Ukrop’s CEO dismisses reports that grocery chain is for sale

The sale of family-owned Ukrop's Super Markets Inc., the dominant grocer in the Richmond market until last year, could alter the area's already splintered supermarket landscape significantly, analysts said yesterday.

As speculation swirled about the fate of the Richmond-based chain of 28 grocery stores, Robert S. Ukrop sent a letter to employees yesterday dismissing the talk as rumor.

"There has been a lot of speculation in the last few days about the future of Ukrop's," the chairman, president and CEO of the company said. "All of this is based on rumors, anonymous blog postings and industry chatter."

Ukrop, however, did not dispute published reports that the chain had issued a prospectus. "Anything I say at this point will add fuel to the fire," he wrote.

According to a story published online Tuesday by the trade magazine Food World, Ukrop's has offered a prospectus detailing company information to at least three companies that could be potential buyers.

The story said the potential suitors are North Carolina-based Harris Teeter, Minnesota-based Supervalu and Netherlands-based Ahold.

While the three are major players in the grocery industry, their impact on the local grocery scene could be vastly different, analysts said yesterday.

If the chain were to be sold, the buyer that would make the most sense would be Harris Teeter, several analysts said.

"It would be probably a logical transaction," said Karen Short, a senior vice president of equity research at FBR Capital Markets & Co. in New York. "It is something Harris Teeter can do. I think they have a relationship with the [Ukrop] family and have always admired the chain."

In a note to investors, Short estimated that total annual sales at Ukrop's were $590 million and that the company's operating cash flow was about $35 million. Based on those numbers, she estimated the value of the chain at $248 million.

Harris Teeter recently announced plans to build a distribution center near Fredericksburg, which could serve the Richmond region.

George Hoffer, a professor of economics at Virginia Commonwealth University, said the distribution center makes it likely Harris Teeter would be very interested in entering the Richmond market.

"You can't make money hauling groceries down [Interstate] 95" from North Carolina, Hoffer said. Both Food Lion and Wal-Mart have distribution centers in the area. Ukrop's uses a Supervalu distribution center in Mechanicsville.

Harris Teeter Inc. operates 181 stores in eight states including Virginia, with stores in Northern Virginia, Hampton Roads, Charlottesville and Danville.

If Ukrop's were to sell to Harris Teeter, its 28 stores likely would be converted to the Harris Teeter brand, analysts said. However, if Supervalu or Ahold acquired Ukrop's, the stores might continue to be operated under the Ukrop's brand.

While the name might stay the same, things likely would change for Ukrop's under either company, said David J. Livingston, president of DJL Research LLC, a Wisconsin-based supermarket consulting firm.

"If one of them buys [Ukrop's], they will ruin them," he said. "Expect to see 20 to 30 percent declines in sales after they are sold."

Analysts said all three grocery chains likely would make cuts at Ukrop's' corporate offices to reduce redundancy.

Livingston said the new owners might incorporate their own private-label products and adjust employee benefits to match existing policies -- moves that could alienate shoppers and workers. It also would take away what differentiates Ukrop's.

The large companies believe that "as a big corporation we can do better than a local chain," Livingston said. "But who can run Ukrop's better than Ukrop's?"

However, whether Ukrop's sells itself to one of these three companies, a different one or not at all remains to be seen.

David A. Reed, a partner with the Williams Mullen law firm in Richmond, said these types of transactions are complicated.

He said the initial step for a company like Ukrop's would be to hire an investment banker who would look for a potential buyer that has the capital or access to capital to make the deal, which could be difficult in the current credit market.

Until then, it is likely that the chain will stay mum on its future.

"You don't want it to get out for a myriad of reasons," Reed said.

"If anything changes with our company's direction," Ukrop said in his letter to employees, "you and our customers will hear it from me and not from the rumor mill, blogs or anonymous sources."

Contact Louis Llovio at (804) 649-6348 or .

Contact Emily C. Dooley at (804) 649-6016 or .