A&P'S FOOD BASICS: AN URBAN ALTERNATIVE

Mark Hamstra

NORTH BERGEN, N.J. -- In one corner of an A&P store here that recently was converted to a Food & Drug Basics, the in-store butcher and deli area has been replaced by a massive display of thousands of one-pound cans of Goya-brand beans stacked almost to the ceiling and priced to move at three for $1.

That illustrates the theory behind Montvale, N.J.-based A&P's no-frills Food Basics format: eliminate the higher-cost departments and instead stock the stores with name-brand and private-label products at rock-bottom prices that will appeal to urban consumers.

The concept appears to be working, at least in some locations. Sources told SN that two of the stores that have been converted to Food Basics in the New Jersey cities of Paterson and Passaic have seen sales volumes triple from the weekly levels they achieved as A&P stores. The Paterson location, which tallied about $125,000 to $150,000 in weekly sales as an A&P, now brings in about $450,000 per week, according to a source close to the store, and the Passaic site has improved its sales volume from about $80,000 per week as an A&P to $250,000 as a Food Basics.

"That's the model, that you lower your expense structure, but you lower your prices, too," said Meredith Adler, analyst, Lehman Bros., New York. "The only thing that makes it work, though, is that you have to drive more volume. So it's just a different model: lower expenses, higher volume."

Adler said she had no information on specific sales volumes or profit margins at the stores.

The company also declined to comment on sales volumes or expansion plans for the format, although a spokeswoman told SN that A&P considered Food Basics to be in the experimental stages in the United States. The company has converted eight former A&P stores in New Jersey and two in New York. In Canada, A&P operates 13 Food Basics and supplies another 65 franchised locations as a wholesaler.

"It seems to be a concept that works in some places," said Adler. "It works best in lower-income neighborhoods."

According to Canadian analysts who have observed the format for several years, one of Food Basics' strengths in Canada has been its strong perishables departments, which distinguish it from some other price-oriented banners. Observations by SN indicate that the company is using the same philosophy in the U.S., as the square footage dedicated to fresh fruits and vegetables appears to be about the same in Food Basics stores as it was in the A&P stores they replaced. The area devoted to meat offerings appears to be reduced somewhat, as in-store cuts have been replaced by case-ready offerings.

Although the stores offer A&P's America's Choice private label for many of their packaged goods, there are no other indications to customers that Food Basics is owned by A&P. In addition to America's Choice, only the top-selling name brands of most products are offered.

As an additional cost-savings measure, Food Basics also requires customers to bag their own orders with bags they can purchase for 10 cents each. More commonly, customers use cardboard boxes the stores keep near the checkout lanes.

Although Christian Haub, chairman of A&P, told a German supermarket-industry publication that he planned to convert most of A&P's stores to Food Basics, company spokesmen have since said his "plan" is not that specific and is more of a "vision."

The company faces several obstacles to a widespread rollout, including funding the construction of the stores while struggling under a heavy debt load and overcoming union resistance.

Adler said she doesn't think the company plans to use the Food Basics format as a conversion vehicle for shuttered A&P locations, although some of the existing units are conversions of stores that had been closed.

To remodel existing stores into the new concept, the company needs to negotiate new contracts with the various UFCW locals that represent its workers. Food Basics employees belong to the union, although they are on a lower pay scale than traditional A&P workers and there are fewer of them per store.

John Niccollai, president, UFCW Local 464A, Little Falls, N.J., said Brian Piwek, president and chief executive officer, A&P U.S., has discussed renegotiating the limitations on converting stores that A&P agreed to in 2001. At that time, A&P agreed to convert not more than 10% of the approximately 100 stores in northern New Jersey and southern New York to Food Basics.

"We could care less how many they build out of the ground," he said. "The conversions are a problem because we obviously don't want to see any layoffs at A&P. The more stores they close and convert to Food Basics, the more people get transferred, and then we wind up with a situation where we have too many people at A&P, and then we have layoffs."

Despite his reservations about converting stores, Niccollai said he was impressed with the Food Basics format overall.

"I think the Food basics concept itself is a great concept, and what I like best about it is, I think it really is Wal-Mart proof," he said. "I think if you go into Food Basics and see what their offering is and their price structure, there really is no great advantage to going to Wal-Mart. You get the same bargains and the same good prices."