A&P’s descent into Chapter 11 protection has taken few in the US retail sector by surprise.
The US grocer, one of the oldest in the US, has found the going increasingly tough since its 1950s heyday as the largest food retailer in the country.
Since the 1960s, A&P has seen its market share gradually eroded and, in recent years, has faced stiff competition from value-oriented operators like Target Corp. and Wal-Mart Stores.
The likes of Target and Wal-Mart have increased their grocery offerings, particularly in fresh food, since the start of the downturn two years ago, hitting the more upmarket A&P hard.
What’s more, while A&P was facing growing competition, it was also trying to digest its 2007 acquisition of regional retailer Pathmark. When the deal was announced, A&P claimed the purchase of Pathmark would “transform” its business but, ultimately, it was a step too far for a retailer already under pressure.
Neil Stern, senior partner at retail consultants McMillanDoolittle, says A&P’s move into Chapter 11 “has been a long time coming”. The company, Stern tells just-food, had “struggled for decades”. However, he adds: “Its issues were exacerbated by the acquisition of Pathmark which never really worked and by what remains a tough retail food environment.”
However, David Livingston, a supermarket analyst at DJL Research, argues that A&P’s management had a questionable M&A track record before the Pathmark deal. “They’ve acquired other chains in the past and have shut them down,” Livingston tells just-food. “The management is where the problem is. They kept repeating the same mistakes over and over. Every acquisition they made failed.”
Commenting on the retailer’s move into Chapter 11 protection, Tengelmann, the German retail conglomerate that is A&P’s largest shareholder, said yesterday (13 December) that the acquisition of Pathmark and the ensuing “difficult integration” had placed a “large financial burden” on the US firm.
“This was exacerbated by the global economic crisis in late 2008 that burst upon the American market,” said Tengelmann MD Karl-Erivan Haub. “The company could not compensate for the combination of high debt and the suddenly dwindling purchasing power of consumers.”
While some industry watchers have blamed competition from the likes of Wal-Mart for A&P’s slide into bankruptcy, Livingston insists the retailer’s management was ultimately to blame. “A&P is not that great at running supermarkets,” he says. “There has been a lot of companies that have been growing and thriving despite Wal-Mart.”
Tenglemann and A&P has yet to make any public comment on whether the restructuring measures planned under Chapter 11 will mean stores will be sold or closed.
However, since president and CEO Sam Martin took the helm at A&P in July, the retailer has already sold seven stores in Connecticut, announced a sale-and-leaseback on six others and announced plans for the closure of 25 outlets. It is highly likely that A&P, now it is in Chapter 11 with, as of 11 September, debts of US$1.1bn, will look to close or sell some of the remaining 395 stores.
Livingston says he “has heard” that A&P will look to close around 100 outlets and he says that the retailer is also likely to going to try to re-negotiate the rents on some of its stores. “They’ve got a chance to turn things around,” he says.
Analysts in Europe have speculated that Ahold, the Dutch retail giant, could stand to benefit from A&P’s predicament. Richard Withagen, an analyst at SNS Securities in Amsterdam, says A&P’s stores in the north-east and mid-Atlantic states compete with about 10% of Ahold’s Stop & Shop and Giant-Carlisle formats.
“A&P’s Chapter 11 filing may give Ahold an opportunity to acquire a number of stores from the company. An acquisition in market areas where Ahold is already active would increase the efficiency of the company’s supply chain and broaden the brand name,” Withagen says.
From a US perspective, Livingston believes a number of retailers could benefit and cites Whole Foods Market as one grocer that could use A&P’s problems as an opportunity to expand, particularly, he says in the Manhattan district of New York City.
There is, of course, also a shareholder link between A&P and Whole Foods. Yucaipa Cos, the investment vehicle of billionaire investor Ron Burkle, holds around 27% of A&P and is a significant shareholder in Whole Foods. There has been speculation that Burkle’s influence at A&P could grow with the business now in Chapter 11.
As for A&P, some commentators believe the retailer can turn itself around. Stern points to other grocers that suffered similar problems. “The business can certainly re-emerge with a cleaned up balance sheet – Winn-Dixie and Bi-Lo are recent examples. A&P then needs to focus on execution,” he says.