Marshall Returns to Northeast, and to Company in Crisis

JON SPRINGER

With powerful investors behind it and pressure to improve upon it, A&P is poised to make some headlines, one way or another, in 2010. And Ron Marshall, who took over last week as the beleaguered retailer's new chief executive officer, hopes to bring good news.

Marshall inherits A&P in the throes of one of the periodic crises that have marked it for decades. The industry's eyes will be upon him as he attempts a financial and operations turnaround at A&P, and prepares it for its next phase. Either as a consolidator or a piece of a larger roll-up, it's hard to imagine A&P, even while wounded, won't play a significant role in the future of the industry.

Marshall, who holds experience both as a Northeast supermarket executive (Pathmark Stores) and a turnaround artist (Nash Finch Co.) is in a unique position to assist the ailing retailer, observers say. They also say he possesses the personality to rally stakeholders behind him — a key skill for the operator of a company whose largest investors (Tengelmann Group and Yucaipa Cos.) are known for exerting their own influences in the food retail business.

Skeptics say Marshall will have his hands full dealing with retail banners that have lost much of their recent momentum during the economic slowdown. They also wonder about how much opportunity exists for cost cutting at A&P, especially after having realized $150 million in synergies as the result of the Pathmark integration.

In a prepared statement, Marshall said he was looking forward to the opportunity to work with A&P's board and managers “to realize A&P's tremendous strategic potential.” That is a goal that A&P's longtime executive chairman, Christian Haub, has held for some time and is shared by investors like Yucaipa, which sold Pathmark to A&P, then reinvested in the combined company last summer as part of a refinancing that also changed the composition of the A&P board prior to the dismissal of Marshall's predecessor as CEO, Eric Claus.

Yucaipa has never made a secret of its desire to participate in and effect consolidation. But barring another investment, A&P can ill afford to spend after other potential acquisitions, at least until its own operations can stop bleeding. And that's where Marshall comes in.

At Nash Finch, Marshall led an effort at financial restructuring that replaced bonds with bank loans and gradually wound down its money-losing retail operations. With a cleaner balance sheet and more financial flexibility, the wholesaler was soon growing again by acquisition.

Some observers believe a similar plan could emerge at A&P over the coming months.

“Whether he is a merchandising visionary and operations expert is questionable,” one source, who asked not to be identified, told SN. “But I think he's going to be a strong financial leader. For example, Marshall will not stand for the unproductive portfolio of closed real estate that A&P has suffered from for decades. He hasn't at Borders and he didn't at Pathmark.

“There are geographic areas A&P operates in that are very unproductive for them and I think they will get out of those, and wind up consolidating and getting stronger,” the source added.

That plan could see A&P shed stores north of the New York Metro area, and sell some SuperFresh stores in the Baltimore market, sources speculated. Unproductive real estate has continued to be a source of financial headaches for A&P — remnants of its closed Farmer Jack operations in Michigan, for example, caused the company additional losses in the recently reported third quarter as real estate leased more slowly than anticipated as a result of the economy.

Resolutions to those issues would leave A&P to turn its focus on what it has going for it — strong share in some of the most populous markets in the country and a variety of vehicles to capture sales within them. That could be attractive to a potential acquirer of A&P, or the company could look to expand its share to other markets by buying other retailers — Supervalu's Acme banner in Philadelphia to name one that's been mentioned by speculators.

Karen Short, an analyst for BMO Capital Markets, has expressed some skepticism over the ability for A&P to realize its potential, but at the same time, she said she sees little downside to A&P's stock.

“We do not believe there is an easy or obvious fix for A&P, nor do we believe EBITDA margins will reach 5%; however, the new CEO is likely to bring about change,” Short said in a recent research note. Those changes, she said, include new managers, cost cutting, exiting underperforming markets and banner consolidation.

Marshall also will have to reignite momentum behind A&P's banners. Fresh stores under the Waldbaums, A&P and SuperFresh banners had shown great improvement following renovations that punched up fresh departments, but renovations were costly and not optimal to meet a more frugal consumer. Pathmark, imagined as the chain's “price-impact” banner, seemed the right vehicle for the times but it too lost momentum in the transition to A&P.

The company's best performers have been at the top and bottom end: Food Emporium stores in Manhattan have been strong money-makers behind a high-end “gourmet” concept. The discount Food Basics stores have been successful in turning around some money-losing stores under other A&P banners, although it is on a small scale to this point. Some sources said A&P could look at selling the Food Emporium chain as one means of getting the company back on track financially or fund the acquisition of an asset with strategic potential.

One observer, Neil Stern of McMillan Doolittle, Chicago, said A&P still needs to prove that creating a larger, more powerful organization through acquisition can work before it embarks on other buys.

“The model is, you get bigger and you integrate, but they haven't yet shown that can work with Pathmark,” Stern told SN.

Nash Finch under Marshall was a strong stock performer over his tenure, and even his year at ailing Borders Books was largely good for the stock, which was trading at under $1 when he took over. Short said she believes A&P stock will also benefit as a result of the company's new leader.