A&P SETS BIG ROLLOUT OF FOOD BASICS: REPORT

MARK HAMSTRA

MONTVALE, N.J. -- A&P here is reportedly planning to ramp up the deployment of its Food Basics discount supermarkets as a strategy to revive its struggling operations in the United States, SN has learned.

In an English translation of an article that appeared in a German supermarket-industry publication obtained by SN, Christian Haub, chairman and chief executive officer, A&P, said that the company planned to convert most of its U.S. stores to the limited-assortment, deep-discount format that has been successful as a largely franchised concept in Canada. It is in the early test stages in the U.S.

A&P declined to comment on the report, which appeared last month in the respected German publication Lebensmittel Zietung. In the article, Haub states that A&P plans to convert 120 stores to the discount concept in the next 18 months in the "first stage" of the rollout. He doesn't provide details about the timing of the conversions by market or other information about how the company plans to finance and execute the strategy. It was not clear whether the Food Basics banner would be used in all markets.

Some analysts said the conversion to a discount format seemed like a viable strategy, although it would face several obstacles, including labor contract disputes, financing and the fact that many of the company's newer stores, at 65,000 square feet, are larger than the typical Food Basics.

"It can be a messy labor arrangement," said Bill Chisholm, analyst, Dundee Securities, Toronto. He also said the company would have to be careful to maintain enough brand presence in each of its markets to support advertising.

Gary Giblen, analyst, C L King Associates, New York, said it might not be as easy to roll out Food Basics in the U.S. as it was in Canada.

"It might be a good strategy, if they can do it, but I don't see it as a panacea," he said.

He cited the lack of deep-discount competition in Ontario, where A&P operates 13 Food Basics and franchises another 68 that it also supplies as a wholesaler. He also said financing the conversions could be difficult. Although some analysts have speculated that A&P could sell some of its operations to pay for the conversions, Giblen described the current market for selling stores as "the worst it's been in 30 years."

A&P, which operates more than 450 of its 692 stores in the U.S., recently posted a loss for the second quarter ended Sept. 7 of $145 million, and the company has more than $1 billion in debt.

Conversion to Food Basics is reported to be relatively inexpensive, however, compared with typical store conversions. Most of the fixtures are retained, and the stores receive minimal enhancements in decor.

In northern New Jersey and southern New York, A&P signed a contract with Local 464 of the United Food and Commercial Workers Union, Little Falls, N.J., in which it agreed not to convert more than 10% of its 100 stores in the region to the Food Basics banner, according to John Niccollai, president of the local. He said the union negotiated the new contract last October as A&P was preparing to open its first U.S. Food Basics in Passaic, N.J.

"We wanted certain restrictions that would protect the jobs of the A&P workers," he told SN.

Among those restrictions is a provision that workers at shuttered A&P stores be transferred to another A&P, he said. Food Basics employees are hired under a different union contract that has a lower wage structure. In addition, he said the contract stipulates that no stores under 35,000 square feet can be converted to Food Basics.

Niccollai said he knew of no other union locals that had contracts restricting the Food Basics rollout.

He also told SN that A&P expects to reach its limit of 10 conversions in the New Jersey/New York market by February. A&P already converted three stores -- one in Paterson, N.J., and another in Brooklyn, New York, in addition to the Passaic site -- and the company recently said it planned to convert three more in New Jersey.

In Canada, Food Basics stores average about 25,000 square feet and offer about 7,500 items. In October A&P transferred its senior Canadian executive, Brian Piwek, to president and CEO of A&P U.S. He had been successful in converting many of A&P's older, urban stores in Ontario to Food Basics, a strategy that analysts said he was likely to pursue in the U.S.

Niccollai, however, indicated that A&P has discovered that the concept appears to appeal to a wider demographic in the U.S.

The Germany-based retail giant Tengelmann Group, which is owned by Haub's family, controls 57% of A&P.