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TPL Insights: Building Peak-Performance Cultures #144 – A Case Study in Human Capital, Strategy, Mergers, Acquisitions and Integration Part 2

November 10, 2022

By  

Rob Andrews

By Rob Andrews based on a lifetime of study of Randalls Food & Drug Stores

In Part 1 we reviewed the meteoric rise and subsequent decline of Randalls Food & Drug Stores since 1980. Truly one of the great supermarket chains of the eighties and nineties, there are many important lessons to glean from this article. It also provides material for consideration and a checklist for those who are considering growth by merger, acquisition, or by organic means.

An article published by the Progressive Grocer features Kroger CEO, Rodney McMullen, highlighting Kroger’s intentions as it moves toward a potential merger with Albertsons. McMullen revealed in a fireside chat at the Grocery Leaders Executive Forum, that he and his team has been working on feasibility studies around what a combined entity would look like all year. Recognizing the devil is always in the details, Kroger’s study is way down in the weeds. Store by store in fact, both from an FTC standpoint, and a strategic and cultural fit perspective. McMullen does not like the word acquisition as he believes the term implies one company being better than the other.

On the surface, I did not like the idea of a Kroger/Albertsons merger as the Kroger brand is significantly stronger. McMullen and his team believe the merger is good for both companies. They believe that Albertsons has done an excellent job with their larger stores and likes that both companies are big on private label. He also views their purpose and values as being “exactly the same.” The merger will make Kroger the second largest grocery retailer in the U.S., with $200 billion in revenues, roughly half of Walmart’s $393 billion. That kind of volume will give the combined entity exceptional buying power and economies of scale. Time will tell. Now back to Randalls:

Lack of Clarity around Strategy

Plainly stated, Randalls’ growth strategy, including its sale to KKR, has been an unmitigated disaster. In 1991, Randalls was to Houston what H-E-B was to San Antonio. Randalls operated 46 stores with revenues of $2.2 billion or $47.8 million per store, and 31% of Houston market share, while H-E-B operated 269 stores with revenues of $6.5 billion or $24.1 million per store, and 34% of San Antonio market share. Randalls’ average store volume in 1991 was twice that of H-E-B, and both retailers held similar shares of their respective home markets. Important to note that during the same period, H-E-B fought off intense competition and emerged victorious from the San Antonio grocery wars. Kroger opened its first store in 1981, and quickly built twelve more of its second-generation superstores. Albertsons was very active and had bigger, nicer stores than H-E-B did at that time. Kroger waved the white flag in 1993 and Albertsons closed its 20 stores and moved on in 2002.

Fast forward to 2022, Randalls has shrunk to 28 stores with revenues of $566 million or $20.1 million per store and less than 4% of Houston’s market share. H-E-B has grown to 420 stores with revenues of $35 billion or $83.3 million per store and 60% of San Antonio market share. H-E-B, with 1991 per store revenues half of Randalls, has pursued a purely organic and disciplined growth strategy and come out on top. In addition to perfect strategic and tactical clarity, H-E-B also operates with a high-performance mindset, a clear purpose, unified leadership from top to bottom, human capital practices second to none, fully engaged stakeholders, fully developed measurement systems, great customer experience, and cost leadership that is the envy of the industry.

Bob Onstead, without Charles Butt’s strong leadership, had two major objectives when he bought Tom Thumb in DFW and the Appletree stores in Austin, which made perfect sense to him. One was to establish Randalls as a regional brand. The other was to acquire enough volume to justify self-distribution, which would ostensibly give them greater supply chain leverage and lower their cost of goods sold. Neither objective was accomplished. Even though the Safeway divisions in Houston, Dallas, Oklahoma City, Tulsa, Kansas City, and Little Rock had been self-distributing, they had the advantage of national buying agreements of Safeway corporate, who, prior to divesting six divisions, operated 2,600 stores. A more careful analysis of distribution center breakeven points and supplier buying agreements might have revealed this.

The regional brand angle didn’t work because the store groups were not strategically aligned. The Apple Tree stores in Austin were a terrible fit on many levels. First, they were old, small, and not capable of carrying as many SKUs (stock keeping units) as the larger Randalls and Tom Thumb stores. Randalls and Tom Thumb had similar go-to-market strategies and were compatible strategically. Randalls and Tom Thumb had been true niche operators, a space that neither Safeway nor Appletree knew anything about. Customers in Austin, who had known the brand in Houston, reported being confused by stores that were branded Randalls but looked and felt more like small independent grocery stores.

Disconnect around Customer Experience

Randalls grew to be Houston’s market share leader with only 46 stores because of its focus on the customer experience. Shopping at Randalls was an event. Randalls was a destination. Foodies especially loved going to Randalls because they felt special when they were there. Randalls never competed on price. When you shopped at Randalls, you knew you were going to pay more, but you did not care. They carried a vast selection and offered the best produce, meat, seafood, deli, handmade salads, artisan bread, you name it. If you shopped in enough Randalls stores, you could tell they were special. Employees smiled and made eye contact as they encountered customers strolling through the stores. They called you by name when checking out and made it a point to ask if you preferred plastic or paper bags. Back in those days, some supermarkets offered carryout service. At Randalls, instead of asking “do you need help” they said, “may I take your groceries to your car for you?” It was simply a brand of experience that caused you to feel good about yourself when you were there.

An exquisite customer experience comprised what Randalls stood for. This was a strategy that was well aligned with Tom Thumb but not Appletree. Austin’s Appletree employees were not fired up. They felt like citizens of a conquered nation, having been acquired by a larger, more successful company. In 1987, still flying under the Safeway banner, they were still riding high as the market leader. Even though the stores were smaller and in serious need of a facelift, competition was light. Safeway employees, operating under five different union contracts, were well compensated and enjoyed being a part of what had been a winning team for three decades. Then came the divestitures, the rebranding, and new union contracts that significantly reduced hourly wages and benefits. In addition, they were not accustomed to operating with the limited resources that came with the leveraged buyout of which they had been a part.

Cultural Mismatch and Lack of Succession

The benevolent dictator Bob Onstead was revered by most of his employees. My comments are not a referendum on his management style. It was what it was, and it had worked well up to a point. As we observe in many founder-led businesses, this style doesn’t lend itself to scale and successful growth. Bob’s blind spots, caused by his myopic mindset and lack of a real leadership team and succession plan, left Randalls in Houston devoid of leadership when Bob moved to Dallas to run Tom Thumb. Ironically, Randalls had some of the most talented and dedicated operators around, but they had not been developed. A succession plan without leadership development is not a plan.

I hope this article is helpful as you consider your growth strategy. Clearly, there are cases in which an acquisition or merger makes sense. A disciplined thought process may help you wind up in the 3% of cases where acquisitions work, rather than the 74% in which they don’t. Give us a call and let’s chat.

Warmest Regards,

Rob

Rob Andrews
Allen Austin
Consultants in Retained Search & Leadership Advisory

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