SmartCo Foods’ failed expansion into the Denver area cost an estimated $40 million to $70 million and was plagued by poor planning, a misreading of the local market and cost overruns, according to a source familiar with the grocery company’s operation and finances.
Coupled with dismal sales, those problems persuaded private-equity firm Apollo Global Management, owner of SmartCo parent Smart & Final Inc., to pull out of Colorado before year’s end, putting more than 500 people out of jobs, said the source, a high-level company employee who spoke on condition of anonymity to avoid retribution from Smart & Final.
“They wanted to get it off the books this year and not carry it into next year,” the source said. “That way, it becomes a tax write-off.”
Another source, also familiar with Smart & Final’s Colorado operation, gave a similar account of Apollo’s role in the decision and its motives. An Apollo spokeswoman declined to comment on SmartCo.
Privately held Apollo, among the largest U.S. private-equity funds, is planning an initial public offering of stock early next year. The firm has struggled during the past few years, losing money in 2008, 2009 and the first six months of 2010.
Apollo has a reputation for buying distressed companies in down markets, but also has shown a willingness to cut its losses when it makes a mistake. Two years after purchasing Linens ‘n Things in early 2006 for $1.2 billion, Apollo took the struggling retailer into bankruptcy and closed 120 stores.
SmartCo is scheduled to close its five Colorado stores — in Denver, Centennial, Littleton and Longmont — today after opening them just four to six months ago. One store may remain open longer to liquidate inventory, a spokesman said.
Pricey trial turns sour
Smart & Final, based in City of Commerce, Calif., has said it pulled the plug in Colorado because sales didn’t meet expectations. The hasty exit stunned employees who lost jobs, vendors who were building business with the company, local officials who had welcomed SmartCo to their communities this summer and even some customers who had begun to warm to the new chain.
Smart & Final officials had said they might have opened up to 25 stores in the state had the new concept — a hybrid of a traditional grocery store and a warehouse store without membership — been successful.
“We did come to that market with expectations of being there a longer time and having a bigger presence. Those plans were based on the idea that these stores would be very attractive to both household consumers and businesses,” said Smart & Final spokesman Randall Oliver. “We quickly could see we weren’t getting the sales we anticipated.”
The source said the $40 million to $70 million in SmartCo costs in Colorado went to lease, refurbish, equip, stock, staff and run the five stores.
SmartCo’s leases with Albertsons LLC, which owns the properties, were favorable, but the company budgeted only about half of what it ultimately needed to refurbish the buildings, the source said.
Net sales at most of the stores were below half of the company’s projections of $400,000 to $600,000 a month, the source said. Sales started out well but dropped off dramatically within a few weeks of each store opening. SmartCo officials have said the stores failed to gain the awareness in the marketplace that they had expected.
The advertising SmartCo did wasn’t enough to quickly gain a strong foothold in the competitive Denver grocery market, the source said.
Tough market to crack
King Soopers has 38 percent market share in Denver, followed by Safeway and Walmart with about 19 percent each, according to the Shelby Report. Those three chains have more than three-quarters of the market, making Denver difficult to penetrate compared with more fragmented markets, industry experts have said.
A year to 18 months — roughly the duration of SmartCo’s leases with Albertsons — combined with heavy advertising, might have given the new stores staying power, the source said.
Adding to the problems, SmartCo’s website wasn’t running properly as the company opened stores early in the summer, according to the source. Another issue was an outdated information-technology system that made it difficult to change and post prices quickly. All of that hurt SmartCo’s competitiveness.
Smart & Final operates about 280 stores under the Smart & Final banner and other names including Cash & Carry Smart Foodservice, Henry’s Farmers Market and Sun Harvest stores in California, Oregon, Washington, Arizona, Nevada, Idaho and northern Mexico.
It was founded in 1871 in Los Angeles and was acquired by Apollo in 2007 for $813 million. SmartCo was Smart & Final’s new concept for a mass-market retail grocery-store chain, with larger stores in the 40,000- to 61,000-square-foot range. The company recently opened a SmartCo in Lake Forest, Calif., where it expanded and rebranded a Smart & Final store. Another conversion is planned for next year in Phoenix.
According to the source, the new concept was pitched to Apollo by Smart & Final chief executive George Golleher and senior vice president and chief financial officer Richard Phegley, who remain with the company.
Plan unrealistic, analyst says
Jon Schallert, a Longmont-based retail analyst, said SmartCo was trying to be too many things, and it didn’t excel at any.
“They were going after a really diverse market — customers that shop at Costco, restaurant owners who would buy in bulk and up here in Longmont the Latino market,” Schallert said. “And they were going to do this in 50,000 square feet?”
Schallert recalled noticing bakery products that were mass-produced and meat that didn’t look fresh in the Longmont store.
“You have to be memorable for something. The memory was of a below-average bakery and meat department,” he said. That matters because the bakery, deli, produce and meat sections generate profits needed to support lower-margin sections of a grocery store, he said.
Customers who visited SmartCo’s northeast Denver store last week said they weren’t particularly impressed with the prices, except on items such as discounted large-package products.
Larry Burns, 69, of Denver, shopped at SmartCo a few times, but didn’t find exceptionally low prices.
“I’m a King Soopers shopper, but they’re so far away from me that I was hoping SmartCo would be better, but they weren’t,” he said. He guessed that SmartCo failed because the prices weren’t outstanding and its store locations weren’t prime.
SmartCo’s swift departure angered many employees, especially since it came just before the holidays. Some complained that they learned of the move from Facebook or in the news. The company said it tried to contact all employees on the morning before the announcement was made publicly. Others said they didn’t believe the company’s explanation for why it left.
“It’s like they planned to fail. It feels like they were just using the jobless rate to prey on our community’s desperation,” said Lina Miller, who was laid off from her Longmont SmartCo bakery job in September, when the company began making cutbacks to reduce payroll costs.
Employees feel let down
Many employees suspected that SmartCo walked away with tax breaks from Colorado. But officials from the state and the four cities where SmartCo had stores said the company did not receive any breaks or incentives.
Gina Marino, who worked at the Littleton store as a part-time cashier until about a week and a half ago, said her hours had been reduced from up to 30 a week to 11 by the time she learned she would lose her job.
The work atmosphere was tense, and managers sometimes yelled at lower-level employees, she said. Still, the job had been welcome after a year and a half of unemployment. Marino has retail management experience and hoped to move up as SmartCo grew in Colorado.
Smart & Final offered Marino, and others, a job at a California store, but she’ll stay in Colorado.
“Who’s going to up and move to California for a $10-an-hour job?” she asked.
Greg Griffin: 303-954-1241 or ggriffin@denverpost.com
Apollo Global Management
History: Founded in 1990 by Leon Black
Assets under management: $54.5 billion
Employees: 418 in 10 offices
Strategy: Contrarian, value investors in private equity, debt and real estate
Key investments: Charter Communications, Harrah’s Entertainment, Norwegian Cruise Lines, Claire’s, Smart & Final
Funding sources: Pension funds 34%, foreign governments 25%, financial institutions 13%, high-net- worth individuals and families 10%, corporations 9%
What’s to come: Announced in March it would go public; offering planned early next year
Sources: Apollo Global Management, Bloomberg Finance
