Debt Load Sinks Fairway. Who’s Next?

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\"Fairway_Final\"In a long-anticipated development, Fairway Market filed for Chapter 11 bankruptcy earlier this week. Supermarket operator Fairway might not be well known to those outside New York City and its suburbs, but for many years it has been the much-beloved store of choice for shoppers passionate about food and specialty ingredients.

Gourmands were attracted to the stores’ mass displays of product and quirky hand-written signs pointing to specialty departments and product attributes. For a time, one store featured a cold room where fresh food — fish to produce — was displayed. Customers donned store-provided jackets before entering the room. That’s retail excitement. And even today, I know someone who is moving to be closer to a Fairway.

Customer passion or not, Fairway is failing. Despite the highly predictable and commonly asserted assurances of management that all will be well when it emerges from bankruptcy, Fairway will never be the same.

Let’s look at how this once-successful company was pulled into the ground by the combination of assumption of ill-considered debt, the loss of management involvement and, to a minor extent, the presence of disruptive competition.

Fairway isn’t a big company. At the moment, it has just 15 stores, most in New York City, but also a few smaller locations in Westchester, Long Island, New Jersey and Connecticut. It has been in business in one form or another for 80 years.

Although Fairway was never a mega-company, its owners had ambitions and pulled off a long period of slow but steady expansion. Then in 2007, the founding Glickberg family sold 80 percent of the company to Sterling Investment Partners for $150 million, of which $71 million was applied as a debt load on Fairway itself.

With that, Howard Glickberg, grandson of the founder, was able to retire.  And the chops that made Fairway great started to fade away. And Fairway never turned a profit after the IPO.

Undaunted, Sterling rolled the dice again by floating an IPO of Fairway in 2013. The IPO, at $13 per share, raised $536 million, much of which was used by Sterling to wipe out its earlier debt and to turn a handsome profit. In what now seems a ludicrous notion, $177 million of the IPO windfall was set aside as seed money to be used to roll out hundreds of Fairways across the nation. That was not to be. Fairway shares are now worth only 10 cents each and are doubtless fated to be worthless.

The “prepackaged” bankruptcy will wipe out shareholders, but will discharge debt and provide DIP financing sufficient to keep the doors open for a time. It seems obvious to me that if Fairway survives at all, it will be reduced to even fewer stores that will seem bland compared to Trader Joe’s, Whole Foods or even conventional supermarkets. The suburban stores will probably be the first to be shuttered.

Concerning Fairway’s competition, much has been made of how Trader Joe’s, Whole Foods and online delivery companies flogged Fairway. I don’t buy it. Fairway at its best was a much more interesting store than these three alternatives, and the one with the most locations. Home delivery has been around for quite a while, but is a much smaller factor than is often thought. Even now, many consumers still prefer Fairway to either of the recent interlopers or home delivery.

Fairway failed because its management was no longer positioned to provide creative inspiration or adaptation to changing consumer expectations. Plus it had a staggering debt load that a much larger company couldn’t have serviced, let alone retired.

There are three key factors that can be taken to the bank by any retailer wishing to avoid failure.

  • An inspired management must be involved and keep stores interesting, fresh and ahead of competitors.
  • Absurdly high debt loads must be avoided, especially if they bring in the numbers guys who manage to protect their own investment. Faith-based metrics won’t survive under the best of circumstances, let alone against the slightest downdraft in the economy.
  • Finally, be quite sure your concept is scalable before considering a far-flung rollout.

Who said retailing was easy?  The sustainability of iconic brands and businesses is under siege in our complex marketplace.  Unless they have enlightened management, financial vision and meet customer expectations, they won’t survive.

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