MESA, Ariz. -- While Megafoods Stores' Chapter 11 filing last week was influenced by many factors, three separate issues in particular played a big role in Megafoods' troubles, according to observers.
The disagreement with its primary supplier, Fleming Cos., Oklahoma City, over terms of a new five-year supply agreement.
That disagreement put into limbo the return of an estimated $7 million to $10 million from its working-capital deposit with the supplier. Megafoods here had earmarked those funds for capital expenditures.
An apparent inability to complete a $24 million sale/leaseback on five stores already open and six still to be built, which, after paying down debt, would have netted Megafoods $6 million.
An apparent inability to sell three shopping centers for $17 million, which would have netted the retailer $9 million.
Industry sources said Megafoods had intended to use some of the money from the proposed sale/leaseback to repay part of its debt to Foothill Capital Corp., Los Angeles, which declared Megafoods in default last week prior to its Chapter 11 filing.
"Megafoods has been operating on a really thin financial line, and everything is all falling down at once," one securities analyst told SN.
Observers also point to longer term factors that precipitated the crisis. Some say Megafoods' financial troubles essentially began when it acquired 15 former Kroger Co. stores in San Antonio in September 1993.
It originally operated those stores in a warehouse format under the name Texans' Warehouse Foods. However, when sales fell short of projections after H-E-B Grocery Co., San Antonio, refused to concede low-price leadership to those stores, Megafoods acquired 21 conventional Handy Andy Supermarkets there last April and converted all 36 to a conventional high-low format.
An industry observer said Megafoods' stores outside Texas are viable units, "but it's San Antonio that has been the problem, and that's where the cash drain is."