QUINCY, Mass. -- Stop & Shop Cos. here seems to have no shortage of challenges in the wake of two recent acquisition announcements, according to analysts.
The New England retailer last month revealed its intention to purchase Melmarkets/Foodtown, a 17-unit operation in Garden City, N.Y., for $87 million. And Stop & Shop earlier this month completed its acquisition of Purity Supreme, North Billerica, Mass.
Analysts said these and other developments present great opportunities for the chain, but also raise hurdles including:
· Stop & Shop must decide how it will merchandise the Melmarkets stores, most of which are smaller than the New England chain's average unit, while living up to Melmarkets' reputation for catering strongly to local ethnic groups, analysts said.
The company must convert and refurbish the Purity stores and install new systems while coping with the demands of the holiday selling season.
With its core New England markets under attack from aggressive supermarket competition, the New England retailer expects to report depressed earnings later this month.
The Melmarkets/Foodtown deal gives Stop & Shop the foothold it wanted in the New York metro market, noted financial analysts. The transaction is expected to close in December, according to a statement from the chain. Aside from switching the Foodtown banner to its own
banner, Stop & Shop does not plan to make any major changes right away, said Terry Vanderwater, Stop & Shop's director of public affairs. She noted that the company does not intend to close any of the Melmarkets stores.
"I think what you'll see is that we'll go into the supermarkets and make some minor adjustments at first. As we begin to run them, we'll see what else needs to be done," she said.
Stop & Shop will be keeping Mel Weitz on as a consultant. Weitz was the Melmarkets chain's president and chief executive officer, as well as its founder.
Analysts stressed that Stop & Shop was wise to retain Weitz, who is expected to help the New England retailer adjust to running small yet high-volume stores carrying a wide variety of Italian and Jewish products.
Gary Giblen, managing director of Smith Barney, New York, called the purchase "an intelligent way to accelerate [Stop & Shop's] expansion into a market with very difficult real estate challenges."
He outlined two of the challenges: Even the largest Foodtown stores are 25% smaller than Stop & Shop's prototype superstore format and not all the locations allow for expansion, and the Melmarkets stores focus on an ethnic clientele that is different from Stop & Shop's traditional customer base.
But Stop & Shop has a chance to retain Melmarkets' current high volume if the company cooperates with Weitz to "help bridge the customer base/merchandising gap."
Meredith Adler, managing director of Chemical Securities, New York, also stressed the real estate issue, saying that several of the Melmarkets stores are more than 40,000 square feet, some are very small and the majority are midsized.
Nevertheless, she said, the acquisition was "an opportunity to move into a very tough real estate market. They do phenomenal volume in Connecticut in the smaller Stop & Shop stores and I'm sure they'll do that in Long Island."
Now that Stop & Shop has received regulatory approval to acquire Purity Supreme, analysts have pointed to several challenges this acquisition may pose.
Stop & Shop has already refurbished four of the Purity stores and the conversions "will continue throughout the balance of the fiscal year," according to a statement from the company.
"The challenges are getting the stores refurbished and turned over to being recognizably Stop & Stop stores in time for the holidays," said Mark Husson, vice president of J.P. Morgan Securities, New York.
Other challenges include installing Stop & Shop's proprietary information systems and training employees.
Meanwhile, Stop & Shop is expecting depressed third-quarter earnings related to heavy promotional spending. According to analysts, Stop & Shop was forced to sharpen promotional programs in its core Massachusetts and Connecticut markets to protect its market share from Shaw's Supermarkets, East Bridgewater, Mass.
In a preliminary statement for the third quarter, ended Nov. 4, the company revealed that quarterly sales increased 5.5% and year-to-date sales increased 4.9%. Same-store sales for the quarter and year-to-date were up 3.4% and 3.5%, respectively.