May-to-October at 82-Year-Old Andronico's Markets: New Owner, 2 Stores Closed ... Now What?

Companion Story: October 18, 2011: Look for Fresh & Easy Neighborhood Market to Grab Closing University Avenue Andronico's Supermarket in Berkeley CA ... If it Can

The Insider - Heard on the Street

In May I wrote in detail about the financial problems facing one of California's oldest family-owned grocery chains, 82-year-old Andronico's, which at the time operated eight supermarkets in Northern California's San Francisco Bay Area.

[Read my May 30, 2011 here: 82-Year-Old Grocer Andronico's Needs A Sugar Daddy of Sorts: 'The Insider' Suggest Tesco and its Fresh & Easy Neighborhood Market Might Fit the Bill.]

In the column I said the survival-mode shoes would soon start dropping at financially troubled Andronico's, which underwent a name change last year from Andronico's Markets to Andronico's Community Markets. They did ... And continue to do so.

The first shoe dropped in July, when the upscale-oriented food and grocery chain, which was founded in 1929 by Greek Immigrant Frank Andronico and has been headed for two-plus decades by his grandson, Bill Andronico, closed its store in the Stanford Shopping Center in Palo Alto, California. I pointed out in the May piece that the store was one of the three worse-performing of the eight Andronico's units.

In August the other shoe - perhaps better described as a heavy-heeled boot - dropped: Andronico's, with one less store than it had a month earlier, filed for Chapter 11 bankruptcy protection, listing debts in the $10-$50 million range, with assets about equal to its debt load.

Not long after the August filing in federal bankruptcy court in Oakland, California, Renovo Capital, a financial firm that invests in companies in financial distress, provided about $5 million in asset-secured debtor-in-possession financing to Andronico's to keep it alive. Renovo also began negotiations with Andronico's to acquire the grocer, which has been owned by the Andronico family since 1929 (three generations).

Last Thursday Renwood Opportunities Fund, a partnership created in October 2010 between Renovo Capital and Rosewood Private Investments, acquired Andronico's from the family for about $16 million, having received final approval to do so from the bankruptcy court. The $50 million Renwood Fund was established last year by the two investment firms to invest in distressed middle-market companies and special situation opportunities.

Two days before, on Tuesday, the financial firms also bought bankrupt nine-store San Francisco Bay Area specialty foods store chain A.G. Ferrari Foods through the $50 million Renwood Fund.

Like Andronico's, A.G. Ferrari, which has three stores in San Francisco, two in Oakland, and one each in Berkeley, Lafayette, Corte Madera and Los Altos, is a food retailing institution in the San Francisco Bay Area. It was founded as a family-owned and operated importer of Italian Foods in 1919. The first store was opened shortly thereafter.

The small stores offer imported and domestic specialty and gourmet groceries, including under it's own label, some frozen foods, and an extensive selection of ready-to-eat and ready-to-heat fresh-prepared foods, with a specialization in Italian cuisine.

Paul Ferrari, a member of the founding A.G. Ferrari Foods' family and who remains president of the chain - for now - expanded the operation over the last couple decades, ending up most recently with 13 stores. Six stores have been closed as part of the specialty retailer's financial problems, which resulted in it filing Chapter 11 earlier this year.

The new owner has brought on ex-Whole Foods Market man John Clougher, who as I reported in my May 30 column has been a top executive at Andronico's since 2010, as CEO of A.G. Ferrari.

Renovo-Renwood hopes it can create some synergies between the seven-store A.G. Ferrari Foods and six-store Andronico's, which is a major reason why they bought both out of bankruptcy, and which is one reason why Clougher, who's been at Andronico's since last year, was named CEO of A.G Ferrari.

In terms of that attempt to find synergy, here's a scoop: Look for A.G. Ferrari's private brand of Italian and related specialty and gourmet food products to start showing up on the shelves and in the perishable cases at the six Andronico's stores in the coming weeks.

Back at Andronico's, as part of the Renovo-Renwood acquisition, Bill Andronico remains CEO of the food and grocery chain founded by his grandfather, Frank, and headed for decades by his father, John, until he took over in the 1980's - at least for the time being.

A week after acquiring Andronico's, Renovo-Renwood made its first move yesterday, announcing it's closing the Andronico's unit on University Avenue in Berkeley, California.

The closing will leave the grocer with three grocery stores in the Easy Bay Area city of Berkeley - one each on Shattuck, Telegraph and Solano avenues.

The other three stores are in the Bay Area cities of San Francisco, Los Altos and San Anselmo.

As I correctly reported in my May 30 column, based on information from my sources, the University Avenue unit was the poorest performing of the four Berkeley stores, something the new owner confirmed yesterday.

The new owner said yesterday that it doesn't plan to close any of the remaining three stores in Berkeley. But it wouldn't surprise me in the least bit if the investment firm's aren't forced soon to close one of the remaining three Andronico's stores in the city, even though I believe it would like to keep all three for reasons of having a better retailing critical mass in Berkeley.

My predicted candidate for closure in Berkeley, if it comes, is the Telegraph Avenue Andronico's unit, which over the last couple years has lost considerable sales to a nearby Whole Foods Market store and Berkeley Bowl, a very popular and high volume local two-store independent grocer. Both Berkeley Bowl stores are located in the city.

The store on Solano Avenue has seen better days as well. And in the coming year-to-two years it will face increased competition from Safeway Stores, which plans to expand and renovate a store nearby, and Whole Foods Market, which is planning a second store not far from the Shattuck Andronico's unit in Berkeley.

The Shattuck Avenue Andronico's market has historically been the grocer's top-performer in the city, but it too is coming under increased competition from Safeway Stores, which also has plans to expand and renovate an existing supermarket not far from the location.

The new owner also must take a serious look at the Andronico's units in the North Bay Area city of San Anselmo (Marin County) and Los Altos, which is in Silicon Valley in the South Bay and not far from the Palo Alto market the grocer closed in July.

Each of the units are Andronico's only grocery stores the respective regions. Having a single store in a market-area - and the North and South Bay are both heavily populated and competitive areas - is a difficult proposition for a grocer because of a lack of critical mass (stores) when it comes to marketing, advertising and promotion. Renovo-Renwood, which doesn't have deep experience in operating grocery stores, will find this out sooner rather than later.

Selling or closing one or both of these stores is something I believe could come before a closing or selling of the Telegraph Avenue store in Berkeley would. Under this scenario, the new owners could sell one or both of these stores and use the cash to improve and promote the remaining four stores, the three units in Berkeley and the supermarket in San Francisco, which is the top-performing store out of the six grocery markets.

Even Andronico's best performing store, the unit in San Francisco's Inner Sunset District noted above, has its challenges. Last year Whole Foods Market opened a new store at Haight and Stanyon Streets in the San Francisco's Haight-Ashbury District.

The Haight-Ashbury Whole Foods store, which is about a five minute drive from the Andronico's unit in the Inner Sunset, has taken some business away from Andronico's, which like Whole Foods specializes in natural, organic and specialty foods, as well as fresh-prepared foods.

The Inner Sunset Andronico's should be able to hold its own though for a couple key reasons.

First, it's the only full-service supermarket in the highly-populated Inner Sunset District. The store has also been a fixture in the neighborhood for decades and has fairly strong customer loyalty.

Additionally, unlike Whole Foods, Andronico's offers a full-selection of mainstream food and grocery products - think big brands like Kraft and Coke and products like Kellogg's Frosted Flakes and French's Mustard - in its stores, including the unit in San Francisco. This is a big plus for the grocer at the Inner Sunset location vis-a-vis the nearby Whole Foods Store.

Additionally, the nearest major mainstream competitor to the Andronico's store is a fairly small Safeway Store a couple miles away on Noriega Street in the Outer Sunset District. There's very little available space in the Inner Sunset for a competitor to open a decent-sized grocery store, as well, which makes the Andronico's location valuable from a geographical perspective.

It's too early to know if Renovo-Renwood can turn Andronico's around, let alone make a success out of the small chain, which has a history of innovation in the Bay Area, which include innovations in interior store design, display fixture use and merchandising that have been copied locally by Safeway Stores, Whole Foods Market and others.

The new owner faces numerous challenges. These include: the diminution in quality and poorer-then-historical appearance of the stores over the last couple years, which the new owner says its going to reverse by investing in renovations; increased competition in every city where the six stores are located; the debt load the new owner is assuming, which includes $1 million owned the United Food & Commercial Workers (UFCW) employee pension fund - Andronico's is a unionized grocer - and more.

Of course the investment firms just might want to turn Andronico's and the six stores around "just enough" to sell the chain off as a whole or sell the stores off individually to multiple grocers, which is the strategic plan I believe Renovo-Renwood is attempting and hopes to pull off.

And speaking of unions and grocers, the contract between the UFCW and Northern California's unionized grocers, which includes Andronico's, expired ten days ago. Contract negotiations are currently taking place between representatives of the union locals and Northern California's three-largest unionized chains, Safeway Stores, Inc., Save Mart and Raley's.

Based on Andronico's poor financial condition, competitive challenges and the fact Renovo-Renwood is going to have to invest substantial capital in the grocery chain in order to keep it alive, not to mention make it successful, it wouldn't surprise me in the least bit if the new owners ask the UFCW union locals for a number of contract concessions, or even attempt to leave the union completely, although that will be near-impossible, when it comes to negotiating and signing a new three-year contract this year.

In the past, Andronico's, like most of the unionized small chains and independents in Northern California - and there are many of them - essentially agreed on the terms of the contract - often called a "me too" contract deal - negotiated and agreed to between the union locals and the region's "Big Three" chains.

Andronico's did this last time around, three years ago. But that was then and this is now. Were it not for Renovo-Renwood providing emergency financing for and then acquiring Andronico's, the 82-year-old grocer would likely have gone out of business. That would have put around 350 unionized store-level grocery workers out of a job.

I expect the new owners to attempt to use this leverage on the union locals in contract negotiations, probably in separate talks from those currently going on between union officials and the "Big Three" chains, although the fact the pension fund is owned $1 million by Andronico's, a debt which the bankruptcy court hasn't discharged according to the my recent review of the court's records, should give the UFCW locals leverage of their own, in turn.

The store-level employees of Andronico's, many who've been in the UFCW union for 10 or more years, and in the case of others are close to retirement, will also join with the union if the new owners make any attempts to go non-union. Many are already very concerned about the debt owed the union pension fund, for example.

The good news, if you appreciate the saving of an 82-year-old regional food and grocery retailing institution - Andronico's Community Markets, or Andronico's Markets if the new owners take the advice I offered in my May 30 column to go back to the old name - is six of the eight stores remain in business, as for now does the "Andronico's" name and brand.

I say "for now" because those of us with experience in food and grocery retailing acquisitions know they seldom end up down the road turning out like the buyers and sellers say they will, particularly when the acquired retailer is a financially distressed grocer and the buyer is a fund, with an expected return on investment, created by two investment firms.

Such investment vehicles are designed to eventually make money for the firms, usually within a five-year time horizon. And that money is generally made by selling the financially distressed property (read Andronico's) that was bought at a discount.

My bottom line: The new owners will restructure the Andronico's operation, lowering labor costs (they've started that process already with the decision to close the store on University Avenue in Berkeley); invest some cash in improving the looks of the stores (any they don't sell soon); pump up the marketing and promotional budget and spend somewhat; and then attempt to either sell all six supermarkets as a whole or sell off the six stores in pairs or individually.

The predicted time horizon: One-to-four years, with a preference from the new owners to achieve the objective, with a decent profit, sooner rather than later.