Pricing Woes Sink A&P's Q3

MONTVALE, N.J. — A&P couldn't promote itself out of the recession.

The retailer last week swore off its previous pricing practices, saying it chased too many vendor promotions providing too little return. Ineffective pricing programs — amid deflation and a sluggish economy — were at the heart of a 5.8% decline in comparable-store sales during the fiscal third quarter, officials said last week.

The financial results for the quarter, which ended Dec. 5, included a loss of $560 million — or $14.35 per share — led by a $412.6 million write-down for Pathmark. EBITDA of $36 million declined 54% from the same period last year and came in well below analyst expectations of $67.8 million. Its stock subsequently fell by nearly 20% and credit agency Moody's downgraded its corporate, debt and preferred stock ratings to Caa, indicating a poor standing and greater probability of default.

Christian Haub, executive chairman and interim chief executive officer, said the company during the quarter moved to change its merchandising approach after realizing consumers were confused by its pricing programs.

“One of the major factors contributing to our less-than-expected performance was the previous belief that the best way to combat declining sales was with even harder promotions,” Haub told analysts in a conference call discussing results. “We layered one promotional program on top of another in an attempt to capture more foot traffic, but in fact ended up confusing the customer. The issue was almost an exclusive focus on promotions instead of investing more into better prices and creating consistency around our offer to the consumer.”

Heavy promotions and “clutter” at the upscale-leaning fresh stores under the A&P, Waldbaums and SuperFresh brands also blurred the line between the format and that of Pathmark, positioned as the “price impact” entrant in A&P's multi-format strategy, Haub said. EBITDA margins at fresh stores plummeted by more than 2% in the quarter as they joined Pathmark among struggling banners at A&P.

Haub said the company uncovered the pricing difficulties with the help of a team of executives from investor Yucaipa Cos., who were called in to lend a hand in the wake of CEO Eric Claus' departure in October. Haub described Yucaipa's work as a “rigorous strategic assessment” followed by a short-term tactical plan to simplify pricing programs. Yucaipa performed a similar strategy upon taking over Pathmark before selling it to A&P.

Haub declined to provide details of the new programs but said they resulted in fewer marketing and promotion programs and more emphasis on everyday shelf prices. The tactics also led to better results among shoppers at Christmas than Thanksgiving. Haub said the latter holiday was “particularly disappointing” for A&P.

He said the “less complex” pricing program was aided by unnamed executives who developed pricing programs with Yucaipa's Food 4 Less warehouse chain in California in the 1990s. Burkle himself served as CEO of that company, which later merged with Ralphs Grocery Co., Fred Meyer and finally Kroger.

John Heinbockel, an analyst for Goldman Sachs, New York, in a research note last week said the issue at A&P was that “some items were priced too low while others were priced too high.” He added that addressing the issue was “encouraging as it suggests more rationality than food retailers typically exhibited.”

Haub said the goal of the pricing program was to arrest sales declines and stabilize the business in the short term.

Under increasing financial pressure, Haub said he would look to reduce expenses by $150 million annually, with costs and processes in administration, labor and supply likely to be affected.

The Pathmark write-down came as A&P reported a sales decline of 4.8% at the beleaguered price-impact banner and further deterioration in operating earnings and margins. A&P also increased its liability for closed stores, primarily in Michigan, where the recession is making leasing the properties more difficult. This adjustment resulted in a $69 million charge.

Q3 RESULTS