Company’s briefly introduction
Once one of the biggest baggers of groceries in the US, The Great Atlantic & Pacific Tea Company (A&P) has been reduced to a shrinking portfolio of regional grocery chains. It now runs about 300 supermarkets in New Jersey, New York, Pennsylvania, and three other eastern states. In addition to its mainstay 80-store A&P chain, the company operates five banners: Pathmark, Waldbaum’s, Superfresh, Food Emporium, and Food Basics. A&P acquired its longtime rival in the Northeast, Pathmark Stores, for about $1.4 billion, but the purchase failed to reverse A&P’s lagging fortunes. Indeed, A&P in 2012 emerged from 15 months bankruptcy after a financial restructuring and closing 75 stores.
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The Great Atlantic & Pacific Tea Company, better known as A&P, is a supermarket and liquor store chain in the United States. Its supermarkets, which are under six different banners, are found in Connecticut, Delaware, Maryland, New Jersey, New York, and Pennsylvania. A&P’s liquor stores, known as Best Cellars, are found in Connecticut, Massachusetts, and Virginia. A&P’s corporate headquarters are in Montvale, New Jersey. Supermarket News ranked A&P #19 in the 2010 “Top 75 Food Retailers and Wholesalers” based on 2009 fiscal year estimated sales of $9.1 billion. Based on 2009 revenue, A&P was the 34th largest retailer in the US. From 1915 through 1975, it was the largest food retailer in the nation (until 1965, the largest US retailer of any kind). A&P is considered an American icon. The Wall Street Journal, in an editorial on December 10, 2010, said that “A&P was as well known as McDonald’s or Google is today” and that A&P was “Wal-Mart before Wal-Mart.” What is now A&P began in 1859; it established a small chain of retail tea and coffee stores in New York City and a national mail order business.
It grew to 70 stores by 1878. In the late 19th century, A&P, still a tea and coffee company, became the country’s first grocery chain. At the turn of the century, it operated almost 200 stores. The company grew dramatically after introducing the economy store concept in 1912, growing to 1,600 stores in 1915. After World War I, the company opened stores offering meat and produce. In 1930 the company, now the world’s largest retailer, reached $1 billion in sales with 16,000 stores. In 1936, A&P adopted the self-serve supermarket concept and opened 4,000 larger stores by 1950. A&P’s decline began in the 1950s when it failed to keep pace with chains which opened larger, modern supermarkets with features demanded by customers. By the 1970s, A&P stores were out of date; its efforts to combat high operating costs resulted in poor customer service. In 1975, the company hired outside management, closing older stores and building modern ones. When these efforts failed to turn the company around, the heirs of the original owners, and foundations that owned a majority of the stock, sold to the German Tengelmann Group.
A&P then launched a store-closing program financed by the surplus assets of its pension plan. Starting in 1982, A&P acquired several chains; these stores operated through their names rather than A&P. While A&P regained profitability in the 1980s, in 2002 it operated at a record loss because of new competition, especially Wal-Mart. A&P closed more stores, which included the sale of its large Canadian division. In 2007, A&P purchased Pathmark, one of its toughest competitors; A&P again became the largest supermarket chain in the New York City area. Highly leveraged after this acquisition, the company experienced financial difficulties because of the recession and filed for Chapter 11 protection in 2010. In late 2011, A&P implemented a restructuring plan to emerge from bankruptcy. On March 13, 2012, it was announced that A&P had emerged from bankruptcy and was now a private company.
More than 150 years ago, The Great Atlantic & Pacific Tea Company, Inc. (A&P) began operations as The Great American Tea Company. Its first store – on Vesey Street in New York City – sold tea, coffee and spices at value prices. Soon after, stores sprung up all around the New York metropolitan area, and salesmen took their wares to the road in horse-drawn carriages bound for New England, the Midwest and the South. In 1869, the Company was renamed The Great Atlantic & Pacific Tea Company, commemorating the first transcontinental railroad. In 1936, A&P became the first national supermarket chain in the United States, one of many innovative concepts that radically changed the way consumers shopped. Its vast advertising and promotional activities reached so many consumers that A&P became an American icon. Below are select milestones from the Company’s rich history: 1859-1899 – Becoming a Grocery Pioneer
* 1859 – The Great American Tea Company is founded as a mail order business by tea and spice merchants George Huntington Hartford and George Gilman. The same year, the first store-warehouse operation opens in New York City at 31 Vesey Street. * 1869 – The Company is renamed the Great Atlantic & Pacific Tea Company, or A&P. * 1880 – A&P begins marketing its own brand of baking powder, its first private label product. It also pioneers the use of refrigerated railroad cars to transport fruit, and becomes the first to bring fresh seafood to the Midwest. * 1881 – A&P becomes the first grocery chain to operate 100 stores and expands to 5,000 delivery routes. * 1880s – With the public’s taste for coffee growing rapidly, A&P establishes its own brand, Eight O’ Clock Breakfast Coffee, packaged in a red bag. George Huntington Hartford names the product after the time of the day that he believed the most coffee was consumed. * 1887 – Sales hit $1 million.
* 1890s – A&P introduces premium “checks” to be redeemed for cups, saucers and other goods, marking the first original customer-loyalty program with premiums and savings coupons. 1900-1959 – Becoming an Innovator and American Icon
* 1912 – John Hartford convinces his father and brother to launch the first ‘no frills” grocery format in America with the opening of the A&P Economy Store in Jersey City, N.J. The cash and carry store, with plain furnishings and fixtures, offered no credit, no deliveries and no premiums – just quality groceries at very low prices. * 1920 – The A&P Economy Store concept flourishes and catalyzes an extraordinary period of growth, resulting in 4,638 stores, from about 350 stores in 10 years prior. * 1924 – The A&P Radio Hour launches as America’s first national radio program. Soaring in popularity through the 1930s, it featured popular artists such as Kate Smith, Harry Horlick and the A&P Gypsies. * 1929 – A&P more than triples its store count to 15,418 stores and increases sales five-fold to reach the $1 billion mark.
* 1930s – A&P expands to California, Washington and Canada. * 1933 – A&P participates in the World’s Fair in Chicago. Housed in a 2,000-seat amphitheater, the A&P Carnival draws thousands of visitors with the A&P Marionette Revue, Harry Horlick and other entertainment. * 1936 – A&P opens the nation’s first “supermarket,” a 28,125-square-foot store in Braddock, Pa., that enables customers to select their own groceries without the assistance of a clerk.
* 1937 – A&P launches Woman’s Day magazine through a wholly-owned subsidiary, The Stores Publishing Company. The magazine features articles on food preparation, home decoration, needlework and childcare, selling for two cents a copy exclusively in A&P stores. * 1941 – Eight O’ Clock coffee becomes the best-selling brand of coffee in the world. * 1958 – Sales grow to $5 billion and 4,252 stores. A&P tops the industry, with volume exceeding that of its closest competitor by more than $1 billion. * 1959 – A&P celebrates its 100th anniversary.
1960-1999 – Becoming a Supermarket Family
* 1963 – With its new Plaid Stamps redemption program, A&P brings back the premium concept. With every purchase, shoppers receive plaid-colored stamps, which can be later redeemed for popular household items, such as snack trays and Lazy Susans. * 1971 – A&P opens its first Warehouse Economy Outlet (WEO). This low-price warehouse concept, featuring displays of fast-selling grocery items in the original cases, is rolled out to 1,500 stores. * 1979 – The Hartford Foundation and family members sell the majority of A&P shares to The Tengelmann Group of West Germany in the face of declining sales and profitability, as competitors follow consumers to the suburbs.
* 1980 – James Wood is elected Chairman, President & CEO. Under his leadership, the company closes operations in several markets, including hundreds of older stores and the majority of its manufacturing operations. * 1981 – Beginning a new growth via acquisition strategy, the Company purchases 17 Stop & Shop supermarkets in New Jersey. * 1982 – The Company launches the Superfresh banner in the Philadelphia area, emphasizing product freshness and strong customer service. * 1986 – A&P acquires the Bronx, N.Y.-based Shopwell Inc., which includes 26 upscale stores named The Food Emporium. It expands further in New York with the acquisition of Waldbaum’s, Inc. that fall. * 1994 – A&P in the U.S. launches a new private label program, introducing four new brands across all of its banners: America’s Choice, Master Choice, Health Pride and Savings Plus.
2000-Present – Innovating and Restructuring for the Future
* 2000 – The Food Emporium opens its unique Bridge Market store, located at 59th Street and First Avenue beneath New York City’s landmark Queensborough Bridge. * 2001 – A&P opens its first U.S. Food Basics store in Passaic, N.J. * 2003 – To reduce debt and lower operating costs, A&P exits Northern New England, sells Kohl’s stores in Wisconsin (which it acquired in 1983), closes all remaining Kohl’s operations, and sells the Eight O’Clock Coffee division. * 2005 – The Great Atlantic & Pacific Tea Company, Inc. sells A&P Canada to METRO INC., a supermarket and pharmaceutical operator in the Provinces of Quebec and Ontario Canada.
* 2009 – The Great Atlantic & Pacific Tea Company celebrates its 150th Anniversary as the oldest grocery retailer in the United States. * 2010 – The Board elects Sam Martin as President & CEO. Under his leadership, the Company embarks on a turnaround plan and files for Chapter 11 to enable it to restructure its operations and financial obligations. * 2011 – A&P launches Woodson & James, a new line of premium-quality Angus beef featuring steakhouse-quality meat at affordable supermarket prices, exclusive to all A&P, Pathmark, Superfresh, Waldbaum’s and The Food Emporium stores. * 2012 – A&P exits Chapter 11 as a private company with 320 stores.
The Great Atlantic & Pacific Tea Company (A&P or “the company”) is engaged in the retail food business. The company offers a strong portfolio of private label brands. Green Way, a new private label launched in 2009, features over 200 healthy, organic and eco-friendly products. In the current economic environment, consumers are tending to choose private label brands due to their quality and competitive pricing. Given the growing demand for private label products, the company’s portfolio of private brands offers a competitive advantage. However, the sluggish US economy could depress purchasing power of consumers affecting the sales of the company.
Robust private label portfolio
Declining market share
Operational and financial issues led to bankruptcy filing
Multiple store formats
Economic downturn in US affects consumer spending
Online retail channel offers opportunities for revenue growth Increasing demand for organic products
Rising labor wages in the US likely to increase the operating cost Remodeling of stores will lead to incremental sales
Robust private label portfolio
A&P offers a strong portfolio of private label brands including America’s Choice, Hartford Reserve, Live Better Wellness, America’s Choice Gold, Smart Price and Via Roma. A&P’s America’s Choice brand presently stands among the best selling private brands in the industry. In addition, in 2009, the company launched Green Way, a new private label line featuring over 200 healthy, organic and eco-friendly products. The company launched The Food Emporium Trading Company private label brand of international specialty items, in November 2010. In the face of macroeconomic pressures, consumers are increasingly opting for private label products. According to industry watchers, private label sales have increased in the US in the recent years. In the current economic environment, value-oriented consumers are choosing private label brands due to their competitive pricing. Also, strong push from retailers and improvements in both quality and selection has been influencing the shopping trends. This trend is expected to continue even after the economy recovers as consumers consider the quality of private label brands to be as high as name brand products.
In addition to providing savings to consumers, private labels provide higher operating margins than national brands to A&P thereby improving profitability. Increased penetration of these private labels will improve the margins of the company. Additionally, they offer a competitive advantage and will enable the company to develop a niche customer base. Multiple store formats A&P operates multiple store formats. The company’s store formats vary from full-service supermarkets featuring fresh produce, seafood, meat, deli, groceries, floral, and pharmacies, to upscale gourmet stores (The Food Emporium), to limited variety stores featuring everyday low prices (Food Basics). Through its broad base of supermarkets, A&P has expanded and diversified within the retail food business.
The company operates stores with merchandise, pricing and identities tailored to appeal to different customer segments, including buyers seeking gourmet and ethnic foods, a wide variety of premium quality private label goods and health and beauty aids along with the range of traditional grocery products. The wide variety of products offered to meet the needs of a diverse customer base will drive footfall and also provide immense opportunities for cross selling. This in turn will contribute to higher revenues by increasing the average ticket. Coupons portfolio Consumers drastically cut back on spending during the recession as unemployment rose and lending slowed. They are looking at generating more value for the money spent. A&P, keeping this in view, launched a comprehensive coupon portfolio of innovations in 2009, to provide shoppers with more savings and convenience.
The company partnered with Zavers, a pioneer in digital couponing, to launch the first paperless, clipless and completely digital coupon service available by a supermarket chain in the Metropolitan New York area. This service allows club card members at A&P, Pathmark, Waldbaum’s and SuperFresh to go online and save the coupons directly onto their club card. The savings are automatically deducted off the customers’ shopping order once the club card is scanned at the checkout. Subsequently, A&P introduced the Rewards Online Mall, allowing club card members to earn rewards by making purchases at over 1,000 online retailers including eBay.com, Best Buy, Home Depot, Macy’s, Barnes and Noble, Travelocity, Staples, 1-800-FLOWERS and many more. For every purchase made, customers can receive an average of 3% back.
Once the total reaches $10, customers will receive a Rewards Certificate in the mail to be used towards their next in-store purchase at any A&P, Waldbaum’s, SuperFresh, The Food Emporium or Pathmark store. To complement its couponing programs portfolio, A&P also premiered an innovative new online coupon gallery available via its banner websites. This service which helps customers save more money while shopping for groceries, was made available through A&P’s partnership with Coupons.com. Each of the company’s banner websites features a special coupon gallery with hundreds of dollars of savings on all departments. Besides offering savings this service is convenient and saves time. Such additional benefits offered by the company will help attract customer visits.
Declining market share
A&P has been losing its market share to the bigger discount retailers and wholesale clubs including Wal-Mart, Costco, Target, and BJ’s. These companies have expanded into the grocery business and yielded to the economic downturn by lowering prices, thereby attracting the value-driven consumers. The big-ticket consumers, on the other hand, preferred higher-end retailers such as Whole Foods and Trader Joe’s. A&P by sticking to its consistent pricing, lost its customers to these companies in the difficult retail climate, while the other grocery retail chains lowered prices considerably, endorsed value proposition, and attracted sales. The company recorded a decline in revenues of 8.3% and 7.4% in FY2011 and FY2010 respectively. The sales declined primarily due to a decrease in comparable stores sales and store closures, partially offset by sales from new stores. The overall decline in sales was primarily caused by a decrease in customer count. The loss of market share to competitors has affected the company financial results significantly.
Operational and financial issues led to bankruptcy filing A&P, in December 2010 filed a voluntary petition under Chapter 11 of the US Bankruptcy Code with the US Bankruptcy Court for the Southern District of New York to facilitate its financial and operational restructuring. The company experienced severe financial and operational issues which led to this move. At the end of the third quarter of FY2011, the company had cash reserves of $92.4 million compared with $281.8 million during the same period, the previous year.The company had long-term debt of $816.8 million at the end of the third quarter of FY2011. The current portion of long-term debt increased to $171.5 million at the end of the third quarter of FY2011 compared with $191,000 at the end of the third quarter of FY2010.
The company has also experienced several other issues that contributed to its bankruptcy filing, including large pension funding requirements and union agreements. Approximately 92% of the company’s employees are represented by unions and covered by collective bargaining agreements. Furthermore, the company had about 70% of inventory tied to one supplier in an unfavorable contract. The company also had obligations, including the payment of rent on stores that were not subleased or leases terminated. The rent expenses for the mostly empty stores were estimated to be substantial next year. All the above factors put the company at a competitive disadvantage and rendered its business unsustainable in the current scenario. The bankruptcy filing and the subsequent financing will significantly affect the investors’ confidence in the company.
Online retail channel offers opportunities for revenue growth The online retail market in the US is growing at a fast pace and the trend is expected to continue. Online sales contributed to 6% of the retail sales in 2009 and are estimated to contribute 8% of the total retail sales by 2014. Online sales grew by 11% in 2009 compared to a total retail growth of 2.5%. Online sales while offering convenience to customers, also improve a company’s margins by cutting down operating costs. A&P is well poised to benefit from the expected increase in online sales. Increasing demand for organic products
Natural and organic food products segment is one of the fastest growing categories in food retailing. Increasing consumer awareness about health and environmental issues, along with an increasing resistance towards genetically modified (GM) food products and GM farming, has led to a rapid increase in the demand for organic food. According to industry estimates, the organic product sales in the US reached $26.6 billion in 2009, an increase of 5.3% over 2008. Of the total, organic food accounted for $24.8 billion and organic non-foods, the remaining $1.8 billion. In comparison, the total food sales in the US increased by 1.6% in FY2009.The growth trend of organic foods is expected to continue. The company offers over 200 healthy, organic and eco-friendly products under its Green Way brand. The company could leverage its presence to exploit the increasing demand for organic products.
Remodeling of stores will lead to incremental sales
A&P has been investing in re-modeling its stores to offer a unique shopping experience to its customers. These remodeled stores offer an expanded selection of deli, bakery, floral, meat, seafood and organics departments and many specialty sections. The Pompton Plains A&P store, located in Pompton Plains, New Jersey, besides offering traditional food categories, also introduced new departments including the kids and toddler aisle featuring all the products needed by mothers in one area; an enhanced pet selection; expanded men’s offerings featuring an extensive array of specialty products for men; and a special section dedicated to gluten-free packaged products. Apart from offering a wide selection of quality groceries, fresh produce, breads, seafood, and meats, A&P’s new Port Jefferson Pathmark store features a full-service pharmacy department which provides numerous benefits to customers including, all major prescription drug plans including Medicare Part D accepted; health screening services; complete diabetic supply center; patient counseling and information service; mail order and online prescription refill; and Live Better! Wellness club.
The new Pathmark is designed with a bright, open layout with modern decor and colorful artwork and signage, further enhancing the overall experience for shoppers. A&P’s Woodcliff Lake A&P store offers expansive departments that feature a wide selection of fresh and gourmet foods. This is complemented by a full-service bakery, Starbucks Cafe, floral department and pharmacy, along with a center store department that presents a complete line of specialty items for men, children and pets.
The company also re-opened the New Providence A&P store with expansive departments offering a wide selection of fresh and gourmet foods, a full-service bakery and floral department and an expansive center store department with a complete line of specialty items for children and pets. The remodels with additional departments attract more consumers and offer cross selling opportunities, therefore contributing incrementally to the sales increase. These additional services will also help the company differentiate itself from its competitors.
Economic downturn in US affects consumer spending
The US, the world’s largest economy, shrank 4.1% from the fourth quarter of 2007 to the second quarter of 2009. Household spending fell 1.2% in 2009, twice as much as previously projected and the biggest decline since 1942. The US economy slowed in the second quarter of 2010 as scarcity of jobs eroded consumer spending. GDP in the second quarter of 2010 grew at a 2.4% annual rate less than forecast. Consumer spending, which accounts for about 70% of the economy, rose at a 1.6% pace in the second quarter, compared with a 1.9% rate in the first quarter of 2010. Job gains have been slow to take hold, curbing household purchases.
US retail sales rose a meager 0.1% in July 2010 from June 2010, according to industry watchers. In addition, the US economy grew 2.6% in the third quarter of 2010. The World Bank forecasts the US economy to grow at a sluggish rate of 2.8% in 2011. High unemployment rate which is estimated to reach 10%, sluggish wage gains and credit crunch are all expected to keep consumers relatively cautious. The unemployment rate remained significantly high at 9.4% towards the end of 2010. Rising unemployment further reduces the consumer spending as customers feel unsecured. Thus, slowdown in US economy would depress purchasing power of consumers which could result in a decline in sales of the company.
A&P conducts its retail merchandise business under highly competitive conditions. Although A&P is a large regional department store chain company, it has numerous competitors at the national and local level that competes with its individual stores, including specialty, off-price, discount, and internet and mail-order retailers. Competition is characterized by many factors including location, reputation, fashion, merchandise assortment, advertising, price, quality, service and credit availability. A&P anticipates intense competition to continue with focus on pricing. Some of the company’s competitors have substantially larger marketing budgets, which may provide them with a competitive advantage. If A&P is unable to maintain its competitive position, it could experience downward pressure on prices, lower demand for products, reduced margins, the inability to take advantage of new business opportunities and the loss of market share.
Rising labor wages in the US likely to increase the operating cost In recent times, tight labor markets, increased overtime and government mandated increases in minimum wages resulted in an increase in labor costs, which could materially impact the company’s results of operation. The Fair Labor Standards Act (FLSA) has increased the federal minimum wage rate in the US from $6.55 an hour in July 2008 to $7.25 an hour in July 2009. This was further increased to $8.25 an hour in July 2010, revising the labor rates for the fourth year in a row. Many states also have minimum wage laws. If an employee is subject to both state and federal minimum wage laws, the employee is entitled to the higher minimum wage. Increased labor costs could increase the operating costs for the company.