Inside the Haggen grocery chain’s spectacular acquisition failure

On Nov. 4, 2014, two months after John Clougher became Haggen’s CEO, Haggen executives attended a meeting at Albertsons headquarters in Boise, Idaho.

The meeting was vital for both companies.

Clougher and the other Haggen executives were there to negotiate a $300 million deal to buy 146 stores from Albertsons and grow into a major player in the grocery store market on the West Coast.

For Albertsons, the sale was a small-but-necessary part of a $9.4 billion merger with its rival Safeway. Albertsons’ bid to become one of the country’s biggest supermarkets depended on it successfully selling 146 West Coast supermarkets to Bellingham-based Haggen. The Federal Trade Commission, concerned that the Albertsons-Safeway merger would reduce competition and hurt shoppers in 130 market areas across the West Coast, ordered Albertsons to sell off 168 total stores before it would allow the deal.

The details of the meeting are laid out in court documents filed in U.S. Bankruptcy Court in Delaware. The documents paint a behind-the-scenes picture of how the deal came together and how it unraveled so quickly.

Haggen was coming out of a rough patch. The company had closed 10 stores in a two-year period before the meeting. But in September 2014, just after taking over as CEO, Clougher told the Bellingham Business Journal that sales numbers were up and Haggen was ready to grow again, though he didn’t “feel the need for any visionary changes,” he said.

At the time, he didn’t imagine Haggen could grow by 146 stores and become a major West Coast grocery player. That opportunity found him.

“It’s a great opportunity. Opportunities come when they come,” Clougher said in December 2014 after Haggen announced the massive acquisition. Clougher didn’t comment for this story.

Haggen’s expansion failed fast. Now, less than eight months after it began, the company plans to shrink from 168 stores in five West Coast states to 37 stores in Washington and Oregon by December. Haggen wants to shed all but 21 of the stores it acquired from Albertsons and keep 16 of its legacy locations, including all Whatcom County stores. Haggen has seven locations in Snohomish County — in Everett, Marysville, Monroe, Lake Stevens, Snohomish, Clearview and Stanwood.

How did the expansion fail so fast? Supermarket analysts say Haggen didn’t have much of a chance at opening 146 new stores in markets where it had little brand recognition. And Haggen claims in a $1 billion lawsuit that Albertsons broke its purchase agreement and sabotaged Haggen’s entrance into new territory.

For the expansion to work, everything had to go perfectly, produce and supermarket analyst Jim Prevor said.

After the FTC ordered Albertsons to sell stores, Albertsons got to pick which stores to sell and who to sell to. The Federal Trade Commission reviewed the deal and was satisfied with Haggen’s chances, said Dan Ducore, assistant director of the FTC’s Bureau of Competition.

“They get to bring us who they’re going to compete with, but it only works if we decide we’re comfortable that these people offer good competition,” Ducore said in August 2015. After reviewing Haggen’s business plan, financial plan and sources of capital, the FTC approved Haggen’s purchase in January 2015.

Prevor said the locations of many of Haggen’s new stores were challenging.

“The approach of [Haggen] is to offer a richer experience at a higher price. That’s not necessarily what people were looking for in those neighborhoods,” Prevor said. “These stores were profitable so I think to some extent what you wanted to do was take them over and keep them the same.”

Taking stores over and keeping them the same was Haggen’s strategy, according to court documents. Haggen based the success of the stores on the idea that when customers walked into a brand new Haggen store, they would see no difference in prices, according to court documents. Haggen noted that even small changes in price make a big impact on customers.

So it must have been surprising to Haggen executives when customers complained that Haggen’s prices were higher than those at the Albertsons, Vons and Safeway stores it replaced.

Haggen’s takeover begins

At 12:01 a.m. on Thursday, Feb. 12, Haggen rebranded its first store, a former Albertsons in Monroe, Washington. Over the next five months, the green Haggen banner went up at 145 other stores in Washington, Oregon, Nevada, California and Arizona. Most supermarkets closed for about 48 hours as workers changed signs, stocked shelves and did other maintenance.

Depending on union seniority, some workers had a choice: they could transfer to a different Albertsons store or stay and work for Haggen.

When a store in Carpinteria, California, converted from a Vons (owned by Safeway) to a Haggen, pricing specialist Debra Sukiasian decided to stay and weather the transition rather than transfer and stay with the company she’d worked with since 1977. That decision led her to sue her new employer in August.

Sukiasian’s store switched in June and her problems started immediately, according to court filings in her suit against Haggen. She noticed a pricing discrepancy. “The register prices were uniformly higher than those marked on the shelves,” court documents said.

Customers noticed the difference too, the lawsuit alleges. Sukiasian brought the problem to Judy Hagy, who was responsible for pricing at all Haggen stores in the region. Her concerns were ignored, Sukiasian alleged in court documents. So she emailed Bill Shaner, then CEO of Haggen’s Pacific Southwest region.

Soon after her email, Sukiasian was “upbraided for disclosing the pricing discrepancies to the CEO.” Haggen’s district manager and vice president of operations told a senior manager at Sukiasian’s store to “find a way to terminate” her, the lawsuit alleges. Sukiasian, who was eligible for retirement, “reluctantly elected to retire rather than be terminated.” Her last official day with the company was Sept. 1.

About the lawsuit, a Haggen spokesperson said, “Haggen was disappointed to learn about this lawsuit and is confident it has absolutely no merit.”

Sukiasian isn’t the only upset Haggen employee. Haggen’s store closures affect more than 6,000 workers, according to regulatory filings. The United Food and Commercial Workers union filed grievances against both Albertsons and Haggen in August, saying that layoffs and reduced employee hours violate a collective bargaining agreement.

Before the store conversions, Haggen met with UFCW 770 and assured the union that they were “in it for the long haul,” said Kathy Finn, the union’s collective bargaining director. A few union members per store left to work for Albertsons, but the majority—90 percent, Finn estimated—stayed with Haggen.

“They enticed people to come to work for them and we don’t feel the commitments they made were made in good faith because within weeks they began reducing worker hours,” Finn said. “It’s hard for me to believe that after taking over a store in two weeks things were so different than they anticipated.”

Haggen claims sabotage

But store conditions were different than Haggen anticipated, the company said. Haggen’s debut in new markets was going sour even before the company got keys to its new stores.

Days before an Albertsons In El Cajon, California, was to be converted, a bakery manager was instructed to “bake off everything in the freezer,” according to documents Haggen filed in U.S. Bankruptcy Court in Delaware. Most of that inventory expired before Haggen opened, according to court documents.

At a store in Shoreline, Washington, Haggen management found inventory missing from shelves, the lawsuit alleges. Within days, the store had to purchase about $208,000 of new inventory, or almost 24 percent of total inventory at the store.

Haggen accused Albertsons of similar overstocking actions in other departments — produce and perishable meat overstocked, multiple shipments of expired medicine arriving unbidden, meat freezers loaded with 256 cases of frozen turkeys left over from the holidays — across at least 25 stores.

Haggen’s 55-page complaint alleges a variety of other transgressions against the purchase agreement at its new stores, including mold in display cases, broken meat scales, poor sanitation, broken ovens, and a walk-in cooler with a broken door held closed with a trash can.

The issues distracted store-level and senior management at a critical time, Haggen said. Money used on those issues depleted the company’s marketing budget and consumers were left with the impression that stores were not well operated.

One of the main allegations in Haggen’s $1 billion lawsuit against Albertsons is that Albertsons didn’t train Haggen managers, as promised in the purchase agreement, on the “business process outsourcing” suite that Albertsons used in 107 of the stores Haggen acquired. The business process outsourcing suite, or BPO, is technology that aids with functions including accounting, payroll and benefits, asset protection, merchandising and pricing, and point-of-sale systems.

Learning to use the equipment was so important to Haggen’s success that representatives from the BPO company attended the Nov. 4, 2014, meeting with Albertsons and Haggen executives to ensure Haggen that it could operate all 146 stores under the same BPO system—which Albertsons promised to provide at all the stores Haggen would acquire, according to filings in Haggen’s lawsuit against Albertsons.

Haggen claimed that Albertsons didn’t come through on its promise to train Haggen employees on the technology, and that caused some of Haggen’s pricing problems.

In a statement, Albertsons spokesperson Brian Dowling said Haggen’s allegations are “completely without merit.”

Haggen brought its complaints to Albertsons on June 29, according to court filings. Albertsons didn’t respond, but instead “raced to the courthouse” to file a complaint against Haggen. Albertsons sued Haggen for about $40 million on July 20, saying the Northwest grocer failed to pay for some inventory.

Bellingham bankruptcy lawyer David Vis said Haggen’s lawsuit may be posturing on the Bellingham grocer’s part, or setting up a defense against the lawsuit Albertsons filed against Haggen a month earlier.

Loss of key employees

While the majority of employees at Haggen’s new stores stayed, the minority who left for other Albertsons stores may have been detrimental to the company.

David Livingston of JDL Research suspects that the employees who left were probably top employees, he said. Workers were eligible to transfer to other Albertsons stores depending on union seniority—the employees who could transfer had the most experience.

“It didn’t take a genius to figure out this may not work,” Livingston said of Haggen’s expansion. “If you’re an employee at Safeway or Albertsons, do you want to go to work at Haggen or do you want to stick with the company that’s taken care of you?”

Even if only 10 percent of employees transferred the stores would be at a disadvantage, Livingston said.

“What if we took the best five players of the Seattle Seahawks and sent them to another team—you’re devastated right? I mean, you’re really screwed,” he said. “You’re the Jacksonville Jaguars all the sudden. It doesn’t take much to impact the quality of the stores.”

Livingston criticized Haggen early in its expansion, but he was more sympathetic to the chain after visiting a Las Vegas store in September, he said.

Store employees told him that right before Haggen took over, Albertsons raised prices, he said.

“Maybe they did sabotage Haggen,” he said. “It was probably very difficult for Haggen price coordinators to come in and figure out what prices should really be. It was almost an impossible job. They really needed more time. They needed six months to do their due diligence.”