RACING AGAINST MULES

I recently saw an episode of HBO’s “Luck”.  A horse trainer entered this very good horse and was sure it would win. It was a cheap race and chose a minimally used rider for the mount.  He told the jockey just take the horse to the outside, let him do his thing, and don’t use the whip.  The jockey did follow most of the instructions.  However in the stretch the jockey felt the horse needed to move more into gear, gave the horse a few taps of the whip, the horse took off like shot, won by 10 lengths and set a new track record.   The trainer was furious, jerked away the jockey’s whip, and tossed it in the trash after the winner’s circle photos.  Why was the trainer mad?  Because now everyone knows just how good this horse is.  The odds will drop too low on the next race.

This happens in the grocery business to.  Horse racing is the only sport where an ambulance follows the participants.  Retail is similar with private equity groups following failing chains.  I could be wrong, but I’m not.

Publix recently announced same store sales increases of a bit over 4%.  They said hurricane Irma boosted sales.  Maybe the hurricane did.  I’m not buying that.  I think sales increased because Winn Dixie, Bi-Lo, Food Lion, Piggly Wiggly, The Fresh Maket,  Super Valu’s Farm Fresh, and a few others are imploding. Publix wants to cover up the stink of these decaying stores with this Hurricane story.  They don’t want buzzards coming down and having to compete with better, more competitive supermarkets.  Publix is good.  They always have been and everyone knows it.  But I don’t think Publix wants the rest of the industry to know just how good.  Harris Teeter knew how good Publix is and went running like a scared cat selling out to Kroger.   In five to ten years we could be seeing a lot of millionaire meat managers working at Publix.

When I worked for Roundy’s many years ago we had the same situation competing against A&P.  Just about when A&P was ready wave the white flag, we would back off and let them have some hope.  A&P thought their improvements were because they were such good grocery operators. I can just see the local A&P executives bragging like Barney Fife to their bosses in New Jersey.  So A&P would then make some capital improvements and extend leases.  Then Roundy’s would brutally go after them again in a game of grocery cat and mouse.  Eventually A&P pulled out and Roundy’s took over many of the newer remodeled stores in good locations.

In my opinion several hundred stores will be closed or sold over the next 5 years along the Eastern Seaboard from Key West to Baltimore-Washington.  Lidl has appeared to be ineffectual so far.  Wegmans will probably open a handful of stores.  So the winners will most likely be Publix and Kroger.  I can’t believe that Ahold-Delhaize sold stores to Publix in Richmond as part of the FTC’s order to sell off stores from the merger.  That is like selling the hen house to the fox.  Couldn’t Ahold-Delahize find a sucker to sell the stores to, even if they had to give them away, like when Albertsons sold off to Haggen’s?  Kroger will also benefit just as they have in other markets when Marsh’s closed in Indiana, Big Bear in Ohio,  Albertsons-Safeway in several markets, and A&P in Detroit to name a few.  Kroger’s stock is near a low due to the industry absorbing the Amazon-Whole Foods deal, but I see Kroger as a beneficiary of competitor store closings over the next few years.

Publix can attribute much of their success to Walmart.  They used Walmart as muscle to drive Winn Dixie and Bi-Lo into bankruptcy.  Now Winn Dixie and Bi-Lo have merged but remain ineffectual.  Publix is building stores by the bushel and Winn Dixie/Bi-Lo are only making sign changes and slapping on a coat of paint.  Then they send out press releases making it sound like an improvement.  My phone rings a few times a week from distressed assets private equity groups and concerned landlords.  The private equity groups never mention Winn Dixie by name but you can sense their nervous interest as soon as I mention Winn Dixie’s name.  I’ve got a feeling many of these stores will be a Halloween Express in about a year.  I might not always be right, but I’m never wrong.