MONTVALE, N.J. — A&P here last week said it would enter into a new supply and logistics agreement with C&S Wholesale Grocers, marking a key milestone in its restructuring under Chapter 11 and signaling peace with one of its largest creditors and fellow sufferers.
The contract will provide near-term improvements in cost and service levels, and generate annual savings of up to $50 million following the retailer's emergence from Chapter 11, A&P said. A&P cited its current agreement with C&S — and its inability to successfully renegotiate the deal — as a significant contributor to its Chapter 11 filing in December.
The agreement became effective May 29, but is subject to bankruptcy court approval, anticipated late this month. A&P also last week said it would ask the court to concurrently reject its existing C&S supply agreement, which was to have run through 2018.
In court papers filed last week, A&P described the agreement with C&S as “not only the culmination of a long and arduous process, but the beginning of a renewed and symbiotic relationship between [A&P] and C&S.”
A&P said the new deal would improve service levels and is structured to not be cost-prohibitive in the event A&P fails to emerge from Chapter 11, or is sold.
The deal contemplates C&S further consolidating A&P's warehouses and gives the Keane, N.H.-based supplier “super-priority” on claims against A&P, totaling $15.1 million in pre-petition debts. It also assures $28 billion in sales from A&P, should the retailer successfully emerge.
“This agreement will strengthen our existing relationship with C&S, as we work together to drive service delivery and reliability enhancements and substantial efficiencies,” Sam Martin, A&P's chief executive officer, said in a statement.
An internal team led by Marie Robinson, A&P's new supply and logistics executive, analyzed A&P's supply chain and determined the company could substantially improve its supply agreement, A&P said. That led to a request for proposals in which C&S was the low bidder.
C&S has worked with A&P since the 1980s and today provides around 70% of A&P's product. The companies restructured their agreement in 2008 following A&P's acquisition of Pathmark, which had separate supply contracts with C&S.
“A&P entered into the C&S agreement when business circumstances looked very different than they do today,” A&P said.
The new deal lowers A&P's supply and logistics costs as a percentage of sales to competitive benchmark levels, and requires C&S to meet benchmark service levels, A&P said. Significantly, the deal would remain cost-effective whether A&P's sales volume substantially increases or decreases.
“The increase in marginal costs of merchandise is significantly less pronounced for drop-offs in purchasing volume. Given the dynamic state of [A&P's] business, this incremental protection on cost rates is extremely valuable,” A&P said.
The deal also settles various disputes between A&P and C&S — including a pledge from C&S not to dispute the rejection of the previous contract.
C&S gets the assurance of a steady stream of business from A&P. If their agreement is extended beyond emergence from Chapter 11, A&P would be locked into the deal until it purchased $28 billion in merchandise from C&S — which A&P estimated to be seven years beyond the date of a confirmed plan.
Only six months ago, A&P cited C&S' unwillingness to compromise their deal as a trigger to a failed financing and subsequent bankruptcy filing. At the time, sources told SN, C&S had also severely shortened A&P's credit terms. A spokesman for the supplier was not available for comment last week.
A&P said the new agreement with C&S would pave the way toward further cost improvements — including ongoing labor negotiations. “The debtors must restructure their supply arrangements to make significant headway in their overall restructuring efforts,” A&P said.