A&P-Pathmark deal: 'Marriage made in heaven'?

The Great Atlantic & Pacific Tea Co., Inc., based in Montvale, N.J., confirmed at a press conference last month that it would buy Carteret, N.J.-based Pathmark Stores for $1.3 billion in cash, stock, and debt assumption or retirement, in a transaction expected to close during the second half of A&P's fiscal 2007 year.

A&P president and c.e.o. Eric Claus referred to the combination of the two well-known Northeast retailers as "a marriage...made in heaven."

Burt Flickinger III, managing director of New York-based Strategic Resource group, shared similar comments when he spoke to Progressive Grocer prior to the announcement of the official acquisition. He referred to it as "a perfect complementary combination," noting Pathmark's solid success in urban markets, as opposed to its overall weaker performance in the suburbs, and A&P's emphasis on rolling out fresh formats in suburban areas, thereby shifting share from Pathmark and others. The effect of the acquisition would be to take "two good operations, between urban and suburban, and make them even better," according to Flickinger.

Flickinger also noted that both grocers have outsourced warehousing and transportation to Keene, N.H.-based C&S Wholesale Grocers, and that both Pathmark and A&P suffer from "particularly high" levels of out-of-stocks that don't seem to be an issue at other area food retailers.

An acquisition might allow the companies to work more effectively on the out-of-stocks problem, said Flickinger, by their being able to invest in better computer systems, consolidate distribution systems, align trucking schedules, and draw on sufficient working capital and inventory.

Flickinger also reasoned that the acquisition's ultimate success would depend on who would be installed at the top of a new combined organization. The retention of such key executives as A&P president and c.e.o. Eric Claus, as well as Pathmark president and c.e.o. John Standley and co-president Ken Martindale, who've both done "a terrific job helping Pathmark make progress" after a decade of struggle, would be key, he said.

A&P has said that executive chairman Christian Haub will retain the position of executive chairman at the combined company, while Claus will continue as president and c.e.o. A Pathmark spokesman told PG that Standley's future role at the combined company was not yet known, however.

The purchase, subject to completion of shareholder and regulatory approvals as well as other customary closing conditions, is expected by officials from both companies to create a 550-store, $11 billion supermarket chain with an imposing presence in the New York, New Jersey, and Philadelphia metro areas, along with stores in the Baltimore/Washington D.C., Michigan, and Louisiana markets.

Claus admitted that the new business entity would be able to compete more effectively with "formidable competitor" ShopRite and other Mid-Atlantic rivals.

During the press conference Haub stressed management's desire to keep all of the chains' locations open, despite the proximity of some A&P and Pathmark stores to each other, and the expectation that the Federal Trade Commission will require some to be sold off.

"We don't intend to close any stores," said Haub. "We want to combine these businesses because we think they complement each other."

When reminded of Ahold's attempted purchase of Pathmark in 1999, which was blocked by the FTC because it would have led to the combined company's having too large a share in the Northeast market, Haub remarked, "The world has changed quite dramatically since that [proposed] transaction," pointing to the proliferation of alternative channels on the retail scene now.

Under the terms of the deal, The Tengelmann Group, A&P's majority shareholder, will remain the largest single shareholder of the merged retailers. The boards of both A&P and Pathmark have unanimously approved the transaction, and both Tengelmann and investment group Yucaipa, which has a stake in Pathmark, have entered into voting agreements to support the transaction.

Claus said at the press conference that although the two retailers would learn from each other, Pathmark would keep its individual character.

"It's not our intention to 'A&P-ize' Pathmark," said Claus. In that vein, Haub noted that A&P's and Pathmark's various store formats "have an important role to play in the marketplace."

Pathmark c.e.o. Standley offered his opinion that the transaction would result in "a vibrant new company, which will benefit our customers, associates, and shareholders."

—Bridget Goldschmidt

Expo West attendees debate whether bigger is better

Attendees and speakers at the annual Natural Products Expo West show, held in Anaheim, Calif. March 8 through March 11, seemed to be pondering the question of whether getting bigger is indeed better. At a time when Wal-Mart is carrying organics and Whole Foods is acquiring its biggest competitor, the organic and natural food industry is in a period of unprecedented change. The show's booming attendance of over 47,000 provided clear evidence that the growth of organic and natural products isn't slowing down any time soon.

Keynote speaker Eric Schlosser, author of Fast Food Nation, challenged the industry to maintain its integrity as such products become more widely accepted, and consequently more profitable. "With reform movements, the crucial point is when you know power is attainable," he said. "That's where this industry is—on the cusp of real power. Now you have to ask yourselves, how are you going to use it?"

Schlosser noted that the origins of the organic industry weren't driven by profit margins, but instead an "idealistic concern for land and animals," among others. "Those who lose touch with what the pioneers of this industry stood for may have to choose another line of work in the next five to 10 years," he said.

"Companies must keep to their core values," continued Schlosser. "Otherwise they may become everything they originally opposed. Companies that profess one set of values publicly, yet don't live by them privately, are in danger." He noted that a growing number of consumers are espousing a more revolutionary mindset, wanting to know how food is being produced and the industry's impact on the environment.

—Jenny McTaggart

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