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The Path To Chapter 11 Can Follow One Of Several Roads

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Events leading a business to file for protection under Chapter 11 can take different forms and move at different speeds.

The retail food business has recently served up two examples of polar opposites in their trip to Chapter 11. A&P’s trip, by some accounts, began in the 1950s. Haggen, on the other hand, had barely opened the doors of its newly acquired stores when it filed, a process of not more than nine months.

From 1915 to 1975, A&P was literally the largest retailer in the world. In 1930 it was reported to have had 16,000 stores. Twenty years later, they had begun a long slide to a bankruptcy filing in 2010. Multiple efforts to restructure failed to save A&P. In July of this year, it once again filed for bankruptcy.

Art Patch is a regular columnist for The Shelby Report.
Art Patch is a regular columnist for The Shelby Report.

Three major issues made it impossible for A&P to operate profitably on a consistent basis:

1) Until A&P was purchased by Tengelmann, a German company, in the late 1970s, its ownership was in a trust. Those in the trust were compensated by dividends. This often left the retail system short of capital to build new stores or renovate the old ones.

2) As far back as the 1930s, A&P had made the decision that private label would be its selection focus. It was not uncommon for private label to get the lion’s share of capital. Because A&P stores were older and smaller and shelf space was dominated by private label, customers could not find the national brands they preferred, so they went elsewhere.

3) Far too often, A&P’s operating costs were influenced by a strong collective bargaining presence. Because of this, the small, low-volume stores A&P operated had higher-than-market labor costs.

Limited cash, fortified private label and high operating costs drove A&P to the most recent filing. It took years to get where it is today. Haggen, on the other hand, went from signing the purchase agreement to Chapter 11 filing faster than a speeding bullet.

Most Shelby Report readers followed the story: Haggen grew from 18 stores to 164 and from 2,000 employees to more than 10,000.

The purchase was viewed by many as one that was driven by ambition, with limited infrastructure.

The $1 billion lawsuit Haggen recently served to Albertsons, from my perspective, details Haggen’s shortcomings.

Haggen claims Albertsons has:

—Implemented an aggressive marketing program against Haggen’s conversion schedule.

—Not provided the proper pricing data.

—Cut off Haggen’s advertising.

—Timed remodels to impact Haggen.

—Understated certain inventory.

—Overstocked perishable inventory.

—Removed fixtures.

My conclusion would be that Haggen senior management and the lead investor, Comvest, must have had a team in the stores as they took possession of them, addressing these issues.

Maybe the lack of infrastructure made it impossible for an 18-store chain to provide the people and expertise to swallow 146 stores.

It seems the Bureau of Competition under the Federal Trade Commission did the buyers little justice by allowing the sale to go through.

A&P took the long, slow, dirt road, and Haggen, a record-setting pace on a fast freeway to bankruptcy.

Disclosure: This columnist has had firsthand experience with the Chapter 11 process. Fodder for another column.

Chase those sales, they won’t chase you!

After a 40-year career that included executive-level positions with Safeway, Lucky Stores, Appletree Markets and Save Mart/Food Maxx, Art Patch retired from the retail grocery business in 2007. He is a graduate of San Jose State College and the Cornell Food Executive Program. Patch is on the ExecuForce Team of Encore Associates and is a ­counselor for SCORE, helping new and emerging businesses develop business and ­marketing plans. He ­welcomes your feedback. Email him at [email protected].

*Editor’s note: Patch’s column also appears in the November 2015 print editions of The Shelby Report.

About the author

Kristen Cloud

A former newspaper editor and publisher, she once enjoyed leisurely perusing the grocery store aisles but, since having a baby in 2016, she is now an enthusiastic click-and-collect shopper.

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