Point of no return?

As A&P navigates Chapter 11, the industry waits to see what is next for this iconic retailer. By Richard Turcsik Bottom line: Is A&P going to survive? That is the $64,000 question that could impact thousands of jobs and careers and change the face of su­permarket retailing in the heavily populated and lucrative North­east and mid-At­lan­tic regions. With the Great Atlantic & Pacific Tea Co., perhaps the most storied of all American supermarkets, in the midst of the most difficult chapter of its history—Chapter 11 of the U.S. Bankruptcy Code to be exact—there is some doubt as to whether the chain will ever regain its footing. A&P’s story is a good tale for any retailer, including the very large ones who believe they are somehow invincible. Once the world’s largest retailer, A&P operated 15,737 stores in the 1930s. As late as the 1960s, it still operated more than 4,300 stores in 37 states, the District of Columbia and Canada. Today, the mighty monster is down to just 336 units in eight states, excluding 25 Superfresh stores in Maryland, Delaware and D.C. that have been put on the block. Its banners include A&P, Pathmark, Waldbaum’s, Superfresh, The Food Emporium, Food Basics and Best Cellars, its chain of wine and liquor stores. Officials at the 152 year-old Montvale, N.J.-based chain say the Chapter 11 process, which it filed with the U.S. Bankruptcy Court for the Southern District of New York on Dec. 12, will facilitate its financial and operational restructuring, which is designed to restore it to long-term financial health. The chain certainly has its supporters. “Do I think their prospects for survival are good? Yes, I do,” says Antony Karabus, a retail advisor with New York-based PwC, who is based in the firm’s Toronto office. “The reason is because I think they have fantastic real estate. They operate in the Northeast, an area of the country that is very rich. It is a market that is still very fragmented and Walmart Supercenters are not in the market. That means there is still a significant market up for grabs.” In fact, Karabus sees parallels between A&P and Winn-Dixie and Bi-Lo, two Southern chains that successfully reorganized under Chapter 11. [See sidebar, page 26.] “They both used bankruptcy to clean up the balance sheet and get rid of their dark stores. You are getting rid of the dark stores, all of those problem contracts and those types of things, and you end up with a much cleaner company,” he says. “But getting a much cleaner company doesn’t mean anything if you don’t have a clear value proposition. And I think what Bi-Lo has done is they have found it and so has Winn-Dixie and I believe A&P can too.” So far, A&P has used Chapter 11 to do just that, but other observers say it needs to do more if it is to ultimately survive, including dramatically improving customer service and sharpening pricing to better compete with a rapidly evolving market that includes market- leader ShopRite and shrewd competitors such as Wegmans, Whole Foods, Trader Joe’s, Target and Aldi. “What A&P has been lacking for at least 25 years is a point of view as to why you should shop at A&P versus shopping at all of the other options available,” says Spencer Hapoienu, president of Insight Out of Chaos, a New York-based database marketing loyalty company. “They never stood for anything. It seemed likes A&P was always coming out with something new that was a reaction. They never led the marketplace.” Failure to adapt Dr. Richard George, professor of food marketing, Gerald E. Peck Fellow, at the Haub School of Business at Philadelphia-based Saint Joseph’s University, concurs. “If there’s one catchphrase that epitomizes their demise it’s ‘the failure to recognize and adapt to change,’” he says. He cites a 1930s Wall Street Journal article that stated that by 1950 every supermarket in America would be an A&P. “They were an icon. And I think it is a lesson to be learned by anyone—whether you are A&P, Walmart, Wegmans, Publix or any of the other great players—that nothing is guaranteed unless we constantly keep an eye on the customers, marketplace, the competitive array and the changing environment,” George says. Burt P. Flickinger III, managing director for New York-based Strategic Resource Group, says while A&P is making progress, questions remain about its long-term viability. “They should come out of bankruptcy very successfully and stronger than ever, but the way they are going now they have a very uncertain future ahead of them and it may not work out for them the way it should,” he says. Evidence of A&P’s deep-seated troubles is a problem Flickinger personally encountered with a store manager in April when he inquired about not being able to find a cheesecake that was prominently featured in the circular. He says the manager told him he didn’t order the cheesecake because it wasn’t a regular item and he never orders sale items that he doesn’t normally carry. “When the store’s own managers defy the merchants and Montvale won’t even order the sale item for the shoppers, it is quite indicative that the basic problems in the business are still institutionalized and are things that would never happen at Wakefern/ShopRite or Wegmans,” Flickinger says. Flickinger does give high marks to Sam Martin, A&P’s president and CEO, who joined the company last July. “Sam Martin deserves an A for relaunching the Pathmark, A&P and Waldbaum’s frequent shopper program and for rebuilding the database, which was missing in our view before it went bankrupt. Sam Martin deserves some high marks for trying to bring some morale back into the company,” Flickinger says. Improved customer service is the cornerstone of A&P’s rebuilding efforts, according to company officials. “We’re continuing to focus on two key building blocks of the turnaround,” Tom O’Boyle, A&P’s executive vice president of merchandising and marketing, tells Grocery Headquarters. “One is improving our value proposition for our customers, and the second is enhancing their shopping experience,” he says. “I’m really trying to create a relevance based on what customers are telling me,” O’Boyle says. “I have a very customer-focused approach to the overall vision and mission of the company. What that means to me is listening to the customers, taking the analytics and trying to create a value proposition that resonates with them at each specific store.” Thus, there will be marketing differences between a Pathmark in urban Brooklyn and one in suburban Howell, N.J. “Seventy percent of what you see in there is going to be fairly consistent, but while both stores will be the same banner, they will stock products that really reflect the community,” he says. “In perishables it is going to be a more significant difference. When it comes to the thin cut section vs. thick cut section, ground beef vs. pork, and poultry vs. seafood, we’ll start to really stretch and expand the categories that are relevant in those markets and shrink and reduce those that aren’t. What we’re going to do is treat each of our 300-plus stores independently based on what customers are telling us is important and then cluster them into groups where they look alike.” Much of that information is coming from customer loyalty cards. “We’re constantly mining the data, looking at the behavior and industry information in the markets we serve,” O’Boyle says. “But we’re also actively doing focus groups. It is just going to be a perpetual stream of understanding what is going on both in the market and in the customer’s mind.” Supplier support A&P has also been getting support from the vendor community, O’Boyle adds. “I’ve been extremely pleased with the support that our vendors have been giving us, not only from a partnership perspective, but an understanding of where we’re at, a commitment to helping us continue to improve our business,” he says. “It’s been remarkable how just about every single vendor has been extremely supportive and understanding of the situation and really doing everything that they can to help us get better. “They’ve helped us not only with new items, but even with just the existing kind of everyday programs and implementation of new initiatives. Some of our very, very large vendors have done things they didn’t do even before we started this process. They have really just showed their commitment to us. Many of the real key relationships have gotten strengthened.” David Brown is one of those vendors. He’s director, retail sales, at Allens, Inc., the Siloam Springs, Ark.-based canned and frozen vegetable manufacturer. One of the things A&P needs to do is tighten its margins, he says. “A&P is going to have to figure out how to logistically lower their margins to sell and compete with all the guys out there,” he says. “It is all about pricing nowadays. It is all about getting your price right at the shelf, and they’ll figure it out. They are a great retailer. I think that once they get through this rough patch they’ll make it.” Precision pricing He cites a recent three-cans-for-a-dollar sale on America’s Choice canned vegetables as one example of how the chain is sharpening its pricing. “They are using it as a loss leader, and that definitely would be a loss leader, but it is something they are going to have to do to get the customers back in the stores and better compete,” he says. A&P has a lot of work to do to successfully exit bankruptcy, says Dom­onic Biggi, executive vice president of Beaverton Foods, Inc., the manufacturer of mustard and other condiments based in Beaverton, Ore., that supplies some product to A&P. “I’m sure they are in there looking and cutting and slashing and rethinking a lot of things,” he says. “They are in a tough spot. They are a tremendous customer of all us in the specialty food business and an important client to have, but they have been slow to change. That has been an ongoing theme with them,” he says. In addition to sharpening its merchandising of national brands, A&P is also refocusing on private label as part of its restructuring. “When it comes to vendors, we have found just as many people willing to help us improve our Own Brands program,” O’Boyle says. “People are lining up wanting to continue to be a great partner to us.” A&P recently introduced a private label gourmet line—The Food Em­porium Trading Com­pany—that O’Boyle says will help it better compete. “The products in this line are phe­nomenal,” he notes. “We think that they are not only going to resonate against the Whole Foods and the Trader Joe’s of the world, but we think they are going to give us a competitive advantage over the other competitors in the market as well.” On May 27, A&P introduced a new proprietary meat line under the Woodson & James label. “Woodson & James is Angus Choice Grade beef,” O’Boyle says. “Our strategy is to offer Angus quality and consistency at the same value as a choice program. We think that is going to be a significant strategic advantage for us in the market.” The chain also continues to fine-tune its flagship America’s Choice private label line. O’Boyle says the company is shying away from categories like laundry detergent, “I just can’t make an emulate product that matches Tide,” he says, but is looking to improve the quality of its offerings. “With America’s Choice, national brand equivalent plus is the minimum expectation. We’re doing a lot of work around recutting every private label item in our family to make sure that we’re delivering on that quality, consistency and value that our customers expect. And quite honestly, as we find opportunities to improve it, as quickly as we can we are.” For now at least, A&P is also keeping its other private label brands, including Live Better HBC, Via Roma for genuine Italian foods and Green Way organic and all-natural. And no matter what happens with the restructuring at least one thing is certain. Jane Parker fruitcakes will adorn front-end displays at Christmas time for years to come. “The first day I arrived so many people came up to me and said, ‘you have to have the Jane Parker fruitcake.’ I’m not sure that the people just in this company alone would ever let that go away. We’ll continue to hold onto our traditional legacy that our customers want as long as they want it,” O’Boyle says. Happy Endings Not every Chapter 11 bankruptcy proceeding ends in those bold red-black-and-yellow “Everything Must Go!” and “Closing Our Doors Forever” signs. In fact, at least in the supermarket industry, if the proper cuts and changes are made to the business there is a decent chance of survival. A year ago, the future of Chandler, Ariz.-based Bashas’ looked bleak as larger competitors and a particularly brutal recession eroded sales and market share. But the company, which exited Chapter 11 in Sept. 2010, has seen sales and customer counts rise at its Bashas’, AJ’s and Food City stores. Business has been so brisk that in May the chain held four job fairs to help fill more than 400 full- and part-time positions. On the East Coast, Winn-Dixie Stores, which exited Chapter 11 in Nov. 2006 after shedding hundreds of stores, has also successfully turned itself around. The Jacksonville, Fla.-based chain, which now operates 484 stores, is seeing sales of $500 per square foot at new and recently remodeled stores, compared to $300 per square foot at older stores, Peter Lynch, chairman, president and CEO recently told investors. “Winn-Dixie won against the odds,” says Antony Karabus, a retailer advisor with New York-based PwC, based in the firm’s Toronto office. “I think more people had said they weren’t going to make it. They have a good management team and found a space between Publix, the dominant market leader, and Walmart. Winn-Dixie has done a really good job, as has Bi-Lo, which was also in Chapter 11.” “Winn-Dixie was able to get rid of a lot of their deadweight stores and the ones they have left are making money,” says an official at one leading Southeastern food brokerage. “If A&P can get down to their core market and shed their underperforming stores, they too will have a good chance.” Different Philosophies A big part of A&P’s Chapter 11 transformation involves improving customer service and the shopping experience in each of its stores. “The differences in each of our stores will be defined by the customer base,” says Tom O’Boyle, executive vice president of merchandising and marketing at A&P. “‘Your neighborhood. Your store.’ is going to be kind of the overriding corporate tagline, but within each of the banners will be different kinds of anchors or customer conversation.” As a result, A&P has developed different taglines for each of its six supermarket banners: