Taking Stock

Yucaipa Ready To Say Sayonara To A&P?

Another “sales exploration,” another potential sale (or in this case, a possible asset dump for a continually eroding once iconic franchise). Yes, it appears that Yucaipa Cos.’ ownership of the (once) Great Atlantic & Pacific Tea Company may be extremely short-lived.

Sixteen months after the large California-based private equity firm took full control of A&P, the option of selling the company is indeed on the table as outlined in a memo by Tea Company chairman Greg Mays. According to the memo, “…future growth requires constant capital investment in our stores, our infrastructure and our people. Accordingly, having made significant progress in improving the financial foundation of the current business, A&P is now in a position to consider strategic future growth plans that will focus on raising new capital to meet those investment goals. Our goal is to ensure that the company is well-positioned for future success that will benefit A&P, our associates, partners, suppliers and customers – and we will ultimately pursue what is the best possible course for all constituents.” The memo continued, “Indeed, it is possible we will decide not to pursue any of these alternatives and will instead choose to simply capitalize our growth plan at a slower pace from internal free cash flow. While it’s premature to speculate on the exact outcome of the strategic review process, we want to be clear that this financial initiative is the first step toward building a stronger future for our business.”

My translation: the company no longer wants to self-feed its declining assets, would consider some outside financial aid, but most likely hopes to sell the company intact to a single buyer.

Mays’ comments cover Yucaipa’s “foundational” issues (leveraging better labor and distribution contracts as well as negotiating more flexible banking agreements), but curiously make no direct mention of what the trade and A&P’s declining consumer base experience on a daily basis: the stores still operate in below par fashion and A&P’s market share continues to dwindle on a quarterly basis.

Where was the investment in enhancing the physical plants, in improving the morale of the associates, and in upgrading its merchandising and marketing programs? Following its exit from Chapter 11 in March 2012, we heard the hoopla from Yucaipa about the capital they would spend to improve A&P – investing in its people and improving its physical plants – which would ultimately yield greater revenue and profits. The UFCW bought into the rhetoric, agreeing to major financial and benefit concessions so that A&P could be in a better situation to survive and ultimately prosper.

When the clerks and meatcutters went back to the table after a year to seek some givebacks, their requests fell upon deaf ears. And if you are going to detail the entire management turnover in the past eight months, you’d better get a big scorecard. On almost every visceral level, A&P has failed and continues to fail. Yes, it’s possible that Yucaipa could find another financial partner to fund A&P’s future, but to do so, it would certainly have to give up some real estate equity (which is what this deal was all about anyway). It’s even possible that, at a fair price, one outside buyer could acquire the entire organization from Yucaipa.

However, without control of A&P’s prized real estate, the value of the Tea Company is greatly diminished. Purely on store performance, who’s going to buy a retailer where more than 50 percent of its store base is considered non-competitive (on several levels – size, innovation, modernization, perishables, etc.)? A new buyer could upgrade A&P’s non-descript pricing image, its vanilla advertising and merchandising programs, while possibly improving morale if a more focused and passionate owner acquired the stores. But A&P has absorbed so many battle scars (many self-inflicted), that the stores by themselves have declining value.

Sure, sweet spots remain (particularly in Bergen County, NJ and the Lower Hudson Valley of New York) where ShopRite doesn’t have the same level of penetration it does in most of the other areas where A&P operates. But it’s not just ShopRite. Wegmans, Wal-Mart, club and drug operators are taking their share from the second tier operators and for the past 30 years it’s been a feeding frenzy at the expense of A&P, even more so since Yucaipa gained control.

We expect a prospectus to be issued in the next few weeks and then we should quickly learn the extent of the bidding process. My guess is that A&P is not saleable (if Yucaipa goes in that direction) as a single entity. So, the usual players are expected to get involved – Ahold USA and ShopRite, which because of store overlap issues would not be able to acquire the whole chain (nor do I suspect they’d want to). The recent speculation that Kroger would take a run at A&P just doesn’t sound logical, given its recent acquisition of Harris Teeter coupled with the less than stellar condition of A&P’s stores (not to mention the huge investment it would take to make them competitive) and the several underfunded pension plans that would have to be dealt with. This is shaping up as a combination multi-store sale (to several large players) and an auction in which smaller groups of units or even individual stores would be moved. The real world picture for Yucaipa currently is much different than its halcyon days when it sold Fred Meyer to Kroger for more than $13 billion in 1999 or even when it unloaded Pathmark (to – who else – A&P) at a tidy profit in 2007.

And one more thing to consider: about two years ago, we predicted that the Delaware Valley-Metro New York corridor would be facing significant reconfiguration, given shifting market conditions fueled by the poor economy combined with heightened and diverse competition. First to leave was Genuardi’s, which had a smaller store base (about 30 stores) and a non-union operation.

We’ve been told by several sources, per its banking agreements, that private equity firm Cerberus Capital Management, which owns struggling Acme Markets, can’t divest key assets for 18 months after its acquisition

of Supervalu (another real estate-driven deal that was separated into two pieces). If that’s the case, and Cerberus ultimately wants to sell operating divisions or large blocs of stores, A&P’s decision to potentially “get out of Dodge” before September 21, 2014, would be a prudent one.

Because, among weak sisters, being the last man standing ain’t such a good thing.

‘Round The Trade

UFCW Local 152’s clerks and meatcutters at 15 South Jersey ShopRite units late last month ratified a new 16 month contract (another short-coded agreement due to the still unclear direction of the Affordable Care Act). The new pact, which covers about 2,500 workers, was agreed to after three months of negotiations between the union and Wakefern. The new deal includes a boost in wages and an increase in pension contributions by the retailer while health benefits that do not require cost-sharing by the members are maintained. “These were painstakingly difficult negotiations because of the uncertainties surrounding the Affordable Care Act,” said Brian String, president of the Hammonton, NJ-based UFCW Local. “Fortunately, both the union and the company were willing to roll up their sleeves and work on a solution. Maintaining the workers’ excellent health benefits was the primary concern of the union’s lead negotiating team and a 20-member negotiating committee of rank-and-file ShopRite

members. That was our goal and I’m proud to say we accomplished it. The absence of cost-sharing makes this contract one of the last of its kind in the industry. We did everything we could to continue the strong benefits

package for members,” he said, noting that ShopRite agreed to increase its health and welfare contributions by 19 percent over the course of the contract. On a broader scope, the UFCW International is reaffiliating with the AFL-CIO after an eight-year break with the national labor federation. “We join the AFL-CIO because it is the right thing to do for UFCW members, giving them more power and influence,” said UFCW president Joe Hansen. “This is not about which building in Washington, DC we call home – it is about fostering more opportunities for workers to have a true voice on the job. Attacks on workers brought the UFCW into direct strategic partnership with the AFL-CIO and made it clear it was time for the UFCW to redouble our efforts to build a more robust and unified labor movement.”…great move by Newark, DE-based Produce Marketing Association (PMA) last month when it hired ex-Food Lion president Cathy Green Burns as its new president. She will report to PMA CEO Bryan Silbermann as the growing trade organization seeks to continue the dynamic growth it has achieved over the past decade…several quarterly financials to report: at Weis Markets the good news is that the Sunbury,

PA chain produced a 4.2 percent increase in its second quarter net income compared to the same period in 2012 and its earnings per share increased $0.04 to $0.90 during the quarter. During the 13 week period ending June 29, 2013, the company generated $24.2 million in net income compared to $23.2 million in 2012 while operating income increased 6.5 percent to $37.6 million. The not so good news: Weis’ second quarter sales declined 2.2 percent to $662.1 million, compared to $677.1 million in 2012. Second quarter comparable store sales were down 4.8 percent.”We attribute our net income and operating income increases to increased store level productivity  and improved distribution efficiencies which helped us maintain our in-stock position and the overall quality of our fresh departments,” said Weis Markets’ president and CEO David Hepfinger. “While our market share remains stable, our sales were impacted by the continuing trend of cautious consumer spending and a challenging comparison to the same period in 2012 when we opened three new stores and were aggressively promoting a new replacement unit. As a result, we fell short of our sales goals. We are encouraged by some recent sales trends and expect to improve our sales results in the coming quarter.”…bolstered by increased sales at its Food Lion unit, Brussels-based Delhaize Group posted improving numbers at its U.S. stores in its second quarter. Overall revenue increased 0.4 percent to $4.25 billion, comp store sales rose 1.1 percent and underlying profits grew by 4.9 percent to $162 million, marking the third consecutive quarter of modestly improved sales and profits. The company noted that price investments at both its Food Lion and Hannaford banners helped drive increased revenue and added that it has reduced its losses at its Bottom Dollar division. While I’ll give new Delhaize America CEO Roland Smith credit for taking the drastic action needed to stem the bleeding, as long as Food Lion remains the straw that stirs Delhaize’s drink in the U.S., I don’t see a major long-term “win” for the international chain. A better indicator will come when the retailer has to cycle its margin reduction numbers next year…at Wal-Mart, second quarter comps were down 0.3 percent at its U.S. stores. The company said the dip in same-store revenue

resulted from low inflation and some price deflation in categories like dry groceries, snacks and frozens. Bill Simon, CEO of Wal-Mart U.S., noted that trading down was also a factor, “…particularly in the categories where product loyalty is not the primary factor in a purchase decision.” Simon added that increases in produce comps were in the mid-single digits and that the positive effects of an internal program to improve employee training also aided sales through the 13 week period…the National Frozen and Refrigerated Association has named its March Frozen Food ‘Golden Penguin” winners. Among those in our region who were recognized were: Wakefern Food Corp. (co-op wholesaler); Bozzuto’s (corporate wholesaler); Ateeco Inc./Mrs. T’s Pierogies (branded manufacturer); Acosta (military sales agent); Douglas Sales Assoc. (retail sales agent); Weis Markets, assisted by Crane Communications Inc., (retail corporate chain or division over 50 stores)…some regional and national news of note: in adjacent markets, Supervalu has dispatched its second regional chain president. Bill Parker, a holdover from the old Supervalu network, has exited the helm of Virginia Beach, VA-based Farm Fresh and was replaced on an interim basis by Chad Ferguson, an ex-Kroger exec who came on board at Supervalu shortly after the Cerberus/Bob Miller/Sam Duncan team gained control last March. Last month, Shoppers Food & Pharmacy president Bob Bly left the Baltimore-Washington unit of Shoppers. Also Shaw’s (now part of the Cerberus network) announced that another round of store closings. The West Bridgewater, MA chain is shuttering six of its 34 units in New Hampshire – Seabrook, Goffstown, Tilton, West Lebanon, Manchester and Keene. A week later Stop & Shop (Ahold USA) said it would close its fleet of six stores in the land of “live free or die” – Hudson, Exeter, Bedford, Milford and two Manchester stores. The underlying story here just might be the mighty clout that Demoulas Market Basket holds in the most densely populated areas of the Granite State…I’m sure many of you read the Bloomberg piece on C&S chairman Rick Cohen. Not only was the story interesting, but it revealed a lot about the “mystery” behind one of the most innovative and successful executives, not only in the grocery business but when in the world. Among the nuggets in the story: Cohen’s net worth is $11.2 billion, making him one of the 100 wealthiest people in the world; as the owner of a privately-held firm, Cohen lets C&S’ corporate income pass through to be taxed as personal income to avoid double taxations; and in 2009 (based on Bloomberg research) the

Keene, NH wholesaler had approximately $240 million in outstanding bonds and achieved a gross profit margin of 2.2 percent on net income of $19.3 billion. Bloomberg estimated C&S’ current annual volume to be $21.7 billion. I’ve probably gotten about 50 phone calls and emails about this story, but one person I’m certain I won’t be hearing from is Rick. That’s because he is one of the most private, low-key executives in the grocery business, and one who doesn’t grant interviews and doesn’t make many public appearances (unless it’s customer-related or for a philanthropic cause). Despite the flattering remarks in the story, I can’t believe Rick’s happy about all the new publicity…Spartan Stores is acquiring Nash Finch in a deal involving two large Midwestern wholesale grocers.

The $1.3 billion stock transaction shouldn’t surprise many, with Minneapolis-based Nash Finch struggling in recent years and the entire wholesale segment being challenged by a myriad of issues ranging from the declining number of independent retailers to the challenging overall competitive and diverse landscape their customers and corporately-owned stores face. The deal, which is expected to be completed by the end of the year, will see Spartan CEO Dennis Eidson remain as chief executive while Alec Covington, well-known to many in this region from his days at Richfood (and one of the smartest and nicest people in our business), will move on to other projects in what I’m guessing will be warmer climes.

 Local Notes

While it was certainly major news in itself that The Fresh Grocer will be joining Wakefern as its 50th ShopRite member, there are a few important sidebars related to this move to recognize. Not only is Wakefern adding

a solid and established merchant into its fold (about $165 million in annual retail sales), it now will also control The Fresh Grocer trademark, a potentially useful name and differentiated format (smaller size, perishables-driven) to attract prospective new members and offer existing ones an alternative growth option. Conversely, the loss of The Fresh Grocer is a big hit for Supervalu’s eastern region, which will lose its second largest independent banner. In speaking with owner Pat Burns about the shift, he emphasized the move was primarily driven by Wakefern’s opportunity to afford him long-term security as well as new programs and opportunities. And when asked, he went out of his way to praise the management team at Supervalu-Eastern (particularly president Kevin Kemp and senior VP Joe Della Noce). He also admitted that Supervalu’s corporate problems and challenges (mainly created by the previous Jeff Noddle and Craig Herkert regimes) were factors in his decision to leave Supervalu…Acme has re-upped its sponsorship deal with the Philadelphia Eagles, president Jim Perkins and senior VP Dennis Clark announced at a meeting of Acme’s vendors on August 15. Both men noted they are excited about the new arrangement and promised new and more flexible opportunities for vendor interaction. Acme’s Little Egg Harbor store (officially located in Tuckerton, NJ) sold one of the three winning $448 million national Powerball lottery tickets earlier this month. Ironically, Acme was not the only New Jersey supermarket to have sold a winning ducat in the fourth largest lottery prize in U.S. history. Stop & Shop’s South Brunswick (Dayton) unit also sold a winning ticket, giving New Jersey three Powerball wins in less than a year and making it the sixth time in 2012 that New Jersey has scored a top-multi-state prize, said Carole Hedinger, executive director of the Garden State’s lottery. “New Jersey isn’t just ‘Jersey Strong,’ it’s ‘Jersey Lucky,’ ” she added. For selling one of the winning lottery tickets, both Stop & Shop and Acme will receive a $30,000 bonus…industry veteran Don Ciotti (Genuardi’s, Wal-Mart) has left Bottom Dollar Foods (BDF) as director of operations and has joined Giant Eagle’s Good Cents Grocery + More discount division in a similar capacity. Ciotti, who joined BDF when it opened its first Delaware Valley store in King of Prussia, PA in 2010, will now go to work for one of the unit of Delhaize America’s

chief rivals and the largest grocer in the Pittsburgh/Youngstown market. Ironically, after a recent lull in new store activity, DBF opened new stores in Souderton, PA and Homestead, PA on August 15. Last month, it also

opened a discount unit in Woodbury, NJ…multiple sources indicate that Amazon has acquired the former C&S warehouse in Avenel, NJ (which until about 18 months ago supplied A&P and Pathmark stores). The 560,000 square foot facility is expected to become the distribution hub for ‘Amazon Fresh,’ which our sources say will enter the Metro NY market next year (watch out FreshDirect and Peapod). The Seattle based internet monster is also building one of the largest depots in the Garden State. Currently under construction in Robbinsville is a one million square foot facility which will be positioned to serve the company’s core business for the entire Mid-Atlantic region. The DC is scheduled to open in early 2014…the ageless Bernie Kenny and his team at Delaware Supermarkets will open their sixth ShopRite on August 25 in Glasgow, DE. The former Super Fresh and Pathmark location has been expanded to 73,000 square feet and will be the second ShopRite operated by the company along the U.S. Route 40 corridor …there are several obits to report this month including the sudden passing of Rick Sciulla at age 58. Rick was director of seafood for Weis Markets and a person I have known for many years dating back to his career at Ahold USA. An extremely hard worker with a great personality, Rick will be missed. Sorry to hear of the death of former Philadelphia Eagles owner Jerry Wolman, the Shenandoah, PA

(Schuylkill County) high school dropout who amassed a huge real estate empire (which included developing the 100-story John Hancock Center in Chicago – at the time the world’s second tallest building – and building the Spectrum in South Philly) before buying the Iggles in 1963 (he paid $5.5 million for controlling interest in the team). He owned the team until 1969 (it was acquired in bankruptcy by Leonard Tose) when his real estate fortunes nosedived and his debt reached $72 billion. Although he exuded great passion for his home team, Wolman’s six year run as owner of the Eagles was not a successful one, with only the 1966 team ending the season with a winning record (9-5). In fact, in his last full year of ownership in 1968, the team rumbled, bumbled and fumbled themselves to an NFL-worst 2-12 record. Among the lowlights of Wolman’s tenure were the trading away of Hall of Fame quarterback Sonny Jurgensen to the Redskins for Norm Snead and the 15 year contract given to Joe Kuharich as general manager and coach of the team (for all the old guys reading this, remember the “Joe Must Go” placards at old Franklin Field). Wolman, who resided for many years in Potomac, MD was 86…Also passing on was JJ Cale, one of the most unsung, yet influential rock and roll guitarists and songwriters of the past generation. Cale, 74, rarely toured and issued only about a dozen albums in a career that dates back more than 40

years, yet is one of those unusual figures who gained more respect from his industry peers than from the public. His best known songs were “After Midnight,” “Cocaine,” (both made famous by Eric Clapton) and “Call Me the Breeze,” (a big hit for Lynyrd Skynyrd). Neil Young, certainly one of the most iconic figures in rock history, stated in his biography “Shakey” that Cale and Jimi Hendrix were the best guitar players he ever heard. I was sorry to hear of the death of Dennis Farina, 69, the one-time Chicago cop who became one of the leading character actors of the past 25 years. Among his many memorable roles, my favorite is his portrayal of Ray “Bones” Barboni, a bumbling, profane and hilarious Miami mobster in the great underappreciated movie “Get Shorty” (1995). And finally, passing away at age 97 was Page Morton Black. Many of you may not know who Page Morton Black is, but for the record she was the wife of Bill Black, the late CEO of Chock Full o’ Nuts coffee. The former professional entertainer is best known for singing the Chock Full o’ Nuts theme song (“Chock Full o’ Nuts is that Heavenly Coffee…”). Beyond that, my memory of Page Black was an unannounced visit to her estate in the Premium Point section of New Rochelle, NY made by my now retired partner, Dick Bestany, retired food broker David Finkelstein and myself. Finkelstein’s business partner, John Kluge, owned the estate adjacent to Page Black’s manse and, on a hot August night after a full day of fortification, the three off us decided to randomly pop in on Page who was a friend of Finkelstein’s. I’ll have to tell you the rest of the story in person, because what ensued

proved to be one of the most unforgettable experiences of my life.