It was another year of restructuring for debt-heavy retail food operators in 2000 as financial and competitive pressures forced them to make tough decisions about their long-term futures.
Five companies were operating under Chapter 11 bankruptcy protection for part of the year, with Grand Union and Jitney Jungle ultimately opting to liquidate and Pathmark, Bruno's and Eagle Food Centers emerging to fight the competitive wars another day.
However, with the number of leveraged companies dwindling, securities analysts said the industry may see fewer bankruptcy filings in the years ahead as equity-based companies take the route A&P and Winn-Dixie pursued during 2000 -- undertaking extensive internal reviews of their entire operations and closing underperforming stores, reformatting others and moving out of some marketing areas.
"This is a tough time to be playing catchup," Chuck Cerankosky, an analyst with McDonald Investments, Cleveland, told SN. "Given the competitive pressures this past year, companies with problematic balance sheets and a weakening sales base found it quite difficult to recover."
Looking ahead, analysts said they expect regional players -- even the most successful ones -- to be forced to consider consolidation to resolve competitive issues.
"There's no room for operators on cruise-control," Gary Giblen, senior vice president and director of research for C L King Associates, New York, told SN, noting the gulf between the successful and less successful players is likely to widen.
Jonathan Ziegler, San Francisco-based managing director for Deutsche Banc Alex. Brown, New York, expressed similar thoughts. "While the number of leveraged companies is shrinking, the pressures on them are becoming more intense, and that applies to a company like Eagle, which has been unable to find a buyer.
"Companies that are desperate will have to do something about hooking up with others. And even companies that are not desperate, like Genuardi's [which announced plans at year-end to merge with Safeway], are recognizing they can no longer flourish on their own but must hook up with bigger players, and we'll see more of that happening."
Here's a look at the five companies that operated under Chapter 11 during 2000 and the circumstances before and since their filings:
For Grand Union, Wayne, N.J., its third Chapter 11 in five years proved to be the last one. Top management had hoped the capital that was freed up after a 1998 financial reorganization would give the company a chance to grow and become a viable player in the competition-heavy Northeast. But the company's investors sought a quicker solution, and after fourth-quarter financial results failed to meet expectations in May, the investors pulled the plug in October and filed Chapter 11, with the goal of liquidating the chain's assets.
In November, Grand Union held an auction at which C&S Wholesale Grocers, Brattleboro, Vt., acquired all but 12 of the company's 197 stores -- 94 of which were spun off to a variety of operators in the Northeast, with C&S saying it would operate the balance as corporate stores.
Grand Union was set to go out of business early in 2001.
It was a similar story at Jitney-Jungle Stores of America, Jackson, Miss., which filed for Chapter 11 protection in October 1999 in the face of 140 competitive openings in the prior three years, plus the heavy debt resulting from a 1996 leveraged buyout and the subsequent acquisition of rival Delchamps later that year.
Jitney began selling off small groups of stores in hopes of restructuring and emerging as a stronger operation by the end of 2000. However, in November it announced it would sell 89 of its 137 remaining stores to two competitors, and in mid-December it held an auction to sell off as much of the balance as possible.
The company said liquidation had not been its original intent but had become the only option once its financial investors declined to support the company's efforts to operate as a stand-alone public company.
Jitney said it planned to cease operations early in 2001.
Pathmark Stores, Carteret, N.J., came close to becoming part of the U.S. holdings of Netherlands-based Ahold at the end of 1999 -- until Ahold canceled the deal in the face of potential Federal Trade Commission-ordered divestitures. With its future back in its own hands, Pathmark filed a prepackaged Chapter 11 in July, in a move the company acknowledged would make it more attractive to potential acquirers while noting that was not the reason for the filing.
After eliminating approximately $960 million of bond debt (stemming from a 1987 leveraged buyout), Pathmark emerged from Chapter 11 in September as a public entity. Although the company said it plans to move forward and grow, observers told SN they believe Pathmark is a strong candidate for acquisition.
Bruno's Supermarkets, Birmingham, Ala., eliminated approximately $884 million in debt and emerged from Chapter 11 in early January, two years after filing for bankruptcy protection to escape its heavy debt and a loss of sales due to consumer confusion over a shifting pricing policy.
Unlike Pathmark, Bruno's chose to remain a private company, owned by the 20 or so financial institutions that held its senior debt. At year-end 2000, it agreed to buy 19 stores from Jitney Jungle.
Eagle Food Stores, Milan, Ill., emerged from Chapter 11 in August following a prepackaged filing in late February that reportedly followed a three-year period during which the company tried in vain to find a buyer.
In Eagle's case it was not debt that was the problem but rather a rash of competitive openings. But the filing enabled Eagle to close approximately 20 underperforming stores -- nearly 25% of its store base and 15% of its sales base -- and to free up cash to spend on stronger promotions and remodelings.
According to Giblen, "Bruno's should do fine for the present. But long term, it's inevitable it will have to become part of a larger entity, though it could be a year or so before it will get a sense of where it's going.
"The same is true for Eagle, which is a weak operator and may ultimately have to liquidate the way Grand Union and Jitney Jungle did.
"And Pathmark. Of the three companies that emerged from Chapter 11 in 2000, Pathmark is the most compelling in terms of its ability to operate on its own, but it's also inevitable that it will eventually be acquired. Right now it has money to build stores and the potential to improve margins, but it remains an attractive takeover candidate."
Cerankosky also said the outlook is grim for retailers who are struggling. "For undercapitalized chains that don't have an edge in locations or specific market niches, it will be difficult to compete against well-capitalized supermarket companies that have scale, as well as non-traditional competitors like Wal-Mart," he said.
"Some companies are likely to step back and consider selling rather than risk their balance sheets, while others will try to rebuild on their own, as A&P and Winn-Dixie are doing. But companies that have been late to execute strong combination-store formats or to make information technology investments will find themselves at a growing disadvantage with companies that are well along those paths," he said.
