Grocer Haggen files for bankruptcy and replaces executive after failing to win over shoppers

After struggling for months, grocer Haggen Inc. filed for bankruptcy protection and replaced the executive in charge of the chain’s ambitious expansion into California, Nevada and Arizona.

The Bellingham, Wash., grocer said Wednesday that Bill Shaner, a top company executive in charge of the Pacific Southwest region, was no longer with the company. Shaner had been with Haggen since December, when the supermarket chain announced that it would expand beyond its Pacific Northwest roots.

Chief Executive John Clougher “will lead the company going forward,” Haggen said in a terse statement. Clougher was not made available for an interview.

Haggen has been floundering since paying what analysts estimated was more than $1.4 billion for 146 Albertsons, Vons, Pavilions and Safeway grocery stores, including 83 in California, mostly in the southern part of the state. Albertsons and Safeway were ordered by federal regulators to divest those locations last year as part of their merger.

With one bold stroke, Haggen expanded from an 18-store chain in the Pacific Northwest to a regional West Coast player. The company spent the early part of the year converting its new stores to the Haggen brand, promising high-quality meat, seafood and organic produce at low prices.

But Haggen failed to win over customers, some of whom complained that shopping at the stores was more expensive than at the chains they replaced.

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Haggen started cutting employee hours and laying off workers, citing “unprecedented” competition in the Southwest. Then, last month, Haggen said it would close 27 of its locations, including 16 in California.

Analysts say the chain underestimated its competition and failed to anticipate the many alternatives Californians have when it comes to food shopping.

The Southern California grocery landscape is dominated by stalwarts such as Ralphs, which controls 18.5% of the business in Southern California and Las Vegas with 368 stores, and Vons, which holds 15% of the market with 267 stores as of May, according to the Shelby Report, a publication for the food and grocery industry.

In addition, retailers including Wal-Mart, Target and even 99 Cents Only have been adding food to their shelves. Wal-Mart has 10.6% of the market with 130 stores.

“Typically where there’s a conversion to new stores, competitors can get increasingly aggressive in price and promotion, making it much more challenging for a new store operator,” said Burt Flickinger III, managing director of consulting firm Strategic Resource Group.

David J. Livingston, founder of supermarket research firm DJL Research, pointed to the company’s previously small-scale operations and limited resources as poor preparation for its extensive West Coast expansion.

“They were just clueless from the very beginning,” he said. “You couldn’t do worse than what they’re doing.”

Late Tuesday, the company said it had filed for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court for the District of Delaware. Haggen said it had received as much as $215 million in financing commitments from its existing lenders to keep its operations running.

Clougher said Haggen decided that reorganizing under Chapter 11 was “the best way for Haggen to preserve value for all stakeholders.”

“The action we are taking today will allow us to continue to serve our customers and communities while providing Haggen with a process to realign our operations to be positioned for the future,” he said in a statement.

Haggen, which expanded its workforce fivefold to 10,000 employees this year, did not specify how many employees would be affected by the Chapter 11 filing. The company said it was seeking court approval to “continue employee wages and certain benefits.”

Rick Icaza, president of United Food and Commercial Workers Local 770, called the bankruptcy filing “devastating” for the chain’s workers.

The union has filed grievances with Haggen, Vons and Albertsons alleging that the recent layoffs and reduced employee hours violated a collective bargaining agreement.

“Rather than doing the right thing, Haggen is fleeing the field,” Icaza said in a statement.

The news took customers by surprise at a Burbank Haggen. Several shoppers said they have come to like the store but noted that prices are higher than at other supermarkets.

Bob Gilbert, 60, shook his head in disbelief when he heard the company had filed for bankruptcy. Gilbert said he often stops in the store for his morning fruit.

“Unbelievable,” he said. “Companies go into bankruptcy for a slew of reasons. It would be a shame to have one less choice.”

Another shopper said he thought the prices were too high.

“If I have a lot of shopping to do, I won’t shop here,” said Burbank resident Joe Schneider, a 56-year-old law clerk.

The bankruptcy is one more dramatic turn in months of turmoil for Haggen, which is majority owned by the Comvest Partners investment group.

Haggen sued Albertsons this month for what it said were “systematic efforts” — without specifying what they were — to eliminate Haggen as a competitor in five states. It said the rival chain started engaging in these efforts shortly after selling its stores to Haggen. Albertsons denied Haggen’s sabotage charges.

The lawsuit followed a legal salvo launched by Albertsons, which accused Haggen of fraud for failing to pay $41 million for inventory it had acquired in the new stores.

Follow Shan Li on Twitter @ByShanLi

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