October 16, 2007
Tops’ Future in Morgan Stanley’s Hands
Prior to last week, Morgan Stanley Private Equity had never ventured into the grocery business. That all changed when the group agreed to buy the Tops Friendly Markets chain from Royal Ahold.
“Tops has terrific long-term performance, strong employee relationships and a loyal customer base,” Gary Matthews, managing director and operating partner for Morgan Stanley Private Equity, told the Rochester Democrat & Chronicle.
“As brand-new owners, we are bullish on the growth prospects,” he said. “Our plan is to invest in the business and stores, and grow our operation.”
Frank DeRis, president of the United Food and Commercial Workers (UFCW) Local 1, which represents about 10,600 workers, seemed pleased with Morgan Stanley’s acquisition of 71 Tops and Martin Super Food Stores stores from Ahold. He told the Democrat & Chronicle, “Our members should be relieved and move on to the future.”
Mr. Matthews said that Morgan Stanley was bringing back Frank Curci, a former CEO of the chain, to lead the transition. Mr. Curci is expected to also serve on the new Tops’ board.
Bringing in Mr. Curci should help Tops achieve the seamless transition that Mr. Matthews is looking for. One of the steps to bring that about is moving merchandising, information technology and finance from its present location in Carlisle, Pa. to the Buffalo area.
“We want to put those jobs back into the local market,” said Mr. Matthews.
Arun Jain, a marketing professor at the University of Buffalo, said relying on current management and those familiar with the upstate New York market should benefit Tops.
“The supermarket industry is very local,” Prof. Jain told The Buffalo News. “You really have to have an understanding of the local market.”
Discussion Questions: What can be expected of Tops under the ownership of Morgan Stanley Private Equity? Is the company at a disadvantage or advantage because this is Morgan Stanley’s first foray into the grocery retailing business? What must Tops do to regain some of the luster it lost under Ahold’s ownership?
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Morgan Stanley is out of their core strengths here. The grocery retailing industry moves on such slim margins that MS doesn’t bring any true expertise or insight to this marketplace. This doesn’t mean that they can’t hire this, but this requires knowing what to do and how to measure (and set) the proper expectations for both performance and success. These metrics must be communicated on both a corporate as well as a public level and the change must be initiated from the top down. This is a difficult agenda for any organization to undertake, let alone one which has no retailing or grocery industry experience. There was a reason that the company was sold, and it wasn’t because it was such a great performer. MS has to determine these weaknesses, move to correct them, while maintaining the strengths of the entire organization. These are difficult balls to juggle and the first 100 days will truly determine if MS is moving to initiate change or just manage the assets of the organization.
Private equity brings financial discipline as an earlier commenter mentioned. But, such ownership also brings a bias toward crisp cost savings, sometimes at the peril of safety and service levels in the businesses they operate. Food companies are a special concern. Think of private equity’s role in the consolidation of the pet food manufacturing industry and its part in the Menu Foods poisoning scandal. One hopes for the best with Tops, but running a grocery chain is a quite different animal than running dry goods emporiums or factories.
I would assume the Morgan Stanley likes the cash flow and the real estate that they just bought. It is very difficult and beyond the expertise and patience of most supermarket chains to maximize value by selling their assets on an individual basis. That leaves an opportunity for other companies to purchase those assets and add value. This type of transaction will continue as traditional supermarkets continue to liquidate surplus stores.
The real story here is not Tops but the direction that the industry is taking. The market is splitting between giant efficient supply chain armies such as Wal-Mart, Target and Costco and small specialty stores such as Aldi, Trade Joe’s and the “market place” type fresh stores. Tesco is about to change the way we shop even further with its Fresh and Easy. With close to one half of the store devoted to affordable prepared foods it will cater to the group that either cannot, does not have the time to or will not cook. Tesco has a “Blue Sky” concept in that they have no real direct competition. Many people do some of what they are doing but nobody is doing it all and nobody will have the supply chain that they have.
Wall Street get ready. In the next twenty years one half of the urban supermarkets between 30-70K square feet will need your help to convert to new uses.
Expect lots of job cuts, price increases, and sale leaseback schemes. This is all about the dollars and it’s an insult to have someone in management talk about jobs. That’s what every new owner talks about to keep employees from panicking and heading off to greener pastures in droves. I don’t know what other companies Morgan Stanley owns but if it’s anything that can be sold in a supermarket, look for big displays of those products in Tops.
Asking if the company is at a disadvantage is a difficult question. It depends. Yes they are if you are talking about sales and market share. No if you are talking about milking the company and making some dollars. I don’t think Tops has any intention of regaining luster. They might do some minor cosmetic changes such as a coat of paint or remodel, but we know Wegmans and Wal-Mart are not going to give back any market share. I predict sales will eventually fall to Winn-Dixie-esque levels; stores will close. New stores will be consolidations of two or more units. Look for some possible acquisitions and consolidations as Wal-Mart continues to roll out more supercenters in upstate New York.
I have never seen a Private Equity group do a great job at operating a supermarket. They are great at figuring out how to make money on the investment, but that seldom comes from growing the customer base, or growing the wallet share of their customers. It usually comes from cutting costs, and then flipping the business. Morgan Stanley may prove us wrong, but I don’t think they will ever win Retailer of the Year. This can’t be good for Tops.
Welcome to the wonderful world of low margins, heavy and aggressive competition, unionized labour, cranky vendors, overworked managers, and a deli cooler that won’t stay cool Morgan Stanley! Do they have the expertise to turnaround Tops? Not sure but they better have a strong plan to revive this once respected name in grocery. There is room for another player, especially if they focus on the underserved urban centers, but customers have come to expect and demand a certain level of service and convenience from their grocer and right now, Tops is not there. Can someone say reno and retrain?
What does Morgan Stanley know
That caused Ahold to say, “No?”
Does that savvy Wall Street group
Think Tops is like a hoola hoop
Where stores will be Curci-cured
And old problems won’t be endured?
Kai poses a good question on whether this move is to initiate retail changes or just manage the assets of the organization. Time will tell.
Morgan Stanley can bring world class financial discipline to Tops. All too often, retail managements aren’t great financial managers, so their use of capital is suboptimal. Additionally, Morgan Stanley brings its deal skills. Most retail executives aren’t experienced at making multiple merger, acquisition, and spin-off deals. Ron Burkle of Yucaipa made a lot more money buying and selling supermarket companies than operating them. Why shouldn’t Morgan Stanley do the same thing?
Tops has suffered from neglect under Ahold’s ownership. It’s hard to imagine it getting less attention as the sole grocery property of Morgan Stanley. Now if Edward Lampert had bought it, then that would be another thing entirely.
A private equity company is in it for the investment. They don’t need to be grocers. They are in the business of being in business. They will pump money in and sell it when they can maximize profit. They will likely keep management in place and put money into improvements then hope sales increase so they can sell it off at a later date.
First of all, Morgan Stanley is not going to run Tops. They are going to hire someone to do it and hopefully someone who really understands the business on a local level.
I’m happy for the chain, its employees, the union and I applaud Morgan Stanley for recognizing the potential of the chain and the supermarket industry as a viable profit-making enterprise.
However, let’s not be naive. You know that someone–or several someones–at Morgan Stanley have already calculated the breakup value of Tops–just in case!
The attraction of Private Equity to Grocery Retailers is pretty straightforward–the grocery business model is not extremely complex. Lots of fixed overhead costs, plus everyone’s investing in retail. As other private equity investment options get saturated, Morgan Stanley might consider this as an opportunity to diversify their portfolio–and yes someone at Morgan Stanley Private Equity has valued the assets of Tops in case they don’t turn it around.
Will they succeed at turning Tops around? If they bring in people that know the retail industry, then they have a good shot because as someone mentioned here, they will bring financial discipline to the table and have the capacity and motivation to bring in outside expertise to enhance the in-house knowledge base.
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Morgan Stanley is out of their core strengths here. The grocery retailing industry moves on such slim margins that MS doesn’t bring any true expertise or insight to this marketplace. This doesn’t mean that they can’t hire this, but this requires knowing what to do and how to measure (and set) the proper expectations for both performance and success. These metrics must be communicated on both a corporate as well as a public level and the change must be initiated from the top down. This is a difficult agenda for any organization to undertake, let alone one which has no retailing or grocery industry experience. There was a reason that the company was sold, and it wasn’t because it was such a great performer. MS has to determine these weaknesses, move to correct them, while maintaining the strengths of the entire organization. These are difficult balls to juggle and the first 100 days will truly determine if MS is moving to initiate change or just manage the assets of the organization.
Private equity brings financial discipline as an earlier commenter mentioned. But, such ownership also brings a bias toward crisp cost savings, sometimes at the peril of safety and service levels in the businesses they operate. Food companies are a special concern. Think of private equity’s role in the consolidation of the pet food manufacturing industry and its part in the Menu Foods poisoning scandal. One hopes for the best with Tops, but running a grocery chain is a quite different animal than running dry goods emporiums or factories.
I would assume the Morgan Stanley likes the cash flow and the real estate that they just bought. It is very difficult and beyond the expertise and patience of most supermarket chains to maximize value by selling their assets on an individual basis. That leaves an opportunity for other companies to purchase those assets and add value. This type of transaction will continue as traditional supermarkets continue to liquidate surplus stores.
The real story here is not Tops but the direction that the industry is taking. The market is splitting between giant efficient supply chain armies such as Wal-Mart, Target and Costco and small specialty stores such as Aldi, Trade Joe’s and the “market place” type fresh stores. Tesco is about to change the way we shop even further with its Fresh and Easy. With close to one half of the store devoted to affordable prepared foods it will cater to the group that either cannot, does not have the time to or will not cook. Tesco has a “Blue Sky” concept in that they have no real direct competition. Many people do some of what they are doing but nobody is doing it all and nobody will have the supply chain that they have.
Wall Street get ready. In the next twenty years one half of the urban supermarkets between 30-70K square feet will need your help to convert to new uses.
Expect lots of job cuts, price increases, and sale leaseback schemes. This is all about the dollars and it’s an insult to have someone in management talk about jobs. That’s what every new owner talks about to keep employees from panicking and heading off to greener pastures in droves. I don’t know what other companies Morgan Stanley owns but if it’s anything that can be sold in a supermarket, look for big displays of those products in Tops.
Asking if the company is at a disadvantage is a difficult question. It depends. Yes they are if you are talking about sales and market share. No if you are talking about milking the company and making some dollars. I don’t think Tops has any intention of regaining luster. They might do some minor cosmetic changes such as a coat of paint or remodel, but we know Wegmans and Wal-Mart are not going to give back any market share. I predict sales will eventually fall to Winn-Dixie-esque levels; stores will close. New stores will be consolidations of two or more units. Look for some possible acquisitions and consolidations as Wal-Mart continues to roll out more supercenters in upstate New York.
I have never seen a Private Equity group do a great job at operating a supermarket. They are great at figuring out how to make money on the investment, but that seldom comes from growing the customer base, or growing the wallet share of their customers. It usually comes from cutting costs, and then flipping the business. Morgan Stanley may prove us wrong, but I don’t think they will ever win Retailer of the Year. This can’t be good for Tops.
Welcome to the wonderful world of low margins, heavy and aggressive competition, unionized labour, cranky vendors, overworked managers, and a deli cooler that won’t stay cool Morgan Stanley! Do they have the expertise to turnaround Tops? Not sure but they better have a strong plan to revive this once respected name in grocery. There is room for another player, especially if they focus on the underserved urban centers, but customers have come to expect and demand a certain level of service and convenience from their grocer and right now, Tops is not there. Can someone say reno and retrain?
What does Morgan Stanley know
That caused Ahold to say, “No?”
Does that savvy Wall Street group
Think Tops is like a hoola hoop
Where stores will be Curci-cured
And old problems won’t be endured?
Kai poses a good question on whether this move is to initiate retail changes or just manage the assets of the organization. Time will tell.
Morgan Stanley can bring world class financial discipline to Tops. All too often, retail managements aren’t great financial managers, so their use of capital is suboptimal. Additionally, Morgan Stanley brings its deal skills. Most retail executives aren’t experienced at making multiple merger, acquisition, and spin-off deals. Ron Burkle of Yucaipa made a lot more money buying and selling supermarket companies than operating them. Why shouldn’t Morgan Stanley do the same thing?
Tops has suffered from neglect under Ahold’s ownership. It’s hard to imagine it getting less attention as the sole grocery property of Morgan Stanley. Now if Edward Lampert had bought it, then that would be another thing entirely.
A private equity company is in it for the investment. They don’t need to be grocers. They are in the business of being in business. They will pump money in and sell it when they can maximize profit. They will likely keep management in place and put money into improvements then hope sales increase so they can sell it off at a later date.
First of all, Morgan Stanley is not going to run Tops. They are going to hire someone to do it and hopefully someone who really understands the business on a local level.
I’m happy for the chain, its employees, the union and I applaud Morgan Stanley for recognizing the potential of the chain and the supermarket industry as a viable profit-making enterprise.
However, let’s not be naive. You know that someone–or several someones–at Morgan Stanley have already calculated the breakup value of Tops–just in case!
The attraction of Private Equity to Grocery Retailers is pretty straightforward–the grocery business model is not extremely complex. Lots of fixed overhead costs, plus everyone’s investing in retail. As other private equity investment options get saturated, Morgan Stanley might consider this as an opportunity to diversify their portfolio–and yes someone at Morgan Stanley Private Equity has valued the assets of Tops in case they don’t turn it around.
Will they succeed at turning Tops around? If they bring in people that know the retail industry, then they have a good shot because as someone mentioned here, they will bring financial discipline to the table and have the capacity and motivation to bring in outside expertise to enhance the in-house knowledge base.