouldn't you come and tout it? They’re not showing up because they don’t have the stuff they say they have. They don’t have the data to refute what myself and others are saying."

Speaker Quinn, the leader of the council, wasn't a supporter of Walmart's New York City plans prior to its decision to skip tomorrow's hearing.

One thing is for sure, the Walmart in New York City issue is just getting started. The city's newspapers, television stations and radio stations are filled with reports on the topic. Just a few examples include reports in: The Daily News, The Brooklyn Eagle, New York Times, Crain's NY, The Village Voice, Brooklyn Paper, The Gothamist and DNAinfo. Television stations such as WNYC and NY1 reports, along with others, also did reports on Walmart in New York City today, as did CNN and Fox News, which means the story is becoming national since they are the two leading national cable news outlets.

Organized labor and its allies on the New York City Council, along with a coalition of small business people, including independent and mom and pop grocers plus others, are leading the charge against Walmart's being granted city approval to open stores in the 'Big Apple.'

Walmart says it's bought ad spots from at least a dozen New York City radio stations and over 30 newspapers, including a number of the media outlets linked above that are reporting on the story, in order to help it tell its story in a media blitz over the next couple weeks.

"What should be clear, especially in this week's activities, is that we are not going to be idle while others try to tell our story for us, and build that story on misinformation, Walmart spokesman Steven Restivo said in a statement. "We know we have a good story to tell. And quite frankly, we owe it to New Yorkers to be proactive in telling it."

The debate and fireworks have started on what's going to be the most challenging of the three urban store initiatives Walmart Stores has announced so far.

The retailer has had a success in Chicago, where it launched its first urban store initiative last year, winning support from Chicago Mayor Richard Daley, and even getting an agreement from the United Food & Commercial Workers (UFCW) that it wouldn't fight to keep Walmart out of the city, in return for its agreeing to offer hourly wages in the urban stores at rates above what it normally pays.

Walmart's second urban store initiative and campaign, which it launched late last year in Washington D.C., also looks positive for the retailer in terms of its gaining approval for a number of stores in the district.

There is some opposition to the retailer's plans and proposals. But it doesn't even register on the retailer Richter Scale compared to the uphill battle Walmart Stores, Inc. faces in New York City. But then, among other reasons - that's why its called the 'Big Apple.' Everything is bigger in New York City, including battles over mega chain retailers opening stores in the city.

A 'New York State of Mind' - Apollo Global Management

While the buzz in New York City's boroughs is focused on Walmart, the investment bankers and traders on Wall Street are talking turkey today about the possible buyout of Sara Lee Corp., by a consortium of private equity firms led by Apollo Global Management and its founder and chief deal-maker Leon Black.

The deal would be huge: A current consensus of Wall Street analysts put the value of a buyout of Sara Lee Corp. as of today at about $12.6 billion, or around $19.33 a share. Sara Lee Corp. stock closed at $18.01 a share today.

Downers Grove, Illinois-based Sara Lee, which is a global company, is best known for its food and drink brands, which comprise the company's number one and two largest business units. Sara Lee's largest and most profitable business unit is its international beverages segment, which focuses on coffee and tea brands like Senseo, Douwe Egberts and Pickwick, which are top-sellers in Europe, Australia, and Brazil.

The company's second largest business unit includes the popular U.S. meat brands Ball Park (hot dogs and sausages), Hillshire Farm (lunch meat) and Jimmy Dean (sausages and more), as well as the Sara Lee frozen desserts brand.

The private equity firm consortium being led by Apollo Global Management could also make an offer for one or more parts, such as the drinks' and food business units, of Sara Lee rather than the whole company. Or they could acquire all of Sara Lee and then sell off some of its parts. For example, it's being reported today by a number of financial publications that Brazilian meat processing company JBS is part of the Apollo-led group. If so, I smell an interest in Ball Park franks, Hillshire Farms' lunch meat and Jimmy Dean sausage, all meat brands owned by Sara Lee Corp. (You can see a list of all of Sara Lee's brands here.)

Sara Lee's board is in the process of deciding if it wants to sell the whole company or continue selling off some of its parts, which it's started to do: Its selling the North American bread and bakery unit to Mexico's Grupo Bimbo for $925 million, in a deal that's expected to close by the end of the first quarter of 2011.

Yesterday, Apollo Global Management, which owns City of Commerce, California-based food and grocery retail company Smart & Final and its Henry's Farmers Market chain, reported that its profit for the three month fiscal period that ended in September 2010 rose over the same fiscal quarter a year earlier, as the value of investments in the firm's $14.7 billion Fund VII increased.

Economic net income, which is the key metric private equity firms generally report and that Wall Street analysts follow regarding the firms' performance, for the three months ending in September rose to $315.3 million, up from $173.3 million for the same period a year earlier, Apollo said in a statement.

Additionally, economic net income from private equity was $213.7 million, up from $71.8 million a year earlier, which Apollo said in the statement was partly attributable to an increase in the value of its portfolio investments in fund VII, a $14.7 billion fund that it finished raising in December 2008.

Private equity firms create various funds like Apollo's Fund VII, then put a pool of investors together to fund it. Monies from the funds are then used for various corporate acquisitions, buyouts and investments.

Apollo, which isn't publicly traded, doesn't normally report quarterly income figures. But the private equity firm plans a public offering soon. Therefore, its been periodically reporting its financial information to the U.S. securities and exchange commission in anticipation of the filing, and being listed on the New York Stock Exchange.

Apollo and the Sprouts & Henry's deal talks

Readers might recognize the name Apollo Global Management from my two most recent columns about the talks between Apollo-owned Smart & Final/Henry's Farmers Market and Sprouts Farmers Market - January 7, 2011: Sprouts Farmers Market-Henry's Farmers Market Deal Negotiations Continue; End-Game Could Be Near and January 5, 2011: Will 2011 See Sprouts Farmers Market Acquiring Henry's Farmers Market? 'The Insider' Says it Could Be in The Cards - along with a having read a January 8, 2011 news and analysis story in Fresh & Easy Buzz [Smart & Final-Henry's Tell Employees About Deal Discussions With Sprouts Farmers Market; Confirming 'The Insider's' Reports] about the potential acquisition or merger.

Regarding the deal talks and negotiations, here's an update: First, discussions continue between representatives of Apollo/Smart & Final/Henry's and Sprouts Farmers Market over a possible acquisition of Henry's by Sprouts, or some sort of merger between the two grocery chains. But no deal has been reached.

Below (in italics) is a statement the editor of Fresh & Easy Buzz obtained today from Kim Rockley, a corporate spokesperson for Arizona-based Sprouts Farmers Market:

"There have been many similar rumors over the years about bringing Sprouts and Henry’s together, which is understandable given their common heritage. While there have been some discussions between the organizations in recent months, at this time there is NO deal in place to merge Sprouts and Henry’s. Our primary business focus right now is getting the new year off to a fast start, including the opening of the 55th Sprouts store, in Fort Worth, TX on January 26."

If you read my two columns, along with the report from Fresh & Easy Buzz (all linked above), you'll see what's been reported is that discussions have been going on between the respective parties over a deal - either an acquisition of Henry's by Sprouts Farmers Market or some sort of merger deal involving the two grocery chains - but not that a deal has been done. In fact, the reports go out of there way to make the fact clear.

The statement from Sprouts clearly verifies our reports that discussions have been going on. Beyond that we haven't drawn any further conclusions. In fact, that the statement says there is no deal in place, also confirms what I've been writing in my column.

And - the deal discussions between the respective parties are continuing.

A 'New York State of Mind' - No 'Big Apple' (or Chicago or Florida) For Tesco's Fresh & Easy

When Tesco crafted its original strategic plan for its El Segundo, California-based Fresh & Easy Neighborhood Market fresh food and grocery chain in 2006-2007, the plan, in terms of market region launches, went something like this: Southern California, Arizona, Nevada (late 2007 launches) and Northern California (launched into by 2009), followed by Chicago (2010), with New York and Florida as strong future, potential markets, with possible launch dates of mid-to-late 2011 or 2012.

As recent as late-2008-to-early-2009, Tesco's Fresh & Easy conducted what it calls "trend spotting" exercises, which, in addition to serving other uses, are designed to identify primarily headquarters employees who might be interested in transferring to new market regions as the fresh food and grocery chain prepares to enter the markets. Included in the exercises at the time were the following market regions: Northern California, Chicago, New York and Florida.

Chicago was the planned market launch after Northern California, which was supposed to be in 2009 but was postponed and is now set for this year, before the end of the first quarter.

But that was then and this is now. According to my sources, Chicago, New York, Florida and any other state not within delivery distance from the Fresh & Easy Neighborhood Market distribution center in Riverside County, California is off the table for 2011-2012.

Instead, Tesco plans to open all of what outgoing Tesco CEO Terry Leahy, incoming Tesco CEO Philip Clarke (in March 2011) and Tesco corporate director and Fresh & Easy Neighborhood Market CEO Tim Mason have said will be 245 new Fresh & Easy stores between now and the end of Tesco's 2012/2013 fiscal year, exclusively or primarily in its existing market regions - California, Nevada and Arizona. There are currently 155 Fresh & Easy markets in the three states. Tesco said it plans to have 400 Fresh & Easy stores be the end of fical 2012/13.

Tesco might open some of the 245 new stores it says it plans to open over the next two years in one or two states near California, Nevada and Arizona. However, the probability of it doing so are extremely slim in my analysis, because current plans call for all of the stores to draw product from the Riverside County distribution center, something Tesco said it planned to do when it reported its half-year results in October 2010.

Potential Western states like Colorado, New Mexico, Idaho, Oregon or Washington are just to far away to be served properly by the Riverside facility, even if Tesco doesn't think so. Fresh & Easy Neighborhood Market is going to have a difficult enough time servicing the Northern California stores from the Riverside County distribution center, which it plans to do starting in a couple months.

The reason Tesco needs the 400 stores, all pulling product from Riverside, is because the estimated volume from 400 stores is what it projects is needed to operate the Southern California distribution facility efficiently. It hopes that added efficiency will help it to stop operating the massive 800,000-plus sqaure-foot facility at such a loss, which is currently the case.

If Tesco were to expand to markets like Chicago, New York, Florida or elsewhere in the U.S. between now and the end of its 2012/13 fiscal year, at which time it says it will at least break-even with Fresh & Easy, the retailer would have to invest huge sums of money in building distribution centers, not to mention stores, along with investing more money for associated cost like labor expenses and marketing/promotional budgets.

Tesco's chances of breaking-even with Fresh & Easy Neighborhood Market in the time period are slim enough without market region expansion. With it the losses would be unbearable, particualry to incoming Tesco CEO Philip Clarke, who had no real hand in launching Fresh & Easy because he was in charge of the company's European and asian operations at the time, a position he will vacate when he becomes CEo in March.

The upshot: Look for all of the new Fresh & Easy stores Tesco opens this year to be in California, Nevada and Arizona, with all but a few being in California.

Right now, I won't go too far beyond that - as I'm not even sure incoming CEO Clarke will keep Fresh & Easy around for all of 2011. But I will offer this: You aren't going to see any Fresh & Easy stores opening in Chicago, New York or Florida in 2011 or 2012.

A 'New York State of Mind' - NRF Show in the 'Big Apple'

Lastly, as if enough isn't happening in the 'Big Apple,' the National Retail Federation (NRF) is holding its annual 'Retail's Big Show' Convention and Expo' at the Javits Convention Center in the city, through tomorrow.

This year marks the trade group's 100th annual convention and show, a milestone event. And befitting 100 years, the event is packed with seminars, presentations and exhibitors, including many with a focus on food and grocery retailing, as is the case each year.

There's so much going on in fact that I'll save a discussion of my observations for a future column. But until then a good place to learn about what's happening at the NRF show is at the trade association's website [here], which includes live-blogging by NRF staff members on some of the presentations going on.

As for 'The Insider,' I've departed the 'Big Apple' - for now.

But, I must say - I'm still in a 'New York State of Mind..."

But at this moment I'm moving much more to the beat of the less-old -school version of the song rather than to Billy Joel's hit tune. The version I'm referring to is the one by Jay-Z and Alcia Keys, called an 'Empire State of Mind.' (Watch the video and listen to the song here.)

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