Albertsons Companies, Inc. (ACI) Earnings Call Transcript & Summary

Hi, everyone. I'm Brandon Fletcher, and we're pleased to have Albertsons with us today. Vivek Sankaran is going to go through, I think, a pretty powerful presentation to give us a sense of not only why the coming-out party was well received, but some of the great opportunities that have been provided for their customers and their associates in an extremely difficult time with the pandemic. And then after we go through that little bit of presentation, which should be coming up now, we'll do our normal fireside chat and questions and get into the nitty gritty of the opportunity for investors as they think through Albertsons. Thank you. Go ahead, Vivek.

Hey, Brandon, thank you so much. Brandon, I was told that there might be investors in this particular call, who may not be familiar with us, so I thought I'd use a few pages to just give people context about our company. I'll keep it -- I was advised also to keep it to less than 5 minutes, so I will do that. And Cody, thanks for moving to this page. I just want -- these are -- this presentation is also available to you, but I'll hit a few highlights here. The numbers on stores, et cetera, but 2 things to point out. One, we have 25 million registered loyalty members, identifiable customers. That number grew substantially. It was 21 million just about a few months before the pandemic. And the other thing I'll point to on this page is $15 billion in our own brands, which is 1,000 basis points higher margin than the national brands for us. It's a portfolio that's 25% -- with 25% penetration growing when you -- if you go to our website, you'll see that it's a very wide portfolio, not just about opening price points, but a lot of other things too. Our geographic presence on the next page, you'll see -- I put this page up because I want to emphasize 2 things here. One, that we do have a national presence. We may not be in many parts of this country, but we have substantial scale with the presence we have across different markets. But more importantly, we've got significant local density. In the markets that we operate, we are pretty dense, right? And that's great from a structural -- competitive and structural standpoint, but it's also really good when you have these locations in dense markets, near where people live, for eCommerce. And our eCommerce strategy is built around the stores. So it's important to just keep that in the background because that's why when you hear us talk about eCommerce, you'll see that it's built around these stores. We have assembled a very good team that comes with very many different backgrounds. You can see all our bios if you wanted to, but I'll point to the mix of experience. You'll see a different -- a whole wide range of names that all of us have come from. You'll also see a mix of grocery experience and experiences from outside grocery. And in the world that we live in, with so many different changes and a transformation that we are going through and the industry is going through, this background and experience has helped us a lot. We are in the middle of a transformation. I will characterize it as maybe the second or third inning of a 9-inning transformation. And this is what we're focused on as a company. We -- and we believe there's a lot of headroom with just this agenda, and executing this agenda will create value while giving us opportunities to explore other things that can take us further in this whole world of food. Number one is driving growth through in-store excellence. We've been maniacal about elevating operations in store. Push -- we've got a significant fresh portfolio. In fact, it's a bigger mix than most, and it was 300 basis points higher in Q4 than the rest of the store. I talked about own brands. We launched 1,200 own brands, and we're going to expand that fresh equity that we have into meals as we go forward. Omnichannel was a significant focus for us last year. We were behind. There's no question about it. The pandemic was an accelerant for us in omnichannel. We invested significantly. We went from about 400 DUG locations to 1,400. We're going to get to 2,000 by the end of this year, and we are investing in MFCs. We have 2 running. We're going to expand to 7 more. And we think that that's going to be the unlock for us in terms of productivity when it comes to eCommerce. Speaking of productivity. We delivered $0.5 billion last year, and we raised our target for '22 to $1.5 billion from $1 billion. And I'm happy to talk about that more as we get into this conversation. And we continue to invest. We are so proud of our contributions to the community through last -- through the difficult period last year. As Brandon said, we believe we made a difference in many ways, including a $260 million contribution through food and cash donations to our communities. And I'll touch on our ESG strategy. We are -- do a lot in that space, and we're going to do more. In terms of -- now all of this doesn't matter if we cannot do 2 things. One is grow our customer base and make a difference in the communities we operate in. We think of our -- we are pivoting the company to think about customers first and the relationship and the stickiness and the lifetime value we have with customers, rather than thinking stores first. And last year we added 11 million additional identified customers versus the prior year. It was a significant year. And these are people who we can identify. And that, as you can imagine, makes a difference to all of the things we can offer them. We can learn patterns about their shopping behaviors and so on. We also increased our omnichannel households by 3x to people who shop our stores and eCommerce. They are the -- they are significant value to us. They spent 20% more with us. So we've made significant progress on identifiable households. We believe deeply in this notion of building relationships with them. And we also believe deeply in the notion of making a difference in the communities we operate in. You'll see on this page, things that we do towards energy, waste recycling, all of the different things we do for our communities. We have committed to science-based targets. And we are, as we speak, going through a materiality assessment, and we're focusing on 4 pillars: climate change, waste reduction and circularity, doubling down on our community impacts and DE&I. That's a quick synopsis of us. Brandon with that, I'm going to turn it over back to you.

Perfect. Great. Thank you very much. Appreciate that. And as the slides come down, I want to remind everybody that questions will be entertained on Pigeonhole for audience questions. I'll be able to see those and flag them. And if I can't get to every individual one, I can bundle some of those sentiments up to share. But kind of a couple of things I wanted to start with. I want to go back to, I think, what was remarkable, which is, it was a little flat-footed, arguably on where you guys were positioned for omnichannel, but a remarkable amount of effort by the team to get so many stores ready and running and doing exactly what the customers need in the difficult time. So I just -- I'd love to hear kind of what are some of the things you guys did, almost feel like you had to do that led to what you think is kind of [ innovation ] opportunities. I always think about Southwest loading a plane on accident because they ran out of time with only 3 planes and suddenly, innovation was created. I'd love some of that color.

Yes, Brandon, we were -- you're right, we were caught flat-footed in the pandemic. Our leader, Chris Rupp had joined us in December last year, and we were just starting to craft the strategy and the demand spiked. So we found things like this. We found that our picking algorithms were way inadequate. They just could not keep up. We didn't have the right slotting capacity algorithms. We didn't have enough people. We hired 30,000 people. We hired people from hotels. We hired people from the food distributors, anybody -- so we reached out to different people to pull that in. But the big -- the couple of important things, we rewrote the picking software. We rewrote the slotting software. We added people. We made double down on a commitment to it. We opened up these DUG stores. We always wanted to ensure we have quality though, Brandon. So it was a trial by fire and a lot of software and engineering work that helped us accomplish it.

Great. That makes a lot of sense. And one of the things that's always interesting, whenever you -- whenever people think about a unionized shop, I think sometimes people forget that if you have good processes and systems, when you work with your partners, those become the way things are done. We used to joke inside of Walmart that sometimes the union would execute better than we would, because those rules actually construct the behavior. And so I feel like when you guys get your DNA right, it's a little bit stickier. Is that a fair characterization?

Yes, because you get more specialization. That's a good point. You get specialization. With specialization, you get learning, and you also have less turnover. You add those up, right? You go up the learning curve and as an institution, you stay there on the learning curve. That's a fair point, Brandon.

Yes. The one thing that we saw in the click and collect is that kind of in the panic and also just the practicality of having to narrow SKUs. I mean everybody had to do that. That was okay because it's what people needed, right? I remember we were walking a Target store, frankly, before we realized how bad everything was. And anything that was natural was not bought. The only cleaning products were the one that were like kills every last germ with toxic bombs, right? And so you didn't need all those other SKUs. Do you think as we come out of that, will that SKU range go back out? Or kind of how do we think about that? Does it become long-tail stuff, you only click and collect and nobody needs to see in the stores? I'd love any color on that.

Yes, Brandon, I don't buy that at all. Here's why. It's -- let's talk about why the SKU range went broad in the first place, okay? There are a couple of big drivers. One is the diversity of America. We are a very, very diverse country and diverse by locale, diverse by taste. Some people like lemon. Some people like spicy. So by definition, the customer need is quite diverse. So I don't see that going away, I only see it becoming stronger. The second thing is innovation is lifeblood for a CPG company. You have to create excitement for your category. You have to create excitement for your own portfolio. And therefore, I think you'll find that we will -- we want innovation to come back. We don't want anybody to throttle innovation, okay? And then I think you also find that there is a rationale and there is a purpose for size changes, right? Some people, large households, small households. Some people can pay $5 for an item, only $3 for an item, so size. so it will come back. It's -- what you're seeing is a phenomenon of supply constraints, right? And in a matter of time, people will pursue. At the end of the day, we're all going for that extra little surplus that's available in the marketplace.

Makes sense. And one of the things that we've seen when people have done exactly that. So they've seen this opportunity to think about layout, to think about a category range, to think about item modular level substitution to dynamically customize the market. It starts people thinking about how remodels get done, right? And unfortunately, arguably in history, I lived through Project Impact at Walmart, which was just an abject disaster, failure by almost every metric. In fact, I ran away and hid in Slovenia, I was so ashamed, for about 3 years. Project Restock at Kroger, similarly not the results people were looking for. How do you guys think about when you're deploying capital for remodels to kind of solve that intersection? Because I think it's a chance to do really well and not a lot of folks have done it as well.

So you're touching on 2 topics, and I'll parse them out, Brandon. One is remodels, right, which is the capital-intensive side of things that we do to stores. And the second is assortment optimization, which actually many -- there is a history of, you're right, of many retailers getting it wrong. So let me talk about remodels. If you go back in history, we would all try to come up with that next new format. And boy, that's going to be the winner and you roll it out. And the remodels were big item, big-ticket items. I'm not a believer in that. I think the world changes too fast, and you can't do 1,000 remodels and then realize that the world's changed and then do 1,000, no. What we believe in is in a modular approach to remodel. So we think of the world. We break a store down into small modules, and we try to be very contemporary with those modules, which can be executed quickly. And the more sure we are of the return, the faster we execute those. And so we're never putting the whole store at risk at any one point in time. The second thing on assortment, the data matters. So I told you about 25 million identifiable households. So when we optimize assortment, we always care about those households that might buy 1 particular item. They're coming in for fish oil, okay? Yes, you don't sell a whole bunch of it. But they come in and they spend a whole lot of stuff on other things. So keep that fish oil for that customer because you want to win the basket. Because we have identified the households, you're able to do that. And so the assortment, I think you'll find if people have that data, the assortment optimization will get smarter as we go forward.

Yes. And I think sometimes for folks who don't cover the sector or haven't worked in this space, they don't understand how much SKU variation there is geographically, right?

Yes.

So even though it's a highly dense market, and there's 3 major grocery competitors and a savvy company like a Publix and a Walmart and a Target, there's still really substantial SKU variation between those stores. And I think that modular optimization is very, very clever. Do you think the analytics are there? I mean, I know you've got the data. Is the analytics kind of catching up? Or was that part of what was...

Absolutely. No, the analytics is catching up. In fact, we've just developed a whole other -- just launched a whole new platform on that, that does the optimization of the assortment and then also creates the shelf. And then we're able to tailor it locally. I mean, let me give you an example of what I mean by local. I'm here in Chicago today. I'm in Itasca and the stores around here are going to carry a different assortment from downtown Chicago, guaranteed. And you should, right? Not -- it's not at the middle -- not the 80%. It's the 20%. And that's where the granularity in the data helps us.

Yes. I think that leads really well to the other notion that we hear a fair bit from investors sector-wise, which is they understand defensibility based on service, so they get a Wegmans or a high-end format. But as you guys think about your kind of format variation and the means of customer retention and differentiation, what are other ways to think about differentiation that just isn't a butcher, baker, candlestick maker in every store?

Yes. So when we -- we anchor everything we do around our fresh portfolio, okay? And when we say fresh, Brandon, you can walk into our stores and get a steak cut 1.5 inch thick in sort of an inch, and you can say, please give me the less marbled stuff. You can do that. We've invested in that. Our cut fruit is cut in our store. We've invested in that because it actually sells more, and you end up with less shrink. So we want to make sure we anchor the differentiation around fresh. And that fresh assortment, I'll give you -- I was in Seattle, and I was visiting stores with the division president. We went into this 1 store, and it had a predominance of red onions. And I walked up to the produce -- the person working it. And I said, "Hey, why do you have so many red onions?" He said, "Sir, I don't know, but we sell a lot more red onions than white onions." And by the way, it was different in the other store. I asked, I said, "Karl, what's going on here?" He said, "Well, this is Microsoft land, and there's a lot of Indian people, who live here. A lot of Indian people eat red onions." It wasn't orchestrated from the center. It was derived locally. And that's the beauty of having an approach where you can allow people to design things locally. You're providing the analytical support on top, but you still have that confirmation locally.

Yes. That makes a lot of sense. I mean, my experience, I lived in Chicago for a number of years, and it was a Jewel-Osco market, and I grew up in Texas, which is a Safeway market, and they serve very different roles and very different components inside of [ people like ] just memory and experience of the stores we've grown up in and in college. Is it -- how do you want customers to think about the roles of banners? Like do you think you need to occupy every niche? Is it essentially you want to be the best "niche" intersection of customer need demand in that geography? How do we think about the kind of use of banners as deployment?

Yes. So the banners -- the first thing banners serve for us is there's a legacy of history. Shaw's stands for something in Boston and stands for nothing in Dallas. And Tom Thumb stands for something in Dallas and nothing in Boston. I'm okay with that. The generations have shopped it. But here's where the differences come. In Dallas, Tom Thumb can carry an assortment that goes more premium than an Albertsons store. If you go and look at the wine assortments, you'll see that. Pavilions in L.A. will go much higher on the assortment than a Vons in L.A., right? So we are able to differentiate from assortment standpoint, price standpoint, a premiumization standpoint, if you want to call it, across the banners. And that serves us really well. And then the tailoring that's done locally is not so much banner-centric, it's more about who's shopping there. That's the -- a lot of what we are doing behind the banners, Brandon, is common. It's a common technology architecture. Even though it's the same app, the shell is different.

Yes. It makes a lot of sense. Yes. It's -- the way we used to think about -- I mean, when I was at Walmart, we had 58 banners at the time, it's even more now, that they give you permission to do certain things. And then inside of that permission, there's customization inside of there, which can, in some cases, be modular-specific to that store as long as your supply chain can handle that variation. So that makes a lot of sense. One of the other things that comes up a fair bit is that kind of the classic margin mix construct. A lot of people who don't know grocery very well think you lose money on food and you make money on other stuff. And for some stores like a Target, they're not terribly great at food, but they make so much money in clothes, it doesn't matter. And even some other grocers have much larger assortments, but you guys just make money on food. That sounds crazy. How do you...

You sound surprised. Yes, I know, making money, it's an old-fashioned concept, okay? We like it, we like it. Let me think about that. So one is, in our stores, yes, we carry GM and all of that, but it's not the vast proportion of it. But we do have a large fresh component. And so the fresh component, if you have a tight supply chain, you know how to manage shrink, and you can increase units, you can make money in fresh, okay? But then let me just talk about mix. Here's the thing. When you have labor in a store, let's say we have chicken on sale, Brandon, okay? It's brilliant. So these -- here's what the meat team will do. They'll put that chicken there. And right next to that chicken, they'll have hand-trimmed chicken, chicken breasts, okay? Because we had a premium relative to what's on sale. You know what we sell more of? The hand-trimmed chicken breast, okay? And watermelon, you can sell the whole watermelon for $5, or you can cut it up and make it 2 bowls and sell it for $10. And guess what, it doesn't cost $5 to cut a watermelon up and put it in 2 bowls, okay? That's mix management if you have the capability in fresh. And you can make money. But to me, it requires tightness in operations. And that big productivity agenda you saw there is driving more of that tightness in operations.

Yes. There's kind of related to that, too is, is the margin mix construct, not hyper-local, I mean, you've got to have a pricing construct that's rational to some degree. But is there a dynamic that 1 store or 1 set of stores may be able to get much higher margins on citrus because of the differences in local buys and geography and in another place, in Vermont, it's a premium, and you're going to pay for that grapefruit because there is nothing close...

That's exactly right. Exactly right. So think of us from a pricing standpoint, think of us as having hundreds of pricing zones. And so we're going to optimize pricing for that particular zone, okay? And then there are certain things that we buy nationally, and there are certain other things, especially when it comes to certain types of produce, you can buy it locally, or you can buy kind of quasi-regionally or something like that, right? So you can get some scale there. But those things affect it. And that does -- the margin does balance it. So we expect our division leaders to manage the margin within the division and then we step back from it and manage the margins across the divisions, if that makes sense. So the portfolio works for us, right? You start granularly and build up the portfolio.

Yes. That makes a lot of sense. One of the other things that has come up a fair bit is whether or not in that construct, why there isn't -- I should put it this way. There are so many mom-and-pops left in this space. Then a lot of times, investors come to this and they go, "Well, I could see there being 3 or 4 grocers, and yet the status quo is 20,000 mom-and-pop boxes," right? So help us with this construct of how do those guys exist? Because I think it's a critical thing for investors to understand why the grocery opportunity remains so large in our view, because all these guys -- they were still -- most of them are still pre-COVID, and COVID filled some coffers, but we'd love just a context of how do these guys still exist?

Yes. And I think grocers are supposed to have died for 40 straight years now. A couple of thoughts. One is, location matters. The physical location matters. If you have a good store, why would somebody drive past a good store to go to a marginally better store to pick up what you eat and consume every day, okay? So there's that. Now I think location matters for eCommerce, too. The stores are simply a point of inventory, that's it. She happened to come and shop. Now we're going to shop it and get it to her. And it happens to be close to where you live, which is why everybody is pursuing great real estate for retail. And so I think there are some fundamentals that help them. Now I think the challenge they'll have, and it will never decline dramatically. It will decline slowly, which you're seeing that consolidation happen, Brandon, slowly, and you're seeing it in certain markets. The challenge they're going to have is technology -- scale matters for technology. You want to have a great own brands program? Bigger is better, okay? You want to get more attention from a CPG? Bigger is better. So it's going to be a challenge over time for the smaller grocers.

Yes. It's a powerful message, I think. It's amazing to me, especially when I talk to people around the world because obviously, a global investor base, that the default assumption is grocery is highly consolidated. And that's because in most of the world it is. But in the U.S., it's just unbelievably fragmented. I tell them that there was a time I was working at a law firm, and there was an FTC review of 2 bankrupt retailers that were merging, and the reviewer would not allow Walmart supercenters to be considered a grocery store for market store definition. That's how tight this market has been regulated. So I think people underestimate just how fragmented this space really is. And I know you guys have done a little bit of M&A, and I'm not a huge M&A guy, but I'd love any context of just as you think about industry structure long run, kind of wear your McKinsey hat, is this -- does it become 10 players at some point? Is 30 still a really consolidated industry from relative to where we are? What's the kind of -- where is the ceiling on that kind of consolidation?

I think it could. To me, even today, if you took a CPG's point of view, I think there's 10 players who are -- and you'd say -- take a point of view and bet on growth, it will come down to 10 names that you would prioritize and put it that -- on the top of that list. But I think the consolidation will happen. I think you -- what we like, we like these -- like the Kings and Balducci's that we did. We like it because these -- to my point on density, it increases our density in a particular market. And we're able to immediately leverage -- because it's contiguous, we're able to leverage the distribution system and importantly, the leadership talent, right, immediately. And you can add value very quickly to it. So those are the types of things I think you'll find all of us doing as we go forward. Certainly, we will.

That makes a lot of sense. I think this is a bit of an extension on just what you said that I think is fascinating, which is a lot of times people dismiss how real the talent is in terms of field capabilities.

Oh my God, yes.

And we've -- I'm a stats guy by training, and we used to have to build in a dummy variable regression for really great store manager because we simply could not explain the variance any other way. And just love color on what you guys have -- as you've found in that way.

No question about it. No question about it. By the way, I have done that analysis many times in my lifetime, and it is an important -- one of the most important variables. Our store managers, our store -- we call them store directors, their turnover is very low, and we love that, right? Because to me, that's such a pivotal role. Our store directors, we think of them as business leaders. They are measured on growth and EBITDA, Brandon. They are bonused on EBITDA, okay? So they can articulate for you how they're going to get at it. And we want them to have that local freedom to do things in that store. We call it being locally great. So go for it. I want you to understand what's happening around your market. We also call it being nationally strong. So I want to ask them, what are you doing? How are you harnessing the rest of the company to give something better for this customer. So we want to play that duality. And the entrepreneurship exists. What we've done in some of the programs that you saw is trying to find ways to bring an ability to leverage scale.

Makes sense. We used to -- I always had this notion of distributed analytics, which is if you empower the store manager and you give them information, there's a decision that they can make that's better than you'd ever make from the home office. But there's also a section of the store they can't possibly pay attention to, and you need the systems to give them guardrails to get both of those....