The alpha case study

Case Study---Alpha

Rationale:

Thiscase isdesigned to reinforce some ofthe issuessurrounding the use ofthe ‘Change’materialsthat are discussed in thisweek’slecture. Youwill also need to drawon materialsfromthe earlierlectures.

Aswithmostcase studies,there is notenough definitive informationto answerthe questions,so youwill need tomake,and justify,a number ofassumptions.

Awinning formula

Alphawas one ofthefirst companiesin theUSA toinvestinlarge, edge-of-town superstores,with amplefreecar

parking,sellingfood andrelated products.

Alphawas createdinthelate1950sas asubsidiaryofamajorpubliclyquoted retail group.Itstartedbusinessby openingastring ofverylarge discount storesinconverted mill andwarehouse premises.Inthe earlydays shoppers wereofferedalimitedrangeofvery competitivelypriced products.

WhenAlphawentpublic in 1981it was thefourthlargestfoodretailer intheUS,selling an ever-wideningrangeoffoodandnon-foodproducts. Itssuccesscontinuedto be based onhighvolume,lowmargins andgoodvalue formoney(under theslogan of

‘Alphaprice.’)

Achangeof strategy:thepursuit ofhighermargins

In1984Alphabegantoshifttowardsanewstrategyfocusedonraisingmargins.A rangeof newinitiatives involvedseeking efficienciestoreducecostsandintroducing more high-margin productssuchas preparedfoodsandawider rangeofnon-fooditems.

There was alsoadrive to expandinthenorthandthenorth-east oftheUSA,where customers hadgreater spendingpower:

·    Thisexpansionpolicy was slowtogetoff the ground,partlybecause planning permissionsfor largeretaildevelopmentswere moredifficult to secure inthe north,wherethe price oflandwas significantlyhigher and manyofthebestsiteswere alreadybeingdeveloped bycompetitors.

·    Saleswere lower thananticipatedbecauseAlpha’s value-for-money imageanditsrelatively austere storelayoutstendedtobeunattractive to relatively wealthy northern customers whowere usedtoshoppinginmore up-marketstores. Alpha attemptedto brighten upsome ofitsstoresand furtherdistanceitselffromits‘pile-them-highandsell-them-cheap’ image butthis didnotgenerate theanticipatedcontribution tooperatingprofits.

·    Another(related) problemwas thatlong-standingcustomers inthesouth oftheunited States (where thecompanyhadinitiallybuiltits business) appearedtobeconfused by whatAlphawas beginningto offerthem and manyswitched theirallegiance tonewcut-priceretailers whowere more focusedonofferingvalue for money.

Diversification

Towardstheend ofthe1980s senior managementbegantoconsider thepossibility thatsaturationmightlimitfuture growthinfoodretailing,andthedecisionwas taken todiversifyinto non-foods.Some ofthemostnotableacquisitions included:

·    1986- BetaDepartmentStores(with over sixtyprimecitycenter ‘high- street’ sites)

·    1987- DeltaRetailers(agroupwitha number ofwell-knowncarpet, softfurnishings,andfurniture brands).Unfortunatelythis acquisition didnotmaketheanticipatedcontributionto profitabilitybecause

recessionaryandcompetitive pressuresin the early1990s ledtoheavy discounting.The furniture businessfairedworst andwas soldin1990. Whiletherecessionhit thecarpetretail businessit continuedto make modestprofitsandby1991 hadimprovedtothepointwhere itwas decided toexpand thissideofthebusiness.

·    1989- Alphamergedwith theZeta Furnituregroup.Thismerger,one ofthe biggestinUSretailingup tothatpoint,was another disappointment. Alpha-Zetaattributedthepoor performancetoone-off problems,such asa newrange ofkitchens thatfailedtosell.Itwas anticipatedthatthe problems wouldbeshort-lived butperformance failedto pickupas expected.

·    1992- Alphalaunched‘Alphadrive’,acar-retailingbusinessatsites adjacentto5 ofitssuperstores,with theintentionofrollingit outto about70percentof allsites.

Refocusing on the corebusiness

Followingthemerger withZeta,Alpha-Zeta’ssharessignificantlyunder-performed. In1992thecompanysurprisedthemarketwitha major change ofstrategy.Instead ofcontinuingwith the policyofdiversificationitdecidedtorefocusonthe Alpha superstores.

The Alpha-Zetamerger endedwitha managementbuy-outofZeta(although Alpha thenboughta25percentstakein thisnewcompany). Alphadrive andmost ofthe Beta departmentstoresbusiness were alsodisposed of anditwas intendedto dispose ofthe carpets business.However, followingthecollapse ofthe equity market,it provedimpossible toobtaintheanticipated profitfromthesaleofDelta Carpets,so thebusiness was retained(andlater expandedwith theacquisitionof GammaCarpets in1995).

In order to developthecore business it was decidedtoinvestupto2.5 billion$ over a periodof 42months. Mostwas earmarkedfor acceleratingtheopening ofnew stores, especiallyin theNorth,butthere were alsootherdemands.Alphahadlagged behinditscompetitors ina numberof areas:

1.  Own-label products:Themaincompetitors toAlphainthesupermarket sector hadallinvestedheavilyinown-label products(thatofferedhigher margins andbetter valuetocustomers) whereas Alphahadonlystartedto introducethem inthemid-1990s,andona muchsmaller scale.

2.  Computerized point-of-sale(POS)equipment:Competitorshadinvested heavilyin technologythatimprovedstock control and providedbetter customer service atcheck-outs.

3.  Centralized distributionnetworks:Thecompetitionhad alsodeveloped centralized distributionnetworks forfreshfoods thatpushed downcosts, enabledstorestoreceivefewer ‘JIT’deliveries fromvehicles carryingfull loadsandreducedtherequirementfor store relatedwarehousingspace.

4.  Store refurbishment: Alphahadneglectedmanyofitsstores,whichwere beginningtolook very tired andinurgentneedofrefurbishing.

Alpharecognized the needfor investmentinalltheseareas.

Aleap forwardthat contributedtoamajor debtproblem

In1997aconsortiumthatwas planningtobuyanother largeUSsupermarket group agreed that,iftheirbidwas successful, theywouldsellsixty-twosuperstores to