Yucaipa Could Transform A&P

JON SPRINGER

MONTVALE, N.J. — It's Ron Burkle to the rescue for Pathmark - again.

Burkle, whose Yucaipa Cos. sold Pathmark to A&P two years ago, earlier this month reinvested in A&P, seeking once again to straighten out Pathmark and, observers speculate, A&P itself.

Yucaipa's $115 million investment, completed earlier this month, gave it a 27.6% stake in A&P, along with two additional seats on A&P's board of directors. The investment was part of a plan to inject more than $400 million into A&P through private stock sale and a debt offering. Due in large part to having lost momentum at Pathmark during the ownership transition, A&P has suffered deteriorating sales and earnings.

The state of A&P, in fact, in many ways resembles Pathmark when Burkle and Yucaipa invested in that business nearly five years ago.

In both cases, Yucaipa invested through a private stock sale while share prices were downtrodden, earnings were falling, cash was constrained, and management was under pressure.

“The parallels are so many, it's almost eerie,” said one observer, who asked not to be identified.

Were Yucaipa to duplicate the efforts undertaken during its last round with Pathmark, expect to see changes throughout A&P in coming months. These could include the elimination of certain banners, changes in management, and further progress toward a long-term goal of the Pathmark investment Yucaipa had yet to complete — a large-scale roll-up of food retailers along the East Coast.

“Having Yucaipa's outside eye may provide a new point of view for A&P,” Burt P. Flickinger III, managing director of Strategic Resource Group, New York, told SN. “Yucaipa's got the perspective of a lot of operating companies across the country whereas most of A&P's people have tended to come internally, or from Co-Op Atlantic in Canada [the former employer of Eric Claus, A&P's chief executive officer].”

Yucaipa representatives were unavailable to comment on this story.

Under control of Yucaipa in 2005, Pathmark named new executives with ties to its former supermarket investments, including John Standley as chief executive officer. After a period of intense study, Standley and his team set out to improve earnings at Pathmark on a strategy of stimulating perimeter sales to complement its traditional strength in Center Store volume.

In a 2006 interview with SN, Standley described Yucaipa's work with Pathmark as changing it from a company focused on internal processes to one with an eye on the consumer. Financial changes included a labor buyout and early retirement program that helped reduce costs.

“He challenged many of the assumptions about how the business was being run,” one source said.

A similar eye on A&P could trigger changes there, the source added, speculating for example that the SuperFresh or Waldbaums names could be phased out for a more simplistic structure. Although A&P officials have said in the past they did not intend to eliminate any existing brand names, several SuperFresh stores have taken on the Pathmark banner in recent months. A&P officials more recently said they would accelerate a “format optimization” strategy of rebranding its stores to the format most appropriate for its shopper base, indicating the Pathmark name would be added most often.

In the meantime A&P is attempting to position Pathmark as a “price impact” format in a multi-format portfolio. Yucaipa wouldn't necessarily turn A&P away from its attempts to return Pathmark to its price-focused roots, sources said, but recovering from the strategic errors along the way is a major inherited challenge.

Flickinger said his recent studies of Pathmark revealed a large number of out-of-stocks and poor customer service. Other sources indicated that Pathmark's large urban stores — traditionally its most productive units — had suffered since the takeover, indicating A&P lacks the knowledge to properly run those stores.

A&P officials acknowledged having erred in reducing advertising and allowing pricing to drift too high at Pathmark, and momentum has slowed.

“Burkle's team has a lot of experience running high-volume stores, and Pathmark is struggling with volume right now,” Flickinger said.

In connection with the Yucaipa investment, A&P said Terrence Wallock and Frederic “Jake” Brace have joined its board of directors, elected by Yucaipa. Wallock is a former executive at several Yucaipa-led food retailers including Ralphs Grocery. Brace is a former chief financial officer at United Airlines. Yucaipa previously had one board member, Gregory Mays, a Yucaipa veteran who most recently served as chief executive of Wild Oats Markets, is already on A&P's 11-member board.