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Troubled A&P Will Put Assets on the Block -- Maybe Even Food Emporium

The turnaround guy is out at A&P (GAP) and the turn-over guy is in, suggesting that investor/advisor Ron Burkle isn't going to wait for a rebound in the company's performance to make some drastic moves.

Burkle, through his Yucaipa Cos. investment firm, increased his stake in A&P last year, bringing more money into the business, but he has watched its performance decline to the extent that liabilities now exceed assets, threatening liquidity and raising the prospect of bankruptcy if the business continues to erode. The company already had stated it would sell and lease them back stores as a way to raise money as well as tap its bank facility, but that's not a permanent solution.

Ron Marshall's departure from A&P after just six months and his replacement as CEO by Sam Martin, who moves over from OfficeMax, (OMX) signals a significant change of strategy. Marshall was the turn around guy, and had even worked on righting Pathmark in the 1990s when it was an independent chain. Martin, however, was the COO of Wild Oats when Burkle engineered its sale to Whole Foods. The sale ended a Burkle notion of combining Pathmark and Wild Oats into a single retail entity. Later, Burkle put together Pathmark's sale to A&P, getting a small stake in the purchasing company that he bumped up to over 25% in 2009.

If Burke and 40% owner Tengelmann, a German company that has been ceding more control to its partner, decide on a sale, A&P can be sliced and diced several ways. The company operates about 430 stores mostly in and around New Jersey in seven chains. A&P, Waldbaum's, and Superfresh are conventional long-held "legacy" supermarkets. Food Emporium is the most unique, with its 23 gourmet grocery stores located almost exclusively in Manhattan, while Food Basics operates 12 discount supermarkets in a swath from Pennsylvania to Connecticut.

In a conference call earlier this month A&P executives said it would, in addition to other measures, sell non-core assets to assure liquidity. The question is, which operations might be non-core enough to sell. Pathmark is no easy sale, as its results are the major drag on finances, Christian Haub, the company's executive chairman of the board, noted in the conference call.

Conversely, Food Emporium may be the easiest to package for a buyer, perhaps a private investment group. Even taking away any real estate considerations, Food Emporium operates in a market full of affluent consumers who suffer a lack of grocery stores. And the chain sells lots of high-end, high-margin goodies at prices that compare favorably with what the boutique and specialty food operations surrounding its stores charge. When asked if Food Emporium might be regarded as a non-core asset, Haub responded that identification of such was currently ongoing. The answer makes Food Emporium seem like a potential sales prospect.

Otherwise, Waldbaum's is geographically distinct on Long Island as is that portion of Superfresh operating around Baltimore. However, executives said they could wring significant cost savings by better integrating legacy chains, making their sale less attractive.

Or course, to sell, A&P has to find a buyer, and anyone who might consider a purchase would have to deal with a competitive environment where supermarkets are having a rough time. Alternative food retailers are thriving in the Northeast. All three major warehouse clubs operate there, and Trader Joe's, Whole Foods (WFMI), Save-A-Lot, Aldi and dollar store operators have expanded. Combine that with slow but steady Walmart (WMT) supercenter growt and the result is a growing pressure on northeastern supermarkets. Ahold (AHO) is the major regional supermarket player these days, and it posted flat identical store sales in the latest quarter.

Burkle's mode of operation, as in the Wild Oats example, has been to consolidate or sell stores depending upon what his immediate options are. Given A&P's recent performance, those options may narrow without swift action. A&P sold its Canadian operation a few years ago to pay down debt and stepped away from the New Orleans market, too, so a big move wouldn't be unprecedented. Despite facing a buyer's market, A&P needs to sell something or stage one of the great turnarounds in retail history. And the turn around guy is gone.


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