Manhattan Meltdown: Gristede’s Helps D’Ag’s, Garden Of Eden Files, Fairway’s Slow Comeback
The bigger the market, the slower the change. For decades, perhaps the most intractable market in the country was the Metro New York area, specifically its wealthiest sector – Manhattan.
The double whammy of cost and availability of real estate, along with the unique challenges of doing business in New York City (a combination of regulations, restrictions, labor unions and competition), made potential new entrants wary of expanding into the country’s largest market.
That began to change in 2001 when Whole Foods opened its first Manhattan store in Chelsea. Currently, WFM operates eight units in Manhattan (and two others in Brooklyn) and is doing more than $1 million per week per unit. Others that have successfully expanded into Manhattan include Trader Joe’s which opened its first Big Apple store in 2006 (Union Square) and now has four others units on the big island and a new store coming next year in the big City Point project in Brooklyn (TJ’s also has existing stores in Brooklyn, Queens and Staten Island). Other grocers that have expanded their Manhattan footprint in recent years include Key Food, Foodtown (Allegiance) and Morton Williams. From the c-store channel, 7-Eleven entered Manhattan in 2005 and now has approximately 25 units operational. And I’d be remiss if I didn’t include the significant expansion of drug chains Walgreens (Duane Reade) and CVS as impactful growth factors in Manhattan. In fact, a trip to those drug merchants (as well as Rite Aid), reminds me more of a grocery shopping experience than a drug store one.
The metamorphosis of the Manhattan market has forced several staid, complacent and uncreative retailers into evacuation or near submission mode just in the past year alone.
While A&P’s bankruptcy filing in July 2015 wasn’t caused by its declining Food Emporium business in Manhattan, its upscale (?) urban specialty format mirrored many of the ineptitudes that plagued the entire Tea Company.
Earlier this year, after never earning a profit in its three years as a publicly-traded company, Fairway Market filed for Chapter 11 bankruptcy protection. While now saddled with less debt and one fewer store, the primary challenge for Fairway remains unchanged: can it regain its mojo as a unique place to shop? Regaining momentum is one of the toughest turnarounds for any retailer, and doing it in the face of new, aggressive competition makes that mountain climb even steeper. The odds of Fairway surviving and ultimately prospering? Well, you won’t see me at the $50 window at Aqueduct anytime soon betting on that horse.
In the past month, Garden of Eden, the specialty food merchant that operates three Manhattan stores, filed for Chapter 11 protection. The perishables-driven independent, owned by brothers Mustafa (Mike) and John Coskun, once operated six stores (including units in New Jersey and Brooklyn). It cited a “historic lack of patronage” as the reason for its filing. Historic lack of patronage? Yeah, and the dog ate my homework, too.
And then comes the strange relationship that’s been formed between Gristede’s owner John Catsimatidis and D’Agostino’s, two stalwart Manhattan retailers that have been punished by the new market entrants over the past 15 years.
D’Agostino’s has essentially been on life support for the past year, unable to keep its shelves adequately stocked because of a tight credit agreement with its primary grocery supplier – C&S. But D’Ag’s problems go back much further than its credit issues with C&S. The company once operated 26 stores in the metro New York area. Now there are only nine left, all in Manhattan. Remember staid, complacent and uncreative? Look in the mirror.
Gristedes may be even a worse merchant than D’Agostino’s. While the company’s 29 locations are good, the stores themselves are old, dirty and lack any vibrancy. However, there’s one main difference: Catsimatidis is a billionaire who has made fortunes in the oil refining, real estate and aviation businesses and can afford to sustain Gristedes indefinitely.
But that doesn’t mean he’s a good grocer. The former New York City mayoral candidate once said that he hasn’t run Gristedes’ day-to-day business for more than 10 years.
In this new deal, Gristedes’ umbrella parent company, Red Apple, will reportedly offer an open line of credit to D’Agostino’s for working capital and the possibility of a future joint venture (according to the New York Post).
“We wanted them to survive, Catsimatidis told the Post, adding that “they needed the money right away.”
As Paul McCartney once sang: “Money can’t buy you love.” It also can’t make you a good merchant, either.
Deflation Isn’t The Only Reason That Retailers Are Struggling
The retail food business – so tenacious, so fickle. And lately, the tenacity has become even more intense and the fickle finger of fate isn’t bringing much joy.
While identical store sales have been declining for the past 12 months for most retailers, the sales declines have become more noticeable in the past three months, and even some of the perennial best performers have been adversely impacted.
Let’s take Kroger, the industry’s supermarket darling for the past five years, and examine its most recent fiscal second quarter ended August 13.
The good news is that the Cincinnati-based juggernaut continued its impressive record of achieving positive ID sales – now for 51 consecutive quarters – and that the company has a rock solid long-term outlook led by a stellar management team.
The disappointing news is that Kroger’s quarterly results for both identicals, 1.7 percent (ex-fuel), and earnings per share of $0.40 were both lower than they were in last year’s corresponding period.
And while Kroger and its peers have cited deflation – especially in meat, dairy and pharmacy – as the largest areas impacting lower retails, the fact is there are several other important reasons retailers have been struggling since the first of the year.
Primary among all factors remains overstoring. As often as I write about it, the competitive element is unyielding. Even with some attrition and consolidation, what generally remains in most metro markets is a group of diversified heavyweights with deep enough pockets to continue to slug it out. Occasionally, we’re reminded that this continual grinding creates change (The Fresh Market sale to PE firm Apollo Global Management or the demise of A&P and Bottom Dollar Foods), but it always seems as though some other entity is willing to pick up the scraps of those mortally wounded companies.
Shopping patterns have changed dramatically over the past decade with millennials and Gen-Yers gladly willing to cross-shop at every opportunity to save money or visit retailers who can best offer a clear point-of-difference experience.
And even though I still don’t believe that online shopping (for retail food) will ever exceed 15 percent of the total grocery pie, I must admit that web-driven merchants have improved their execution and offered creative nuances that have attracted younger shoppers.
Adding to the pressures that many retailers face is the how Wall Street negatively views all this turmoil. Kroger’s share price has dropped 25 percent since the first of the year, Whole Foods’ price has dipped 15 percent during that same time frame and Costco’s share price decline has been about five percent. Only Wal-Mart among the industry leaders (by channel) has seen its stock price rise during 2016. And those gains have been made after three years of below average performance. Wall Street is also the main reason why Cerberus Capital management has not been able move its two prime grocery holdings – Albertsons and Save-A-Lot (part of Supervalu) which have been seeking to launch IPOs for more than a year.
However, this is not a gloom and doom long-term picture since we know that there is no more cyclical business than food retailing. Those stalwart companies that I noted will be around for many years and other great privately-held retailers such as Wegmans, H-E-B, Publix and Market Basket have demonstrated that they have the savvy, talent and capital to remain vital factors even when the going gets tough.
In the meantime, it’s just so damned hard and unrelenting to have to battle so fiercely every day.
‘Round The Trade
The American Beverage Association has filed suit in an attempt to block the ridiculous and unfair soda tax that the City of Philadelphia will be imposing on its residents come January 1, 2017. “The tax will meaningfully diminish the everyday purchasing power of Philadelphia residents – particularly those on a limited or fixed income – and will put the city’s businesses that sell soft drinks at a material competitive disadvantage relative to comparable businesses just outside the city’s borders,” the lawsuit stated. Additionally, beverage industry groups, restaurants and consumers who joined in the suit claimed the soda tax duplicates the state sales tax already imposed on soft drinks. Expect a multi-year battle over this pitiful piece of legislation…earlier this month, Price Chopper opened its second “from the ground up” Market 32 in Oxford, CT (New Haven County) as the Schenectady, NY-based regional chain attempts to reposition itself as a more upscale, perishables-oriented operator. The 54,000 square foot unit is the 10th Market 32 to open with another net new store slated to open in fort Edward, NY for later this year. BTW, several Wall Street sources have told us that parent firm Golub Corp.’s sales exploration process is being hindered because of a large (nine figures) underfunded pension liability that a new buyer would most likely have to inherit…Walgreens is now acknowledging that it will likely have to divest as many as 1,000 stores if it hopes to win regulatory approval from the FTC in its attempt to acquire rival Rite Aid Corp. for $9.4 billion. Originally, the nation’s largest drug store chain estimated that it would not have to sell more than 500 units to win regulatory approval. The Deerfield, IL-based merchant still hopes the deal will be completed later this year and expects to realize synergy savings of more than $1 billion within 3-4 years after the deal is consummated. I’d still be mildly cautious about FTC approval, given the recent rejections of Sysco’s attempted purchase of US Foods and Staples’ attempted acquisition of Office Depot…Trader Joe’s (the country’s sales per square foot leader) announced this week that it will open a new store next year in Allston, MA, a little more than a mile from Ahold USA’s first bfresh unit in that same Boston neighborhood. The new 13,000 square foot TJ’s will also be less than three miles away from another bfresh unit slated to open next year in the adjacent Brighton section of the city. In other Trade Joe’s news, the 9th Circuit U.S. Court of Appeals has allowed a suit filed by the retailer against Canadian retailer Pirate Joe’s to be reactivated after a lower court dismissed it. Pirate Joe’s, owned by entrepreneur Michael Hallatt, operates a store in Vancouver, not far from the U.S. border. Hallatt’s marketing plan is simple – buy products from Trader Joe’s stores in Washington and resell them at his Pirate Joe’s unit. TJ’s claims the practice is both illegal and dangerous (if the food becomes contaminated) and is seeking for the process to be terminated. Hallatt’s response: “I buy the stuff, I own it. I get to do whatever I want to and I just happen to want to sell it to my friends in Canada. Honestly, I think Trader Joe’s should just open a store in Canada and put me out of my misery.”…as we reported earlier, it looks like the final days for Sears and Kmart are imminent. According to Moody’s Investor Services, the retail organization doesn’t have enough money or access to new capital to continue much longer. Moody’s estimates that Sears Kmart’s negative cash flow will be $1.5 billion this year. Sears said last month that its cash and equivalents have fallen to $276 million from $1.8 billion a year ago. Want some jaw dropping numbers? In 2000, Sears’ annual sales were $41 billion. Last year they plunged to $15 billion. Kmart’s revenue stream is even worse with sales diving from $37 billion to $10 billion in that same time frame. Company officials continue to deny the seemingly inevitable outcome, citing a large real estate portfolio and strong brand presence with names such as Craftsman, Diehard and Kenmore. Yeah, right…from the “gang that can’t shoot straight” file comes this ditty. Hampton Creek, the San Francisco-based company reportedly backed by significant Silicon Valley money ($90 million) is being investigated by the SEC for organizing a 2014 plan to buy back large quantities of its plant-based mayonnaise-like product Just Mayo from the shelves of grocery stores arguably creating the perception of larger sales than were real. The issue at hand is whether the “buyback” created false representation to those investors who agreed to finance the start-up’s initial growth. Two years ago, Hampton Creek was sued by Unilever for using the word “Mayo” on its packaging (mayonnaise is officially defined as an egg based product; Just Mayo contains no eggs). That suit was later dropped and the company agreed to make changes to its label. Just Mayo is actually an innovative, good tasting product. However, its buyback program, which Hampton Creek was part of an internal quality control analysis, sounds like a bit a stretch…and sadly, the Howard Johnson restaurant in Bangor, ME closed earlier this month. That means that there’s only one final HoJo that remains operational. That unit is located in Lake George, NY. From its beginning in Quincy, MA in 1925, the orange- roofed eateries once totaled more than 1,000 before beginning a significant decline in the 1980s. Goodbye 28 flavors of ice cream. Adios fried clams.
Local Notes
Weis Markets has begun the conversion process for its 38 recently acquired Food Lion stores as part of the Ahold Delhaize merger store divestiture mandate. Beginning on September 11, the Sunbury-PA-based regional chain converted five Maryland stores (Cumberland, Frostburg, Owings Mills, Eldersburg and Reisterstown). Those units reopened on September 16. The following week Weis converted former Food Lion Maryland units in Columbia, Elkridge, Mitchellville and two in Gaithersburg. The process of converting about five stores per week will continue through the end of October. “Once the conversions are completed over the next two months, we will have nearly doubled our Maryland store count and expanded into Virginia and Delaware,” said Kurt Schertle, Weis COO. “Our goal is to build on our advantages as a locally focused retailer that offers a strong combination of quality, value and service. As part of this commitment, we plan to expand variety in every department.” The closely-held publicly-traded merchant plans to hire more than 2,000 former Food Lion associates. All of the other retailers – Shop ‘n Save/Supervalu, Top’s, Big Y, Acme Markets, Saubel’s – except Publix (10 stores) – have now opened all or most of the stores they acquired as part of the Ahold Delhaize divestment process. Publix’s first former Martin’s units in Richmond will likely open next spring… Ahold officials confirmed at its analysts’ conference call following its second quarter earnings release that it will be negotiating with their vendor partners to seek more favorable deals for the combined company. Those negotiations have already begun in the U.S. and several key CPG companies have complained that Ahold USA and Delhaize America are asking for renegotiated trade dollars that are not realistic. It seems that Ahold Delhaize’s negotiations in Europe are a bit testier. The Dutch Food Industry Federation (FNLI) plans to file a complaint with the Steering Committee for Fair Trading in the Netherlands, alleging that the newly merged company is acting unfairly in its attempt to gain stronger pricing leverage from its suppliers… Ahold USA also announced that it will be aligning its Peapod online business more closely with its corporate category management teams based in Carlisle, PA. According to a memo directed to its suppliers from new EVP-merchandising Andrew Iacobucci, the reorganization seeks to provide AUSA’s vendors with better access to Peapod opportunities; better communication between AUSA and Peapod; and better integration for planning. Peapod will now utilize the same category management structure used by AUSA, “as they believe it is a best-in-class category-focused approach that will better suit their business. Many of those responsible for merchandising will be located in the AUSA Carlisle office. Additionally, teams focused on pricing, promotion and assortment will be able to use some of the same systems and processes used by AUSA’s central merchandising strategy & support team. They have also created geographic sales teams focused on their delivery areas, and have created a specific role focused on accelerating business-to-business growth. Finally, they have created a new digital merchandising team to provide their online customers the best shopping experience. This team will work closely with their category management team and vendor partners to accelerate growth,” the memo states. also named by Procter & Gamble North America has named its Ahold team as its “Top Customer Team” based on business performance. In noting the excellence of the P&G team, Iacobucci said “P&G has built a strong relationship with the Ahold Health & Household team that is a good example of how we can partner together to drive sales growth. This collaborative and personal approach combined with the way they have aligned with the team is ‘best practice’ material. Generating and sharing ideas leads to innovation, excellent new product launches, and win-win scenarios like investing in top talent on the account. P&G has partnered to implement ideas that are solution-driven while balancing the current needs of the total category. Well done!”…Albertsons is expanding its digital presence at five of its banners including Acme, Shaw’s and Star Markets. Working with provider MyWeb Grocer, Albertsons is increasing the number of software modules that will allow the big retailer to ramp-up the launch of its click-and-collect and delivery options in some of the country’s largest markets including Philadelphia, New England and Chicago. “We wanted to offer customers an integrated digital experience that leveraged an experienced provider and would bring our e-commerce offering to market quickly, while still providing a best-in-class user experience,” Albertsons chief marketing and merchandising officer Shane Sampson said. “Our team first selected MyWebGrocer’s software and services in February 2012 to power our digital channel with shopping trip planning features and digital circular capabilities, so expanding our work with them to include the Digital Experience Platform makes sense for us.”…While things have been improving at Wal-Mart these days, there’s an interesting story in the August 17 issue of Bloomberg Businessweek detailing the growing major crime problem at Wal-Mart’s U.S. stores that probably won’t leave too many smiles on the faces of Wal-Mart execs in Bentonville. The gist of the story focuses on Wal-Mart’s inability to control criminal activity in its stores, noting that as the Behemoth has cut labor and security costs, serious crimes in its stores has increased, creating frustration for local law enforcement which often has to serve as the primary police force for Wal-Mart. The story notes that more than 200 violent crimes, including attempted kidnappings, murders, multiple stabbings and shootings, have occurred this year alone within the network of the nation’s 4,500 Wal-Mart locations. That doesn’t include last month’s discovery of a meth lab inside a 6-foot high drainage pipe under a Wal-Mart parking lot in Amherst, NY… we have several deaths to report this month. The great comic actor Gene Wilder has left us. While known to most people for his iconic role as Willy Wonka in the 1971 movie “Willie Wonka and the Chocolate Factory,” Wilder’s best roles – in my opinion – were in three classic Mel Brooks movies, “The Producers” (1967), “Blazing Saddles” (1974) and “Young Frankenstein” (1974), in which he played three of the absolute funniest characters in movie history – Leo Bloom, The Waco Kid and Dr. Frederick Frankenstein (or Frankenschteen), respectively…also exiting the planet were two writers, playwright Edward Albee and novelist W.P. Kinsella. Albee, who many believe was the foremost American playwright of the past 60 years, died earlier this month at the age of 88. Among Albee’s many critically received plays were “Who’s Afraid of Virginia Woolf?” (1962), “A Delicate Balance” (1966) and “Zoo Story” (1959). During his prolific writing career, which lasted nearly 60 years, Albee’s plays won three Tony Awards and three Pulitzer Prizes. W.P. Kinsella, whose 1981 novel “Shoeless Joe” became one of my favorite films, “Field of Dreams” (1989), passed away earlier this month in his native Canada. He was 81. All told, Kinsella published nearly 30 books of fiction, non-fiction and poetry…one of the most unsung film directors of the past 25 years, Curtis Hanson, 71, has also left us. The former high school drop-out, who learned his craft as a photographer, writer and editor for the magazine Cinema, wrote and directed one of the best movies of the 1990s, “L.A. Confidential” (1997), which won two Academy awards. Among Hanson’s other quality works were “The Hand That Rocks The Cradle” (1992); “Wonder Boys” (2000); and “The River Wild” (1994)…and finally, “Crazy Eddie” is dead. Eddie Antar, the former electronics store executive, who became household name in the 197
0s and 80s because of his seemingly incessant TV commercials whose tagline always ended with “Crazy Eddie – His Prices are Insaaane!” died last month at the age of 68.” Actually the voice and face on those unforgettable commercials was disc jockey Jerry Carroll. In real life, Antar, apparently was a little bit crazy and a little bit evil. After taking his 43-store chain pubic in 1984, “Crazy Eddie” started raiding the company’s cash register ($45 million in missing merchandise was discovered) and then manipulated the retailer’s stock to cover up the fraud. Feeling the heat, Antar fled to Israel after being indicted on securities fraud and insider trading, he was ultimately extradited back to the U.S. and served seven years in prison.
