The Washington Post recently ran a story with an interesting headline, “The new era of grocery just claimed its first victims.” The article implies that Amazon/Whole Foods and other “next generation” supermarkets have essentially bankrupted two companies, one of which operates the famed Winn-Dixie (Southeastern Grocers); the other, Tops, is a relatively small chain in New York, Pennsylvania, and Vermont.
As a veteran of Supermarkets General Corporation, which ran Pathmark, Steinbach, Rickel’s, and some other brands you may not recognize, I call baloney. Southeastern and Tops were killed largely by investment banking, based on their history — just as Supermarkets General was.
Back in the 1980s, Pathmark was the most profitable supermarket chain in America, with its mere 132 stores. The company invested heavily in research, and not at all in corporate appearances. We had a sophisticated computer system that theoretically could tell us what was sold in every store, every day, which is pretty good for 1984; some clever people in middle management who could sell things with high profit margins when people came in for the loss leaders; and a “can-do” attitude among the leaders that meant, among other things, that Pathmark was probably the first modern supermarket to build superstores in the inner cities. The company had a lot of shoplifting from those stores (the 24/7 store hours didn’t help), but precious little competition; it worked.
You may ask why you can’t find a Pathmark today. It’s because of Revlon, indirectly.
Another supermarket chain, Pantry Pride, had slowly withered until it had just three stores. The tiny company’s managers boasted to industry trades that it would emulate Pathmark and pursue modernization, computerization, and more nonfoods and pharmaceutical sales. What it actually did, which worked even better, was — it bought Revlon.
Yes, with about a million dollars of assets, Pantry Pride bought Revlon. Bankers gave them huge loans, using Revlon itself as collateral, in a rather absurd leveraged buyout. That worked out well, in the long run; Revlon slashed its animal testing, and prospered over the long run, though those old Pantry Pride supermarkets probably closed down. The company, by the way, renamed itself to Revlon in short order.
That scared the you-know-what out of the cash-rich Supermarkets General people, because we could easily be taken over next, so they “swallowed a poison pill” — they bought a money-losing, debt-crunched chain or two, to hurt their own balance sheet and become less attractive. (Before you laugh, think about what Daimler-Benz did to Chrysler Corporation.) Then, scant months later, if memory serves, the same managers bought Supermarkets General in a leveraged buyout, taking it private.
Well, the same thing that happened to Tops and Southeastern happened to Supermarkets General, and in very short order. There was a wave of layoffs, in which they nabbed people we probably didn’t particularly need. Then another in which they got people we probably did need, and a third. Ancillary businesses were ejected.
I moved on, but tried to stay in touch. Rickel’s Home Centers, spun off on its own, merged with Channel Home Centers and they both were dead and gone within months. Years later, I was in graduate school and temping at Donaldson Lufkin Jenrette, and across my terminal came an attempt to make Pathmark a public company again. Eventually, still choked by debt, with almost no visible changes to the stores since the mid-1980s, Pathmark was acquired by the Great Atlantic & Pacific Tea Company, or, as commoners call it, A&P.
Have you seen any A&P stores lately? I thought not. I don’t know if it was Pathmark’s debt that killed them, but they’re finally gone, too. (Ironically, they had done a quick Chapter 11 when I was working at Pathmark’s nonfoods office.)
According to the Post, Southeastern has around 600 stores — Winn-Dixie, Harvey’s, and Bi-Lo — in just seven states. They’re planning to file for bankruptcy by April. Tops’ strange geography is probably part of their problem; Pennsylvania, New York, and Vermont? For years Pathmark didn’t expand because they wanted to keep everything within easy trucking reach of the two distribution centers.
Tops and Southeastern both have the same problem Pathmark did — lots of debt from merger-and-acquisition games. They were both run by private equity firms, which probably did not have as much skin in the game as they could, but the debt was the killer. They couldn’t invest and make interest payments at the same time (think about the national debt for a moment, and move on). Cutting prices to go against Walmart and Aldi wasn’t likely; adding fresher local foods wasn’t possible; and creating new efficiencies through automation or pushing customers to higher-margin items was harder with the debt as well.
Perhaps, had they been run differently, they would have gambled on “last chance” efforts, tried to increase efficiencies, boosted local managers’ control and options to try to make store profits higher; some companies have done so and found that formerly unprofitable stores were not viable.
The problems they faced weren’t really that new. Yes, Walmart is a major challenge, but it has been for quite some time. Aldi isn’t likely to be taking a lot of market share yet. Whole Foods was only recently purchased by Amazon and warehouse-club stores have been around for decades. Few major supermarkets have the luxury of being alone, without competition; the ones that come closest are the smallest stores, in rural markets or in inner cities. A&P itself shoved out countless smaller marts and markets when it expanded from coast to coast, growing ever larger. Pathmark helped to eliminate Acme. That’s competition. Those who choose to extract their profits now and leave debt-ridden zombies should be ashamed of themselves, but when those zombies die, it’s neither surprising nor the fault of some brave new world.
The good news is that, as in most fields, new players are constantly coming in and taking advantage of the old players’ complacency or incompetence. Most of the places that don’t already have direct competitors for closing supermarkets will see new ones opening — perhaps an Aldi will take up a third of the space of an old Winn-Dixie here, a Stop & Shop will open there, an Amazon/Whole Foods in another place. The world didn’t end when Pathmarks became A&Ps, nor when A&Ps (some of them, anyway) become Stop & Shops. The Post pointed out that Hy-Vee and Wegman’s have done quite well lately…
Have we heard the last of the storied Winn-Dixie? Probably not. Both Tops and Southeastern say they will use bankruptcy to increase investments. Maybe that’ll work, but only if they have innovative people with a free rein to change the way things are done.