Haggen’s Growing Pains Lead to the Inevitable

With opportunity comes risk – and vice versa. And so it goes for Haggen, whose declaration of bankruptcy this week has been one of the more predictable, albeit pitiable, scenarios we've covered in many years.

At the risk of piling on redundant, repetitive admonishments, the developments that unfolded at Haggen over the last several weeks made it all but inevitable that the end was near for the upstart chain, which rocketed in record-time from 18 stores and 2,000 associates, to 164 stores and 10,000 associates, following the ill-fated FTC-mandated sale in tandem with last year's Albertsons-Safeway merger. Under the settlement, the divestitures to Haggen were required to be completed within 120 days from the purchase of the first store, which upon first hearing, struck me as being more than a bit ridiculous.

But the band played on.

Backed by the Florida-based private equity firm Comvest Partners, Haggen shelled out roughly $300 million for its newly acquired store fleet and geared up for an ambitious, unprecedented conversion to rebrand the stores in phases during the first half of 2015 after the deal was approved in late January. Co-led by CEOs John Clougher – who was named CEO of Haggen last September after serving as CEO of Andronico's Markets in northern California and prior to that, president of Whole Foods Markets' Northwest – and veteran supermarket industry exec Bill Shaner, who was named to lead the company's Pacific Southwest division, inclusive of California, Nevada and Arizona, industry observers were agog when pondering the agendas of the duo charged with steering the biggest multi-regional food retailing transformation in 15 years.

When announcing the co-CEOs, John Caple, chairman of the Haggen board and a partner at Comvest, said the "pivotal acquisition" provided a ripe "opportunity to introduce many more customers to the Haggen experience."

Unfortunately, however, the introductory period – and the experiences following its rapid expansion – was less than stellar. Off-putting prices – in many cases for identical products that skyrocketed dramatically virtually overnight, with no attendant gains with service, selection or quality – captured the bulk of Haggen's heat with consumers, many of which never returned after a few preliminary visits.

Having kept tabs on the transition with some well placed vendor sources and trailing consumer sentiment on social networks in the weeks leading up to the present, it was clear that Haggen's struggles were mounting by the day, with complaints – and debtors – piling up faster than errant shopping carts in a Costco parking lot on a Sunday afternoon. But after several bad-to-worse twists and turns, including last month's news that it was closing more than two dozen stores, and last week's report of its $1 billion lawsuit against Albertsons, alleging that the latter organized a "coordinated and systematic [effort] to eliminate competition," the bankruptcy writing was on the wall.

And here we are.

In its 22-page Chapter 11 filing, Haggen – with $50 million to $100 million in assets and an identical sum of liabilities – lists multiple creditors, the largest of which is Los Angeles-based Unified Grocers, which is owed nearly $15 million. Others on Haggen's IOU tab, per the bankruptcy documents, are Topco Associates, $5.7 million; Charlie’s Produce, $3.5 million; DPI Specialty Foods, $1.4 million; Supervalu, $1 million; and Bunzl Seattle, $649,000. Albertsons, which is suing Haggen, is also listed as being owed an “undetermined” amount of money related to the litigation, while Dale Henley, the company’s former CEO, is also cited as being owed nearly $5 million in deferred compensation.

Bill Shaner – whom I've known and respected for years, and still do – is out, while Clougher is now singularly helming the company, which will likely shed more stores and potentially some customer programs in the process. “The action we are taking today will allow us to continue to serve our customers and communities while providing Haggen with a process to re-align our operations to be positioned for the future,” Clougher said in a statement.

Looking ahead, Haggen intends to sell off select locations in the five states it operates while testing the waters with buyers in other various sites amid discussions with interested parties to sell many of the company’s remaining assets.

And though Haggen did not pinpoint the number of stores it would sell, the first order of new business for Clougher and Co. is to focus on more profitable locations with the backing of $215 million in debtor-in-possession (DIP) financing from its existing lenders to maintain operations – including employee wages, certain benefits, and certain customer program – and store merchandise during the process.

The upstart retailer's ambitions to increase its total chain volume 700 percent in a year was a tall order from the outset. But in the cut-throat competitive markets where it sought to gain an overnight-edge, an incremental ramp-up over a more reasonable amount of time, rather than the measly 120 days from purchase of the first store from Albertsons-Safeway that Haggen was given from the FTC, proved that the odds for long-term success was a long-shot at best.