PATH TO RECOVERY

CHRISTINA VEIDERS

CARTERET, N.J. -- Pathmark here has empowered itself onto the comeback trail.

Nine months after emerging from bankruptcy, Pathmark reported two consecutive quarters of turnaround results, indicating, according to several analysts, that the chain is well on its way to regaining a dominant market-share position.

Comp-store sales for the first quarter, ending May 5, increased 3.1%. This marked a 12-year high, excluding the second quarter of 1994, which was skewed slightly higher due to a strike the previous year. Total sales rose 6.5% to $977.2 million during the 13-week quarter. This is in contrast to declining comps reported for nearly every quarter from 1990 to 1996. Pathmark finished out the 53-week year ending February 3 with a sales increase of 3.9% to $3.9 billion, or 1.9% excluding the extra week. Same-store sales rose 0.3%, excluding the extra week.

"We are on our way back," Jim Donald, chairman, president and chief executive officer of the 143-unit chain, told SN during a June 14 interview, just before the company's first annual meeting since going public. Donald, age 47, joined Pathmark in 1996 after managing Safeway's Eastern division, Lanham, Md. Having previously served with Wal-Mart and Albertson's, he brought to his position a well-established and respected career in food and mass-market retailing.

A big challenge Donald faced in joining Pathmark was to nurse a financially sick company, which was battered by a leveraged buyout in 1987, back to health. The expectations were to either take the company public or sell it, said Donald.

When Ahold abandoned its bid to acquire Pathmark in December 1999 because of FTC opposition, Pathmark chose to go public, filing a prepackaged Chapter 11 bankruptcy in June 2000. The bankruptcy and subsequent restructuring period lasted just 68 days and Pathmark emerged as a publicly traded company last September.

The next challenge was to launch and execute "next level" initiatives, designed to impact both the top and bottom lines. Donald credits the execution of those initiatives as allowing Pathmark to begin its comeback and report a strong first quarter. The focus of the initiatives was to provide good customer service, take advantage of opportunities that exist at store level, increase gross margins without increasing prices, set standards for food safety and sanitation and draw shoppers' attention to Pathmark's produce department.

Donald also recognized the execution and the backing given by the 28,000 people that work for the company for the success of Pathmark's turnaround.

Ted Bernstein, managing director, Dresener, Kleinwort, Wasserstein, New York, said: "Pathmark is doing well now, and the future looks bright. It's indicative of the fact the problem was simply a balance-sheet issue and it wasn't an issue of company operations."

Turtle images abound in Donald's office. "A turtle only moves forward when it sticks its neck out," he said. Donald's recognition/reward program to incentivize the associates is a concept borrowed from the annals of Wal-Mart's Sam Walton, who was quick to recognize the contribution of Wal-Mart employees. In this case, Donald has come up with the "Turtle" award for those who contribute incremental sales or help improve the bottom line.

Donald talked about the incremental sales gained by associates who have taken a risk and stuck their necks out in picking an item during a particular week to produce incremental sales or money-saving ideas.

Examples include a seafood manager who risked selling 300 pounds of seasonal fish, and Pathmark's treasurer who recently renegotiated the debit- and credit-card process. The seafood manger sold all the fish in two days and brought in $1,200 in incremental sales. The treasurer saved Pathmark $365,000 a year. Both won Turtle awards for their efforts.

During one week in June, Pathmark produced $2 million in incremental dollars with 8,000 associates participating. That equals $100 million a year, noted Donald. "Imagine the power of 28,000 associates all picking an item and selling it incrementally for a week. That is huge," he said.

This month, Pathmark rolled out a stock-option plan for its associates, a benefit it hasn't offered in 14 years. It's part of giving associates not only a say in the company but ownership as well, according to Donald.

This is one way Donald said he sees Pathmark as being different from the competition. Differentiation is critical for food retailers in fiercely competitive and oversaturated Northeast metro areas. It's also part of Donald's ultimate goals, which are to make Pathmark the best place to work and the best place to shop.

Pathmark already has benefited by good press when it comes to food safety. It was favorably cited among its competitors in a series of mostly negative reports on food safety in New York-metro area supermarkets by several media sources this spring, including The Daily News, The New York Times and CBS.

"This is not a lucky coincidence," Donald told analysts during the company's first-quarter announcement. "Our company sanitarians inspect our stores on a regular basis to insure that we meet, if not exceed, federal guidelines. When it comes to growing same-store sales, this is a proven winner."

Workers' compensation and general liability are other important initiatives. "We have to be the safest place to work and shop from workers' comp and general liability. There is training going on all the time to take those numbers down and take it to the bottom line to reinvest," said Donald.

Through its associates and its shoppers, Pathmark is ultimately driving productivity to the bottom line. This may require challenging a department with a high accident rate to go for one week without an incident, or improving sales per labor hour by 350 basis points, said Donald.

Pathmark is betting that these initiatives will help it distinguish itself in the mostly dense-populated urban markets that it operates.

Among the major food chains competing for the 25 million shoppers living within Pathmark's markets, which represent 10% of the U.S. population, are Shop Rite, A&P, Stop & Shop and Acme.

Estimates of market share vary with location and research source. One trade-media source measures the metro New York market with 121 Pathmark units capturing a 4.8% share and placing third in the market overall. This follows market leader Shop Rite with 146 stores and an 8.3% share, and A&P with 246 stores and 5.4% share. In the Philadelphia and southern New Jersey market, Albertson's Acme is the main competitor, with Pathmark's market share standing at 9.5%, according to another source. Generally, Pathmark is in the No. 1 or 2 position in most markets, except for Philadelphia where it comes in third, says Gary Giblen, senior vice president and director of research, C L King & Associates, New York.

"They have a healthy respect for the competition, but if you analyze their competitors blow by blow, each one is hobbled," said Giblen.

"This is not a status-quo marketplace," admits Donald. "There are a lot of things happening with our competition that for the first time doesn't really involve us. We are marching now to our own tune."

Most analysts agree that Pathmark is in a good position to take advantage of growing its share while some of its competitors are struggling with internal problems. Pathmark has 143 stores in New York, New Jersey, Pennsylvania and Delaware. It will have 146 stores by the end of the year with 85% of them being new or renovated units. Stores average 53,000 total square feet and generate $723 per selling-square foot.

Pathmark's strengths also lie with its expertise in operating supermarkets in inner-city and urban neighborhoods.

"From the 2001 census data, the marketplace is continuing to evolve in terms of diversity and demographics. It's up to us to make sure that in our neck of the woods we are doing what's right for customers, whether they be Hispanic, Oriental, or African-American," said Donald.

In the metro markets, where price is king, Donald considers double couponing as simply part of the cost of doing business. Pathmark recently added a loyalty card, another element of the food-retailing game. The big challenge, however, is to differentiate.

Pathmark has launched several programs to make it stand out from the crowd. A recent endeavor is focused on produce, which has become part of its ad campaign with the tag line "Take a Fresh Look at Pathmark" (see SN, June 4 issue). Produce Pete, aka Peter Napolitano, a local celebrity who appears on the weekend edition of the Today Show, has been retained by Pathmark to be a spokesman and assist in training.

"Historically, we've been a large box focused on dry goods and we never got credit for our produce departments. What we are trying to do now is use Produce Pete, who is well known in the area, and couple that with renewed training. We want to make sure our quality and variety is as good or better than our competition. We're going to make that a point of focus for our customers as well as ourselves," said Donald.

Donald himself has even gotten into the act with a promotion launched in January that partners with Perdue Farms. In-store banners state that "only Jim could make fried chicken this delicious." Posters show Jim Perdue on one side saying, "My fresh chickens are the meatiest chickens you can buy," and Donald on the other side saying, "My special recipe makes it crisp outside and tender inside."

"It's one of the ways we differentiate. We got our associates to band around Jim's chicken and the customer response has been good. Again, its not necessarily the unique factor of calling it Jim's chicken, it's getting our associates behind it and being able to execute the details of the program," said Donald.

Besides its healthy performance and turnaround in the marketplace, much of the talk about Pathmark in the investment community has been about another possible acquirer. "It's inconceivable to me that they wouldn't be sold short term," said Giblen. "Pathmark is the prized property in food retailing. It's the manifest destiny of Safeway coming up from the mid-Atlantic and increasingly getting into this area and also Sainsbury's Shaw's coming down the other way.

Comments Bernstein, "Pathmark continues to be the property to own in the Northeast if you are looking for a well-run regional supermarket operator with a great store base and great name recognition."

While Donald doesn't rule out an acquisition by a major food chain in the near future, he said he is running Pathmark for the longer term and helping it compete. "We are running the business straight forward and doing it long term," he said.

A Spirited Movement

Pathmark is quickly winning back its foothold in major metro-market areas through the execution of its "next level" initiatives. These include:

Giving customers the service they want every day.

Improving gross-profit margin through information sharing.

Developing in-store opportunities with senior management involvement.

Setting new standards in food safety and sanitation.

Making Pathmark the place to work and shop through high standards in food and workplace safety.

Focusing attention on Pathmark's produce department using Produce Pete as a spokesperson.