A&P TO ACQUIRE 24 FOOD BASICS

MARK HAMSTRA

MONTVALE, N.J. -- A&P here last week said that a Canadian court has approved the company's proposed settlement of a class-action franchisee lawsuit.

The company will pay $32 million, about half of which will be used to acquire 24 stores operated by franchisees who filed the suit. The acquisition could impact A&P's sales and profit structure in Canada, analysts said.

A total of 29 current and former franchisees of A&P's Food Basics price-impact chain in Canada had sued A&P, alleging that the company withheld supplier rebates. The case had been scheduled to go to trial this month. After the store acquisitions, A&P anticipates having 42 franchised and 58 corporately owned Food Basics stores in Canada, a spokeswoman for the company told SN.

The changes will boost A&P's retail sales for its Canadian division, but will have a negative impact on its Canadian wholesale revenues, which are derived from sales of products to Food Basics franchisees. In fiscal 2003, A&P reported $2.44 billion in retail sales in Canada, or about 22.5% of the company's total revenues. Wholesale sales in Canada were $813.8 million, or about $7.5% of A&P total revenues.

Bill Chisholm, analyst, Dundee Securities, Toronto, said the acquisition of the stores could make A&P's Canadian operations less profitable because the franchisees that were willing to sell their stores to A&P might not have been performing well.

On the other hand, he said, "it could be that the company can run them better."

A&P said in recent financial filings that the margins on its retail operations in Canada have been better than those for its wholesale business, although Chisholm pointed out that the wholesaling operations lack the risk of actually operating the stores.

"The margin in wholesaling is very low, but it certainly is profitable," he said.

Last year, A&P posted a 27% gross margin in its Canadian retail operations, or $658.6 million, and a 1.83% gross margin in its Canadian wholesaling business, or $14.9 million.

The company declined to discuss how the acquisition would impact its profitability.

A&P could eventually seek to transfer the acquired stores back to other franchisees, Chisholm said, although he noted that the company has indicated that it plans to continue operating them itself.

In addition to the Food Basics banner, A&P also operates stores in Canada under the A&P, Dominion, Ultra Food & Drug and The Barn Market banners.