November 3, 2022
November 3, 2022
By Rob Andrews
How can so many exceptionally talented professionals enter into so many mergers and acquisitions that are predestined to fail? I’m tired of seeing founders sell successful businesses to buyers who run them into the side of the mountain in record time. I’m sick of seeing buyers acquire solid brands and immediately start to disassemble the enterprise without taking time to figure out what they’ve bought. I’m frustrated at seeing founders abandon the secret sauce that made them successful in the first place to pursue expansion strategies that ultimately spell their demise.
I rant like I do because I hope I can save a few business leaders from making mistakes that destroy massive enterprise value and disrupt countless lives. In this paper, we examine how one wonderful family-owned business met its ultimate demise, and how they might have avoided disaster. In the case of Randalls, the grocery store, the list of weaknesses in what appeared to be a rock solid business included:
– Lack of a unified leadership team from top to bottom of the organization.
– A command and control leadership style with too much decision-making concentrated at the top.
– Lack of a succession plan for key board members and executive leadership team members.
– Lack of experience with successful expansion, acquisitions, mergers, and integration strategy.
When my family moved to Houston in 1961, we quickly became customers and raving fans of this tiny supermarket chain. They only had four stores, but a blind man could see they were special. In 1980, as a fledgling search consultant, my partner and I wrote the first search master service agreement for Bob Onstead, a co-founder, Chairman & CEO, to help him fill key leadership roles. Subsequently, my firm executed dozens of searches for the company until 1999, two years after KKR had acquired a majority stake in the company.
Meteoric Success in Record Time
It was an absolute thrill to watch what had been a tiny chain of small grocery stores morph into a 46-store powerhouse with a commanding 30% market share. Competition during the seventies had been intense. So intense that Weingarten’s waved the white flag in 1983, selling its stores to Grand Union, who in turn sold them to Safeway. Lucky owned Eagle Food Centers and left Houston that same year. Rice Food Markets, once a Houston mainstay with 55 stores, had shrunk to 12.
All during this time, Randalls was on offense. They adopted a strategy of developing their own shopping centers, owned the best real estate in town, and had become known as the best friend of the Houston community, giving generously to local charities, and sponsoring major Houston sporting events. By 1985, Randalls had surpassed Safeway’s market share with less than half as many stores. Randalls had an offering that put them in a category all by themselves. By the early nineties, Randalls had emerged as the undisputed champion of the 1980s Houston grocery wars.
For twenty-five years, I was a Randalls groupie. I went to all grand openings and followed every move they made. By 1990, Randalls appeared bulletproof. They were the market leader and the fastest-growing company in Houston. Driven by a purpose greater than making money and a powerful tagline that read, “Remarkable People, Remarkable Stores,” they occupied a niche to which everyone aspires and only a few attain. Randalls’ tagline was real. It was who they were. Higher prices and premium margins but the best of everything. Big beautiful squeaky-clean stores, the friendliest most helpful people around, the best produce, meat, seafood, deli, handmade salads, artisan bread, you name it. Randalls was Bob Onstead’s baby. He had built it just the way he wanted it. He called most of the shots and everything was done Bob’s way. Watching Bob operate, had been tantamount to watching Gen. George S. Patton march through Europe.
So powerful was Randalls that Charles Butt (Chairman & CEO of H-E-B) was committed to staying out of Houston as long as Bob ran it. Randalls average store volume was close to three times its next closest competitor and they were extremely profitable. The only non-union operator in Houston, Randalls base wages were lower than any of its rivals, yet their workforce turnover was extremely low, and their employee engagement was sky high. Randalls employees loved their company. There were company softball teams, bowling leagues, picnics, parties, you name it. Randalls blue and white was all over the city as loyal employees proudly wore their colors outside of work.
Weaknesses and Threats Lurking Below the Surface
For all of Randalls’ strengths, a closer examination would have revealed major threats and weaknesses. Among them, was Bob’s top-down, autocratic leadership style. While it had worked well on many levels, it was bound to crumble at some point. People who knew Bob well called him a benevolent dictator. His blind spots, caused by his lack of a real leadership team, were mitigated by his two co-founders, who kept him “between the ditches”. His business was simple enough for him to manage as long as it was comprised of stores Randalls developed, and confined to Houston and surrounding areas. As we will see, his tendency toward command-and-control management turned out to be an important factor in the company’s decline after almost twenty years of spectacular growth.
In 1992, there came a series of unfortunate decisions that constituted the beginning of the end for one of the world’s most successful operators. While Bob had been the company’s face and its top field general, he had a strong board that helped guide him. Norm Frewin and R.C. Barclay, both cofounders, acted as Bob’s advisors. When R.C. Barclay died unexpectedly in 1991 it shook the company at its core. For the first time, Randalls had a serious leadership problem. Without a true leadership team and succession plan, Bob was now making every executive decision and many well below. To make matters worse, Bob’s company, which he was now flying solo, was about to become significantly more complex.
An Expansion Plan Doomed to Fail
The ill-advised acquisition of Cullum Companies, which owned Tom Thumb and Simon David, and the subsequent acquisition of AppleTree in 1992 proved to be the beginning of the end for Randalls. While Tom Thumb had a very strong market share in DFW, the company had a lot of baggage, including a couple of near bankruptcies and a mountain of debt. When Tom Thumb employees got nervous about the direction of their company, Bob Onstead decided to move to Dallas, ostensibly to comfort them and run the DFW business. While this move might have improved morale in Dallas, it left the core Randalls business without strong leadership. Bob did not have a strong bench of leaders, nor had he invested in the development of a team that would succeed him.
To add insult to injury, the reception of Randall’s in Austin was horrible. Austin shoppers had been intensely loyal to Safeway and were willing to put up with the AppleTree group, comprised primarily of Safeway Houston Division leadership. When Randalls showed up and rebranded the stores, Austinites were underwhelmed. They lamented the lack of investment in what they termed “cramped and dirty stores.” Additionally, when Safeway spun off its divisions in Houston, Dallas, Tulsa, Oklahoma City, and Little Rock in 1988 to local management leveraged buyouts, Charles Butt saw an opportunity in Austin and accelerated his investment in a city where he’d previously had a minimal market share. Butt’s onslaught of big, new supermarkets and the addition of H-E-B’s first Central Market put the final nail in the coffin for Randalls’ Austin operation. As an aside, H-E-B now has a 50% market share in Austin and climbing. It has 60% in San Antonio, the highest of any chain in any major metropolitan area. H-E-B basically owns the entire market south of San Antonio all the way to the Mexican border.
As if this were not enough, H-E-B was not Randalls’ only problem. Kroger was also rolling out its “signature” stores aggressively across Houston and DFW. To boot, Onstead’s top-down management style, very different from Tom Thumb’s delegated style of leadership, was not received well in Dallas. In five short years, the once dominant Randalls was in turmoil with no end in sight. Onstead’s son Randall, now CEO formulated a plan to take on what they believed was a financial partner, by selling a majority interest in the company to KKR. KKR promised to allow the Onsteads to continue to make management decisions and would “simply set financial targets” for them. This is a case of not knowing what you don’t know will kill you. KKR had already presided over one the most disastrous declines in American history with its acquisition of Safeway in 1986. Why on earth would anyone sell their blood, sweat, and tears to someone whose track record suggests impending doom?
In Part 2, we’ll dig further into Randalls’ further decline and what might have been done to chart a much different course. Give us a call and let’s talk about your company’s strategy for successful growth.
Consultants in Retained Search & Leadership Advisory
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