Third time’s a charm? After two aborted bids to go public and 2015 and 2018, Boise, Idaho-based Albertsons Companies, riding the COVID-fueled grocery boom, finally launched its initial public offering (IPO). Fifty million shares were sold at $16 per share, below the retailer’s initial estimate of $18 to $20 for 65.8 million shares. At the revised price, the deal raised $800 million for its investors, including Cerberus Capital Management, lower than the initially anticipated $1.2 to $1.3 billion. Albertsons will not directly benefit from net proceeds resulting from the IPO.
Albertsons’ common stock (NYSE: ACI) opened its first day of trading on Friday at $15.50 per share. Shares traded between $15.31 and $16.50, finally closing down for the day at $15.45.
Though officially a public company, Albertsons will still be majority owned and controlled by a group of investors led by Cerberus, but also including Apollo Global Management, Kimco Realty Corp, Klaff Realty L.P., Lubert-Alder Management, and Schottenstein Stores Corp. Cerberus holds the largest stake in the retailer, at 31%, and has been an investor for nearly 15 years. Cerberus was behind the retailer’s first bid to go public in 2015, which was withdrawn due to market volatility, as well as its second in 2018, which was pulled when Albertsons announced its merger with Rite Aid Corp (which didn’t materialize either).
While Albertsons’ rocky road to an IPO seems par for the course, its lower-than-expected debut certainly introduces additional skepticism to the public offering. While COVID-19 ignited the grocery industry as consumers stocked their pantries and sheltered at home, the period of explosive growth could be behind us. Rival Kroger recently reported double-digit sales gains in Q1 2020 due to the pandemic, but executives indicated that they were seeing signs of this growth slowing somewhat as stock-up trends subside as states ease their stay-at-home restrictions.
While Albertsons isn’t likely to realize any operational changes in the near term, today’s launch does mark an important step in its private equity journey, setting the stage for investors, particularly Cerberus, to eventually cash out of the business. And as a standalone company, Albertsons could more freely focus on bigger strategic initiatives over the longer term, allowing it to compete on a level more commensurate with other publicly-traded grocery giants, including Kroger, Walmart, Ahold-Delhaize, and, increasingly, Amazon. Let’s explore some of the areas which might be of strategic focus for Albertsons:
Debt repayment: While Albertsons has been actively paying down debt, it still carries a substantial $8+ billion debt load, largely from its acquisition of Safeway in 2015. Paying down its debt could prove to be prudent for the retailer, which will likely continue to incur costs (potentially leading to additional debt) as the COVID-19 pandemic wages on.
Private label: Private labels have been a source of higher-margin revenue growth as grocers across the competitive spectrum have innovated in this space to improve quality and selection, earning shoppers’ trust along the way. Albertsons has been transparent about its goal to eventually increase its Own Brands penetration to 30% (versus 25.4% in FY 2019). To fuel this, it plans to launch around 800 new Own Brands products annually over the next few years. Growing Plated as a culinary brand or investing in trendy plant-based products could boost Albertsons’ private label profile as well.
Omnichannel experience: With the online grocery industry exploding thanks to COVID-19, look for Albertsons to continue to expand home delivery and Drive Up & Go and make continuous strides to improve customer satisfaction and usability. To round out the omnichannel experience, expect Albertsons to remain invested in store remodels and new openings.
Technology/Fulfillment: Albertsons has been focused on improving customer-facing digital interfaces and personalization via its “just for U” loyalty program, which has been consolidated across banners. Expect focus on these areas to continue as well as in fulfillment, particularly as the digital business grows. Albertsons currently has micro-fulfillment centers in two California stores, with plans to add 10 more MFCs within the next two years. These plans could accelerate given current market conditions.
Buy/build/partner: In the question on whether to buy, build, or partner, Albertsons has historically focused on “partner,” forging strategic relationships with Microsoft Azure (technology), Takeoff Technologies (MFCs), Bloomreach (digital experience), Glympse (location-sharing for delivery/pick up), and Quotient (retail media). Post IPO, Albertsons could redirect its focus to acquisitions or proprietary initiatives to differentiate itself from competitors while diversifying revenue streams, as competitors have done in last mile delivery (e.g., H-E-B/Favor, Target/Shipt) and retail media (e.g., Walmart/Walmart Media Group, Kroger/Kroger Precision Marketing).
While Albertsons’ public debut was a bit lackluster on Friday, it’s important to keep in mind what the grocer’s move away from private equity could mean over the longer term. The offering comes at a pivotal time as well. The COVID-19 pandemic has infused the grocery industry with unprecedented growth, providing opportunities to drive additional loyalty and gain new shoppers.
Leaders in this industry will need to focus on innovation, differentiation, customer experiences, and seamless omnichannel journeys in order to cultivate loyalty among current and newfound customers. While time will tell if Albertsons is able to rise to this challenge, it certainly has the tools it needs to mine success.
For more information, please contact:
Pam Goodfellow, Director