NEW YORK -- A sunny outlook on improving economics and promising early results from the new perishables format at A&P was clouded by an executive's admission that the long-term prognosis for the retailer's Food Basics discount division in the Midwest was "pessimistic at best."
Difficulties in Detroit -- where A&P is reportedly looking to sell its holdings -- were detailed in remarks by Mitch Goldstein, executive vice president and chief financial officer for Montvale, N.J.-based A&P, at the Goldman Sachs' Small-Cap Consumer/Retail Conference here last week.
While Food Basics' 11 stores in the Northeast are meeting performance expectations the company had following its experience in Canada, results have not been encouraging at the 13 Food Basics stores in the Midwest, Goldstein said. Those have struggled mainly due to poor locations and not through a fault in the store concept, he added.
"We've seen some improvement in Michigan, but the stores we converted were not doing well when we converted them," Goldstein said. "We all had been very hopeful that the conversion itself would create a better economic result, and it really has not.
"It isn't really a Food Basics issue, but an issue of the stores themselves," he added. "While we're seeing some improvements, the long-term prognosis is pessimistic at best."
Goldstein acknowledged widespread speculation that A&P might sell some assets, including its divisions in Michigan and Canada, but stopped short of discussing specific plans. Simeon Gutman, an associate in Goldman Sachs' food and drug retail group who monitored the event, noted such speculation has resulted in a 60% stock price increase for A&P during the year -- among the highest of any retailer during the period.
"There's been a lot of speculation about divestitures, but we haven't said a single word about it except 'no comment,"' Goldstein said.
He added that any divestitures would be made with an eye toward reducing debt and generating capital toward future projects, and would resemble in strategy A&P's previous sales of stores in New England and the Midwest, and the divestiture of its Eight O'Clock Coffee brand. Proceeds from those transactions de-leveraged the company and allowed it to invest elsewhere, he said.
"Nobody ever wants to sell an asset, period," Goldstein said. "You never want to take a piece of your core business unless you had a reason to and a good use for the proceeds.
"There have been estimates that Michigan is losing money and, therefore, getting out would be very de-leveraging," he said. "We have a wonderful business in Canada, and it's run separately from the rest of the company. So, there wouldn't be a significant stranded cost if it went away. It wouldn't be hard to sell from a mechanical standpoint.
"That said, it's a core business. The only logic [to sell], if we got a lot of money for it, would be to pay down debt and strengthen the platform from which a significant investment could be made."
Goldstein said new stores and conversions to the fresh market concept have received a "stellar" consumer response. Yet, he said it's still early in the evolution of the stores. He said A&P is experimenting with "different flavors" of the concept at various sites, but "we've begun to hit on a fairly good consumer resonation."
Conventional stores that have been remodeled to the fresh market concept -- mainly in New Jersey -- have seen low double-digit sales increases, Goldstein said. Remodeling to a fresh concept does not cost more than a traditional remodel, but requires "a different kind of spending," he added.
"In this environment, where a lot of people are selling Campbell's Soup, water and cereal, we have to find ways to sell in an environment that is differentiated and sell products that are differentiated," Goldstein said. Fresh market remodels are intended to stem sales erosion and drive larger baskets from loyal shoppers, as well as the opportunity to draw more visits from what Goldstein called "customers who trade off stores week to week."
While A&P is still losing money in the United States, Goldstein highlighted that it has improved its performance in earnings before interest, taxes, depreciation and amortization for two consecutive quarters, "which stands in contrast to what a lot of other companies are doing in the industry."