A&P Tries To Reinvent Itself-Again

NJBIZ, Jun 18, 2007 by Ruth, João-Pierre S

MONTVALE

Venerable grocer focuses on its Northeast home market

THE GREAT ATLANTIC & Pacific Tea Co. Inc. (A&P) is in behindclosed-doors talks to sell its Sav-ACenter stores in Eouisiana, the latest sign that the struggling Montvale-based grocer means business as it reinvents itself.

The company says it is in advanced negotiations with potential buyers for the 21-store Sav-A-Center chain, even as A&P awaits regulatory approval of its $1.3 billion purchase of Pathmark Stores Inc. in Carteret.

The moves are part of A&P's strategy under CEO Eric Claus of biting off a bigger share of the Northeast market.

The Pathmark deal would create an $11 billion supermarket company with about 550 stores under such brands as A&P, The Food Emporium, Food Basics, Waldbaum's, Farmer Jack and SavA-Center.

A&P and Pathmark have been awash in red ink. Pathmark last week reported an $8.5 million loss on revenue of $999 million for the first quarter ended May 5, compared with a profit of $5.4 million on revenue of $998.5 million a year ago. Included in the first-quarter loss were charges related to the A&P takeover.

For its part A&P lost $7.2 million on revenue of $1.6 billion for the fourth quarter ended Feb. 24, compared with a loss of $39 million on revenue of $1.6 billion for the year-ago quarter.

A&P had a profit of $26.9 million on revenue of $6.85 billion for the fiscal year ended Feb. 24, down sharply from net income of $392.6 million on revenue of $8.74 billion for the prior year, which included the sale of the company's Canadian operations.

A&P is selling Sav-A-Center, whose business was walloped by Hurricane Katrina. The company has not identified the suitors. Meanwhile, A&P is looking for a buyer for its Farmer Jack chain, which operates 66 stores in the Detroit area.

"A lot of [Sav-A-Center] units in Louisiana were doing very very well but Hurricane Katrina put a damper on that/' says Kevin Gallagher, vice president of Griffin Communications, publisher of the monthly trade journal Modern Grocer in Iselin. "[A&P's] stance right now is to focus on the Northeast, their home marketplace."

Gallagher says many supermarket operators are under pressure. "It's an ultra competitive retail marketplace/' he says. "Other channels of trade are constantly picking at their base of business, from drugstores selling grocery and some perishable items to traditional convenience stores."

Wal-Mart Supercenter stores intensify the pressure by combining a Wal-Mart with a full supermarket. Wal-Mart's Supercenter in Turnersville is currently the only such store in New Jersey.

Claus, who formerly ran A&P Canada, took over the CEO job in 2005 from Chris Haub, who now serves as executive chairman. Haub had led a turn-of-the-millennium effort called Project Great Renewal that sought to make A&P No. 1 or No. 2 in all of its markets. The moves included closing older stores and selling the company's Eight O'clock Coffee division.

But the Great Renewal effort failed to meet its goals, leaving A&P facing wellentrenched rivals in its home territory. "ShopRite by far is the leader in the metro New York marketplace," says Gallagher. "A&P is the fourth in New Jersey and that includes all the A&P banners operating in the state."

The Pathmark deal unveiled in March would make the combined entity No. 8 in revenue among the top 10 U.S. supermarket chains, according to TNS Retail Forward, a research and consulting firm in Columbus, Ohio. A&P ranked No. 10 in 2001. The deal could wrap up next February, pending completion of an FTC review.

Analysts at UBS Investment Research say the merger may bring its own problems. "We continue to see underlying execution risk at A&P and integration risk following a pending Pathmark acquisition," the firm wrote in April, while noting that "prospects for purchasing synergies remain intact."

Pathmark and its 141 stores have danced with previous merger partners. Dutch food retailer Royal Ahold tried to buy the chain for $1.75 billion in 2000. The deal collapsed after the FTC ordered the sale of more stores than Ahold wanted to part with.

E-mail tojpruth@njbiz.com