The Waters Get Murkier For A&P, Supervalu

“…However, there is uncertainty regarding whether our company can complete all or a portion of these efforts and, if these do not occur, there is substantial doubt about our company’s ability to continue as a going concern.”

If you guessed Edsel Ford uttered those words more than 50 years ago, you’d be wrong. No that sentence came from A&P’s recently released 10-Q filing. And for the first time, since its downward trend began 30 years ago to its death spiral since it acquired Pathmark In 2007, the Great Atlantic and Pacific Tea Company seems to be admitting that it is no longer “great,” but preparing for its own potential funeral.

But what’s left to dissect? Each successive quarter seems to be worse than one that preceded it or the corresponding period the year before (and that’s cycling off a long streak of bad sales and earnings – what’s worse, losing $781 million last fiscal year or posting severely declining metrics in every measurable category, quarter after quarter.

This recent period, its second quarter which ended September 11^th, produced an almost unbelievable box score – overall sales down $200 million; comps decreasing 6.6 percent; an operating loss of $143 million, and the fact that it only has $181 million in operating cash and a debt of more than $1.4 billion.

New CEO Sam Martin seems to understand how dire the situation is. And while another new management team, another potential financial restructuring (unless the Haubs of Tengelmann and Ron Burkle of Yucaipa want to further invest in their own stuffed animal, don’t expect much measurable change) and another “new” merchandising plan recently have been or shortly will be unveiled, who really believes the once iconic supermarket chain with 151 years under its belt, can survive in any form related to its great past.

Sure, A&P has some outstanding real estate to proffer at an auction. But how much in terms of real dollars will it cost a prospective buyer, when considering if certain leases are assignable, how much time is left on each lease and whether the buyer will have to renegotiate with the landlord, all factors which will make many “plus location” opportunities difficult or more costly.

With capital still tight and fewer players in the game (including the possibility that private equity firms might sit this out), onerous labor contracts and several underfunded pension plans, there is no guarantee that a bankruptcy followed by an auction/liquidation would be as fruitful as some think.

At Supervalu, although the patient’s financial health is better (liquidity is not a concern at this point, and the retailer-wholesale is still profitable), the trend line is almost as scary and the company’s leadership remains in question.

Once again, I listened to CEO Craig Herkert’s conference call, I read and re-read the transcript and I’ve got to wonder where his sense of urgency is. As I’ve stated before, former CEO Jeff Noddle and his team created much of this mess, but Herkert, who’s now been running the ship for 18 months, has only exacerbated the problems. In the past few months, although the numbers haven’t improved, there have been two key change agents. One occurred in late August when SVU’s share price tumbled below $10 per share (it closed at $10.83 on October 28).

The other change was more subtle. After Supervalu released its first quarter earnings in June (lowlighted by an industry worst negative 7.2 identical store sales), the financial analysts began to change their tune. Instead of further buying into Herkert’s rhetoric that placed many of the company’s problems on “economic headwinds” while spinning a new web of process driven initiatives (“SHE,” “WWP,” “America’s Neighborhood Grocer”), the metrics trend and falling share price have made Wall Street (as well as SVU associates, many of its vendors and other analysts), question the ability of its chief executive to actually execute a plan that would be creditable with consumers and achieve at least a little forward momentum.

And of course, lowering earnings and ID sales guidance in mid-stream is also a guaranteed way to irritate the money watchers.

Instead, when Supervalu’s second quarter results were announced on October 19^th, ID sales slid to negative 6.4 percent (compared to 4.8 percent in the corresponding period last year) and the company lost a whopping $700 million in retail sales.

After playing “rope-a-dope” with its pricing strategy since he took office in May 2008, Herkert finally acknowledged that price cuts are needed due to “unfavorable value perceptions.” Those “unfavorable perceptions” should not have comes as an epiphany to Supervalu; they should have been visible in 40 point type the day Herkert took the job. To enter the price game now (and we don’t know to what extent the reductions will be) indicates to me that he doesn’t realize that ship sailed a long time ago (or is this still more rhetoric?).

Commenting on the wretched second quarter performance, Herkert stated, “…as the company moves into the next phase of its business transformation, we remain focused on our customers and taking actions that will better meet their needs. I remain confident that we have the correct strategy in place to achieve long term success.”

Exactly what is that strategy and how will it improve the sharply declining results?  Achieving “backroom efficiencies” by whacking head counts, going way overboard with SKU reductions and forcing out key managers (and replacing them with untested or less skilled executives) hasn’t changed anything that the company can tangibly say has increased its most important measuring sticks – sales, earnings, customer counts, or transaction size.

If I were a Supervalu director or financial analyst, I’d like the chief executive to cite one example where the needle has moved forward in a manner that shareholder’s should feel good about today.

And by the way, where is Supervalu’s board on all of this? You’re paying your CEO millions of dollars a year and the results are awful. Intangibles at store level, such as morale, continue to erode; there is virtually no money at the division levels to invest in real estate or pricing initiatives, and several sources have told us that Supervalu is asking for a small fortune for its stores, many of which are too small, too old and saddled with challenging union issues.

Hey, the entire scenario is daunting and Herkert should not absorb all of the blame. Debt remains at $7.1 billion and virtually every facet of the company’s business is lagging. Spin and process aside, the time has come to change the plan.

If Supervalu is going to retain and grow its best assets – Save-A-Lot, Jewel and wholesale (supply chain) – then it’s time to dump the other banners – even if it means doing so at fire sale prices. The retailer/wholesaler simply can’t continue to operate in “stagger mode” for much longer.

And as an extremely well paid chief executive (especially when you analyze compensation against performance), its time that you, Craig Herkert, demonstrate to your associates and your shareholder’s that you’re capable of making potential game changing decisions, no matter how large and painful they might be.

It’s SVU’s only hope.

ShopRite Makes A Statement

In Glen Burnie, MD

Wakefern’s expansion into Maryland is not exactly breaking news, but when Larry Collins and his family opened his fourth ShopRite (and first in Maryland), it truly gave competitors a true example of what independent supermarket ownership combined with a savvy supplier can accomplish – the Wakefern way.

Not to take anything away from the Klein family, Wakefern’s first Maryland member who joined the co-op in 2008, but those stores did not fit the same size and volume profile as many ShopRite units did in New Jersey, Pennsylvania and New York. Even with those physical challenges, the combination of Wakefern’s skill and Klein’s talent helped the Harford County merchant achieve its highest annual sales in its 85 year old history.

The Collins family store is designed to give every major competitor (Giant, Shoppers, Lauer’s) in that sector of Anne Arundel County a major headache with the exception of Wal-Mart, which currently operates one of its highest volume SuperCenter in nearby Severn, MD (about five miles away) and is converting its “division one” store on Ordnance Rd. in Glen Burnie to a combo unit.

The new Collins’ ShopRite encompasses about 80,000 square feet (the site was a former Kmart unit) with a heavy emphasis on perishables. It’s clearly a “service” store (which Larry Collins believed was important to offset Wal-Mart’s strong price image, but Wakefern’s magical high/low merchandising plan offers plenty of low retails, especially in the number of promotional items that are featured.

Wakefern has been kicking the tires in Maryland for at least a decade. Unlike other areas of the Mid-Atlantic, there are no other existing independent groups that could be easily converted into turnkey membership. That might have been an issue a decade ago, when Wakefern operated more a higher percentage of corporately owned SRS stores, but the Keasbey, NJ wholesaler has plenty of retailers from which to draw.

And like Collins, other existing ShopRite members from more northern environs are positioned to move into Maryland and Virginia if the right locations can be found (did I hear Jeff Brown’s name being bandied about?). With a relatively new distribution center (more than one million feet in size) based in Pennsylvania’s Lehigh Valley, expanding to the south will not present a challenge for Wakefern, either. And with its extreme value corporately owned PriceRite stores in its arsenal (there are 41 PriceRite currently operational in Pennsylvania, Connecticut, Rhode Island and Massachusetts), Wakefern has another powerhouse model to work with.

Much like Harris Teeter’s entry into the market a decade ago, Wegmans debut a few years after that, I’d be betting on the ShopRite banner to become a significant new factor in the Baltimore-Washington market over the next five years.

Local Notes

Along with the new Collins’ Shop Rite in Glen Burnie, our other “store of the month” is the new Wegmans store in Woodmore (Largo), MD. Opening week sales were very strong at the 130,000 square foot unit. To this reporter, this location is a fascinating test of sorts. While the population density within a five mile radius is very strong, the demographics are clearly different than Sterling, VA; Hunt Valley, MD or Malvern, PA (or any of the retailer’s new Mid-Atlantic units). While Prince George’s County has been growing and the Woodmore site offers one of the most upscale locations in the county, the five mile demographic view encompasses less affluent consumers. And that begs the question as to whether customers from Annapolis, Montgomery County or Northwest D.C (which better fit the usual Wegmans consumer profile) will travel to Woodmore to shop. Time will tell for this beautiful store…another nifty new store can be found on Lititz Pike in Lancaster, PA. That’s where Giant/Carlisle opened its new replacement store and what an engineering achievement it was. About 35,000 square feet of “new” store was added over the past 16 weeks, while the adjacent original space remained open. The melding of the two pieces coupled with a spiffy overall décor package will certainly help Giant’s market share in one if its most underserved areas of Central PA. One more thing about Giant/Carlisle and Ahold USA. It’s been no secret that some vendors are frustrated by whet they believe is slower than expected progress on the organizational restructuring which began just about a year ago. Some have also expressed concern that that final version might end up resembling more of Stop & Shop’s model than Giant/Carlisle’s. Both CEO Ahold USA-Retail (and soon to be COO of the entire Ahold US platform) Carl Schlicker and executive VP of sales and merchandising Jeff Martin not only agreed to an interview during a very busy and transitional period, they answered every question open and honestly. No spin, no sugar-coating, no dodging and weaving – that’s not only refreshing for any reporter to hear, but it’s becoming unusual in an industry that often features executives who are inaccessible or who have become top notch spinmeisters…one of Ahold USA’s primary competitors, Weis Markets enjoyed another solid quarter as it continues to upgrade its stores, personnel and systems. The Sunbury, PA merchant posted a 4.9 percent earnings increase in its third quarter ended September 25. Overall sales grew by 2.7 percent while comps increased 0.1 percent. “We continue to produce solid earnings increases in a slow growth environment that continues to be affected by cautious consumer spending,” said CEO Dave Hepfinger. “We attribute our results to continuing operational improvements at store and distribution levels, increased efficiencies, improved cost controls and disciplined marketing and advertising.”…it looks like the government is finally making some headway in its antitrust suit targeting Visa, MasterCard and American Express and their practices of charging usurious fees to their customers. Visa and MasterCard recently reached a settlement with the Justice Department (which still needs court approval). Through the settlement, merchants could offer their customers an immediate discount (or rebate) for using a specific type of payment that would potentially be less costly (for example, debit card vs. American Express). American Express did not settle and plans to continue to fight the antitrust suit. According to Leslie Sarasin, CEO of FMI, “This is a monumental development for supermarket retailers and most importantly, their customers. Supermarkets have been prevented by credit card companies from accepting less expensive forms of plastic, ones that do not require the merchant to pay excessive fees just for the privilege of accepting a particular card, thus essentially preventing competition. We believe this is a positive development when Justice Department action, supported by seven state attorneys general, mirrors legislation passed by Congress and intended to benefit consumers.” She speaks the Gospel…while private equity firms (which still have plenty of capital at their disposal) don’t seem very interested in any retail deals that may be on the table, according to Bloomberg, their priority might be on the manufacturing sector where Sara Lee, Clorox and ConAgra could be targets…unable to sell many of its Farmer Jack stores in the Detroit area after it withdrew from that market in 2007, A&P has decided to stop paying rent on 27 stores whose lease value is estimated at $150 million. Of course, there have been a slew of lawsuits stemming form the “stop payment” decision, but in truth, what else could the Tea Company do? When you’re in the fourth quarter and your team is losing 31-10 with three minutes left on the clock, you’ve got to pull out all the stops in order to try to survive. While the Farmer Jack rent default plan might not lead to A&P’s survival in the end, at least CEO Sam Martin and his new team are making moves to cut its losses to try to enhance (if ever so slightly) its consumer perception.  At Supervalu, it’s more musical chairs. Bob Gleeson, who was Shoppers’ senior VP-merchandising, until he left a few months ago to accept a similar job at Acme Markets, is back at Shoppers at his old post. His new boss will be Tim Lowe, who first came to Shoppers in 2008 as senior VP-operations, only to leave earlier this year for a short stint at Burlington Coast Factory. With Dick Bergman’s recent retirement as president of Shoppers, Lowe has returned. Meanwhile, Acme is now looking for a new merchandising chief, whose primary job it seems would be to serve as executive liaison to implement the chain’s less than crackerjack SuperFusion merchandising plan. Yes kiddies, “who” was on first and “what” really was on second! While Safeway’s recent third quarter report continued a recent trend of slightly missing its mark, the retailer’s struggles in the Delaware Valley with its Genuardi’s unit, continue. The company recently closed its Lansdale, PA store, marking the fifth Genuardi’s unit to shutter this year (Glen Mills, PA: Newtown Square, PA; Chesterbrook, PA and Voorhees, NJ) and one wonders how much more shelf life Genuardi’s has in a very, very overstored and competitive market. You would think that by being non-union alone, that some of the Genuardi’s locations would be of interest to other retailers, especially when compared to the Philadelphia area two other wayward retailers – Acme Markets and A&P/Pathmark…I visited the new Bottom Dollar store in King of Prussia, PA a few days after it opened on October 8 and came away pretty impressed. The 19,000 sq. ft area is a much better fit than the larger Maryland and Virginia stores, which were converted Food Lions. The refrigerated walk-in produce was nice touch and the store had many more SKUs (about 7,000) than the typical extreme value store. And while it utilized Delhaize’s Hannaford brand as its private label offering, there was much more national brand variety than at Bottom Dollar’s extreme value competitors. What I found lacking was a less than resounding merchandising/signage effort to promote price. That left me with a feeling of a store still trying to find its identity. It won’t be easy for Bottom Dollar, which is being supervised in the Delaware Valley area by Don Ciotti, the Genuardi’s and Safeway veteran, because of the ferocity of competition in the overall market and the already existing presence of extreme value retailers Save-A-Lot, Aldi and PriceRite. In late October, Bottom Dollar opened two more Keystone state units in Coatesville and Downingtown, and plans about 20 stores for the region…C&S is expanding its business, this time in the independent sector. The Keene, NH wholesaler, who will shortly oversee Giant/Landover’s Jessup, MD distribution, has been named primary supplier for two key accounts – the 66 store Foodtown group based in Iselin, NJ and more recent
ly, Carl Greeley’s three store Geresbeck’s/Box ‘n Save operation based in Baltimore… a few deaths to report this month, most notably from the world of television. Departing the planet recently was Stephen J. Cannell, writer and producer of so many popular TV series including, “The A-Team, “The Commish,” and “Wiseguy” (a precursor to what many of us enjoyed about “The Sopranos.”). But Cannell’s talent is most fully realized in his creation of Jim Rockford (James Garner) in his biggest hit show, “The Rockford Files” (1974-1980). Garner played the title role as a sometimes hapless, but highly intuitive private investigator to perfection. One of the best TV shows of all time played by one of the best comedic actors of the past 50 years and created by one of the most prolific writers that the medium has ever produced. Cannell was 69. Also passing away was Barbara Billingsley, who played All-American mom June Cleaver in the iconic 1950s TV series “Leave it to Beaver.” Billingsley 94, also had a hilarious role an equally hilarious film, “Airplane (1990).” For brevity’s sake, let’s just say she was fluent in “jive.” Another household name in television sit-coms, Tom Bosley, 83, has also passed on. As Howard Cunningham in “Happy Days,” Bosley provided the voice of reason to his son, Richie (Ron Howard) and friends during the booming 1950s in Milwaukee. But Bosley’s career encompassed a lot more than his 11 year run on the show. He acted for 55 years and won a Tony award in 1959 for his portrayal of former New York City Mayor Fiorello LaGuardia in the play “Fiorello.” And could it be that “Danno” is dead?  It is sad to report that James MacArthur, who played Detective Danny “Book ‘Em Danno” Williams on “Hawaii Five-0,” has died. It is somewhat ironic that one of the most popular characters of the late 60’s and 1970s, has been reborn in a new TV version of  the show, which is now the  most watched new series in this fall’s lineup. MacArthur, 72, was the son of one of America’s greatest actresses, Helen Hayes. Finally, it is with a heavy heart to note the passing of Alex Anderson. Never heard of Mr. Anderson? That wouldn’t be unusual, but you’ve certainly heard of the characters he created – most notably “Rocky” (Rocket J. Squirrel) and “Bullwinkle” (Bullwinkle J. Moose) who were the centerpieces of arguably the funniest and most avant-garde cartoon series of all time, which first appeared in 1959.