DIFFERENT PATHS SEEN FOR CONSOLIDATION IN NORTHEAST

Mark Hamstra

Analysts seem to agree that consolidation is looming in the New York metropolitan market -- the question is whether it will occur through a brutal price war that weakens all the players or via a more civil process of carefully calculated merger and acquisition.

At a meeting of analysts hosted by SN last week (in-depth coverage will appear in a future issue), some of the analysts suggested that the New York market was ripe for an aggressive price battle, given the recent developments at A&P and Pathmark. Last month A&P, Montvale, N.J., said it had agreed to sell its Canadian division to Metro, Quebec, for about $1.475 billion, giving it plenty to invest in its core operations in the New York-New Jersey area. Carteret, N.J.-based Pathmark, meanwhile, has accepted an investment from Yucaipa, the Los Angeles-based firm that has promised to become a consolidator in the Northeast.

In a conference call with analysts after the sale announcement, Christian Haub, chairman and chief executive officer, A&P, said he's seen a more aggressive stance on Pathmark's part already.

"We have clearly noticed the different posture that Pathmark is in, based on the new investment and the more resources they have available," he said. "You feel a little bit of a rejuvenation going on in their ads and their promotional stance." (See Page 8 for more on A&P's conference call and quarterly results.)

Not all observers agree that the newly flush operators will channel their resources toward cushioning price promotions, however.

Andrew Wolf, an analyst with BB&T Capital Markets, Richmond, Va., said he thinks Pathmark and A&P are more likely to invest in upgrading their store bases than in waging an all-out price war.

"The theory might be that if Pathmark, A&P and ShopRite all really got aggressive on price for some period of time, after the dust had settled on that scorched-earth scenario, a lot of weak operators would fall out," he said. "I don't see that as a likely scenario. If New York is a market that is ripe for consolidation, which I believe it is because it is so fragmented, then you have to ask yourself, what will yield a higher return on capital: acquisition, or this scorched-earth price competition? I think it's through acquisition."

Gary Giblen, senior vice president and director of research, Brean Murray, New York, conceded that although a more aggressive pricing environment could emerge in the region, he thinks it is more likely that Pathmark will manage for profitability rather than sales growth, which would mean avoiding a price war.

"That's the M.O. of [Yucaipa Managing General Partner] Ron Burkle," he said.

He pointed out, however, that Stop & Shop could become more competitive now that Ahold "is back from the dead."

Ahold has been combining the operations of its Giant of Landover, Md., chain with those of Stop & Shop, and has resumed a remodeling program that had been dormant in the wake of the accounting scandal at Ahold. Stop & Shop recently said it would convert 12 Super G stores in southern New Jersey to the Stop & Shop format.

In his conference call, Haub of A&P noted that he's seen a "flurry of competitive activity" as a result of some recent Stop & Shop remodeling in the area. "What we see more than anything is continued aggressive capital spending on new stores and renovations," he said.

Giblen pointed out that ShopRite, always the low-price leader in the market, "generally only gets more competitive when they perceive vulnerability."