Industry Faces Restructuring Challenges: Panel

NEW YORK — The same forces inspiring a new wave of supermarket consolidation are likely to spark a concurrent groundswell of retail bankruptcies and restructurings.

The latter phenomenon will present opportunities and challenges to lenders, lawyers, strategic investors and others who do business with distressed companies, according to speakers at a panel discussion here Thursday. And understanding the unique challenges facing distressed supermarkets is key to successful restructuring, they said.

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“For traditional supermarkets … the market is competitive, it’s saturated, and its been tough for a number of years,” said panelist Richard Pedone, a partner with the law firm Nixon Peabody. “And it’s bringing us to a flashpoint where you’re going to see a lot more distress.

“It’s a mature industry where people are killing each other. And where that happens, there’s bound to be opportunity,” he added.

Much of the stress on traditional supermarkets has come as a result of non-traditional competitors including clubs, mass merchants and specialty stores that have absorbed nearly all of the sales growth in the industry since 2008, said another panelist, Craig Boucher, a director at Deloitte’s corporate restructuring group. Boucher briefly served as Winn-Dixie’s chief financial officer while that chain went through a Chapter 11 bankruptcy.

According to Boucher, pressure from non-traditional competitors is forcing some smaller supermarket retailers to seek additional strength and buying power through strategic mergers. Although there has been more than $22 billion in supermarket mergers in 2013 — the hottest pace of consolidation since 1999 — there is still more capacity not likely to be part of a merger, he said.

“There are 38,000 grocers in the U.S. — not stores — grocers,” he said. This group accounts for more than 58% of the supermarket industry with no single player accounting from more than 1.2% of the total share.

Restructuring a grocery chain presents challenges that tend not to exist when dealing with non-supermarket retailers, particularly on the legal front, said Lee Harrington, a partner in Nixon Peabody’s financial restructuring and bankruptcy practice. These challenges include so-called PACA claims arising under the Perishable Agricultural Commodities Act, which creates a trust for the benefit of suppliers to collect payment on perishable items.

Harrington, who worked on A&P’s bankruptcy, said that case helped to establish a mechanism to deal with such claims, which totaled $3.4 million.

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