The most exciting investment development of 2005 is Yucaipa Cos.' return to the supermarket business.
The investment group's moves last month to become active with Pathmark Stores and Wild Oats made Yucaipa a player once again in this industry. Both retailers have run into financial challenges and stalled growth, due partly to a lack of resources.
In the case of Pathmark, Yucaipa said it plans to buy a 40% interest in the retailer through an investment of $150 million. In a conference call with investors last week, Pathmark Chief Executive Officer Eileen Scott asserted that "we've had our hands tied behind our back for a long time." In the same conference call, Ron Burkle, Yucaipa's managing general partner, pointed to Pathmark's solid fundamentals, which include a great brand, high sales-per-square-foot units, and an operating region with good potential.
Here's what's next: The Yucaipa investment, which requires Pathmark shareholder approval, would enable Pathmark to upgrade the store base and eventually grow with additional units. Scott said her to-do list includes quickening the pace of remodels, with a focus on perishables and natural foods departments and store systems. It's a good bet that in-market acquisitions will eventually be on the table, given Yucaipa's past investments. Burkle told SN that Pathmark would hopefully be able to "lead consolidation in that part of the country."
This deal is certainly a positive for Pathmark. It's time this traditionally strong franchise was given the ability to increase its competitiveness with the help of an experienced partner. The outcome of the Pathmark-Yucaipa saga, as always, will rest on the execution plans that management develops.
Turning to Wild Oats, Burkle has taken a 9.2% stake in this natural foods retailer. There's no shortage of challenges for Wild Oats. Its store base needs to be stronger. It faces an 800-pound gorilla in Whole Foods Market. Its management execution has been criticized.
However, Burkle looked beyond many of these problems and saw potential within the natural foods space. He believes there would be a big upside if the chain could make acquisitions of new store locations. He was attracted by the recent appointment of industry veteran Robert Miller as non-executive chairman.
Interestingly, Burkle's attraction to Wild Oats may not have centered on the merchandising programs the retailer has been furiously putting into place. These include partnerships with Peapod and Stop & Shop, and a merchandising drive to attract more mainstream consumers. Burkle didn't seem to emphasize these aspects in outlining his interest in the company.
Here's what's next: Burkle will hold the Wild Oats shares for investment purposes, but will "closely monitor" the situation, reserving the right to become more vocal. Burkle is also open to increasing his investment stake later. Yucaipa's involvement could give Wild Oats improved access to capital and an experienced partner to help enhance management's process.
Taken together, Yucaipa's two investments inject additional energy into the industry's competitive battles and may signal stepped-up acquisition activity in the future.
