A&P TACKLES QUESTIONS ABOUT BOARD REQUIREMENTS 2004-07-19 (1)

Tim Moran

SOUTHFIELD, Mich. -- Of the 30 or so people gathered for A&P's annual meeting last week, fewer than 10 were ordinary shareholders -- but Wall Street gadfly Evelyn Y. Davis made up in stridency and volume for any lack of shareholder numbers.

Davis, self-proclaimed "most famous stockholder in the country if not the world," badgered Christian Haub, A&P's chief executive officer, about a board decision that directors must hold at least $150,000 in company stock, saying the amount was too much. She also took the bemused-looking Haub to task over the company's choices for annual meeting locations in what she termed "ridiculous places."

"People in Detroit have me to thank for the fact that you met in Detroit instead of ridiculous places like last year -- Thunder Bay, Canada!" she said.

The Haub family, which controls a majority stake in the company through its Tengelmann Group in Mulheim, Germany, was clearly on cordial terms with Davis. Helga Haub, a director reelected on Tuesday, greeted her with the traditional European kiss on each cheek. A stockholder proposal authored by Davis that would have required corporate meetings only in major cities failed to pass at the meeting, but Christian Haub indicated informally that future meetings would take place in major urban centers closer to the East Coast.

Directors and executives chose to meet in a hotel conference room in Southfield, a northern Detroit suburb, this year in order to be near A&P's new bare-bones Food Basics stores, which executives toured on Monday. A&P recently closed 13 Detroit-area Farmer Jack outlets and converted 10 of them to Food Basics, an emphasis designed both to stop the bleeding from the Farmer Jack banner and to stabilize the A&P U.S. strategic business unit with a tactical approach to inroads by retailers including Wal-Mart Stores.

Key to the Food Basics no-frills model is a limited product selection of only 7,000 to 8,000 stockkeeping units, compared with the 60,000 SKUs in full-service stores, and reduced labor costs reached through special bargaining with the United Food and Commercial Workers union.

No new financial performance data were released at the annual meeting. First-quarter results for A&P are expected to be discussed in an investors' conference call in late July. Without a full year's performance under their belt, it's hard to judge how the Detroit-area stores are doing, the company said, though Haub said he expected them to track the success of other converted Food Basics stores in the Northeast.

For fiscal 2003, ended Feb. 28, A&P reported a net loss of $147 million, or $3.82 per share. The year saw total sales rise to $10.8 billion, up nearly $716 million from the previous year.

In answer to a Davis question regarding grocery competition from Wal-Mart, Haub said the combination of Food Basics and Farmer Jack stores is the A&P answer to supercenter discount pressure. Wal-Mart, with $50 billion in grocery sales in North America, is the nation's largest food retailer.

"Price-oriented with limited assortment, we think that's a good area to compete with Wal-Mart," Haub said.

The company is also relying on advanced supply chain management and global logistics coordinated by the Tengelmann Group, which is headed by Haub's father, Erivan Haub. He said such focused stores allow for better inventory control and fewer employees and can help promote more profitable store-brand sales. In its business meeting, A&P elected its nine-person slate of directors and approved its 2004 non-employee director compensation plan.

TENGELMANN: RFID HAS PROMISE

SOUTHFIELD, Mich. -- Radio frequency identification tags could provide the ultimate self-service answer for limited-assortment grocery stores such as A&P's Food Basics, said Erivan Haub, chairman and chief executive officer of German retail investor Tengelmann Group, in a discussion after the company's annual meeting here last week.

A&P is betting heavily on its streamlined supply-chain operations to make no-frills stores and traditional stores, such as Farmer Jack, more profitable. Tengelmann, which has been in the European retail food and textile businesses since 1864 and which owns a majority share of A&P's stock, is providing logistics wisdom to the A&P business units in the United States and Canada. Technology that aids logistics is a key battleground for retailers.

Already the radio frequency tags are cropping up in European retail operations, Haub said, and he thinks it's only a matter of time before item-level tagging will have a major impact in the U.S.

The RFID tags contain an antenna, a tiny silicon chip and a capacitor that captures and releases power. When the tag passes by a reader, low-power energy from the device is collected in the capacitor, which then powers up the tag to broadcast information. Simple tags store a small amount of data, such as an electronic product code and a price. More complex tags can include space for extra data to be stored or changed -- or even a small string of computer programming code.

Both Wal-Mart Stores, Bentonville, Ark., and the U.S. Department of Defense have mandated suppliers use RFID tagging for inventory tracking. Wal-Mart, in a pilot project with 100 of its largest suppliers and 37 others, has required that by 2005 all pallets and containers be read as they pass through warehouse lines at speeds up to 540 feet per minute (about six miles per hour). The Defense Department has said it will set final requirements in September specifying RFID pallet identification from its 43,000 suppliers.

At the item level and to a grocer, though, the tags could eventually do away with the scanners and checkout lanes that form cost centers and bottlenecks today.

"Self-service becomes a lot different," Haub said.

Not only could such tags total a running invoice as customers added items to their cart, possibly setting up for direct debit from a customer's bank account, but the RFID chips could make inventory control and replenishment an automatic, and lean, process. With a limited-SKU store carrying only a few thousand items, managing the supply chain correctly could boost profit margins by streamlining warehouse use, reducing inventory and automatically making decisions about the best place to source a store order from.

For RFID to be successful, item-level tags must become cheaper, Haub said. Tag providers are wary of discussing price, but estimates range from pennies per tag to more than 30 cents for some more-capable tags meant for manufacturing processes.

"They have to come down to one-half cent per tag, but it will happen. It's a matter of time," he said.

Haub predicted that within five years, RFID tags would be inexpensive enough to make a big impact on grocery operations.