So, the inevitable inevitably happened at A&P. Surprised by the bankruptcy? Hardly. Surprised by the timing? Yes. But then, when you can’t pay the electric bill (or to quote the great Willie Nelson and later the recently deceased “Dandy” Don Meredith, the party is over and it really is time to turn out the lights.)
Ever since the once mighty Tea Company went the Chapter 11 route, I’ve heard way too much nostalgia talk about the company’s “greatness,” its iconic status in American retailing and its pioneering methods in shaping this industry. It’s nice to reflect and reminisce, but the truth of the matter is that the A&P train has been running on one wheel for the 36 years I’ve been reporting about the food business, and ever since the disastrous decision to acquire Pathmark (disastrous for everybody but Ron Burkle and his Yucaipa organization) three years ago, not only were the wheels damaged, so was the track.
Sunday, December 12 marked the derailment of the Great Atlantic & Pacific Tea Company. Sure, it might make it back in some revisionist form (we hear that the metro New York A&P bannered stores are the units that management would like to keep), but much like Winn-Dixie, Bi-Lo, Bashas or the now sold Penn Traffic stores, the organization will never get up to full speed again.
Then again, it really hasn’t been at full speed since before any of our readers entered the business, and the last 25 years have often resembled episodes of the Three Stooges rather than a respectable food retailer. Countless management changes, quarter after quarter of poor results, store conditions that were notches below many of its competitors – all being supervised by the Haub family, whose success in Europe obviously got lost in the translation.
There’s lot more work to do before the “new” A&P begins to take shape, The bankruptcy court (judge, trustees and creditors) will have a lot to say about the direction of the company. While some think that Chapter 11 will provide A&P with a “get out of jail free” card, it won’t be that easy.
We estimate that of the approximately 12 pension funds they’re involved with, underfunded liabilities are in the $300 million range. And if A&P (and the court) opts to no longer participate in those funds, the other existing retailers that are also currently in those plans, will have to shoulder increased exposure. Don’t be surprised to see as many as 200 of the 395 current A&P, Pathmark, Super Fresh, Food Emporium and Food Basics units on the block. It’s true A&P has many quality locations in towns and cities that are either geographically protected or too expensive for current competitors to enter. However, until the all parties can actually see what those individual leases hold (time remaining on the lease, renegotiation clauses, continuous occupancy language), some of those “on paper” quality locations may not be as desirable as first perceived.
And how about the store associates? How can this really produce a good outcome? Like scavengers, A&P’s competitors have been scrutinizing its store lists for more than a year, believing a massive store dump or bankruptcy proceeding would happen. That day has come. While the unions will fight this fiercely, the future store owners who either acquire stores directly from A&P (with the bankruptcy court’s approval) or negotiate with a third party if a store is shuttered, will in most instances seek non-union status even if the buyer currently is organized in other parts of their operations.
Now that it’s protected under Chapter 11 status, could A&P choose to withdraw from its pension fund liabilities and create an indirect scenario where the new buyer can open that old facility free from UFCW attachment?
A few more thoughts on the denouement. To “blame” C&S’s unwillingness to negotiate new terms which might have extended the Tea Company’s shelf life a bit longer is laughable. C&S negotiated those terms to protect itself knowing full well the handwriting was on the wall for A&P. CEO Rick Cohen didn’t become super successful by making very many bad deals.
No, A&P can only blame itself. The vibe has been bad for too long now. In today’s environment with a still imperiled economy, overstoring in every market in which A&P operates, and a diversity of retailing styles never seen before in the food and drug business, a 35 year run of ineptitude finally resulted in crashing into the proverbial brick wall.
In the end, the Haub family and Ron Burkle will probably suffer little. They have crafted contractual language that will protect them from the worst.
But there seems to be a small light in the tunnel: after the filing it was announced that executive chairman Christian Haub would no longer be serving A&P in a day-to-day capacity (he remains chairman). That’s good news when you consider that almost every year under Haub’s leadership (he became president in 1994 and CEO in 1998) bore some resemblance to the 1962 New York Mets.
As for the vendors and associates who have loyally served A&P for many years, there are few guarantees. However, I’m not getting a warm and fuzzy feeling that they are going to be happy with their ultimate fate.
But would you expect to get more from a company that’s fumbled, stumbled and bumbled itself into this level of dysfunctionalism over the past 35 years?
Why Supervalu Can’t Sell
Shaw’s And Other Tales Of Woe
Non-disclosure agreements aside, I was interested to read in The Wall Street Journal about Supervalu’s attempt to sell its ailing Shaw’s unit for more than $1 billion, only to find no takers at that price.
According to my sources, the Shaw’s “book” has been on the street for several months and there are several factors why SVU’s New England operation, as well as other sinking divisions, seems to be currently unsalable.
First, the asking price is way too high (the fact that former CEO Jeff Noddle and his team significantly overpaid for the five Albertsons it acquired in 2006 is of little or no concern to any prospective buyer today). With a very challenging economy remaining in New England and competition as fierce and diverse and in virtually every other Northeast market, Shaw’s continues to post poor identical store sales (even cycling off poor numbers), its store conditions are eroding and the morale of its work force is deteriorating. Add to that the expansion of power players Wal-Mart, Market Basket (Demoulas), PriceRite (Wakefern) and the conversion of many Target stores to its p-fresh perishables hybrid, and Shaw’s is the low man on the totem pole and continues to slide down further in every successive quarter.
The WSJ story notes that whatever interest there is in Shaw’s is emanating from the private-equity community, but not at SVU’s current asking price. There is no doubt that the private equity channel has been squirreling away capital for several years, but it, too, has long-term concerns about the once fertile supermarket sector. The “buy and flip” scenario that was so popular in the 1980s and ‘90s is tougher to execute today because of the diverse overstoring and pressure to equate value primarily with retail pricing. Additionally, in the past private equity could always look to a strategic operator to sell to several years after the purchase. When you look at today’s playing field, there are few healthy and viable players remaining who can afford the risk and price of getting into that game.
And of course, it still gets back to the properties themselves. If Wegmans, Harris Teeter, Publix or H-E-B ever became available, you’d see a significant number of suitors (both financial and strategic) lined up at the door.
But in the case of Supervalu, every property it purchased from Albertsons – Shaw’s, Acme, Jewel and the two Albertson’s banners on the West Coast – is suffering from the same malady with symptoms that include the aforementioned physical plants, declining morale at store level and a “go-to-market” strategy in which high everyday pricing (compared to the competition), bland merchandising and a reduction in variety have consumers buying less and making fewer trips to any of those Albertsons units. And you can add Shoppers and Farm Fresh (two divisions that were part of Supervalu before it acquired the Albertsons “crown jewels”) to the list of declining performers.
Supervalu’s third quarter earnings will be released on January 11. With the stock now in the $9 per share range, there are no indications on my radar to believe that ID sales, customer counts and transaction size won’t continue to track in the deep negative zone.
You’ve also got to wonder, either as a shareholder or an analyst, how long SVU’s board will continue to have confidence in current CEO Craig Herkert, who in May will have been Supervalu’s chief executive for two years.
As I’ve said numerous times, Herkert inherited a very difficult situation; but his “leadership” ability in his 20 months at the helm has only made the company less viable and valuable.
Something’s got to give. Soon.
‘Round The Trade
Several reports indicate that Fresh Direct, the metro New York based online grocer, is seeking to raise $200 million to expand its base into the Baltimore-Washington market. While it has been mainly unprofitable in its 10 years of operation, Fresh Direct is a significant factor in the borough of Manhattan and operates in New York City’s four other boroughs as well as in other suburban counties in New York and New Jersey, The company is led by Rick Braddock, who replaced veteran grocery industry executive Steve Michaelson. Michaelson recently left Supervalu to become CEO of vegetable processor GreenLine Foods…you shouldn’t be surprised that Wal-Mart took such assertive action in trying to block Hank Mullany’s move to CVS where he would become president of its drug unit. Hank was a big hitter even in a huge company like Wal-Mart and clearly they didn’t want to see him go, much less wind up with a large retailer they deem a competitor. A Delaware Chancery judge reaffirmed an earlier injunction on December 15 and now the whole issue will go to trial on March 15. My bet is that a compromise will ultimately be reached, but not for awhile…don’t underestimate Wal-Mart’s potential interest in some A&P stores if they become available. At 35,000-50,000 square feet, many Super Fresh and Pathmark locations would seem to fit Wal-Mart’s “smaller format” needs. More Wal-Mart news: the U.S. Supreme Court has agreed to hear Wal-Mart’s appeal of the gender bias class-action suit which alleges that the Bentonville, AR merchant discriminated against hundreds of thousands of women in pay and promotions. The high court will review whether the 10 year old lawsuit justifies class action status, which if allowed to stand, could cost Wal-Mart several billion dollars…premium priced Fiji Water almost had a real dilemma on its hands. It seems that political instability and rising taxes on the Polynesian island nation caused the company (owned by entrepreneurs Lynda and Stewart Resnick of Pom Wonderful and Paramount Farms fame) to consider shutting down its bottling operations. A last minute compromise was reached and bottling operations will continue in Fiji. But what would have happened if no resolution was reached? Perhaps an unforgettable new name and a new water source. Something like Piscataway Water. As a future contingency plan, it’s kinda catchy, don’t you think?…the A&P sale-a-thon should be interesting, given a still tight money market, many underwhelming locations and a limited number of potential buyers. While I expect Ahold and Wakefern to be aggressive hunters, they both are potentially limited by store overlaps. And, as for possible newcomer heavyweights such as Kroger (doubtful) and Delhaize (a small possibility to expand its Food Dollar unit), I wouldn’t go to the $20 window and make either of those bets…the Food Marketing program at St. Joseph’s University will be hosting its 5th annual Food Summit on March 10 at the school. It’s another heavyweight panel including Carl Schlicker, COO of Ahold USA; Dan Sanders, president of Acme Markets; Rick Brindle, customer VP for e-sales and industry affairs for Kraft; J.M. Procacci, Procacci Bros.; and Mike Webster, senior VP and GM of NCR’s retail group. This year’s topic will be “Sales and Profit Growth through Direct Marketing, Social Media and E-Commerce.” And on the undergraduate side at the Academy of Food Marketing, a tip of the hat to executive director Bob Higgins. The former Scott and Irving Tissue executive, who’s been at the helm for about 15 months, is really shaking things up in a positive way. Recently, AFM’s board was partially reorganized and six new members were added including: Dave Jones, VP-industry initiatives at Kellogg; Robert Hill Jr., president and CEO of Acosta; Jeff Brown, CEO of Brown’s Super Stores (ShopRite); Jeff Martin, executive VP-merchandising and marketing at Ahold USA; and Tom McAloon, regional GM for Wal-Mart. We’ll have more next month about how Higgins is trying the reshape and revitalize a very important ancillary partner, which is now the largest food and drug industry academic training ground in the country.
Local Notes
It appears that Mars will be acquiring the former Super Fresh unit on Route 1 in Bel Air, MD. That store has been closed for nearly two years and is one of more than 20 Super Fresh units that A&P had packaged for sale several months before the Chapter 11 announcement. In my opinion, the best three Super Fresh units in the Maryland and Delaware markets are the company’s locations in Rehoboth Beach, DE, Timonium, MD and its store on 4th St. in Baltimore City. As with Supervalu, the Tea Company is asking too much for many of its sites, given the realities of the current marketplace. Maybe an auction process under the Chapter 11 umbrella will help garner more action. In the timing is everything department, Harry Giglio, has resigned his post as senior VP-perishables at Weis Markets to join A&P as its top man in meat and seafood. Harry’s one of the best meat/seafood executives I’ve ever met, but regardless of a hefty signing bonus and increased compensation, you’ve got to wonder about career choice in this instance…in other Supervalu news, the company has sold its Total Logistic Control division to Ryder in a stock purchase agreement. in a stock purchase agreement. The sales price was not disclosed. Additionally, Sherry Smith, who was named interim CFO after the resignation of long-time chief financial officer Pam Knous in July, has been installed as permanent CFO and also becomes an executive VP of the (Little House on the) Eden Prairie, MN based retailer/wholesaler…Marty Margherio, president of Farmland Dairies, and one of the real good guys in our business, is going to hang up his hat at the end of the year. Margherio led Crowley Foods for many years and helped rebuild Farmland from bankruptcy in 2005. CFO Terri Webb, who has worked with Marty for many years, will take the helm as president- national brands. We wish Marty the best of luck in his future endeavors…also a tip of the hat to Lynda Williams, who recently retired after 40 years with UFCW Local 400 based in Landover, MD. Williams served as administrative assistant to five Local 400 presidents – Rex Clifford, Ray Chilton, Thomas R. McNutt, Jim Lowthers and Thomas P. McNutt – before calling it a career. I can attest that Lynda was one of the most capable of all admins in any facet of the grocery business and hope her retirement days are as filled with happiness and productivity… in financial news from the drug sector, Walgreens reported that its first quarter profit increased 18.6 percent for the period ended November 30. Prescription sales generated about two-thirds of Walgreen’s total revenue, which grew six percent. Comp store sales increased 0.9 percent. On the opposite end of the financial spectrum sits Rite Aid Corp. In its third quarter, ended November 27, the Camp Hill, PA merchant posted a loss of $79.1 million, a modest improvement over last year’s $83.9 spillage (isn’t it so not witty when the news release states that the company has “narrowed its loss”). Total revenue also declined 2.36 percent to $6.2 billion and same store sales decreased 1.3 percent. One company that has a huge investment in the grocery industry and deserves a shout out is United Natural Foods, INC. (UNFI). The Providence based distributor surpassed the quarterly billion dollar sales mark for the first time in its recently completed first period ended October 30. UNFI’s total sales jumped 19 percent in the quarter and earnings increased $1.9 million – 12 percent – to $17.4 million. Although it may have cut its teeth in natural and organics with Whole Foods (which remains a dominant customer), UNFI has broadened its retailer base and proven itself as a very tough competitor in the specialty and ethnic portal, too…on the brokerage front, Star Sales & Marketing, which is part of the Star/ProStar Group, has relocated its B-W office. The company’s new address is: 898 Airport Park Rd., Suite 109, Glen Burnie, MD 21061. Phone: (443) 557-1006…I’d like to be the arbitrator in the Kraft-Starbucks dispute involving the Seattle firm’s 12 year old grocery store arrangement with the food giant. Starbucks claims that Kraft has neglected the brand and wants to unilaterally terminate the agreement, while Kraft insists the arrangement can only end if its is bought out (at a premium) by the large coffee producer. I’d pay to see Starbucks CEO Howard Schultz in court…I was very sad to hear of the death of Hall of Fame pitcher Bob Feller. “Rapid Robert” was the one of the game’s best overall hurlers, winning 266 games during an 18 year career, all with the Cleveland Indians. His record undoubtedly would have been even better if he hadn’t missed four seasons during World War II. I had the pleasure of meeting Bob Feller more than 30 years ago in Buffalo (he was helping his buddy and fellow pilot, food broker Jack Bradigan at a food show). A nicer, more humble man you could never meet. Born in Van Meter, IA in 1918, Bob Feller was truly an American hero. Also passing on was Claude Broome, executive chef at Guest Services, the large hospitality firm based in Fairfax, VA that also owns Lancaster Produce. Broome was only 49 and leaves behind a wife and two daughters. We pass along our condolences.