If the saga of Haggen Holdings were to be turned into a Broadway musical it would likely be called How Not to Succeed in Business.
For Haggen is the story of a scrappy 18-unit independent chain from small-town Bellingham, Wash., with dreams of making it big in the bright lights, big city metropolitan areas of California, Arizona and Nevada.
Haggen tried to do so by acquiring 146 Safeway, Vons and Albertsons stores for $1.4 billion with the federal government’s blessing. But the ensuing comedy of merchandising errors—outrageous prices, whacky advertising, significant out-of-stocks, a billion-dollar lawsuit, poor locations, inability to compete in a cutthroat market, lack of name recognition—showed that it bit off more than it could chew, and it choked to death as a result.
Within four months of completing the transformation of its new stores, Haggen filed for Chapter 11 bankruptcy protection on Sept. 8, and quickly retreated to a “core” group of 37 supermarkets and one stand-alone pharmacy in its original Washington/Oregon marketing area.
Then in November, according to published reports, Haggen sought the “approval of the proposed sale of the Debtor’s Core Stores.” In effect, that means the chain is seeking to go out of business altogether.
“I was aghast because Haggen didn’t have the wherewithal to handle that metamorphosis from being a small regional chain to a multi-state chain,” says Dr. David Rogers, president of DSR Marketing Systems, based in Northbrook, Ill. “The Pacific Northwest is so different from Los Angeles and everywhere else they expanded to. It was clearly a bridge too far.”
Haggen initially expected to reach the other side of that bridge with its core stores.
“Haggen plans to continue to build its brand in partnership with its dedicated corporate support and store teams. Haggen has a long record of success in the Pacific Northwest and these identified stores will have the best prospect for ongoing excellence,” the company said in a statement.
In the meantime, it has liquidated most of its newly acquired stores.
Haggen officials were not available for comment, but a source close to the company says, “As part of the Chapter 11 process, Haggen retained Sagent Advisors to explore all sale opportunities and coordinate the sale process. The company continues to actively explore all opportunities for its stores and its employees.”
It has already agreed to sell 28 stores to warehouse club-type operator Smart & Final and eight locations to upscale Gelson’s. Albertsons, Sprouts Farmers Market and 99 Ranch Market have also bid on stores.
Industry observers say a company of Haggen’s size making such a large acquisition was unprecedented.
“Historically, what Haggen did has never been done in the history of the grocery industry,” says Ricardo F. Icaza, president of UFCW Local 770 in Los Angeles, which represents 1,000 Haggen workers in the greater L.A. area. “They just came in and expected to make a profit in such a short period of time. Now they are just abandoning the stores. They’ve only been open for three or four months.
“It is absurd that anybody could conceivably think that they could turn a profit in so short a time even if they did everything right. But they didn’t,” Icaza adds. “They failed to advertise properly. They overpriced their goods, which was really traumatic because they entered into a very competitive market,” he says, noting that California’s grocery sales top $44 billion.
“Generally when you make an acquisition, if you are a good company, like a Kroger, you better count on about a 15 percent decline in sales because you have to go through a learning curve when you take over stores,” says David J. Livingston, president of DJL Research, based in Milwaukee.
“Haggen didn’t understand the marketplace in terms of customers,” says Richard George, Ph.D., professor emeritus, Food Marketing at Haub School of Business, at Saint Joseph’s University in Philadelphia. “They are kind of premium price oriented and the Albertsons stores they bought were not. They did not understand the competitive array. They didn’t understand the whole issue of cash flow. They just didn’t have enough resources to carry them through to make the transition.
“They were going from 16 stores to 160 stores—that’s a 10-fold increase,” George says. “They didn’t have the necessary cash flow. I think it just caught up to them obviously much sooner than later. And now you have their demise. Everybody is suing them. People are out of work. It is a sad situation.”
Livingston says Haggen made a fatal mistake by assuming that it could come in and sales at its acquired stores would stay the same.
“The thing is, if you’ve never been involved in a big acquisition before, you’ve got a lot to learn,” he says. “This is an acquisition that would really take about a year to do. Haggen just came in and basically changed the sign and said ‘we are here.’ In California, the Haggen name has no recognition at all.
“Another problem was that when they reopened the stores their pricing was outrageous and the customers knew that right away,” adds Livingston. “The press jumped all over that. Whose fault was that?”
$1 Billion Lawsuit
Haggen officials believe the fault lies with Albertsons, which is why the company filed a more than $1 billion lawsuit against Albertsons and Albertsons Holdings on Sept. 1. According to the lawsuit, among numerous other things, Albertsons provided “Haggen with false, misleading and incomplete retail pricing data, causing Haggen stores to unknowingly inflate prices.”
“Haggen’s only hope is that they are suing Albertsons for $1 billion,” says George. “But that will be a long, drawn out litigation and the only ones who will get rich off of it will be the lawyers.”
Livingston went to the new Haggen stores and talked with employees. “They said that Albertsons raised the prices right before they turned the keys over,” he says. “OK, that’s fine. Haggen’s job is to go in and do their due diligence, do a book-to-book price check with all of the major competitors so they know exactly how to price these items. They didn’t do that.”
Rachel Shemirani, vice president, marketing at Barons Market, a six-unit natural/organic grocer operating in the San Diego area, where Haggen took over several Albertsons and Vons, agrees. “When Haggen came in their pricing was just outrageous,” she says. “Even the employees and the store managers were saying, ‘What are you doing?’”
Many locals had the same question about Haggen’s advertising campaign. “When Haggen came in there were billboards everywhere,” Shemirani says. “They were advertising like crazy, but they just missed the mark. They would put in a picture of Orville Redenbacher’s Popcorn and say something like, ‘You can find local food at your local Haggen.’ It was like, what? Orville Redenbacher’s is not local!”
Even the company’s going-out-of-business signs were weird. One store posted the following:
“Q: When are you closing? A: We don’t know;
Q: What’s moving into this location? A: We don’t know;
And yes, we were open for only 3 months,”
Followed by a hand-written, “Yes, we’re really closing.”
Shemirani also cites the name issue. “San Diego didn’t really know they were coming,” Shemirani says. “I knew they were coming because I follow industry news, but people were like ‘What is a Haggen?’ A couple of billboards are not going to define them. You really have to go out into the community and show who you are and whatnot, and be a real part of the community. That is how you succeed.”
Haggen did just that in its original Pacific Northwest footprint. It was founded as Economy Food Store in downtown Bellingham, Wash., by Benett and Dorothy Haggen and her brother Doug Clark in 1933. The store was a success and moved to larger quarters several times before opening a second location in 1963 in Everett.
Haggen grew into a profitable regional chain, expanding into the Portland, Ore. market in 1995. It was an industry pioneer too; in 1979, it opened the first supermarket FTD floral department; in 1989, it became the first supermarket to install a Starbucks counter. In 2009, Jim Donald, the former CEO of Starbucks, was named CEO of Haggen.
In 2011, the Haggen family sold controlling interest in the company to The Comvest Group. Over the next four years, Comvest installed a new management team and closed 16 stores.
Then in 2014, Albertsons announced it was acquiring Safeway in a $9.2 billion merger. The Federal Trade Commission (FTC) worked with the affected states, did its normal merger review, and found a number of markets where the overlap of Albertsons and Safeway or Vons locations would create an anti-competitive market.
As a result, the FTC required the chains to divest 168 stores to allow the merger to move ahead. Haggen Holdings acquired 146 of them in Arizona, California, Nevada, Oregon and Washington State.
According to an FTC official, it was Albertsons and Safeway management that selected Haggen to be the acquirer of the West Coast stores. The FTC then examined Haggen’s books, and Haggen officials came in and made a presentation about how they were going to make the acquisition work.
“Part of our normal review involves assessing who the buyer is, what their management looks like, what is their experience in the industry, what are their plans for taking over the stores, what is their source of funding and what are their arrangements with a wholesaler,” the FTC official says. “We ultimately have to get comfortable that their buyer knows what they are doing and has the money to do it. It is a fairly detailed review. We really have to kick those tires before anything can be done.”
In Haggen’s case, the chain agreed to keep union employees and contracts, and the stores were to be supplied by Unified Grocers, based in Commerce, Calif. Unified expected the partnership to bring in $750 million in annual new business, and the retailer-owned cooperative successfully completed a refinancing of its credit facilities to provide greater flexibility to finance its growth plans and lower its ongoing interest costs. Unified did not respond to requests for comment.
After the review, Haggen was given the green light to acquire the stores.
The FTC is still trying to figure out what went wrong. “Merger law enforcement is sort of a forward looking exercise where you project what you think will happen competitively in a market after a merger,” the FTC official says. “You need to keep in mind that we are not insisting on guarantees. There are risks, and sometimes things don’t work out as anticipated or hoped.”
Livingston says Albertsons and Safeway shrewdly chose Haggen. “You do not want to ever sell your stores to a strong competitor,” he says. “You want to sell these to the most inept operator that you can find, even if they are not the highest bidder. I think Albertsons and Safeway just knew that Haggen was in over their head, and that this was just too good to be true.”
Now Albertsons is looking to make a comeback and has placed bids on 36 of its former stores, including 12 in Washington, three each in Arizona, Los Angeles and Las Vegas; five in San Diego; four each in Bakersfield-Riverside, Calif., and Oregon, and two in Santa Barbara, Calif.
However, the FTC can put the kibosh on that proposal. “The order has a provision that for five years Albertsons cannot buy back any of the stores it divests unless they give us notifications in advance and an opportunity to do a review,” says the FTC official. “Even a one store deal that wouldn’t trigger the pre-merger Reporting Act, because of the order they would still have to go through the same procedure with us. If they want to buy a store back they have to come to us and we get to consider it.”
For now, the fallout is still coming as Haggen faces a long line of creditors. “A lot of so-called innocent bystanders are going to be friendly fire casualties here,” says George.
Many are store-level employees. “When Haggen came in they assured the members that they would be assuming the union contract and urged them to stay on and transfer from Albertsons or Safeway to Haggen stores,” says Icaza.
“Based on their promises, many of our members went,” Icaza says. “Now we find ourselves in a situation where members are losing their homes, having to quit school, and those kinds of things. We are working hard to develop some kind of emergency fund for the members. We have been able to work with Albertsons and negotiate an agreement that members can go back to work there if there are openings without losing their seniority.”
According to Livingston, Haggen is damaged beyond repair. “You get only one chance to make a first impression—and Haggen failed at that miserably,” he says. “It is like they went to the prom in a T-shirt and shorts.”
A Competing Viewpoint
Officials at Barons Market, a San Diego-based six-unit operator of natural/organics supermarkets, had a front row seat on the Haggen disaster after the Bellingham, Wash.-based chain purchased several Vons and Albertsons stores in the area.
“First off, we weren’t afraid,” says Rachel Shemirani, vice president of marketing.
That is because Barons operates stores averaging 15,000 to 18,000 square-feet, and the stores Haggen was buying were 40,000- to 50,000-square-foot behemoths, offering a mix of both conventional and organic products. “We believe traditional supermarkets are asleep,” Shemirani says. “People are busy. They don’t have time to walk a 50,000-square-foot store. People love to shop. People love to eat, but people hate food shopping.”
And Haggen apparently did not make things easier.
“The big thing we heard immediately from customers and their employees was that their pricing was way too high,” Shemirani says. “Southern California is very competitive, and they didn’t do their homework. Their ads were laughable: $1 to $2 [more] per product and sometimes $3 or $4. We thought, why not just drive down the street to an existing Vons or Sprouts and see what is going on? I don’t think they did that. In the end, they blamed Albertsons for not letting them know. We’re constantly checking prices, just to make sure that we’re good.”
Haggen did very little in the way of remodeling, Shemirani says. “They changed the signs and did a couple of very easy quick changes,” she says. “They turned over the stores pretty quickly—almost overnight in some instances.”
Now Barons Market is reaping the fruits of its competitor’s demise.
“We are interviewing a lot of Haggen store managers right now, so that hopefully we can get some of that top talent,” Shemirani says. “We have been interviewing so many wonderful store managers and produce managers.”
It might even try to pick up a store or two.
“Our most recent store was an old Ralphs,” Shemirani says. “With a larger store we cut it in half and rent out the other side. Right now we’re waiting for the dust to settle because Smart & Final and Gelson’s are coming in and taking over some of the locations. Smart & Final is not really a good fit for some of those sites, and Gelson’s does not have any stores in the area, but is picking up three in the higher end areas of La Jolla, Del Mar and Carlsbad.”
Source: Grocery Headquarters