WEAKENED RETAILERS START TO FADE OUT

David Merrefield

It's never pleasant work to watch the downward spiral of a food-retailing business, especially one that has a long history. But it's happening: Both Grand Union and Jitney Jungle of America are liquidating and the banners are destined to vanish, or to be sharply attenuated.

Let's take a look at Grand Union first. At one time, Grand Union, based in New Jersey, was quite a force on the Eastern Seaboard with a network of stores running from New England to the Caribbean, and filling much of the territory in between. Now, as you'll see by reading the news article on Page 1, nearly all the assets of the company are being sold to its wholesaler, C&S Wholesale Grocers.

Imagine that: The sale of Grand Union to its wholesaler is not just an unexpected denouement, but the fact that a chain the size of Grand Union wouldn't be self-distributing is telling in itself. Even now it consists of nearly 200 stores. Grand Union went to an outside supplier in connection with one of its bankruptcy filings, of which it had three in the past five years.

It is difficult to pin a single reason on the failure of Grand Union. It seems as though just about everything that could happen to a supermarket company happened. Ownership changed. Debt grew. Management churned constantly (at one point its topside executive was commuting from Los Angeles). Embezzlement was charged. Serial bankruptcy occurred. Assets were divested. And so on it went.

But even through such a litany of woe, Grand Union could have survived nicely if it had a vibrant and growing top line. It didn't, and thereupon hangs this tale. Grand Union probably waited far too long to start to modernize and enlarge its small retail spaces. And, by the time it became apparent it would need to do so, it simply lacked the financial wherewithal to take action, especially because many of its locations were landlocked and there was no inexpensive way to do much. At the same time, it started to feel the pinch from its competitors who had played the expansion card earlier. Also on the competitive front, retailers similar to Grand Union were being identified as buyout targets and, therefore, becoming parts of deep-pocket operators. Grand Union wasn't wooed for the very reason it couldn't easily upgrade its stores and had no way to differentiate.

Another venerable retailing name on the verge of extinction as a separate company is that of Jitney Jungle. That Mississippi company, with very old roots in wholesaling and retailing, is being liquidated with many store locations going to Winn-Dixie Stores and Bruno's Supermarkets, as was reported in SN last week. Jitney's woes center around an inability to service debt occasioned by its leveraging and the ill-advised purchase of Delchamps in the late 1990s.

But, as is the case with Grand Union, if Jitney had a strong top line, it could have serviced its debt. After all, its management agreed to take on debt with confidence it could be retired. That didn't happen, again because of an inability to properly respond to changes in the industry, particularly consolidation.

What's happening is that the industry has recapitalized in the past few years with resources flowing from less efficient users of capital to more efficient users of capital. These two chains, unfortunately, seem to be in the category of highly inefficient users of capital, so they presented little value to efficient users, but for real estate.

This won't be the last of it. Other regional chains that are unable to combine with a stronger player, that are highly leveraged or that are unable to find a point of differentiation -- or all of those -- are highly vulnerable now.