Chris McGarry Joins Ron Burkle, Paul Hertz Greg Mays As Members Of A&P’s ‘Clown College’
Ego: Give Chris McGarry some space, he’s just doing his job as A&P’s chief restructuring officer.
Alter Ego: This isn’t about his job, this is about the disingenuousness of his comments to the Bankruptcy Court and his actions (or non-actions) and those of his executive peers at A&P – Ron Burkle (managing partner of Yucaipa Cos.), Greg Mays (chairman of A&P) and Paul Hertz A&P CEO) – in hastening A&P’s second bankruptcy in five years.
Ego: Are you saying those gentlemen did something illegal?
Alter Ego: No, not in the literal sense of the word. In fact, this bankruptcy process has been so well scripted, it makes me wonder how long these guys and their attorneys and accountants had planned this scenario.
Ego: Are you suggesting they believed that A&P’s acquisition by Yucaipa Cos. was doomed to failure from the start?
Alter Ego: Only they would know the answer, but it’s clear they never gave the company much of a fighting chance when it emerged from bankruptcy in 2012.
Ego: So what’s your beef?
Alter Ego: Shouldn’t that be obvious? When A&P exited bankruptcy in March 2012, it had the cleanest financial slate and operating flexibility opportunity in years. These clowns demanded major concessions from their suppliers and their associates, promising in return to invest capital in the newly restructured company and to consider givebacks to the associates who were pretty much forced to sacrifice significant wages and benefits. From the outset, the new A&P leadership team showed little initiative to improve the company. For example: New stores and an aggressive remodeling program? – never happened; Reducing prices to become competitive again? – cue the laugh track; Investment in labor and training? – a pipedream; Restoration of concessions to the 28,000 store level associates? – fugggedaboutit. Oh, and did I mention that bonuses were paid and compensation was not reduced to the ‘Feeble Four’ even as the company suffered in large part because of their decisions?
Ego: What specifically did McGarry tell the court that makes you believe he should be admitted into this so-called ‘clown college?’
Alter Ego: First, he was part of the same senior leadership group as Burkle, Mays and Hertz, having previously served A&P as general counsel before being named chief administrative officer. In his filing with the Bankruptcy Court, he noted that the labor concessions ($625 million) made by A&P’s store associates only served as a ‘modest’ reduction. ‘Modest?’ tell that to the meatcutters and clerks who sacrificed a lot more than McGarry did and will likely be visiting the unemployment line soon.
Ego: Wasn’t McGarry accurate when he stated that the 2010 bankruptcy was mainly prompted by A&P’s need to rationalize its store base and renegotiate supply and distribution agreements?
Alter Ego: Technically, yes. But identifying A&P’s problems in 2010 wasn’t the issue. It was about keeping their initial promise to improve A&P. Their actions indicate significant lack of effort and indifference toward their employees. It’s not as though these guys were industry rookies either; Burkle and Mays have been part of many successful supermarket turnarounds. In this case, it appears they never really tried hard enough to fulfill their promises and it seemed that their weak attempt at a turnaround quickly turned to indifference. However, the horrible results achieved on their watch – even worse than those achieved by the previous inept management team – didn’t seem to get in the way of their personal greed. If A&P were still a publicly-traded company, these clowns would have been dismissed years ago.
Ego: Any closing thoughts?
Alter Ego: Where is P.T. Barnum when you need him?
‘Round The Trade
The busiest people in the grocery industry? My vote goes to the management team at Albertsons (as if they weren’t busy enough over the past two years already). In addition to its effort to take the company pubic, Albertsons is also attempting to acquire 76 A&P stores in Delaware, Pennsylvania, New Jersey, New York and Connecticut (the latter two areas would be new markets) for $256 million. Those acquired units (subject to FTC approval and the final results of the A&P auction) would all trade as Acme Markets. Just added to their “to do” list is responding to a $1 billion lawsuit filed by Haggen, which acquired 146 Albertsons and Safeway stores from the Boise, ID-based chain late last year. In July, Albertsons (still controlled by Cerberus Capital Management) sued Haggen for fraud and breach of contract, claiming that the retailer, with headquarters in both Bellingham, WA and Irvine, CA (and also controlled by a PE firm – Comvest) refused to pay more than $40 million for inventory it reportedly acquired as part of the $300 million deal in December 2014. This month, Haggen filed its own complaint in U.S. District Court in Delaware, which alleges that following Haggen’s purchase of 146 Albertsons and Safeway bannered stores), Albertsons engaged in “coordinated and systematic efforts to eliminate competition and Haggen as a viable competitor in over 130 local grocery markets in five states,” and “made false representations to both Haggen and the FTC about Albertsons’ commitment to a seamless transformation of the stores into viable competitors under the Haggen banner.” Furthermore, the complaint notes, Albertsons sought out Haggen in order to convince the Federal Trade Commission that Haggen would be a new competitor in local markets, which enabled Albertsons to gain the FTC’s approval of a merger between Albertsons and Safeway – a merger that created “one of the largest food retailers in the United States, with over 2,200 stores and $61 billion in combined sales,” according to the complaint. Despite the FTC’s orders and Albertsons’ agreement to abide by all conditions of the sale, the complaint alleges, Albertsons engaged in an illegal campaign against Haggen including “premeditated acts of unfair and anti-competitive conduct that were calculated to circumvent Albertsons obligations under federal antitrust laws, FTC orders, and contractual commitments to Haggen, all of which were intended to prevent and delay the successful entry of Haggen (or any other viable competitor) into local grocery markets that Albertsons now dominates. During the transfer process, Albertsons launched its plan to gain market power and/or monopoly power, acting in a manner that was designed to (and did) hamstring Haggen’s ability to successfully operate the stores after taking ownership,” according to the complaint. As a result, despite Haggen’s plans to successfully operate and expand upon the acquired stores, Haggen was “forced to close 26 of the stores that it newly acquired as a part of the Albertsons’ divestiture, and faces the potential closure of additional stores,” the complaint said. “Albertsons’ anti-competitive actions critically damaged the operations, customer service, brand goodwill and profitability of the divested stores from the outset,” the complaint alleged, “[and] have caused significant harm to competition, local communities, employees and consumers,” throughout California, Oregon, Washington, Nevada and Arizona. Instead of focusing on succeeding in the new markets, according to the complaint, “Haggen has had to focus on strategies to recover from Albertsons’ wrongful acts, which include, sadly, Haggen’s efforts to find new jobs for displaced employees who too are victims of Albertsons’ actions.” In particular, Haggen alleged in its complaint that Albertsons, in violation of numerous laws, the FTC order and the purchase agreement, intentionally and deliberately undertook a number of “malicious and unfair actions” that “strained Haggen’s resources” and “created substantial distraction and diverted the attention of store-level and senior Haggen management” during the store conversion process, such as: using proprietary and confidential conversion scheduling information to plan and execute aggressive marketing campaigns intended to undermine Haggen grand openings; providing Haggen with false, misleading and incomplete retail pricing data, causing Haggen stores to unknowingly inflate prices; cutting off Haggen-acquired store advertising in order to decrease customer traffic; timing the remodeling and rebranding of its retained stores to impair Haggen’s entry into the relevant markets; diverting customers by illegally accessing Haggen’s confidential data to gain an unfair competitive advantage; deliberately understocking certain inventory at Haggen-acquired stores below levels consistent with the ordinary course of business just prior to conversion, resulting in out of stocks which negatively impacted the shopping experience upon Haggen grand openings; deliberately overstocking perishable inventory at Haggen-acquired stores beyond levels consistent with the ordinary course of business just prior to conversion such that Haggen had to throw away significant amounts of inventory it paid for; removing store fixtures and inventory from Haggen-acquired stores that Haggen paid for; diverting Haggen inventory to Albertsons stores; and failing to perform routine maintenance on stores and equipment. “Albertson’s anti-competitive conduct caused significant damage to Haggen’s image, brand, and ability to build goodwill during its grand openings to the public,” according to the complaint. The complaint continued, “Albertsons’ unlawful acts destroyed or substantially lessened the economic viability, marketability and competitiveness of the [Haggen] stores, depriving consumers in each of the relevant markets the benefits of substantial competition from a new market entrant.” Ouch! Regardless of legal outcome, Haggen stands to be the big loser here. Currently it’s fighting for its very survival, particularly in Southern California where poor customer perception has plagued Haggen from the start of its “new company” initiative. I feel for Haggen CEO Bill Shaner, one of the good guys in the business and a helluva of a merchant. Without piling on further, let’s just say that growing a company overnight from 18 stores to 164 units, with limited capital expenditures would have been a daunting task for any operator. When you also recognize that Haggen is owned by a private equity firm, acquired many inferior physical plants and has entered these new operating areas with no established traction, it’s easy to see how this formula is failing…Ross Purdy has joined Abingdon, VA-based K-VA-T (Food City) as VP-center store operations. A 35 year industry veteran, Purdy joins the growing regional chain (which recently acquired 29 Bi-Lo stores in the Chattanooga, TN market) from Daymon Associate …interesting read of the month – recently published “We are Market Basket” – which details last summer’s tale of the feuding Demoulas family. It was written by Daniel Korshum assistant professor of marketing at DrexelUniversity and Lowell Sun reporter Grant Welker, who covered the family’s six-week holy war last summer from the battle lines. Up next: a movie about the intra-family dispute called “Food Fight” due out later this year. Incidentally, regarding Ahold’s earnings, discussed later in his column, one of the Dutch chain’s realities next quarter (which will adversely affect Shaw’s and Hannaford’s sales and earnings, too) will be to swallow the impact of a fully healthy Market Basket operation. Insiders tell me that ID sales at the Tewksbury, MA family-owned high volume merchant have vaulted seven percent and that doesn’t include five new stores that Market Basket has opened over the past 12 months…about 220 miles south of Tewksbury, Fairway Market has ongoing major issues to deal with. After another disappointing quarter w
hich resulted in a $13.9 million loss, it may be time for the “like no other market” merchant to consider finding a buyer. The optimism of relatively new CEO Jack Murphy (ex-Earth Fare, ex-Fresh Fields, who joined the Manhattan merchant 10 months ago) isn’t shared by many others, especially after he said that the unprofitability could last several more quarters and he was hopeful that a positive top line sales could be achieved in the next 12-18 months. This certainly isn’t Murphy’s fault – he’s a top-shelf merchant with strong industry experience, he just entered the scene too late. Every measurable performance metric has been flat or has plunged since the company went public in April 2013, and as we went to press, the urban retailer’s stock price plummeted to slightly more than $2.30 per share (it traded at approximately $28 per share about two years ago). Furthermore, the company that was founded by the Glickberg family in 1932 (they sold majority control to PE firm Sterling Investment Partners in 2007, before Fairway went public) has scaled back its store expansion and also has had major difficulties in dealing with new competitors (particularly Whole Foods) which have invaded Fairway’s universe. Clearly, Fairway is running out of options and Wall Street is only going to wait so long…on the other end of the sales and earnings spectrum is Aldi, which is “killing it.” The Batavia, IL based U.S. division, currently growing sales at about 18 percent annually, plans to add 600 new stores and an 10,000 additional associates by 2018 and is hosting jobs fair this month to fill 2,500 positions. Moreover, in an attempt to vary its product mix, the German-owned discount retailer has added more organic items to its SKU catalog. Under its “Simply Nature brand, Aldi is trying to offer more healthy options for its discount-minded shoppers and also better compete with the likes of Whole Foods, Sprout’s and Trader Joe’s, a company that the parent firm also owns.
Local Notes
Ahold’s results improved in its second quarter, primarily because of strong sales performance by the chain’s Albert Heijn unit in the Netherlands where revenue jumped 6.8 percent and ID sales increased 3.4 percent. In the U.S., which accounts for approximately 60 percent of Ahold’s total revenue, its performance was aided by favorable exchange rates and the positive impact of the post-Easter week falling into Ahold’s first quarter results. However, at constant exchange rates and excluding gas (where falling fuel prices hurt most retailers), overall sales fell 0.3 percent. Identical store sales did improve by 1.8 percent (ex-gas) from negative 1.8 percent last year. In the post-release conference call with financial analysts, CEO Dick Boer expressed his ongoing confidence in the ‘Project Thunder” which is currently in the new produce department rollout phase. He spoke briefly about the potential acquisition of 25 A&P store in Metro New York (Stop & Shop) where he said the company will spend between $2-3 million per unit on improvements. He also spoke briefly about the pending Delhaize merger, noting, “We are excited about the agreement with Delhaize, which brings together two highly complementary businesses to create a stronger, international food retailers for the benefit of our customers, associates and shareholders.” From the very big to the very small at Ahold: the mega-retailer debuted “bfresh” – its small format banner – on September 4 when it cut the ribbon on the first of what the chain hopes will be hundreds of stores. The new 10,000 square foot unit is located on Harvard Avenue in Allston, MA (I used to live about half a block from that location while in college). The Allston unit is actually the end result of “Everything Fresh,” the 3,000 square foot laboratory store that Ahold USA opened last December in Philadelphia to experiment with the format. We hear the next “bfresh” will open shortly in Fairfield, CT…Weis Markets posted strong second quarter earnings and sales as it continues to drive volume through its focus on increasing sales. For the 13 week period ended June 27, the Sunbury, PA based regional chain saw its net income increase 28.4 percent to $16.4 million. Overall revenue was up 3.8 percent to $718.4 million and comp store sales rose a healthy 4.3 percent. This marks the first quarter in which Weis was able to comparably cycle its price impact program, demonstrating the closely-held retailer’s ability to grow both shares and profit. According to CEO Jonathan Weis said, “Our second quarter results reflect our continuing investments in sales-building strategies and disciplined promotions that helped us generate strong sales and earnings. During the period, our results benefited from strong unit sales growth throughout our fresh and center store departments.” …Redner’s will close its Trexlertown, PA unit on September 19, company officials confirmed. The reason: after 25 years of serving that Lehigh County community, the store’s lease expired and Redner’s chose not to seek renewal. A contributing factor was certainly the future impact of new Whole Foods, Costco and Target units which will open next year (those stores will be located in the Hamilton Crossings mega-center in Trexlertown) as well a relatively new 74,000 square foot Giant replacement store which opened less four years ago and is virtually adjacent to the Redner’s location…and speaking of Target, former Safeway and (for a brief time) Albertsons CEO Robert Edwards, has joined the improving mass merchant’s board of directors. Edwards and current Target chief executive Brian Cornell worked together at Safeway from 2004-2007 when Cornell was the chain’s EVP/CMO and Edwards was then EVP/CFO…I guess he couldn’t get the obvious next title (corporate CEO), so Rite Aid promoted Ken Martindale, 55, to chief executive of Rite Aid stores. He was most recently president of the Camp Hill, PA based drug chain. John Standley, who has worked alongside Martindale from their days at Smith’s Food & Drug (Yucaipa Cos.) dating back to the mid-1990s, remains chairman and CEO of the entire Rite Aid empire. Standley first joined Rite Aid in 1999, left for 18 months to serve as Pathmark’s CEO (where he brought in Martindale) and became Rite Aid’s CEO in 2008. Rite Aid also has agreed to acquire the pharmacy assets from 12 of the 25 stores that A&P plans to close next month. The deal, which was approved by the Bankruptcy Court, allows A&P to transfer prescription records and patient lists/profiles to the drug chain. The price: $8.1 million…news about the Korean-owned cash & carry business in Washington, DC: several sources report that major changes are occurring which will affect small retail merchants (many Korean) in the DC and surrounding areas. The DC Cash & Carry, located on Okie Street NE, has closed due to lease issues. That facility is owned by David Hahn. According to multiple sources, a new cash & carry will open in the next month on V Street in the District operated by another gentleman named David Hahn (no relation). David Hahn (V Street) also owns Triple C, a general merchandise/HBC distributor based in Baltimore. The Washington Cash & Carry, located on 4th Street NE, remains unchanged and continue to operate a thriving business. Got all of that? – there’ll be a quiz later…a couple of deaths to report over the past month: I’m sad to report the passing of Frank Gifford, the former New York Giants football star who was voted to the Pro Bowl at three different positions (running back, wide receiver and defensive back). Famous for his 12 years in the NFL, Gifford was even better known for his 15 year run as co-host of “Monday Night Football” which began in 1971. “Frank Gifford was an icon of the game, both as a Hall of Fame player for the Giants (he was inducted in the Pro Football HOF in 1977) and Hall of Fame broadcaster for CBS and ABC,” NFL Commissioner Roger Goodell said. “Frank’s talent and charisma on the field and on the air were important elements in the growth and popularity of the modern NFL.” Gifford was 84. Also passing on (and hopefully not to hell in his case) was iconic horror film director Wes Craven. Craven, a Johns Hopkins University graduate, began his career as a college professor before catching the movie bug in the 1960s. His first horror flick was “The Last House on the Left” (1972), which was made for $87,000. In 1984, he scripted and directed what many critics consider his masterpiece, and one of the best horror movies of all time, “A Nightmare on Elm Street,” starring a then-unknown Johnny Depp and featured the debut of the notorious Freddie Kruger (Robert Englund). All told, Craven, 76, directed nearly 30 films, most of them of the horror genre.