HAUB SEEKS TO CREATE A 'NEW A&P'

Jon Springer

MONTVALE, N.J. -- If successful, the divestitures planned by A&P here would create what Christian Haub, chairman and chief executive officer, called a "new A&P," with significantly reduced debt, plus the cash to accelerate store renovations into fresh market or discount concepts the company believes drive higher sales.

A&P will retain 28 Sav-A-Center stores in New Orleans, which Haub said have a solid No. 2 market position there. A&P's strategy resembles a combination of recent tactics by two food retailers: Greenville, S.C.-based Bi-Lo, which spilt from a larger corporate parent, outsourced distribution, and sold stores to raise money for new expansion; and Safeway, Pleasanton, Calif., which is devoting its resources to renovated stores featuring higher-margin perishables and prepared foods.

Haub said the majority of A&P's remaining conventional stores (250 in Connecticut, New York and New Jersey under the A&P, Waldbaum's, Super Foodmart and The Food Emporium names; and 75 in metro Philadelphia and Baltimore areas under the Super Fresh banner) would be converted to the fresh market format based on their location and demographics. Others will be flipped to the deep-discount Food Basics format. A&P has completed 40 fresh market conversions and 10 Food Basics in those areas already. Yet, continued changes require a capital and focus the company could not summon without first reducing its debt. Converted fresh stores are seeing sales gains of 5% to 10%, Haub said.

Haub estimated fresh store conversions cost around $1.5 million and discount conversions around $800,000 each, though the actual costs vary depending on store conditions and size. The discount division is likely to grow more through new store development, Haub added, saying the difference between the store's respective positions could allow both concepts to compete in the same market without hurting each other.

The "new A&P" -- one without the Canada and Midwest divisions -- generated sales of $5.8 billion, comps of 0.7%, and EBITDA of $129 million during fiscal 2004.

The changes could send A&P back to profitability by the end of fiscal 2006, Haub predicted. Earnings could get a kick as the result of an additional $50 million to $75 million in cost savings the company will pursue through reductions in labor, supply chain and administrative costs, he added.

Asked if supply chain initiatives include a plan to close or sell warehouses and outsource distribution to a third party, Haub told SN, "We haven't determined anything that specific. When you're in a situation that we have been in, you look at everything and don't rule out anything until you have done your analysis and considered what's best for the business."

Al Rispoli, president of Teamsters Local 863 in Mountainside, N.J., which represents union workers at A&P's Edison, N.J., warehouse, told SN that A&P in a meeting with the union earlier this year had said the facility could close. However, it emphasized there were no immediate plans to do so. Analysts told SN they felt outsourcing distribution could make financial and strategic sense for A&P, given its geographic concentration and smaller size.

Bryan Hunt of Wachovia Securities, Charlotte, N.C., told SN that A&P's new strategy is timely, given the market conditions and financial positions of its competitors in the Northeast. He noted that both Stop & Shop, Quincy, Mass., and Pathmark, Carteret, N.J., have been capital-constrained recently, and Wakefern is devoting its resources to a new warehouse.

"What's potentially interesting is having a cash-rich company investing in its store base and taking market share with merchandising and physical changes to its stores, before everybody else can react," he said. "What's also unique in the Northeast is that there's not a true price-impact competitor. So if A&P were to roll out Food Basics more aggressively, that might allow them to really differentiate from the pack."

Perry Caicco of CIBC World Markets, Toronto, speculated A&P may eventually have more in mind, positing a scenario in which A&P sells its five warehouses to C&S Wholesale Grocers and combines the proceeds in a cash-and-share offer for Pathmark. The latter, Caicco said, is effectively for sale, even after the recently announced Yucaipa investment. To be sure, not all observers contacted by SN agreed with this scenario.

Haub described competition in the Northeast as "fierce," and driven by price since the 9-11 terrorist attacks. That has meant competitors chasing the price lead of Wakefern's ShopRite stores. "When you have a major competitor that aggressive, you can't ignore it," Haub said of Wakefern. "I can only speculate what their profit motive is, but they really drive the business off volume. We sometimes wonder how they can do that and still make money at the same time."

He added that A&P is taking the Pathmark-Yucaipa deal seriously "because it means that we'll have more resources to compete, renovate stores and build new stores if necessary."