Shopko

ShopCo, have you heard of this store? Maybe not. I'll tell you who has heard of this store. If you're from the Midwest or specifically Wisconsin, there's a pretty high chance of it. If you're from the Pacific Northwest or close to it, there'still a decent chance. But anywhere else in the country, or outside of the country, this may be new to you. Trust me when I say, ShopCo was a big deal. They were a billion dollar company that existed for over 50 years. If you haven't been to ShopCo, it's too late. In June of 2019, they shut down the last of their stores, and I've seen so many comments saying that I should talk about it. After all, it's kinda my thing. Which works out perfectly because I have been to ShopCo. Based on my experience as a customer, I would say it's a lot James Rubin, he was a pharmacist who in 1961 had aspirations of opening his own department store. Here's the genius of James Rubin. When you open a store Maybe right in the middle of Chicago would be a good spot, but since that's what everyone else was thinking, there were now too many stores in the major cities, and the less populated areas were being ignored. James Rubin identified an underserved market, and actually moved from Chicago to the much smaller city of Green Bay, Wisconsin. And I realize they have a football team and all that, but it's a pretty small town. Today it's the 158th largest in the country, and in 1960 had a population of 62,000 compared to Chicago's 3. 5 million. That's where he got together a group of investors and raised about a million dollars to open the first ever ShopCo store. Being one of the few stores of its kind in its area, it was successful. Five years later, in 1966, he opened a second location also in Green Bay. By 1971, there were 10 of them, generating over 41 million in annual sales. This is when James Rubin decided to sell it to a company called Super Value with Noe at the end. They were a very large food wholesaler who had over a billion dollars in sales that next year, and this was their means of getting involved in the non-food retail end of things. Now, since Super Value was a much bigger company, with more resources available to them, they were able to make ShopCo into something significant. As soon as they took control, they started making improvements to these 10 stores. Probably the most significant of these was building pharmacies in them. They were the first of their kind to do it, and it's fitting since a pharmacist is the one who started their whole business. In 1978, they were one of the first to start offering eye care services, where you can buy your eyeglasses and get your examinations. Over this time, Super Value was also adding new stores, tripling in size over their first decade of ownership. Everything was going great. They continued targeting the underserved markets in Wisconsin and the surrounding area, and when you combine that with the unrivaled convenience of these healthcare services, they were attracting a lot of customers. In 1981, they had over $300 million in sales. They continued along these lines throughout the 1980s, by almost any measure, each year was bigger than the last. By 1991, they had sales of $1. 65 billion. In fact, in the eyes of Super Value, ShopCo was getting too big. I know that sounds Super Value dealt with food. That was the core of their industry. They were the n In fact, ShopCo was their only business that wasn't food related, and it was getting big. It was taking too much attention from their core business, so they decided to get rid of it. Some of it. Most of it. Here it is in their words. In 1991, Super Value began the implementation of a strategy to focus on its core food distribution and retailing business segments. The company executed the first major step in the strategy in October 1991, with a sale of 54% of Super Value's interest in ShopCo. Its discount general merchandise subsidiary through an initial public offering. Super Value continues to own a 46% interest in ShopCo, which at fiscal year end operated 118 discount department stores in 15 states. What this means is they put 54% of ShopCo up on the stock market. They sold over 17 million shares at $15 per share, bringing in net proceeds of over 240 million. This was their arrangement for the next six years, until Super Value gave up their existing 46% through a stock buyback agreement. They were now much more independent, and this was a perfect time to launch a transformation plan. This was the 1990s, when Kmart was still huge, and Walmart was expanding Since those two were so much bigger, they weren't able to compete based on price, and that's where the transformation became necessary. It was a pretty big overhaul. In the design stores, inventory improvements, better customer service, they were trying to be seen as a little more upscale, but the part that stands out to me is their increased emphasis on health services. They were already known for their pharmacies and eye care centers, so they made it a point to have them in just about every store, along with eventually opening freestanding optical centers called Vision Advantage. In 1994, they started ProVantage Mail Service, it was a prescription management and mail service pharmacy. Then to build on that, they acquired a business that allowed them to become an all-out pharmacy benefit manager, and then soon expanded to become a vision benefit manager. And if you don't know what those are, don't worry, they get tricky, but it's a huge part of the pharmaceutical industry. Considering this transformation plan, I have to say, not a bad job. They responded to really fierce competition, not by trying to beat them at their own game, but by doubling down on their strengths, and further focusing on what made them unique. I know we're all thinking it, it's Alright, but you can't argue with the results, throughout the 1990s, they just about doubled their sales while steadily adding new stores. In 1999, all of these n Get this, they had 157 stores compared to Shopco's 160, they sold very similar merchandise, targeted lower population areas, even more so than Shopco, and had a pharmacy in 66 of their locations. Shopco's plan was to aggressively expand this chain across the country. I think the reason they were clinging to Pamida was because of their presence and familiarity among these less populated areas. Their research suggested that they were contending with far less competition from these major chains. They were operating an area so small that Walmart didn't even bother with them. So in an attempt to further take advantage of this market, the next year they opened an additional 72 Pamida locations, bringing their total to 229. Combine that with the 164 Shopco'stores, they were getting pretty big. Again, maybe too big. Look at their debt leading up to this. When they bought Pamida in 1999, they ass Then when they expanded it the following year, they added even more debt. It was a very risky strategy and the risk wasn't paying off quite Economy wasn't great, their sales were down, and for the first time, they were posting yearly losses. Management took one look at this and said, wait a minute, the expansion plan is on hold. Over the next few years, they effectively shifted into reverse by actually closing down a few stores and putting all the money that they could toward lowering their debt. In 2005, when the company was looking much healthier, it was bought by Sun Capital Partners in a $1. 1 billion deal. They made a bunch of changes to the business, notably separating Pamida and Shopco in 2007, but then combining them again in 2012 and turning all the Pamida stores into Shopco hometown stores. So that marked the end of Pamida. Let's get to the bankruptcy. In December of 2018, they announced they'd be closing 39 stores, which doesn't sound good. And then it started to look much worse. In January of 2019, when they announced they'd actually be closing 100 stores and filing for bankruptcy. In the bankruptcy filings, they state that they were still a $3 billion a year company, but they had, it's a wide range, somewhere between $1 billion and $10 billion of debt with only $1 billion of assets. Which is a very negative net worth and probably about time to file for bankruptcy. The original plan was to close down some poor performing locations, become a smaller company overall, and hopefully find someone that wants to buy it. Things continued looking worse. In February, they'd say they'd be closing 250 stores, which is about 70% of them. And then in March, they finally announced that they failed to find a buyer and they'd be closing all 363 stores. A bit of good news, I guess, occurred in April when someone bought their optical business, so that'll continue and is really all that exists of SHOPCO. In June, they closed the last of their stores, meaning after 57 years of business, all of these ups and downs and mergers and buyouts, it was all over. The reasons behind all this are tricky to identify. And the fact that it's been a private company over the last 14 years doesn't help things, but let's look at the facts. When Sun Capital bought them in 2005, SHOPCO's debt was $247 million and their assets were $1. 4 billion. At the time of the bankruptcy, that debt was as high as $10 billion, with their assets remaining similar, if not a little lower, around $1 billion. They actually own the exact same now, many have questioned the motives behind Sun Capital. They sort of have this reputation of acquiring companies through leveraged buyouts and then watching them fail. When SHOPCO was acquired in 2005, the deal significantly added to their debt. Then there's this investigation involving dividend payments that they essentially paid to themselves, so a fair amount of that debt could be a result of things Also, consider the fact that SHOPCO is almost the exact same size it was in 2005, right around 360 locations and $3 billion in revenue. Because of 14 years of inflation, that $3 billion is effectively worth less now, and just imagine how much of it is going toward interest payments. Even with their much smaller debt back then, they were paying $34 million each year interest expense and reporting $43 million in earnings. With billions in debt, I can't imagine that interest is allowing them to stay profitable. The reason that Sun Capital seems to cling to in their bankruptcy statements is increased competition, and there could absolutely be something to that. The pharmaceutical industry has gotten awfully competitive, and think of internet sales. From day one, SHOPCO'strategy has been to target those smaller communities that the competition has ignored. Their mentality is that there's not a Walmart for miles, so we'll build a store here and people will be willing to pay a little more for that convenience factor. Well, now that the internet offers another option that's both cheaper and more convenient, it's more attractive. SHOPCO is more convenient than Walmart, but the internet is more convenient than SHOPCO. That would be my best explanation for their stagnant sales, and then you get into the cycle of not having the money to update the stores which hurt sales even more, and combine all these factors, I think it starts to make sense why SHOPCO no longer exists. Let me know in the comments, do you agree with those reasons, or if not, what do you think happened? Have you ever even been to SHOPCO? They never had the greatest reach, but I would almost call it a cult following? Are you one of the people who shop there until the end, or maybe at some point you turn to a competitor? Either way, what's your reasoning for it? And if you're one of the many people that has never heard of this place, was it entertaining to hear about? I think it's a really cool case study, so any thoughts you have about it, leave it in the comments. I'd