High Prices & Miscalulations Force 16 Albertsons/Haggen Conversion Closures

In a further indication that grocery chains featuring an overpriced line of goods are losing traction in the Southern California market, Haggen Inc. this week moved to close 16 of its supermarkets in Southern California and two more in Central California.
In a risky move, Haggen, which established itself as a purveyor of top of the line meats and vegetables and specialty grocery products in the Pacific Northwest at 18 large-scale stores, in December initiated a deal to buy 146 former Albertsons and Safeway grocery stores, 83 of which were in California, after the Federal Trade Commission required that those stores be spun off after the Albertsons/Safeway/Vons/Pavilions merger last year. The Federal Trade Commission approved the deal on January 27, 2015.
Albertsons’ share of the Southern California Market was already eroding, however, as a consequence of its high-priced goods. Customers were abandoning many Alberstons as virtual ghost stores for better priced groceries at Super King, Cardenas, WinCo, Food For Less and Superior.
Upon the takeover by Haggen in March and April, customers were shocked to find that Haggen’s prices were steeper than those at the Albertsons markets they replaced. Large numbers of those customers have yet to return to Haggen stores.
The entire matter has been complicated by disputes that erupted between Albertsons and Haggen, even before the transitions in the 146 stores were fully made. According to Albertsons, Haggen had agreed to pay almost $41 million for the inventory at 38 of the former Albertsons stores. Haggen did not make good on that commitment. In June, Haggen, communicated to Albertsons that it believed Albertsons had violated certain tenets of the purchase agreement and was out of compliance with anti-trust provisions of the U.S. Code. Without directly stating that its failure to make the nearly $41 million in payments was due to those violations, the company gave indication it would withhold the payment for the inventory.
Last month Albertsons filed a lawsuit in federal court against Haggen, accusing the company of fraud in failing to pay more than $36 million toward inventory at 32 stores and almost $5 million in inventory at an another six stores. Haggen slyly waited until the deals relating to the sale of all 146 stores closed before notifying Albertsons in writing it was withholding payment for the inventory, according to the suit. Haggen’s ostensible reasons for withholding the payment relating to “issues occurring during the acquisition process” are “baseless,” Albersons maintains. It accused Haggen of “acts [that] were fraudulent in nature and done with malice and a willful disregard for Albertsons’ rights.”
Some Haggen executives dispatched from the Pacific Northwest to oversee operations in Southern California now acknowledge that the company misread the Southern California market, basing the company’s estimation that it could adapt its product line into the Albertsons locations based upon the higher prices of goods on Albertsons’ shelves noted during a survey late last year. Haggen’s estimate failed to take into account that Albertsons’ prices were already at the top of the scale in Southern California and that sales at the Albertsons markets were sluggish, at best. In response, Haggen has cut staff hours and laid off workers, reducing the vaunted level of customer service that has been its trademark, while maintaining prices that are higher than all of its competitors, giving shoppers virtually no reason to shop there.
Having gone from 18 stores to 164 in a four month period, Haggen seriously miscalculated the overall cash flow the expanded operation would provide and for six months has been hemorrhaging red ink. Shortly after its first two dozen California stores opened in March, roughly 1,000 items were given serious mark-ups at eleven of the Haggen supermarkets in Los Angeles, Orange and San Diego counties. When those prices were remarked upon by shoppers, the company maintained those mark-ups had been done in error. Industry analysts say the impression yet lingers with consumers that the mark-ups were deliberate and are a harbinger of what the stores will charge across the board on most if not all of its products. Less than three percent of the stores’ inventories were impacted by the mark-ups.
Of note is that none of the stores to be closed in this round are in San Bernardino County. Those to be shuttered include four in Orange County, four in Ventura County and six in the San Diego area, as well as one in Bakersfield location and a store in Los Osos. Company executives, however, did not rule out closing out further stores, including those in San Bernardino County, saying they are yet refining the company’s “right-sizing strategy.”

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