The Day After

As A&P dissolves, what happens to its existing businesses? Will the sale of A&P’s stores to other retailers change the dynamics of the Northeast market and represent rebirth of these units? Or, will it be another episode of The Walking Dead? As the 156-year-old Great Atlantic & Pacific Tea Co. slogs through bankruptcy court for the second time in five years, tentative agreements have already been reached for the sale of some of its 334 stores in the oppressively competitive New York, New Jersey and Philadelphia marketing areas to chains and independents. This includes Stop & Shop, the Key Food cooperative and Acme—with proceeds of the estimated $600 million sale being sliced up among creditors, including C&S Wholesale at the top of the list. However, other potential buyers are reportedly waiting in the weeds for the outcome of the bankruptcy proceedings. At the top of that list is Wakefern Foods, which may be looking at as many as 50 locations for its ShopRite retailers. Whatever the result, the bottom line is that A&P is getting out of retail, and the stores that are not sold will be closed. The one wild card is whether the bankruptcy judge will allow the company to cut employee severance by as much as 75 percent—a move that A&P said is necessary to pay off creditors, but may be in violation of its last union contract. Whether any of these moves will shift the market share in the Northeast remains to be seen. Potential buyers have done their due diligence, yet industry observers note that too many of these units have suffered from years of neglect, limited, if any investment, and dysfunctional management. As one market source harshly put it: “If A&P and these stores disappeared tomorrow, no one would notice.” Nonetheless, A&P’s withdrawal could have an ancillary effect on other retailers and the real estate market. It has been estimated that 30 sites in Bergen and Passaic Counties in New Jersey may get new tenants. This could be good news if the sites become home to a stronger supermarket or nonfood retailers that would be a bigger draw for local consumers. A strong supermarket can attract 10,000-20,000 customers a week to a shopping center, according to Matthew Casey of Matthew P. Casey Associates, a Clark, N.J.-based real estate analysis firm. In order to avoid empty storefronts, landlords reportedly started making calls to prospective tenants immediately after A&P announced its bankruptcy filing. When A&P filed for bankruptcy protection under Chapter 11 on July 19, the chain listed assets and liabilities of approximately $2 billion including 334 stores under the A&P, Pathmark, Super Fresh, Waldbaum’s and Food Basics banners. Final bids by all retailers have to be submitted to the court by Sept. 15. Preliminary bids for about 120 stores have been made by: Albertson’s Acme division, 76 stores for $256 million; Ahold/Stop & Shop, 25 stores for $146 million; and the Key Food cooperative, 19 stores for $28 million. One name conspicuously absent from the current buyer’s list is Wakefern Foods, the country’s largest retailer-owned co-op, whose independent ShopRite retailers ring up $14.7 billion in annual sales and have a lion’s share of the market throughout New Jersey. Wakefern itself operates Price Rite, no-frills deep discount stores. There are about 60 Price Rites in Connecticut, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island, Maryland and Virginia, averaging about 35,000 square feet. All deals are still subject to the court’s approval and if additional bids come in, A&P has asked that auctions take place by early October. At this point, an additional 25 stores under the A&P, Pathmark and Super Fresh banners are slated to close in New York, New Jersey, Pennsylvania and Delaware. However, observers feel that when all is said and done, as many as 100 units could be shuttered. Despite years of decline, A&P still has some strong positions. While observers estimate that A&P’s share for its five stores in Fairfield County, Conn. is less than two percent, in New Jersey, shares are close to 20 percent for its 10 stores in Passaic and nearly 15 percent in Bergen County—two of the chain’s largest markets in the state. Essex County has nine stores with an estimated 11 percent share and Warren County has four stores at about 13 percent. For the entire Garden State the chain’s share of market is a little less than eight percent. In New York, three stores in Putnam County have garnered a 23 percent share; in Staten Island, seven stores represent about 14 percent. A&P’s 24 stores in Westchester County come in close to 13 percent and Suffolk County on Long Island, which has 28 stores, is just under 13 percent. A&P’s share for the entire New York market was estimated at a little less than eight percent as well. “I’m amazed they hung on as long as they did,” says Peter Deeb, managing partner, Deeb MacDonald & Associates, based in Williamsburg, Va. “When Yucaipa couldn’t bring them back, you knew they were done. My first impression was that (the sale) might reduce competition in the marketplace. But some significant dollar volume is going through those registers. “However, I’m not seeing a lot of opportunity at this point,” Deeb adds. “This is one of the most competitive areas in the country and what you’re buying is a lot of stores that need a lot of money, particularly Pathmark stores which have really deteriorated.” A big issue is how ShopRite will react to the new competition. “ShopRite will just beat the hell out of you (on price) and make you spend a ton of money until you just want to go away,” Deeb says. Frank Dell, president of Dellmart & Co. management consultants, based in Stamford, Conn., says that purchases by ShopRite retailers would be the ultimate revenge. “Remember that Pathmark was once part of Wakefern,” he says. “They were half of their volume and when they left, it almost killed Wakefern.” A&Ps, Pathmarks and Food Basics stores in Southern New Jersey might be a particularly ripe opportunity for ShopRite, says Deeb. “They could really solidify their position in South Jersey and Philadelphia.” Another potential buyer that has yet to emerge is Trader Joe’s. “Some stores are a bit too large for them. But look at their store in Stamford, Conn. It was an old supermarket that was converted to a Border’s book store and is now back to being a supermarket,” Dell notes. Some speculation has also swirled around Kroger and Walmart, although most observers feel it is highly unlikely. In order to have a presence in the East, Kroger needs to buy someone with a warehouse operation, similar to its acquisition of Harris Teeter last year. “They [Kroger] have the balance sheet to do it. But they don’t like fixer uppers—and these are major ones. Right now they’re tinkering with a value format but I don’t think they would go into a big new market with it,” says Craig Rosenblum, a partner at Barrington, Ill.-based Willard Bishop. “I don’t think Kroger would be interested,” says Kelly Tackett of New York-based Planet Retail. “They’ve got their hands full with Harris Teeter and going into the Mid-Atlantic. And I also agree they like to go in with a strong presence rather than with underperforming stores.” Another possibility, albeit a slim one, is for Walmart’s Neighborhood Markets. “I think they would work fine in some of these locations but I don’t get the impression that they’re all that successful yet,” says Dell. Other sources agree, as the chain is still unsure about density in the Northeast. “Although they say that Neighborhood Markets are the future, they’re questioning whether they have their arms wrapped around the concept enough to put 30 or 40 stores in one of the most competitive metro areas in the country,” says one observer. Additionally, with the investment in a second 1.2-million-square-foot distribution center in Bethlehem, Pa., it has been suggested that their main focus will be e-commerce rather than pumping funds into marginal stores. Ahold’s plans for the 25 stores its currently bidding on are up in the air. Observers say they will most likely go in with traditional Stop & Shops as opposed to the “Super” format, which uses an 85,000-square-foot footprint. “They may not want to spend the money refurbishing these stores—especially with the Delhaize/Ahold merger putting so much on their plate,” Rosenblum says. “They’re going to focus on integrating stores quickly in order to get some money back quickly for the stores they do purchase.” Ahold’s purchase would probably be a boon for C&S Wholesale, which has had a long relationship with the chain. “They’ll probably end up with that business as well as getting paid as one of A&P’s largest creditors,” Rosenblum adds. On the other hand, some say that Delhaize is superior from a supply chain and distribution standpoint. As such, the business might be split, according to observers. There is also speculation that C&S might take over some of the A&Ps as they did years ago with the now-defunct Grand Union chain. Acme’s pending acquisition of 76 stores makes sense given Cerberus’ expansion plans. “Bob Miller [CEO of Cerberus] knows how to run great retail operations and Cerberus has made no bones about wanting to be a national retailer. The ability to put more stores in the Northeast that conform to their model fits into their plans,” Rosenblum says. There is also the possibility of value formats like Aldi or Lidl taking over some smaller sites. Aldi, now with 1,400 stores in the U.S., gets about $8 billion in sales from its U.S. operation, and is growing at a 15-20 percent annual rate. In order to sustain that growth, it may be forced to expand in markets it might not have considered in the past. “They [Aldi] want to come to market in an efficient way—with scale and the ability to distribute,” says Rosenblum. “Just look at Dallas. They dropped 50 stores in the market in two years. It was the same in the Southeast and now they’re expanding on the West Coast. They like the smaller 20-25,000-square-foot boxes. Lidl prefers the 35,000-square-foot box but they need distribution in the Northeast.” One sensitive issue for any supermarket retailer would be current union contracts. Approximately 120 stores are under what has been called “stalking horse” agreements that would enable buyers to terminate current union contracts. This is significant considering that A&Ps labor costs once ran as high as 16 percent and put them at a severe competitive disadvantage. When the chain filed for bankruptcy in 2010, the UFCW, which represents 26,000 A&P workers, agreed to $625 million in wage and benefit givebacks over a five-year period if the company required future buyers to honor the contracts and maintain all employees. This is now being challenged in current bankruptcy hearings. Whether the labor situation is an attractive proposition for buyers is questionable. “There are two sides to the equation,” says Rosenblum. It might initially lower costs enabling a store to get up and running, but the reality is that anyone in the Northeast is already dealing with the unions. “It’s nothing new for them,” he adds.   Deeb added: “If I’m Stop & Shop or ShopRite, I frankly don’t know if I want a lot of those employees. They’re used to making a lot of money and I don’t know how productive they are. When business is bad and you’re not sure you’re going to have a job how well do you work?” However, the issue may be a public relations one, according to Tackett. “What’s the aftermath of those ‘stalking horse’ agreements? Will there be negative feelings with the union?  It seems to be the opposite of good will,” she says.