Analyst: A&P Eyes Pathmark

By George Anderson


CIBC World Markets analyst Perry Caicco believes A&P may be interested in making a bid for Pathmark Stores.


According to The Associated Press, Mr. Caicco wrote in a note to investors that A&P’s payout of a special dividend resulting from the sale of its Canadian operations “paves the way for a share-heavy consolidation move, most likely with Pathmark.”


Karen Short, an analyst with Soleil Securities, agreed. She told the Bergen Record newspaper, “The market perception was that [the dividend] was one of the things that had to happen before a deal could be worked. This opens the door.”


Speculation over a possible deal between the two New Jersey-based supermarket chains comes after Pathmark posted disappointing results in its latest report.


Pathmark’s CEO John Standley said the retailer is making progress in getting turned around. “I am more enthusiastic today than I was six months ago when I got here,” he said in a call with analysts.


Mr. Standley said he expects that the company would have a rough go of it in the first two quarters ahead, “but then we’ll be on our way.”


He added that Pathmark is developing a new store prototype that focuses on perishables. No date was given for a possible rollout.


Yucaipa Cos. owns a 40 percent stake in Pathmark. 


Moderator’s Comment: What do you see as the challenges and opportunities for the company should a merger between A&P and Pathmark take place?
– George Anderson – Moderator

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Eliott Olson
Eliott Olson
17 years ago

Gene

You’re the only one old enough to remember choosing between chain dancers. If the fleets in, they should do OK.

Bill Bittner
Bill Bittner
17 years ago

I agree with many of the earlier assessments, but will try to take a different perspective on it. What should A&P do at this point? Having driven the wolf from the door by selling off assets and portions of the business, what can they do now to revitalize it?

First off, the chairman has announced a three prong plan that really does make sense. His plan for high-end gourmet, fresh, and economy formats should result in distinct channels clearly recognizable by the consumer. The key word in that sentence is “should.” While the plan sounds good, there are some very fundamental steps that must be taken to ensure success.

A&P has to ensure the distinction between formats by completely separating the merchandising organizations. They can use the same IT applications and get merchandise through the same suppliers, but they have to keep the assortment, pricing, and promotion decision makers separated. I have seen it happen over and over again as merchandising departments attempt to support multiple formats and end up making compromises that finally result in stores that are no longer distinguishable either from within the company or by the consumer.

Because they will have distinct formats and store labor contracts must be honored, everything must be done to reduce the “cost to the shelf.” A&P must work with its wholesalers to ensure that store deliveries are “store friendly.” This means the wholesaler must be able to sequence the deliveries so that customized pallets can be created based on individual store layouts. Essentially, this means a “pick to belt” type operation with final sequencing done by load. It also means that multiple case packs must be available for stores with different plan-o-grams.

A&P needs to get off of the retail accounting method and begin keeping a perpetual inventory in all its stores. Item level inventory tracking must be integrated with replenishment ordering from all its suppliers and the vendors should have visibility of their products down to store level. The vendor is hurt most by over or under stocks, as returns increase or consumers choose another manufacturers’ products. Giving the vendor visibility puts additional pressure on suppliers to make sure that inventory is in the right place at the right time.

The internet is going to impact supermarkets somehow, and with the widely available access to broadband connections in the North East it will most likely occur earlier there. This has yet to unfold, but A&P must be on top of this trend. Whether it means offering shoppers home delivery, in-store pickup, facilitating “tiered shopping,” or pick-up on home meal replacements, they must be ready.

Another controversial but innovative consideration might be increased central preparation of meat and Home Meal Replacement items. Maybe a real innovative approach would be to “contract” the resources of the “gourmet outlets” where higher labor rates are expected and use their facilities to prepare product for the economy formats. One advantage A&P has always had is the proximity of their locations and by developing a “sister store concept” they might be able to share resources.

In any case, to keep this whole thing going will take a new level of cooperation from everyone involved. This means forming genuine partnerships with the unions so that more flexible contracts can be negotiated that allow workers to fulfill multiple roles in the store. It is always painful to walk into a supermarket and see cashiers standing around because a rainstorm has kept the expected customers away. Cross training is good for morale as people learn new skills. Everyone has to understand that the consumer has choices and that their goal is to make the consumer want to come to A&P.

The last thing A&P needs to do is take on another “tired old supermarket” that hasn’t been able to invest in itself and make the changes necessary to compete in the 21st century.

Mark Lilien
Mark Lilien
17 years ago

Mergers are like marriages: many fail and many more aren’t constructive even when the couple stays together. Both A&P and Pathmark are known for weak performance. When 2 weaklings merge, the combined entity is not stronger, it’s twice as weak. The enhanced New York/New Jersey market share and anticipated overhead reductions won’t be enough. Both companies should sell more of their real estate and think about franchising their locations.

Gene Hoffman
Gene Hoffman
17 years ago

The first thought that comes to mind is: Why haven’t A&P and Pathmark been able to return to their former lofty leadership positions as successful, growing retailers by their own initiative?

If you merge A&P and Pathmark, then mix in a few new store prototypes among their existing operations, with Yucaipa watching from the sidelines while doing its own opportunistic financial planning, what will you must likely to get? Two chain dancers, both getting a little bit older, but still trying to cut a caper with the younger and more nimble dancers on the marketplace dance floor.

Steve Anderson
Steve Anderson
17 years ago

The most important thing to be considered is that A&P and Pathmark are headquartered in the Northeast, the last part of the country where Wal-Mart does not have significant penetration. The unions may put up a fight, but it is inevitable that Wal-Mart will open stores in urban centers, including New York City. Moreover, Wal-Mart may use its 99,000-square-foot stores and Neighborhood Markets to increase penetration in urban areas where real estate is scarce. Meanwhile, Target is becoming more aggressive in the grocery space.

We’re only in the first inning of what is likely to be a dramatic change in the grocery retail landscape, particularly in the New York area. It likely will mean the demise of many older, heavily unionized chains (such as Grand Union in 2001).

Ryan Mathews
Ryan Mathews
17 years ago

I don’t think there’s any serious doubt that A&P is on the acquisition trail. That said, I think there is serious doubt they are in position to structure a successful acquisition. We have to ask ourselves what’s changed in their corporate culture that would allow the acquisition of a troubled firm to be a positive move. After all, this is the same company that had trouble making a success out of the acquisition of a market leader like Kohl’s in Milwaukee and Farmer Jack in Detroit. If they couldn’t make powerhouses continue on a winning track, how are they supposed to bring any troubled chain back to prosperity? The glib answer is that with the Canadian divestiture they are now better capitalized. But, they obviously had money during their last round of acquisitions. What we need to feel better about a Pathmark acquisition — or any acquisition for that matter — is some sign that A&P has passed through a significant internal change; that decision making has become more streamlined and effective; and that there’s a new vision in place.

Warren Thayer
Warren Thayer
17 years ago

I’m disappointed that there’s no point in my posting on this one this morning. Ryan said it all, and he said it perfectly correctly.

David Livingston
David Livingston
17 years ago

A&P has been Midas in reverse for as long as I can remember. They buy strong regional chains and turn them into weak regional chains. The competition is applauding this move as cheers of “Thank God for A&P” ring about the industry. A&P has never improved anything they have purchased. The challenges are endless and the opportunities are limited to real estate. A&P might be a bit over-confident on the merger because it’s in a market they think they already know.

Bernie Slome
Bernie Slome
17 years ago

Great comments folks! Proves that if you are late to the party there is not much left to say. That might prove true should A&P attempt to acquire Pathmark. Pathmark, in my opinion, is on the road to turning things around. They have become more customer focused; they are starting to create new store formats, thus they seem to be in a better position to return to their former lofty heights. Maybe after they turn things around they should look at acquiring A&P! Or, as Race said 83% of mergers fail, leave these 2 companies to stand alone!

Race Cowgill
Race Cowgill
17 years ago

I see it the same way. In Pathmark’s hey-day, in the mid 1980’s, they had big stores with very few SKUs, poor condition produce, 20 or 30 checkout lanes with only half of them open and average checkout lines of nine on a Saturday afternoon, and surly customer service personnel. Interestingly, at the same time, A&P started down the path to the same results but with smaller stores. Both of these organizations showed evidence of a heavy financial focus and light customer focus, unusually high risk-aversion in a risk-averse industry, and low awareness of their weaknesses. My recollection is that in the last 20 years, these organizations have been run by well-intentioned people who have immersed themselves in the details of financial activity and structures, not in the core elements of the grocery business.

Our stats show 83% of mergers and acquisitions fail. 83%. It seems unlikely that these two organizations will succeed as one.

Justin Time
Justin Time
17 years ago

All of the previous comments have their own merit, to a certain extent.

Last Saturday was one of those rainy days and, at my local Super Fresh, 8 of the 10 registers were open, 4 of which are self checkouts. No human cashiers were standing around.

Some commentators tend to kick A&P, especially on inventory control. I make it a point to check reduced items and discontinued item displays. A&P family stores have this best under control. Safeway and Giant are more prone to carry slow moving products.

I think the A&P acquisition of Pathmark is a good thing. With the acquisition, A&P will have a store count of about 550. This is where the chain should be and have revenues exceeding $10 billion, the same level of sales they previously had with about 100 more stores. So weeding out the bad performers has helped the bottom line.

A&P’s strategy as they approach their 150th anniversary is one of balance, diversity and offense. Closing stores and divisions aren’t the game plan any longer. The “fresh” concept is working big time for them. Just check out recently reopened Sav-a-Center Fresh Stores as well as the new Fresh Market in Woodcliff Lake, NJ. These aren’t your Momma’s A&P’s.