business news in context, analysis with attitude

Analysis From

    Four weeks after reporting disappointing earnings and growing debt, The Great Atlantic & Pacific Tea Co. (A&P) has announced two separate agreements for the sale of nine of its A&P Superfood Marts in northern New England. Four stores will be sold to Ahold-owned Stop & Shop and five will go to Big Y Foods. The company has stated the transactions are part of a larger divestment of operations in northern New England, which will include the closure of its Springfield (Massachusetts) office, and the sale of its remaining supermarkets in Massachusetts previously operated from this office. A&P expects to generate proceeds of approximately $80 million (US) from the disposal. After this move, the lion‚s share of the company’s remaining supermarkets in New England will be operated under its New Jersey-based A&P banner.

    Clearly, A&P is suffering from the same malaise as many grocery retailers in the US - that is, a slow-growing economy, a desolate sales environment in terms of consumer demand, declining margins, rising labor costs and deflation. In addition, it faces tough competition from the likes of Wal-Mart and Ahold, which have adopted a highly promotional and aggressive pricing policy.

    The retailer itself has attributed its poor results to a host of factors, including the price consciousness of cautious consumers and the rising costs of employee benefits in particular. To tackle these burdens, the company has set itself the objective of reducing costs across the board, and has developed a new business plan for its US operations. The company has identified approximately 120 traditional food stores that have the potential to be converted to its Food Basics banner over the next 18 months. Food Basics is a low price, limited assortment, deep discounter. This format was imported into the US last year from its successful Canadian operation.

    However, to improve results, the company needs to think about longer-term
    and more creative solutions such as outsourcing distribution, asset disposals and potential joint ventures. Furthermore, A&P needs to take a hard look at its numerous, disparate banners which are ripe for consolidation and even closure. Within its total of approximately 520 stores, there are ten different trading banners, of which six chains have around 50 stores or less. The scope for further sales, closures, conversions and amalgamations is significant, and it seems likely that A&P will exit 2003 somewhat leaner, and possibly meaner.
KC's View: