Sponsored By

CHRISTIAN HAUB'S

MONTVALE, N.J. -- A&P hadn't had a complete leadership transition in 18 years.So the news last month that Christian Haub was taking the helm was an event that raised hopes for a resurgence of the 139-year- old company.A&P's financial underperformance in recent years has led shareholders and analysts to wonder when its promised turnaround would occur. Haub's moves will eventually help answer numerous

David Orgel

June 22, 1998

16 Min Read
Supermarket News logo in a gray background | Supermarket News

David Orgel

MONTVALE, N.J. -- A&P hadn't had a complete leadership transition in 18 years.

So the news last month that Christian Haub was taking the helm was an event that raised hopes for a resurgence of the 139-year- old company.

A&P's financial underperformance in recent years has led shareholders and analysts to wonder when its promised turnaround would occur. Haub's moves will eventually help answer numerous questions surrounding the company. How fast will the financial picture be improved? Will the retailer make the necessary capital commitments to make the store base more competitive? Will A&P choose to remain in its secondary markets?

In an interview with SN, Haub, 33, A&P's president and chief executive officer, made clear that his goal isn't to take quick steps that would serve only to make the financial picture seem better. Haub, whose family owns parent company Tengelmann, Mulheim, Germany, and controls A&P, is laying a more extensive groundwork as he takes the leadership spot held by James Wood since 1980.

"I'm not looking for a quick turnaround here," Haub said, noting that steady quarter-by-quarter improvements are more like it. "I'm looking at building a successful company longterm. The plan we're putting into place now isn't geared toward turning things around quickly. It's going to be a longer-term building process."

That effort is resting on the pillars of what Haub calls his "nine great actions and priorities," a plan that includes everything from improving merchandising and marketing to keeping good employees. There's also a revamped management team in place to tackle many of these issues.

But perhaps the most important priority on the list is the need to improve the aging store base as A&P battles competitors with large, updated stores. Haub said the newer, larger stores developed over the past three years have shown sales improvements so dramatic that the company's direction is confirmed.

"Our greatest challenge is that there are still too many smaller, undersized stores in the marketplace," Haub said. "To be successful today in the supermarket industry you have to have modern, state-of-the-art facilities that offer the customer one-stop shopping."

The major focus on upgrading square footage represents a change from A&P's direction in the 1980s and early 1990s, when acquiring companies was a primary activity. The company achieved top market shares in core markets by buying other retailers, but it also ended up with many smaller stores in the process.

"So replacing our store base with these larger new stores is key," Haub said. "We're very focused on that and have a great development team. We have a tremendous pipeline of new stores for the next three to five years. So we are well on track."

Haub's other strategies to lift the company's business include the following:

Finding the best solutions to build fresh-foods merchandising, particularly in the meals area, where A&P is even pursuing a strategy via the Internet.

Grabbing new private-label opportunities, including in-store shops.

Building niches in areas like the baby and pet categories in order to defend market share from other retail formats.

A&P hopes its strategies will jumpstart its financial performance. The retailer's earnings this decade peaked in 1990 with profits of $3.95 a share. In the early 1990s problems in its Canadian market and a poor economy hurt results, and the company posted a loss in 1994 because of its Canadian unit. The company was rebounding in 1995 and 1996 but recorded lower results in 1997, when profits were $1.65 a share. The last two quarters of 1997 were particularly disappointing.

"Of the major supermarket chains, A&P has had probably the most disappointing performance over the past several years," said Debra Levin, an analyst with Morgan Stanley Dean Witter, New York. Levin said A&P probably has two more quarters of negative earnings comparisons before its investments in new stores, technology, training and other areas begin to improve the picture.

Last year sales rose to $10.3 billion from $10.1 billion, and comparable-store sales declined 1.6%, much of it because A&P is self-cannibalizing its smaller stores when it builds larger ones, Haub said.

The company's stock price, which hit a high of $65 in 1989, fell in the 1990s as A&P had its troubles. In the last several years it has ranged in the $20s and $30s. Haub talks of the need to "build a confidence with Wall Street and the investor community."

The Tengelmann family owns 54% of A&P. The rest of A&P is public. Tengelmann is owned by Erivan Haub and his three sons, one of whom is Christian. Tengelmann's roots stretch back to a company formed in 1867 by the forefathers of Erivan Haub. The company was renamed Tengelmann when it entered food retailing in 1893. Christian Haub has been co-CEO of A&P for the past year along with Wood. He took the sole CEO spot last month.

In recent months Christian Haub has fine-tuned the A&P management team that will lead his program. Parts of the team came from another metro New York retailer, Grand Union. These executives include Joseph McCaig, executive assistant to the chief executive officer, and William Louttit, chairman and chief executive officer of the greater New York Metro operations.

In addition to McCaig, some other members of the senior executive officer team include Michael Larkin, senior executive vice president and chief operating officer; Aaron Malinsky, executive vice president of development and strategic planning; and Fred Corrado, vice chairman and chief financial officer.

A&P faces some big challenges, but those who take the long view might say the company has an advantage. In its history of almost 140 years, the retailer has overcome many hurdles while creating multiple formats, merchandising concepts and other ideas that have become industry standards. The company has rarely done things on a small basis. While its business today no longer stretches from coast to coast, it still runs operations on a wide geographic scale. Its core areas include the greater New York area, Ontario and Detroit. But its expansive area of operations includes locations in New England, Atlanta, New Orleans and Virginia.

There were 936 stores at the end of the last fiscal year, not including 52 franchised units in Canada.

The chain is approaching a key period in its resurgence effort.

"He's got significant challenges," Levin said of Christian Haub. "That's because of a tough competitive environment, and many of the stores are in areas where the company does not have dominant market share. And they lack critical mass in areas such as New England, Atlanta and Virginia."

But, Levin added, "over time the quality of the store base is improving, and that should help them over the next five years. And I get the sense that management is very focused and starting to think more strategically. They're more focused on consistency. It could produce meaningful changes for the company if they accomplish that."

Ed Comeau, an analyst with Donaldson, Lufkin & Jenrette, New York, said, "Christian spearheaded some of the real-estate issues. That's one piece of the turnaround. Hopefully, the new stores can come up to a good level of profitability. That's one of their biggest challenges."

Mark Husson, an analyst with Merrill Lynch, New York, pointed to the need for aggressiveness by A&P.

"The stated capital-expenditure plans are not particularly aggressive," he said. "They're still only about 3% of sales. That's not a major reorganization, that's a standard number for the industry.

"Many markets in which they operate are still very unconsolidated, like Philadelphia and New York. And in areas like Atlanta, you have to question if it will ever reach the critical mass needed to make money. A&P has a vestigial presence in other markets where it has to decide to either go for it or get out.

"I think the new team has a great opportunity to be more aggressive in capital expenditures and in consolidating markets like Philadelphia and New York by making acquisitions to give them leverage on their fixed cost base in those markets," Husson said.

The company clearly believes its commitment is adequate for growing square footage and staying in the competition. Capital spending is increasing to $300 million from $270 million, with more than 60% of that being spent on new stores. A&P opened 40 new stores in 1997 and plans to open at least 45 in 1998. The number of remodels/enlargements will be advanced to 80 this year from 45 last year.

"Our long-term goal is to get to 50 new stores a year," Haub said.

But A&P continues to close smaller stores to ensure store-base modernization. "We'll still close between 50 and 60 stores a year. But square footage should still grow because more is being added than being closed."

Average store size for the chain continues to grow and the current prototype is in the mid-50,000-square-foot range. The largest stores are about 65,000 square feet, but those are the exceptions.

The new stores are drawing traffic from a 7- to 10-mile range, whereas traditionally A&P's stores pulled from a 3- to 5-mile area. "If you look at a market like New Jersey, people are driving by one or two of our stores to get to the big store. Eventually, the smaller stores will be replaced by the bigger ones, but it will take a few years."

A&P is also managing to infuse lessons from the new stores into the rest of its store base. "The priority is to get the fresh-foods departments as close to new stores as possible, and expand other areas as well," Haub said. "Introducing pharmacies in a lot of existing stores drives sales."

Not surprisingly, A&P's core areas will get the biggest priority for expansion. These include the greater New York marketplace, Detroit and Ontario.

A&P's metro New York area, which operates 268 stores, includes New York City, Long Island, New Jersey, Westchester and Connecticut. Banners include A&P, Food Emporium and Waldbaum's. "Our performance is good in this market because we're building new stores," Haub said.

"From a real-estate point of view we've had the advantage of being the only very serious new store developer in this marketplace," he said. "Our execution of delivering deals has made the development community look at us first for new store sites. That's a tremendous advantage."

However, the area is marked by a large number of competitors, including Pathmark Stores, Woodbridge, N.J., and ShopRite, the banner of the Wakefern food cooperative based in Elizabeth, N.J.

Haub said some weaker competitors in the market have become aggressive in trying to grab market share.

Haub noted that A&P's upscale Food Emporium banner, which has been a stellar performer for a number of years, will add a number of new stores, notably in Manhattan. "So we're seeing a lot of opportunity for that concept in the established markets."

Profit declines at Waldbaum's affected overall corporate earnings last year. Haub noted the intensely competitive nature of the Long Island business, with warehouse clubs making inroads and double couponing affecting pricing. But the company has moved to improve the situation, he said. "That turnaround will come from the implementation of the 'great A&Ps,' and also by adding new stores this year, which they haven't had in a while. We will remodel a number of stores."

In the Michigan market, the 101-store Farmer Jack banner has been building new units and market share, Haub said. The chain competes with Kroger Co. and Meijer Inc. and has been setting the pace on category management development for the entire company.

In Ontario, the company operates 187 stores and franchises 52 others. The Food Basics limited-assortment concept -- most of which involves franchised stores -- is proving to be a good fit for the market, Haub said. The low-price discount format, which has bare-bones services, grocery and prepackaged meats, is in its third year and growing.

But A&P hopes to add to that success by targeting another Canadian banner for growth. "We're now looking at building new supermarkets, especially in the city of Toronto, under our Dominion banner," Haub said. Dominion operates in the ethnically diverse metro-Toronto area.

A&P's Mid-Atlantic region is another area slated for growth -- with the Super Fresh banner. This region includes Philadelphia, Baltimore and Washington.

Super Fresh, however, stumbled last year in Pennsylvania where competition is intense and the economy is not optimal. But A&P hopes to reverse the profit declines. "We'll be looking at improving stores and operations," Haub said.

"We had impact from new square footage in the marketplace. When Giant of Landover started opening stores, there was a significant reaction from the competition. Acme has put a lot of new stores in the marketplace in the last two years.

"We've also seen growth by some nonunion companies like Genuardi's and Giant of Carlisle. That puts more pressure on the unionized players. We have to control our labor costs to make us more competitive."

Among other operating regions, Haub said, A&P's Kohl's banner in Wisconsin has been a "consistent performer" in an area of good population growth. Business has been improving in A&P's stores in Atlanta and New Orleans.

In New England A&P has been gradually replacing stores, building selectively and focusing on improving the profitability of larger, newer stores under the Super Foodmart banner.

In Virginia, conversions from Super Fresh to Farmer Jack have gone well in the Tidewater and Richmond markets despite intense competition. "There's probably not been a market that's seen more square footage growth in the last 18 months," Haub said.

"So despite the enormous growth of supercenters and Hannaford, and the Food Lions and everyone else, it's amazing how well we've maintained our position there. I think the Farmer Jack approach has created excitement."

Haub declined to speculate on whether A&P might consider exiting any noncore markets. Said analyst Levin: "I don't get the sense that management is focused on divestitures at this point."

Asked about the potential for acquisitions, Haub said any such deals have to work into the company's existing growth strategy. "If there are opportunities to improve the store base, then we may look at it," he said. "But we would only be focusing on existing markets. We're not looking at expanding to new markets. We would be very careful about acquisitions where we would just add to our problems and buy a lot of small stores. That's what we're really trying to get out of."

A&P's goal isn't just to build bigger stores. It hopes to upgrade merchandising as it boosts its square footage.

One such area is fresh meals. The company, like much of the industry, is still mulling the best solutions for this category.

"It starts with simply providing rotisserie chicken and fried chicken and fixtures to sell it," Haub said. "And we're looking at expanding sandwich programs and prepared-food programs we could easily roll out to all our stores whether big or small. In our bigger stores, we're working on in-store prepared meals with our in-store chef program."

What are some of the elements marking the direction at A&P's larger stores? A visit to one near A&P's headquarters found busy lunchtime traffic, particularly in the prepared-foods areas. The store's offerings included a large salad bar, hot soup service, an antipasta bar, and a large range of "Carryout Cuisine," which was primarily ready to heat.

There was sushi-to-go. Ready-made sandwiches included rollups, seafood pitas, subs and prosciutto baguettes. Ready-to-heat entrees ranged from chicken francaiss .... to spaghetti and meatballs to meat loaf and mashed potatoes. Shoppers could grab a bean and cheese quesadilla or some Spanish rice. Pizza, fruit salads and spare ribs were on hand.

The store adds a dedicated checkout in the area to ensure fast exits, especially at lunch. The meals effort is making its way into cyber-territory with a new program to accept Internet orders for deli and bakery products, including prepared meals. The company is developing the program in conjunction with Seattle-based Cybermeals. A&P is beginning with about 200 stores but expects to expand it to 80% of its store base.

"We look at that as another opportunity to promote our home-meal-replacement offering and gain experience with Internet-based retailing," Haub said.

A&P may be mulling the right formulas for meals, but it's already fine-tuned merchandising in the arena of private-label products. Its Master Choice and America's Choice programs are well established across a broad range of categories. On a sales basis, private label represents "about the mid-teens range" in terms of overall percentage of the total. On a unit basis it is "upper teens approaching 20%"

"We think we have some good growth opportunities," Haub said. "We hope to improve it even beyond where it is today. Private label is another way of differentiating the store and creating loyalty to you vs. the competition. You need to make private label top of mind for the customer.

In an effort to beef up store-label merchandising, A&P is opening in-store shops for its Eight O'Clock Coffee brand. The presentation, which includes a sit-down counter, "is a way of generating our Eight O'Clock Coffee image," Haub said.

A&P is sharpening its marketing approach in order to differentiate its stores from the competition and build sales, Haub stressed. Card marketing that includes rewards programs is one of the newer approaches.

"We're having tremendous success with some tests and programs, like our baby club and our air miles promotion," Haub said.

The air-miles program in Canada gives rewards for customer dollars spent, and includes an extensive list of local retail partners. A&P has the exclusive rights in the supermarket category.

The baby club gives a $20 cash rebate for spending more than $200 on items in the baby category. Launched at Farmer Jack last fall, the program was successful in targeting young families that are willing to spend all their dollars in one store.

"It gave us an opportunity to recapture business in a category that's been under attack by discounters, warehouse clubs and drug stores," Haub said.

A&P's overall direction is to create a one-stop shopping environment with features including banks, pharmacies, expanded pet shops, baby care sections, reading centers and kitchen shops, according to the company's annual report.

While in-store merchandising and marketing are front-burner topics, A&P is also focused on back-room efficiencies. The company is mulling its options in areas including the competitive Northeast region.

"The Northeast is an area of opportunity," Haub said. However, he stressed that, unlike many of its competitors, A&P would not "go all-third-party" in sourcing its business. A&P counts itself among the many Northeast retailers that make use of C&S Wholesale Grocers, Brattleboro, Vt., for a portion of their product supply.

"We'll be better off with self distribution," he said. "But there may be certain parts of the business that could lend themselves [to outsourcing]."

Stay up-to-date on the latest food retail news and trends
Subscribe to free eNewsletters from Supermarket News

You May Also Like