Taking Stock: With Burkle On The Verge, Let The A&P (Real Estate) Games Commence

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In the next few weeks, Ron Burkle, founder and principal of private equity firm Yucaipa Cos., will control the A&P empire. All right, in the 1920s and 30s “empire” might have been an apt description for a grocery chain that once operated nearly 14,000 stores (1925), but today Burkle’s treasure lies in the real estate value of the shrinking chain’s 336 current supermarkets.

Whatever one thinks of Mr. Burkle as a merchant is really moot. It’s true he Brothers where his father was president) and in his many successful conquests of grocery chains over the past 25 years (Food 4 Less, Boys Markets, Alpha Beta, Smitty’s Ralph’s Fred Meyer, Dominick’s and Wild Oats) Burkle has done a much better job than most private equity firms of improving the fundamentals of many of those organizations before selling them off to other larger grocery entities.

But times have changed, and for once-mighty supermarket powers like Pathmark and now A&P, trying to “fatten the calf” through improved operations and keener marketing and merchandising programs is almost impossible when considering the vast levels of overstoring in most markets and the number of diverse retailing styles that exist today. So, much like he did with Pathmark which he acquired for $150 million in 2005 and then sold his equity to the Tea Company for $650 million two years later, Burkle is playing with house money and has a real opportunity to cash out big – not by significantly improving A&P’s market share in metro New York or in the Delaware Valley – but in taking advantage of A&P’s real estate portfolio.

After all, wasn’t that the true rationale behind Lone Star Fund’s acquisition of Bi-Lo and Bruno’s from Ahold in 2005? And don’t you think that Winn-Dixie’s real estate assets weren’t the driving force behind Lone Star’s recently announced tentative purchase of thatJacksonville,FLchain with more than 475 stores?

Do I believe Burkle, who will serve as chairman as the soon-to-be privately owned firm, will invest money to improve A&P’s physical plants and infrastructure? I vote “yea.”

Do I expect associate morale to improve under new ownership, too? Once again, “amen.” Certainly with millions of dollars of debt swept away after exiting Chapter 11, very favorable labor contracts (at least compared to A&P’s other unionized competitors) and a cap-ex plan that is more aggressive than any A&P has put forth since the 1980s, Burkle can make ripples, at least early on.

But to think that A&P has a real chance of putting a dent in ShopRite, Wegmans, AholdUSA’s Giant/Carlisle or Stop & Shop units isn’t probable from my perch.

However, selling the company’s 16 Food Emporium stores in Manhattan, dumping many of its unprofitable stores in the Philadelphia market and selling a large parcel of properties on Long Island is the smartest and most logical way that Burkle and his partners, Mount Kellett and Goldman Sachs and its lenders Credit Suisse and J.P. Morgan Chase can make hay with this deal.

And with the vision of a new A&P with 150-175 stores located primarily in Central and Northern New Jersey and Westchester County, NY where there are still enough “favorable” leases, and in some areas, protection from the whuppin’ that ShopRite has laid on the company over the past 30 years, the chain should be able to claim some small victories. However, “small” victories wouldn’t seem to fit Mr. Burkle’s modus operandi. There are larger triumphs to be gained in the properties that the new chairman will have sway over.

As several of our readers have noted, with so few PE deals occurring over the past five years, due in part to a shrinking group of potential strategic buyers available, who could or would buy the entire company, especially if sales and earnings don’t improve substantially?

Today, there is not one strategic buyer that comes to mind. But look at it from another perspective. Don’t be shocked if Burkle takes another run at Supervalu, this time focusing on the inept firm’s most distressed Northeast properties – Acme and Shaw’s.

In 2006, shortly after Supervalu acquired five key retail divisions from Albertsons, Burkle planned to acquire about 12 percent of SVU for about $680 million. Ultimately, sources have told us that his investment in the Eden Prairie, MN retailer/wholesaler was much smaller (we told you he was a smart guy), but his interest in attempting to acquire the former Boise, ID based chain, then led by Larry “The Milkman” Johnston, predates the Supervalu and Cerberus Capital Management (Albertsons LLC) deals.

So, if the end game in this process is indeed a real estate play, and Supervalu continues to be unable to find a buyer for its beleaguered Northeast chains at their price, wouldn’t the

addition of 115 Acme stores and 160 Shaw’s units make the Burkle’s asset portfolio that much stronger?

Ron Burkle is a great poker player, brings a mountain of cash to play with and possesses the talent and risk-taking ability to become even a bigger winner in the new rules of supermarketing.

 ‘Round the Trade

While its core banner, Food Lion, is struggling, parent company DelhaizeAmericacontinues to reinforce its commitment to building more Bottom Dollar Food Stores. In addition to the 14 units that have recently opened in the Pittsburgh-Youngstown market, the retailer announced that eight more new Bottom Dollar Food (BDF) units will open in central and southernNew Jerseyover the next 12 months. Opened on March 2 were new 18,000 square foot BDF units inTrentonandCinnaminson. Next month (April 13), the retailer will cut the ribbon in Bordentown, and future openings include stores inEdgewaterPark, Bellmawr, Woodbury,MountHollyandEast Windsor. “We have been pleased with customer reaction to our current five stores inNew Jerseyand we are very excited to continue serving customers at our additional locations in the market,” said Bottom Dollar Food president Meg Ham. “New Jerseycustomers will find Bottom Dollar Food unique because of our unbelievably low prices on quality private brands and the national brands that matter most, and our meaningful, efficient assortment of fresh produce and meat.”…although Supervalu would not break out the specific number of jobs riffed at the division level that were among the 800 who were cut, we’ve learned that about 15 of those positions were at Bowie, MD Shoppers Food & Pharmacy and another 19 were at Acme Markets in Malvern, PA. Of course, in the warped logic of CEO Craig Herkert, reducing staff at the banner level can only help Supervalu become even more “hyperlocal.” Don’t try to figure it out, all you need to know is that Herkert’s really some type of industry savant. If you don’t believe it, just ask him. In other SVU news, theEden

Prairie, MN firm has announced that its new Everyday Essentials private label brand has caused the need to eliminate older private label brands such as Richfood, Flavorite and Homelife. Other PL brands such as Shoppers Value, Culinary Circle and Stockman & Dakota will remain available…lots of financial news to report this month. Wal-Mart seems to be righting its ship to some degree on the sales front. The planet’s largest retailer announced that its fourth quarter U.S. ID sales rose 1.5 percent, marking the second consecutive period that IDs trended positive after nine straight negative quarters. Wal-Mart has reverted to a more aggressive “old school” pricing mindset and while it has helped the Bentonville, AR retailer’s stock price rise 29 percent in the past six months, but earnings have suffered. The company posted a marginal profit gain in the quarter of $5.19 billion (from $5.02) billion last year. Overall sales increased 5.8 percent to $122.3 billion…Safeway’s fourth quarter earnings dipped about 6 percent to $215.6 million, but veteran CEO Steve Burd remained confident in his company’s strategy going forward. “Our business continued to grow,” said Burd, “With ID sales growth remaining steady and costs well-controlled, we increased earnings per share 8 percent. As we move into 2012, our personalized marketing efforts and innovation in private label brands should contribute to our growth.” Safeway’s ID’s rose 1.5 percent (ex-gas) on an overall sales gain of 6.2 percent. During the fourth period, thePleasanton,CAmerchant invested $412.2 million in capital expenditures in the fourth quarter of 2011. The company opened 11 new Lifestyle stores, completed 10 Lifestyle remodels and closed 14 stores. For the year, Safeway invested $1.09 million in capital expenditures, opened 25 new Lifestyle stores, completed 29 Lifestyle remodels and closed 41 stores…one of Safeway’s chief rivals in many markets, Kroger, posted a fourth-quarter net loss of $306.9 million. But in this case, the nation’s largest pure supermarket chain’s red ink was totally due to a real one-time transaction (not the questionable write-downs that Supervalu and A&P are best known for). TheCincinnati,OHretailer announced in December that it was going to spend $650 million on pension-related costs at four of its unions, who were. While the one-time contribution was costly, Kroger said the move is expected to reduce costs over the long term. As for the “through the cash register” numbers, total sales grew 7.7 percent and ID revenue jumped 4.9 percent. “All of the data we are seeing suggests the overall economy and customer sentiment are improving,” CEO Dave Dillon said. “Both give us reason to be optimistic.” He’s right about the economy finally start to improve, but with gas prices beginning to spike again, retailers are still hesitant to make any long-term predictions about growth…two of the best financial performers over the past year have been Costco and Whole Foods. AtIssaquah,WAbased Costco, now under the helm of new CEO Craig Jelinek, net income rose 13 percent in its second quarter to $394 million and its same store sales grew by 7 percent (ex-gas). The country’s largest club store operator also noted that its customers spent 2.4 percent more per visit during the quarter. The frequency of visits also rose to 5.2 percent. “We’re always going to match or try to be lower than our competitors,” chief financial officer Richard Galanti said. Revenue from membership fees also rose to $459 million from $426 million. AndAustin,TXbased Whole Foods Market continued to post the best numbers in the entire industry. In its recently completed third quarter, WFM produced a 21 percent first quarter earnings increase (to $283 million) in the 16 week period ended January 15. The natural and organics merchant saw overall sales increase 13 percent to $3.4 billion while comp store revenue jumped a mighty impressive 8.7 percent. “We continue to execute at a high level, delivering a great shopping experience for our customers while delivering great returns to our shareholders,” said Walter Robb, co-chief executive officer of Whole Foods. “This quarter we produced a 28 percent (earnings per share) increase on a 13 percent increase in sales. We are pleased with our sales momentum and are confident we will continue to leverage our sales to the bottom line as reflected in our increased operating margin and earnings outlook for the year.”…and finally, kudos to the folks at Weis Markets, which not only opened a beautiful new 62,000 square foot replacement unit in Bellefonte, PA (whose opening week sales total broke a 100 year old company record), the Sunbury, PA regional chain, also posted magnificent numbers in its recently completed fourth quarter and yearend. The transformation of Weis under the stewardship of CEO Dave Hepfinger over the past three years has been very impressive to watch.

Local Notes

As labor negotiations continue between UFCW Locals 400 and 27 and Giant/Landover and Safeway (their four year contracts expire at the end of this month), both UFCW organizations have demonstrated their unhappiness with the bargaining approach that the B-W’s two largest retailers are taking. The unions are claiming that, despite years of unfettered profitability, Safeway and Giant are “demanding a long list of concessions” from their union members. “Our members have sacrificed for many years to make Giant and Safeway the profitable powerhouses they are,” said Local 400 president Tom McNutt, following recent “action” rallies held at 20 Giant and Safeway stores on February 22. “Yet management has the audacity to demand givebacks that would block many of our members from ever climbing the ladder to the middle class. What these two companies have failed to realize is that our members are united in their fierce determination to start receiving their fair share of the prosperity their hard work generates — and they are ready to do whatever it takes to achieve this goal. Today’s remarkable outpouring of support should prove a real eye-opener for management.” About 17,000 retail clerks and  meat cutters are employed at more than 300 stores operated by the chains. And just before presstime, UFCW Local 400 issued another press release in which McNutt claimed that Giant and Safeway management is “going nuclear” in its attempt to “ram through” a new contract. As their deadlines approach, it should be an interesting and lively final few weeks of bargaining…also before presstime,Hanover,MDbased High’s of Baltimore Inc., owned for many years by the Darnell family, has been sold to the Carroll Independent Fuel Co. (CIFC) The deal between two family owned c-store and fuel companies includes 46 High’s convenience stores and gas stations, primarily located in the B-W market. According to published reports, CIFC will retain all High’s employees under High’s of Baltimore LLC, led by president Brian Darnell…our friend (and former Safeway eastern division president, Pathmark chief executive and Starbucks CEO) Jim Donald just can’t seem to sit still. The peripatetic Mr. D last month was named CEO of Charlotte, NC based Extended Stay Hotels. While this is JD’s first foray outside the food and beverage business, you know he will lend his boundless energy and superior people skills to help majority owners Blackstone Group, Paulson & Co. and Centerbridge Partners (which acquired the 700 unit hotel chain in bankruptcy in October 2010) turn their troubled business around. And one of Jim’s former cohorts at Safeway, Janice Studds (director of risk management) is retiring from the chain’s eastern division after 43 years of service to the company. Starting in the stores, Janice has worn many hats during her wonderful career with the company and her dedication, loyalty and warmth have served her and Safeway well. We wish her the best of luck in her future endeavors… at Shoppers, a few recent notable promotions to report: Micky Nye has joined the regional chain as VP-operations. A veteran of more than 35 years in the grocery wars (Pathmark, Shaw’s), Ms. Nye has relocated toBowie,MDfrom Supervalu’s Southern California Albertsons division. Also, Mark Merrill, a five year veteran at Shoppers, has been promoted from director of district operations support to district manager, reporting to Nye. Another tip of the hat (this time a bit belated) to the great Julie McWilliams, Shopper’s director of labor relations, who recently retired after 27 years with the B-W unit of Supervalu. Smart, kind and hard working – that’s Julie in a nutshell and I hope her days of leisure are filled with fun things…I’m sad to report to death of Don Cornelius, 75, creator of “Soul Train” (1970-2006) was found dead in his Los Angeles home last month of a self-inflicted gunshot wound. I know I’m dating myself, but where else could you watch great musicians like James Brown, Aretha Franklin, Stevie Wonder, Michael Jackson Marvin Gaye and Tina Turner perform on TV? Although Cornelius was certainly influenced by Dick Clark and his iconic show, “American Bandstand,” by the time “Soul Train” debuted in 1970, it provided much fresher and livelier fanfare thanClark’s “AB.” And other than Barry White and Melvin Franklin of The Temptations, who had a better bass voice? I was also deeply saddened by the recent passing of Gary Carter, Hall of Fame catcher with the NY Mets and Montreal Expos. Carter was one of the toughest and grittiest baseball players of the past 50 years whose leadership skills and passion for the game were off the charts. Carter, who was diagnosed with a brain tumor last May, was only 57. Also passing on last month was actor Ben Gazzara at the age of 81. TheNew York Cityborn actor often played quiet and

brooding characters. Two of his best roles were in “Anatomy of a Murder” (1959) in which he played an Army officer charged with a revenge killing, and “Husbands” (1970) when he played one of three buddies trying to get over the death of another close friend.