A&P’s Long Goodbye
For the second time in less than five years, A&P has filed for Chapter 11 bankruptcy. Two Chapter 11s in close sequence like that are sometimes cynically called a “Chapter 22.” But this is no joke. By the time it’s all over, a stalwart retailing name that started in 1859 on the site of what is now the One World Trade Center building in lower Manhattan will be gone forever.
A&P — once the nation’s largest retailer, spanning from the Atlantic to the Pacific — already has buyers in place to take over a third of its 300 stores. These buyers include Acme (Albertsons), Ahold and Key Food. Another 25 stores will be closed outright. So roughly half its store fleet, which spreads from Delaware to upstate New York, will be rebranded immediately. A&P operates stores under the A&P, Pathmark, Waldbaums, Food Emporium, Superfresh and Food Basics banners, all of which will be involved in the sale or closure process — and already are.
A&P is a good as gone, especially since the favored Chapter 11 exit of a debt-to-equity swap seemingly is unattractive since debt is $2.3 billion and equity $1.6 billion. Of course, this is some vey bad news to many of A&P’s 30,000 employees.
Most likely, the Chapter 11 process will unfold allowing A&P to renounce some remaining lease obligations along with union contracts, and perhaps some portion of its pension overhead. Without doubt, the balance of its stores will soon be shuttered, sold or surrendered to satisfy debt.
All of this is no surprise A&P has long been nearly irrelevant in the supermarket business. Most consumers outside A&P’s immediate catchment area were probably unaware that A&P still even existed. In the food-retailing business, A&P had become something of an ongoing joke: “Where’s the best place to open a supermarket? Anywhere near an A&P.”
Much ink has been spilled about how A&P’s retail empire was hobbled for many years by inattentive and slow-moving management. Apparently that’s the tip of A&P’s iceberg. Recent events spelled its doom.
A&P was crushed by debt with its purchase of Pathmark supermarkets and the assumption of more debt, which was taken on largely to allow the Haub family to recover some of its long-term investment in A&P. The family, through Tengelmann of Germany, owned A&P for many years. After the new debt was assumed, ownership of A&P passed to Yucaipa Cos., a frequent investor in distressed supermarket assets.
As the poignant moment approaches when the lights go out at A&P, it’s equally sad to see the demise of two other once-proud and successful regional operators: Pathmark and Waldbaums.
But A&P is not alone. Now let’s move from the East Coast to the West Coast where the wheels are coming off Haggen.
Haggen, the regional operator in Washington state and Oregon with 18 supermarkets, recently took a big gulp with the purchase of 146 supermarkets from Albertsons. The stores became available when Albertsons and Safeway merged and the Federal Trade Commission required the divestiture of overlapping units.
Haggen’s new stores were in a different operating territory: southern California, Nevada and Arizona. They were under several banners, and all had to be converted quickly to the Haggen nameplate. So overnight, Haggen became about 10 times larger, entered a new operating area, buffed up and reopened stores, and introduced a new name to consumers.
As I predicted, it was too much. Haggen failed to recognize the vigorous competition from established supermarket operators in its new operating domain and failed to right-price goods. What’s worse, it turns out that it doesn’t seem to be sufficiently capitalized to weather this tempest.
There are two strong indications that all isn’t going well. Haggen is dismissing or reducing work hours of roughly 20 percent of its work force, about 8,000, in its southern stores. Moreover, Albertsons has sued Haggen for more than $40 million, claiming that Haggen failed to make payments for inventory Haggen took over when it bought their stores.
Clearly, Haggen is not making any great inroads in its new operating area.
Food Lion on the Line
But there’s more disruption in supermarket land. Let’s take a quick look at the upcoming merger of two East Coast operators, Delhaize and Ahold. We reported that Delhaize of Belgium has long grappled with ways to revive its flagging Food Lion brand, foreseeing an exit from the U.S. The upcoming merger with Ahold of the Netherlands accomplishes that exit in the best way possible for Delhaize.
There will be many difficulties along the way, but this merger looks promising since Delhaize has Food Lion supermarkets in the south and Hanford Bros. supermarkets in New England. Ahold’s Giant and Stop & Shop stores in the mid-Atlantic fit neatly. Of those banners, only Food Lion needs rescue work.
The common thread that binds all these three events is the quest for bigness, and the success it brings, or doesn’t. And by big, I mean into the thousands of stores. Kroger, the nation’s largest and most successful food retailer, has demonstrated bigness at its best. Kroger has about 2,500 stores. The newly merged Albertsons and Safeway has about 2,300 stores, and Ahold-Delhaize will have about 2,000 in the U.S. Bigness confers product-acquisition and distribution efficiencies that are not within the grasp of operators with even hundreds of stores.
These behemoths are the new big three and they dwarf all the other supermarket operators.
This means that for a while, anyway, smaller operators — even those with hundreds of stores —will be buyout targets for the big three, or could even fail.
Yet, retailing is forever cyclical, so the current wisdom that big is better will hold true until a smaller operator proves it to be wrong.