Can Mariano's Save Roundy's as Expansion Accelerates?

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Tue. June 10th, 2014 - by Christofer Oberst

Bob Mariano, Founder of Mariano’s Fresh Market and CEO of its parent company, Roundy’s, is looking for bigger opportunities outside of Illinois to expand his new, namesake grocery chain. But will the acceleration in growth rate be enough to help out the struggling Roundy’s?

Roundy’s net loss for the first quarter of 2014 was $4.5 million, while same-store sales fell 5.3%. Currently, Roundy’s shares are around $5, close to its 52-week low and below the $7 per share at which the company priced a stock offering in February. Meanwhile, Mariano’s has been growing fast – and continues to grow fast – with 13 Chicago stores in December, 11 stores from former Dominick’s conversions, and 5 new stores being built from the ground up for a total of 29 by year-end.  

“Opening Mariano’s in other markets is a real potential opportunity for us,” said Mariano, according to Crain’s Chicago Business. “We haven’t done the work yet to determine which market… but we clearly feel that Mariano’s can travel.”

Aside from the stock offering, Roundy’s has also suspended its dividend and refinanced debt to finance Mariano’s expansion, Crain’s Chicago Business reports. It also agreed to sell 18 Rainbow stores in Minneapolis to Supervalu and other local grocers for $65 million. Mariano said the transaction would allow the company to “better focus strategically” on growing the Mariano’s banner in the Chicago market and strengthen the business in core Wisconsin markets. The move had some analysts speculating that Mariano may spinoff Roundy’s.

“Given the relative disparity of the valuation between the Mariano’s chain and the rest of Roundy’s, it would make sense to spin it off at the right time,” said Andrew Wolf, analyst at BB&T Capital Markets. “If you read between the lines, that’s pretty much what they’ve been saying.”

Because Roundy’s doesn’t report numbers for its store brands, it’s unknown how profitable Mariano’s is; although, Mariano suggests that “mature” locations see about $1 million in sales per week, about twice as much as Roundy’s-owned stores in other markets.

To put things in perspective, Mariano’s stores require about $5.5 million of initial investment. Compare that to $10.5 million for a Whole Foods store. Return on invested capital within four years is 35 to 40% for a Mariano’s store, while Whole Foods is 31%, according to Crain’s Chicago Business. Still, Roundy’s reportedly has $742 million of long-term debt, which David Livingston, a Milwaukee-based grocery consultant, says is a critical weak spot.

“Whole Foods and other competitors feel that Mariano’s is vulnerable simply because at some point they can’t operate their stores at a very high level if they continue to remain in that much debt,” said Livingston. 

 Mariano remains confident that the company can succeed by staying on top of customer demand and trends.

“At the very least, you have to be on-trend, and to be really great you have to be at the forefront,” said Mariano.

What’s next for Roundy’s? Will Mariano spinoff the company, or will he keep pushing ahead? Stay tuned to AndNowUKnow as we follow any further developments.