6 Upshots of the Southeastern Restructuring

Southeastern Grocers announced a financial restructuring to be completed under a prepackaged Chapter 11 proceeding this week, stating it would close 94 underperforming stores.

The decision was prompted by $1 billion in debt due over the next year. Southeastern’s plan calls for refinancing roughly half of that debt, and turning the rest into new equity—moves that the retailer said would help to refuel a strategic repositioning it couldn’t afford while stores struggled, and debt service absorbed too much of its resources.

The news, however, isn’t all bad—for Southeastern and competitors alike. Following are six upshots of the event.

Mark Thompson, who monitors retail real estate trends at GroceryAnchored.com, noted that exactly half of the closing units are sites with fewer than 40,000 people within a 3-mile radius and, of those, 26 have fewer than 20,000. That’s barely enough to support a single store before considering competition, and so they likely did very little relative sales volume.

It’s conceivable that a retailer with a lower cost structure, such as a hard discounter, could make a run at some of these sites, but they will also need to be convinced that the condition of the store and the shopping center are just right—and at low-volume stores, sources note, that’s not always the case.

Southeastern’s biggest landlord, Wheeler Real Estate Investment Trust, said it has moved to recapture four closing stores (in Mullins, St. Matthews and Ladson, S.C., and one in Tampa, Fla.) with the idea that it can re-lease the sites quickly, perhaps to supermarkets paying better terms.

“Based on other grocery operators’ interest, the company believes there is an opportunity to enhance the value of these centers outside of [Southeastern’s] tenancy,” the shopping center owner said in a release.

While the move will likely leave some landlords disappointed, others are probably pleased. The demographic characteristics of the 30 Winn-Dixie stores closing in Florida, for example, indicate generally acceptable conditions for a grocer, if one will dare make the leap. According to Thompson, the Florida stores have average 3-mile radius populations of roughly 75,000: Twelve of them are along the growing I-4 corridor in Central Florida and 11 are South Florida.

On paper, it looks like a potential match for Albertsons, which fled Florida many years ago but left behind three stores. The company recently renovated and reopened them under the Safeway banner, leading to speculation the company would consider adding to the fleet.

The possibility that Southeastern would require a restructuring was well-known as it approached its debt maturities, and it appears the retailer’s real estate team prepared accordingly. Wheeler noted the company had renegotiated many of its leases—some rents went up, and others down—in the months proceeding yesterday’s announcement, and that activity may have softened the blow of closures. Some reports said the event could cost the company 200 stores, so the 94 announced Thursday—in addition to previously announced sales and closures—was not as big a blow as feared.

Southeastern CEO Ian McLeod, who departed in June, and successor Anthony Hucker spent much of their strategic energies lowering prices and tailoring stores to their neighborhoods. The company introduced a new banner, Fresco Y Mas, as a conversion option for stores serving Hispanic neighborhoods, and engaged in overnight unit transitions addressing decor and assortment at 18 stores. That change was largely successful, with sources saying some stores experienced volume increases of 30% or more, and likely kept more stores from closing: Just one Fresco Y Mas made it on the closing list. Southeastern also revamped its Harveys banner to focus on better serving lower-income shoppers, and ported it to some Bi-Lo and Winn-Dixie locations. Several of those flips, however, didn’t make it.

Southeastern Grocers is a corporate name, but could also be a description for an ailment plaguing food retail. Simply put, there are way too many grocery stores dotting the landscape—particularly in the Southeast, where population growth has drawn all manner of new and expanding competition, from Lidl to Wegmans to Publix to Sprouts. In the rural South affected by Southeastern's announced closures, that could mean additional opportunity for volume to companies like Save-A-Lot, Walmart and Aldi. “When you close stores, the survivors in closest proximity can see 20% or more volume gains,” Burt P. Flickinger III, managing director at Strategic Resource Group, told WGB.

For Bi-Lo, the financial restructuring will be the second since Lone Star Funds first acquired it from Ahold in 2005, and its second due primarily to heavy debts placed on it by the owner (Winn-Dixie before its merger with Bi-Lo previously underwent Chapter 11 to unravel bad business decisions and injudicious expansion). But one doesn’t need to look very far back in history to see similar disasters striking private-equity backed retailers, such as Tops Markets, which filed Chapter 11 last month, and Toys R Us, which said this week it would likely close all of its stores this week after being unable to find a buyer.

Though each of these cases has unique circumstances, all three retailers shared a common issue of financial constraints in part due to high debts placed on it by private owners, and subsequently were unable to keep up the investment pace. In Southeastern’s case, better capitalized competitors such as Kroger, Publix and Walmart have been outspending them by hundreds of millions a year. “There’s been far too many instances of private owners piling on tremendous debt on retailers, taking big dividends and management fees, and leaving the companies without means to sufficiently invest in their lifeblood,” Flickinger said.