March 6, 2007
A&P Takes Pathmark Over
As widely expected, A&P (Great Atlantic & Pacific) has made a deal that Pathmark, primarily Yucaipa Cos., could not refuse.
The deal, if approved by shareholders and regulators, would create a 550-store grocery chain with most of its stores in the New York to Philadelphia corridor. A&P also operates stores in Michigan, Louisiana and the Baltimore and D.C. markets.
Pathmark stores will continue to operate under the same banner and format, while administrative and management functions for the combined companies will be consolidated and moved to Great Atlantic’s headquarters in Montvale, N.J.
Christian Haub will continue as executive chairman of the new organization. Eric Claus, president and chief executive of Great Atlantic, will also maintain the same position in the combined company.
Mr. Haub told analysts during a conference call, “The combination will create a more competitive and profitable supermarket chain in the Northeast. It will turn two unprofitable companies operating in a highly competitive market into a profitable company” sooner than if they stayed independent.
“This transaction is the latest step in A&P’s strategic transformation, which began approximately 18 months ago in 2005 with the successful sale of A&P Canada and its U.S. executive leadership change,” said Mr. Haub.
John Heinbockel, an analyst with Goldman Sachs, expressed surprise there was “no stated role for Pathmark’s very capable executive team. We had assumed that any deal would represent more of a balance than this,” he wrote in a research report.
Mr. Heinbockel also said he expected push back from regulators with 50 or 60 stores having to be divested before approving the deal. This, he wrote, would include many of the profitable locations on Long Island.
Discussion Questions: Christian Haub said the deal will “turn two unprofitable companies operating in a highly competitive market into a profitable company” sooner than if they operated separately. Do you believe this is true? Are you surprised, as is John Heinbockel, that a role was not established for talented management from Pathmark? Do you see continuing operating Pathmark stores under the same banner as a positive or negative?
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Let’s just take a look at history. When has A&P, with Christian Haub in charge, taken over a group of stores and been able to improve them? Have sales ever gone up? Has store count ever gone up? Here is a quote from their 1994 10-K “The Company operates approximately 1,173 stores.” This deal only gets them back to 550 stores, and we know that number will soon start falling as well. With all the innovations A&P has claimed to have made, they just keep going backwards. Typically, when A&P is in control, sales will start to go down, down, down. I predict those $500k per week Pathmark stores will be $280k per week in short order. The competition will continue to play cat and mouse with A&P, hoping A&P holds on to the stores for as long as possible before selling to a more competent operator. Let’s get real. We know what happens when A&P buys a profitable company. Just think what will happen when they buy an unprofitable company!
Companies which offer an inferior product (and thereby lose market share) do not become winners by buying another company with inferior offerings. A&P, meet Pathmark.
Merging may provide some efficiencies, economies of scale and clout (though I doubt it), but it doesn’t solve to the real problem: both chains are being out-retailed by their competitors.
I truly believe as an acquisition and melding of operations, the acquisition of Pathmark by A&P will work.
First off, it is a concentrated acquisition. All Pathmark stores are no more than 100 miles from headquarters, so they can be monitored for changes in customer demands, and changes made as such.
Secondly, they both use C&S Wholesale as their supplier. Once AC and Master Choice brands are fully integrated into the Pathmark stores, savings will be achieved.
Thirdly, the A&P team is putting together a chain devoted to fresh, discount, gourmet and “CenterPath” formats. Taking the best of Pathmark in the center store, and incorporating this in the A&P family banners superstore footprint, will make for better operating A&P family stores.
Fourth; while capex will be lowered 25 percent this year, the new builds are going ahead. These new fresh format stores are Whole Paycheck and Bloom category killers. You can definitely sell “fresh” and make it fun and profitable both to the consumer and to the bottom line.
Fifth; the A&P team loves what it does. If you listen to the conference calls, you can sense that the team, and in particular, Eric Claus, knows how to manage and implement change. When you love food, enjoy talking to your employees and your customers, and do so with knowledge of the marketplace, good things result.
You know, most of you love to kick the grand old lady around. But still she survives and changes with the times. What other grocery chain will be celebrating 150 years in operation during 2009? Can’t think of any offhand, can you?
I think the merger could work. Really.
All A&P management would have to do is look at models of successful retailers around the country and start doing things that customers like:
Stock products that sell well and fit the needs of the target customer.
Have enough employees on hand to keep the shelves full and the stores clean (and answer customers’ questions).
Hire management at every level that genuinely likes and understands the grocery business and wants to serve the customer.
Invest in ongoing performance-improvement processes that start with customer and employee research and make implementing their best ideas a routine part of day-to-day operations.
Market to customers as if you genuinely like them and understand their needs. Use technology to reach them where they are, but respect their time and privacy when they’re not in the mood to engage with you.
Finally, treat the corporation you’re running as a vehicle to deliver products and services to customers at a fair profit, i.e., as a business.
And stop treating it as an arcane financial instrument designed to siphon cash from operations and place it into the hands of a small group of well positioned executives and M&A professionals.
Although Wall Street seems to be applauding the deal, there definitely is room for skepticism, especially given the fact that both companies have not been profitable for a while. Acquisitions and mergers are an expensive affair in any industry especially when there is a lot of hard assets to integrate as in the case of the retail sector. Still in some cases it is considered worthwhile because the synergy could potentially be equal or higher than the cost. If both have been consistently unprofitable, this becomes less likely.
Christian Haub has a clear and realistic vision and has begun to execute a strategy to implement that vision.
While only time will tell whether A&P will be able to successfully integrate operations while at the same time capturing the cost synergies needed to make the deal pay off, this purchase makes sense. There really were no great opportunities for either company on a standalone basis.
In terms of operating Pathmark under that name, it’s probably the only thing that can be done in the near term, but it will reduce potential cost savings.
A&P already has a talented team in place, and one question would be: How many of the senior folks at Pathmark are really looking for a job in an operating company versus whether they’d be focused on their next “turnaround” opportunity?
It is truly amazing that the combination of two struggling, unprofitable operations is somehow expected to result in one healthy, profitable one.
If the last decade has taught us anything, it is that it takes more than just a merger to create a winner. This is the same “Pac-Man” strategy that hasn’t worked for numerous other companies.
The skeptics have a lot of standing on this story. A&P’s track record on acquisitions does not inspire great confidence. The synergies may help somewhat–consolidation of administrative functions and buying power should lower the profitability hurdle. And Pathmark certainly has some outstanding real estate in the New Jersey and New York suburbs.
But the announced plans to run the two store groups under their existing banners means A&P leadership is foregoing what may be the best synergy of all–regional marketing power. Of course Mr. Haub may alter this plan at any time, but right now, with all the skeptics rolling their eyes, it would be reassuring to hear that A&P has a plan to leverage a unified supermarket brand throughout the region. I’d submit that the Pathmark banner has greater equity with consumers than A&P does.
Great expectations accrue only to the most astute in matters of the “financial heart.” In this matter, only Yucipa is the winner. A&P has again masterminded future problems with Teutonic aplomb by eliminating Pathmark talent.
Good points, David, as always. Merely buying more stores will not solve A&P’s fundamental problems, which have been haunting the company for many years now. This is a very painful issue for A&P to face, and it is no surprise that it may not yet be able to face it. Ironically and very commonly, not facing the painful information of why customers do not want to shop there as much as at other grocers means that the chain will not improve significantly. Many business leaders appear to look at turn-around and fundamental improvement as mainly a question of financial structure, forgetting that customers are the gasoline for all financial activity, and efficiency is the engine oil..
Oh, puh-leez! With all due respect (and that’s been dwindling for some time now) and based on past history, Mr. Haub’s statements are actually laughable. Two unprofitable companies will now become one profitable company? Gimme a break. Where’s the board of directors, to allow this debacle to go on for so many years? Where are the investors? What are those Wall Street securities analysts smoking when they say this is a wonderful deal with great synergies? This deal will hasten the demise of both. Pathmark at least had a chance before. For even the most casual observer, it’s obvious where A&P is headed.
The big plus for A&P will come if pricing gains will be large enough to increase margin dollars. When the prices go up, if the volume falls too much, there won’t be any gain at all. Every conventional chain supermarket company has the same wish: to dominate each region it’s in, so that prices can rise. There will be some headquarters savings, but the purchase of Pathmark won’t be worthwhile financially if the margin dollars aren’t increased. Too bad for A&P that many Pathmark stores aren’t far from Stop & Shop, ShopRite, Costco, Sam’s Club and BJ’s. All 5 will show substantial comp sales increases when the Pathmark purchase by A&P is implemented.
This is a purchase. It is not a merger of equals. Why be surprised that the A&P management team remains intact? Perhaps there will be some role for the most talented of the Pathmark execs, but time will tell. There will be cost savings by the elimination of a second headquarters and duplicate functions. Will it be enough? Again time will tell.
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Let’s just take a look at history. When has A&P, with Christian Haub in charge, taken over a group of stores and been able to improve them? Have sales ever gone up? Has store count ever gone up? Here is a quote from their 1994 10-K “The Company operates approximately 1,173 stores.” This deal only gets them back to 550 stores, and we know that number will soon start falling as well. With all the innovations A&P has claimed to have made, they just keep going backwards. Typically, when A&P is in control, sales will start to go down, down, down. I predict those $500k per week Pathmark stores will be $280k per week in short order. The competition will continue to play cat and mouse with A&P, hoping A&P holds on to the stores for as long as possible before selling to a more competent operator. Let’s get real. We know what happens when A&P buys a profitable company. Just think what will happen when they buy an unprofitable company!
Companies which offer an inferior product (and thereby lose market share) do not become winners by buying another company with inferior offerings. A&P, meet Pathmark.
Merging may provide some efficiencies, economies of scale and clout (though I doubt it), but it doesn’t solve to the real problem: both chains are being out-retailed by their competitors.
I truly believe as an acquisition and melding of operations, the acquisition of Pathmark by A&P will work.
First off, it is a concentrated acquisition. All Pathmark stores are no more than 100 miles from headquarters, so they can be monitored for changes in customer demands, and changes made as such.
Secondly, they both use C&S Wholesale as their supplier. Once AC and Master Choice brands are fully integrated into the Pathmark stores, savings will be achieved.
Thirdly, the A&P team is putting together a chain devoted to fresh, discount, gourmet and “CenterPath” formats. Taking the best of Pathmark in the center store, and incorporating this in the A&P family banners superstore footprint, will make for better operating A&P family stores.
Fourth; while capex will be lowered 25 percent this year, the new builds are going ahead. These new fresh format stores are Whole Paycheck and Bloom category killers. You can definitely sell “fresh” and make it fun and profitable both to the consumer and to the bottom line.
Fifth; the A&P team loves what it does. If you listen to the conference calls, you can sense that the team, and in particular, Eric Claus, knows how to manage and implement change. When you love food, enjoy talking to your employees and your customers, and do so with knowledge of the marketplace, good things result.
You know, most of you love to kick the grand old lady around. But still she survives and changes with the times. What other grocery chain will be celebrating 150 years in operation during 2009? Can’t think of any offhand, can you?
I think the merger could work. Really.
All A&P management would have to do is look at models of successful retailers around the country and start doing things that customers like:
Stock products that sell well and fit the needs of the target customer.
Have enough employees on hand to keep the shelves full and the stores clean (and answer customers’ questions).
Hire management at every level that genuinely likes and understands the grocery business and wants to serve the customer.
Invest in ongoing performance-improvement processes that start with customer and employee research and make implementing their best ideas a routine part of day-to-day operations.
Market to customers as if you genuinely like them and understand their needs. Use technology to reach them where they are, but respect their time and privacy when they’re not in the mood to engage with you.
Finally, treat the corporation you’re running as a vehicle to deliver products and services to customers at a fair profit, i.e., as a business.
And stop treating it as an arcane financial instrument designed to siphon cash from operations and place it into the hands of a small group of well positioned executives and M&A professionals.
Although Wall Street seems to be applauding the deal, there definitely is room for skepticism, especially given the fact that both companies have not been profitable for a while. Acquisitions and mergers are an expensive affair in any industry especially when there is a lot of hard assets to integrate as in the case of the retail sector. Still in some cases it is considered worthwhile because the synergy could potentially be equal or higher than the cost. If both have been consistently unprofitable, this becomes less likely.
Christian Haub has a clear and realistic vision and has begun to execute a strategy to implement that vision.
While only time will tell whether A&P will be able to successfully integrate operations while at the same time capturing the cost synergies needed to make the deal pay off, this purchase makes sense. There really were no great opportunities for either company on a standalone basis.
In terms of operating Pathmark under that name, it’s probably the only thing that can be done in the near term, but it will reduce potential cost savings.
A&P already has a talented team in place, and one question would be: How many of the senior folks at Pathmark are really looking for a job in an operating company versus whether they’d be focused on their next “turnaround” opportunity?
It is truly amazing that the combination of two struggling, unprofitable operations is somehow expected to result in one healthy, profitable one.
If the last decade has taught us anything, it is that it takes more than just a merger to create a winner. This is the same “Pac-Man” strategy that hasn’t worked for numerous other companies.
The skeptics have a lot of standing on this story. A&P’s track record on acquisitions does not inspire great confidence. The synergies may help somewhat–consolidation of administrative functions and buying power should lower the profitability hurdle. And Pathmark certainly has some outstanding real estate in the New Jersey and New York suburbs.
But the announced plans to run the two store groups under their existing banners means A&P leadership is foregoing what may be the best synergy of all–regional marketing power. Of course Mr. Haub may alter this plan at any time, but right now, with all the skeptics rolling their eyes, it would be reassuring to hear that A&P has a plan to leverage a unified supermarket brand throughout the region. I’d submit that the Pathmark banner has greater equity with consumers than A&P does.
Great expectations accrue only to the most astute in matters of the “financial heart.” In this matter, only Yucipa is the winner. A&P has again masterminded future problems with Teutonic aplomb by eliminating Pathmark talent.
Good points, David, as always. Merely buying more stores will not solve A&P’s fundamental problems, which have been haunting the company for many years now. This is a very painful issue for A&P to face, and it is no surprise that it may not yet be able to face it. Ironically and very commonly, not facing the painful information of why customers do not want to shop there as much as at other grocers means that the chain will not improve significantly. Many business leaders appear to look at turn-around and fundamental improvement as mainly a question of financial structure, forgetting that customers are the gasoline for all financial activity, and efficiency is the engine oil..
Oh, puh-leez! With all due respect (and that’s been dwindling for some time now) and based on past history, Mr. Haub’s statements are actually laughable. Two unprofitable companies will now become one profitable company? Gimme a break. Where’s the board of directors, to allow this debacle to go on for so many years? Where are the investors? What are those Wall Street securities analysts smoking when they say this is a wonderful deal with great synergies? This deal will hasten the demise of both. Pathmark at least had a chance before. For even the most casual observer, it’s obvious where A&P is headed.
The big plus for A&P will come if pricing gains will be large enough to increase margin dollars. When the prices go up, if the volume falls too much, there won’t be any gain at all. Every conventional chain supermarket company has the same wish: to dominate each region it’s in, so that prices can rise. There will be some headquarters savings, but the purchase of Pathmark won’t be worthwhile financially if the margin dollars aren’t increased. Too bad for A&P that many Pathmark stores aren’t far from Stop & Shop, ShopRite, Costco, Sam’s Club and BJ’s. All 5 will show substantial comp sales increases when the Pathmark purchase by A&P is implemented.
This is a purchase. It is not a merger of equals. Why be surprised that the A&P management team remains intact? Perhaps there will be some role for the most talented of the Pathmark execs, but time will tell. There will be cost savings by the elimination of a second headquarters and duplicate functions. Will it be enough? Again time will tell.