A&P STRUGGLING TO OVERCOME 'RENEWAL' WOES

JON SPRINGER

MONTVALE, N.J. -- A&P here will be under intense pressure to realize the benefits of its Great Renewal strategic initiatives amid disappointing earnings and heavy competition, financial analysts told SN.

In the wake of a $14.5 million loss in the fiscal third quarter ended Dec. 2 (reported in SN, Jan. 8), A&P will reduce its 2001 capital expenditures, slow its store development program, re-examine its activities, and "eliminate all things not vital to our current situation," Christian Haub, A&P's president and chief executive officer, said in a conference call. Haub said heavy competition, worse-than-expected performance of some new stores and poor execution contributed to disappointing results.

A&P has also named several new executives, including last week a new chief operating officer, Elizabeth R. Culligan. Culligan, who formerly served as president of Nabisco International, East Hanover, N.J., asumes a position left vacant when Michael J. Larkin left A&P in July.

"It is imperative that we generate more profitable sales and reduce expenses, particularly with executive overhead," Haub said. "We'll also look at labor, advertising and supplies."

One aspect of the business under examination is A&P's ongoing Great Renewal II initiative, Haub said. A&P has already spent $75 million on the project, which will implement new technology systems and processes aimed at reducing supply chain costs and improving efficiency. "Even though we believe we are on the right track, we think it's prudent to undertake a complete review of the entire initiative," he said.

Analyst Mark Husson of Merrill Lynch, New York, told SN he feels A&P desperately needs to revamp its systems if it is to compete -- and will find a way by cutting other corners.

"It's not a question of shall we do it, or shan't we -- it's a question of what other costs can we cut to make sure this gets done," Husson said. "They've got execution problems, and Great Renewal II can provide the systems and discipline they lack now."

Ed Comeau, an analyst for Credit Suisse First Boston, said A&P's problems are compounded by less success than anticipated from the first phase of the Great Renewal project, the program to shed unprofitable operating divisions launched in late 1998.

"It's pretty clear they're having problems with a whole list of things," Comeau told SN. "It's not only that there was a lack of execution, but a lack of benefits from Great Renewal I. They projected good savings from that program, but a year later, they're still showing a loss.

"Christian appears to be very discouraged not to be able to achieve the results he went after," Comeau added. "It's hard to be optimistic when you keep banging your head against the wall and not getting the results you want."

In the conference call, Haub said heavy promotional activity coupled with a softening in consumer spending contributed to A&P's results.

"I'm very disappointed with our progress," he said. "As we feared during our October conference call, the competitive climate got worse during the third quarter, causing increased promotional activity and lower price points on key items -- confirming the deterioration of the consumer spending envir-onment.

"I'm also disappointed in our own ability to execute our own programs and manage our results in this environment."

Though sales gained 4% to $2.4 billion during the quarter, Haub said gross margins were down significantly. "We spent margins without achieving the necessary sales to pay for this investment," he said. Haub said A&P is developing an improved private-label program to capture more margin dollars.

New Stores Struggling

Haub said a number of recently built or acquired stores have failed to perform as well as anticipated, and that A&P would slow its store openings and revamp its development process as a result. The company may also close or sell poorly performing stores, he said.

Haub did not specify which specific stores were struggling, but Husson said he suspected some New York metro-area stores, including A&P's elaborate new "Bridge Store" located at the foot of the Queensboro Bridge on the East Side of Manhattan, were underperforming. Husson called the bridge store "the most gorgeous white elephant in the industry."

Haub said the new stores were struggling mainly because of less-than-anticipated volume and that A&P is working to reduce inventories and make more efficient use of labor at those stores. He added that A&P would improve its consumer research analysis for new stores. "We have to take the existing consumer base in our new store trade areas more into account," he said.

A&P expects to open between 20 and 30 new stores during 2001, Haub said. Its capital expenditures would be reduced $125 million to around $275 million, which he said would keep spending at the level of A&P's internally genera-ted cash.

Canada Not For Sale

Haub denied some Canadian press reports that A&P's Canada division stores were for sale, and said the division was performing well. "I know there has been some speculation in press, but clearly, Canada is not for sale at the moment," Haub said. "It is a core part of the business and is performing well."

Comparable store sales in Canada were up 4.2% during the third quarter, Haub said, outpacing U.S. stores. A&P overall experienced comp-store increases of 1.4%.

Haub said he was pleased that A&P was able to maintain or grow market share in all its regions during the quarter. "Defending and growing market share remains one of the key strategic priorities of the company," he said.

New Personnel

In addition to newly named COO Culligan, A&P has made a number of key management changes, Haub said. During the third quarter, Craig C. Sturken was named president and chief executive officer of the company's Atlantic region. Sturken formerly held the same position at A&P's Midwest division. Sturken replaced Bill McEwan, who left the company.

Dennis Edison succeeded Sturken in the Midwest division. Edison previously served as executive vice president, merchandising and marketing for the region. A&P also named Karen Stout head of its New Orleans division. Stout formerly worked for Harris-Teeter, Matthews, N.C.

"I am more confident today about the strength of our operations leadership than I was at the end of the second quarter," Haub said.

Heavy Competition

Haub characterized competition as "pretty tough" in all of A&P's trade areas. In the Northeast, A&P's banners are contending with Edward's conversion to Stop & Shop, in a combination of banners operated by Dutch retail giant Ahold. A&P is also monitoring the ongoing spinoff of Grand Union stores to new corporate parents, and activities at the Elizabeth, N.J.-based Wakefern co-operative, which may lose a large Shop Rite operator in Big V, Florida, N.Y., he said. In Philadelphia, A&P's Super Fresh banner is preparing to battle with Norristown, Pa.-based Genuardi's, which is being purchased by national operator Safeway, Pleasanton, Calif.

"Everyone is fighting for sales," Haub said. "We're concerned with Stop & Shop's conversion of the Edward's stores. We've seen some very aggressive promotions in pockets where they have completed the changes on Long Island and that attracts customers."