Two armies in the battle for the Northeast received much needed ammunition in 2005, when Montvale, N.J.-based A&P finally monetized its lucrative Canadian division and Carteret, N.J.-based Pathmark found itself in the hands of wealthy new investors intent on effecting a turnaround.
Pathmark encountered difficultly keeping profits up in 2004 amid commodity cost inflation and aggressive pricing by competitors. By year-end, the company was for sale, hoping to attract bidders on the basis of productive, well-located stores.
That very combination appealed to Yucaipa Cos., the Los Angeles-based private investors headed by Ron Burkle, who said he envisioned a patched-up Pathmark as an agent for consolidation in the Northeast. In the 1990s, Yucaipa performed a similar roll-up on the West Coast, collecting companies including Ralphs, Smith's Food and Drug, and numerous others, culminating in the $13 billion Kroger-Fred Meyer mega-merger in 1999.
Yucaipa played an aggressive role in the Pathmark bidding process, offering to improve an initial bid in exchange for an exclusive period of negotiation during which it convinced Pathmark's directors to approve a deal calling for a $150 million investment for a 40% stake and a five-year management service contract. But at least one jilted suitor wouldn't go away quietly, forcing Yucaipa's bid to withstand several counteroffers and the scrutiny of a proxy service report urging shareholders to reject the deal.
Shareholders, however, approved the deal in June, and Yucaipa summarily went to work. A new chief executive officer, John Standley, and several new board members were named. Stores by year-end featured new merchandise sets, larger produce sections and other changes as Yucaipa attacked the "low-hanging fruit," as a first step in a strategy to raise earnings before interest taxes, depreciation and amortization (EBITDA) from $138 million to $200 million by 2008.
Though suffering some of the same competitive and cash pressures as Pathmark, A&P saw a different solution: A plan to retire its debt through the sacrifice of its lucrative Canadian division, and a replication of Canada's successful merchandising strategies in the U.S.
As laid out by A&P executives in May, the strategic plan would include sales of divisions in Detroit and Canada; cost savings through distribution and administrative restructuring; and improved sales and market share through store remodels that would have the "new A&P" turning a profit by the end of fiscal 2006.
By year-end all but the sale of the Farmer Jack division in Detroit would be under way or complete. That division, responsible for $20 million in EBITDA losses in fiscal 2004, saw several rounds of store closures and several attempts at a labor contract renegotiation in anticipation of a sale. However, a potential deal to sell the units, reportedly to Grand Rapids, Mich.-based Spartan Stores, fell apart and A&P agreed to continue running the stores, at least for now.
The sale of Canada was a considerably more successful endeavor for A&P, ultimately drawing a winning bid from Metro worth $1.475 billion, including nearly $1 billion in cash and a 15% stake in the Montreal-based operator. Shortly after this deal was announced in July, A&P also named a slew of new officers, including Eric Claus as chief executive. He formerly served as president of A&P Canada and pioneered the "two-tier" retail merchandising strategy that A&P had begun applying at its U.S. stores.
This strategy involved converting A&P's conventional stores to either a "fresh box," featuring expanded perishables or extreme value stores. Claus vowed to refine those strategies and to attack costs "with a vengeance."
Analysts observing the metamorphoses of the longtime competitors by year-end were imagining them as potential future partners in a Northeast market transformed from a "fragmented mess," where profits were hard to come by to something else entirely.