Taking Stock

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With Kroger Entering DC, A&P Looking To Sell, Northeast Corridor To Undergo Further Reshaping 

We’ve said it many times: the New England to Richmond-Norfolk corridor is the most competitive marketing territory in the country – and it’s about to get even more competitive.

Start with significant overstoring, both in the sheer number of outlets and in the diversity of retailing styles, and you’ve got a potentially volatile landscape where the weak are getting weaker, the big guns have plenty of capital to seek acquisitions even of successful high-quality merchants (like Harris Teeter) that no longer want to continue the battle in what always will be a low margin capital and labor intensive business.

A snapshot of what’s occurred in the past six weeks is a pretty good indicator of how the Mid-Atlantic and entire Northeast landscape continues to change.

The Kroger acquisition of Harris Teeter is significant in many ways. In the long-term, the most important takeaway from this $2.5 billion deal might be Kroger’s red carpet opportunity to enter the Baltimore-Washington market, which Giant/Landover and Safeway have long dominated. While Harris Teeter did much of the hard work entering the market organically and operating fine stores, the resources available to Kroger and its market clout as the largest pure supermarket chain in the country has demonstrated will certainly be the greatest threat the two current market leaders have felt in many years. To illustrate Kroger’s ability to execute at a high level, just watch the job the Cincinnati based chain is doing in Richmond, where it has given Giant/Carlisle (Martin’s) fits ever since that Ahold USA unit acquired Ukrop’s in 2010.

Looking farther north, the cat’s now fully out of the bag for A&P. In what is now a widely circulated memo to its store managers from chairman Gregory Mays, A&P is reviewing its options to fund its future growth (what growth?). While the memo mentions such “strategic alternatives” as raising outside capital and internal refinancing, it also notes that a sale of the company is possible (I’d bet on that option).

It’s been nearly 18 months since Yucaipa Cos. gained control of the once iconic chain after it exited bankruptcy. We were told improvements were coming, cap-ex would be increased and the new project engine was going to be restarted. Along with control of the Tea Company’s real estate, Ron Burkle (founder of Yucaipa) got his labor concessions from the UFCW and a sweetened distribution deal from C&S, but we’re still waiting for improvements that can be seen in a tangible manner.

The stores are still below industry standards, morale by measure is worse than it was two years ago and, as for those new projects, selling and closing stores shouldn’t be viewed as progress. In fact, since Yucaipa took control of A&P in March 2012, the chain’s consumer perception is even worse than it was pre-bankruptcy. So, is there really any option but to sell in what has become a new subset in the grocery business – squeeze out the real estate assets and then dump the stores, something that the private equity community has become proficient at.

And should A&P sell, it will have ramifications for another PE company – Cerberus Capital Management. While some have speculated that Cerberus could even be interested in acquiring A&P (there is a link between Supervalu and New Albertsons executives), it’s doubtful that A&P would want to deal with another PE company (unless there were no strategic buyers interested in the whole chain, which is a possibility). In fact, selling a distressed entity in an overstored, highly competitive region like the metro New York-Delaware Valley corridor might prove difficult (forget the rumors about Kroger being interested), so A&P might have to settle for a series of smaller package sales to existing players (Wakefern and Ahold USA would be the leading acquisition candidates on paper) where store overlaps might be an issue.

And how does that affect Cerberus? We’ve been told by several sources that Cerberus’ financing agreement prohibits the big investment firm from selling key assets at both its New Albertsons and Supervalu units for 18 months. If true, that would certainly give A&P a major head start to pursue a sale. And in an overstored and diverse market, being the last man standing ain’t always such a good thing,

That’s not to say that Cerberus intends to dump certain assets after the reported 18 month window expires. It has held on to its original Albertsons stores since 2006 (with significant stores closings needed to streamline the chain). In fact, a recent meeting with the new management team at Acme Markets (president Jim Perkins and VP-merchandising and marketing Dennis Clark) gave me encouragement that they are earnest in working to achieve improvements. And in the short time they have been at the helm (five months), the stores are being run better, some prices have been reduced and morale is noticeably improved. That’s light years beyond what A&P has accomplished in nearly 18 months of new ownership. Still, Supervalu, when it owned the “Albertsons” chains, let so much water drain out of the pool that Acme (as well as other Cerberus controlled properties in the region – Shoppers, Farm Fresh and Shaw’s) is going to need to hit a lot of home runs in the near future to even get back in the game, which has changed significantly in the past five years.

There are other potential game changers to watch, too. While the announcement that Supervalu independent customer Fresh Grocer is set to become the 50th ShopRite member is big news in itself, the fact that Wakefern has also acquired the Fresh Grocer trademark gives the powerful Keasbey, NJ co-op an alternative banner to deploy for smaller, perishables-oriented stores to both existing and potentially new members.

Beyond that, watch for New York City-based high volume retailer Fairway Market (now a publicly-traded company) to continue its expansion push farther south into the Delaware Valley and Baltimore-Washington; the country’s most profitable and fastest growing retailer, Whole Foods, wants to triple the numbers of stores it operates over the next decade; Fresh Market, also now a “listed” company, is adding stores in the many favorable demographic locations available in the Mid-Atlantic; and Wegmans, with 11 more stores planned in the Northeast, has the ability to “carpet bomb” any competitor when it opens a new store. Oh, and there’s Wal-Mart, which continues to drive sales with SuperCenter conversions, and if it ever gets its act together with its Neighborhood Markets expansion plan, could become an even scarier competitor in the region.

Tighten your seat belts!