A&P EXPANDS FOOD BASICS VIA CONVERSIONS

DAVID GHITELMAN

MONTVALE, N.J. -- A&P here said last week it will convert 10 Detroit-area Farmer Jack stores to its Food Basics deep discount format by early April.

The move followed A&P's announcement that it will increase capital spending in the next fiscal year, with a focus on remodels and on converting underperforming conventional supermarkets to Food Basics stores.

A&P made the spending announcement during a conference call with industry analysts to discuss results for the third quarter and 40 weeks ended Nov. 29. During the call, the company expressed its growing confidence in the discount format.

Christian Haub, A&P's chairman, president and chief executive officer, said, "Food Basics will play a suitable role in the turnaround of our U.S. business."

Although Haub declined to say how much the company plans to boost capex or how many stores it plans to remodel or convert to the deep-discount format, he noted that A&P currently has labor contracts in place that would permit it to operate Food Basics stores in New York, New Jersey, Philadelphia and southeastern Michigan. Haub called these markets "all of the places where we think we have future opportunity" for the Food Basics format.

However, the industry observers told SN they remain skeptical.

Gary Giblen, senior vice president and director of research, C L King Associates, New York, said he thought converting struggling units to the Food Basics format would help A&P "to a small degree, but it's not a panacea to save the company from deterioration."

Others said they weren't even convinced the conversions made sense. David Livingston, a Pewaukee, Wis.-based retail consultant, said he's been favorably impressed by a Food Basics store that he's visited several times in Windsor, Ontario, which lies just across the Canadian border from Detroit, but added that he didn't believe the format would work in the United States.

"I don't think A&P will ever lower prices enough," he said. "Aldi and Save-A-Lot are already in Detroit, and I can't see how A&P is going to get down to their level of pricing."

On the subject of capex, Mitch Goldstein, A&P's chief financial officer, said during the call that spending will rise "very substantially" next year. A&P had budgeted $175 million for capital spending in the current fiscal year, he noted, but had only spent $109 million as of the end of the third quarter. It is likely to spend only about $150 million for the year.

During the call, the company offered a positive assessment of its effort to "relaunch" its Farmer Jack operations in Michigan and Ohio. Haub said Farmer Jack's comparable-store sales during the holiday weeks "were among the best in the company." The conversion of the 10 Farmer Jack stores along with the closing of three other southeastern Michigan units should further aid the turnaround effort, he said.

In the 12-week third quarter, A&P sales rose 8.7%, to $2.5 billion, and comparable-store sales increased 1.2%. The company had a loss of $25.1 million, or 65 cents per share, vs. a loss of $29.7 million, or 77 cents per share, in the previous year's third quarter.

In the first 40 weeks of the current fiscal year, sales grew 5.2% to $8.1 billion, and comparable-store sales rose 0.7%. The company had a loss of $88.5 million, or $2.30 per share, vs. a loss of $172.5 million, or $4.48 per share, in last year's comparable period.