After landing in Southern California six months ago, Northwest grocer Haggen has filed for bankruptcy protection – a move considered one of the quickest collapses to hit the supermarket industry in decades.

“This is the fastest (failure) in modern supermarket history,” said grocery strategist Burt P. Flickinger. “In all of retail, I haven’t seen anything like this.”

The company filed for Chapter 11 bankruptcy late Tuesday.

Haggen entered the fragmented Southern California grocery market in March after buying 146 Albertsons and Vons stores outside its core Pacific Northwest market, where it operated 18 stores. Eleven of its 83 California locations were in Orange County.

The rapid expansion into uncharted territory proved a daunting task. From the get-go, shoppers didn’t embrace high-priced Haggen, an outsider that touted itself as a cross between Whole Foods Market and Safeway.

Early on, Haggen attempted quick adjustments.

Bill Shaner, the company’s former Pacific Southwest chief executive, told the Register in April that prices had been cut on hundreds of items. Shaner is no longer with Haggen, a company representative said in an email to the Register.

The bankruptcy filing shows Haggen owes money to many creditors, including $14.8 million to United Grocers and almost $5 million in deferred compensation to former Chief Executive Dale Henley. Haggen also owes money to Pepsi-Cola, Coca-Cola and other vendors. The filing also shows Haggen owes an undetermined amount to Albertsons.

To maintain its operations, the company will receive $215 million in financing from its lenders.

“After careful consideration of all alternatives, the company concluded that a reorganization through the Chapter 11 process is the best way for Haggen to preserve value for all stakeholders,” said John Clougher, chief executive of Haggen, in a statement. “The action we are taking today will allow us to continue to serve our customers and communities while providing Haggen with a process to re-align our operations to be positioned for the future.”

Supermarket analysts said Haggen underestimated the steep competition in Southern California, a $44 billion market that includes endless food buying options – from deep discounters like Wal-Mart to niche operators like Trader Joe’s and Costco.

“In Washington state where Haggen had been successful, people are willing to pay more, but in rough and tumble Southern California and Nevada – where price is the No. 1 motivator – Haggen didn’t do sufficient homework,” said Flickinger, managing director of Strategic Resource Group.

The New York-based retail consulting firm analyzes major retail markets in the country. Flickinger said Haggen missed the mark on “power categories” that are important to shoppers: frozen foods, dairy, cereal, pet food, shelf juice and peanut butter.

“They were always higher in price,” Flickinger said.

Strategic Resource Group estimated the average family of five in Southern California is paying $1,000 more a year to shop at Haggen compared with rival chains like Ralphs.

“It’s really important for shoppers to save,” he said.

With better options before them, shoppers turned elsewhere.

To put that in perspective, Flickinger said his firm estimates an average Ralphs in Southern California generates sales revenue of roughly $15 million to $35 million per store, per year.

Haggen was on track to do half that much, with each store in the region projected to generate revenue of $8 million to $10 million, according to data collected by Strategic Resource Group.

The poor foot traffic prompted Haggen to scramble.

In July, Haggen began laying off six to 10 employees at each of its new stores.

Around the same time, Albertsons sued its new rival for more than $41 million, claiming Haggen owes for inventory that changed hands during the store conversions. Soon thereafter Haggen announced in August it would close four of its 11 Orange County locations within 60 days.

The company said it would shutter a total of 27 stores as it “right-sized” itself, including four in Orange County. No closure dates have been announced at this time.

A week ago Haggen turned around and sued Albertsons’ parent company for $1 billion, alleging the chain undercut its effort to transition Albertsons and Vons stores in the region.

Jim Hertel, managing partner at Willard Bishop in Illinois, said his firm initially provided consulting work for Haggen as it grew from 18 to 164 stores almost overnight.

“It was an audacious move,” said Hertel, adding that his firm is no longer working with Haggen. “A lot of stuff had to go exactly right for them. It hasn’t.”

While pricing was an issue, Hertel said Haggen also failed to properly market itself in California. “You change the banner and bring in a new (one) that has no meaning in California. Conventional wisdom says you introduce a new brand, you have to create awareness.”

Beyond home mailers, Haggen, which is backed by private equity, didn’t make a big investment in marketing.

Hertel said Haggen shoppers in Washington state and Oregon understand what the brand stands for. But those in Southern California didn’t have “a feel for the place,” he said.

“That’s what got them,” Hertel added.

As Haggen reorganizes, Hertel and Flickinger both said it’s possible for the chain to regroup and still have a presence in Southern California.

One advantage it has? The store has retained veteran store managers from Vons and Albertsons, whose experience can be a “real plus” for Haggen, Flickinger said.

“Despite its transitional challenges, Haggen can make a comeback,” he said.

Still, Haggen needs to work quickly to right the ship as discounter Aldi enters the region next year with 45 locations.

“Aldi is going to take Southern California by storm,” Flickinger said.

The German-owned chain with ties to Trader Joe’s is known for selling steeply discounted knockoffs of popular brand-name groceries. The company’s 1,400 no-frills stores are concentrated in 32 East Coast, Midwest and Southern states.

Its first 25 California stores will open between March and July 2016, and are certain to steal share from big-box retailers and traditional markets – something Haggen couldn’t do.

“Aldi is a competitive nightmare,” Flickinger said.

Source: Orange County Register