MONTVALE, N.J. — Is making more Pathmarks going to make more problems?
That's the question some observers have for A&P, which despite acknowledging struggles within the Pathmark banner figures to be busy this year converting more and more of its conventional stores to the burgeoning price-impact format.
Officials at A&P, based here, said that “format optimization” — converting its properties to the banner most appropriate for its surrounding demographic — is a top strategic priority for improving its overall sales and earnings performance this year. Pathmark, which was acquired by A&P 15 months ago and is slotted as a price-impact format, along with Food Basics, a limited-assortment discount store, will comprise most of the format growth, according to Eric Claus, chief executive officer of A&P.
But deteriorating business at Pathmark in recent months — analysts estimate that comparable-store sales fell by 3% at the banner in the most recent fiscal quarter — make the prospect of growing the chain risky. What Pathmark needs most, observers said, is a stronger brand image and sharper pricing. A&P will have to accomplish both while flipping stores.
“The question for A&P is, how do you drive traffic into a format that doesn't have any momentum?” Simeon Gutman, an analyst a CanaccordAdams, told SN last week.
Inertia at Pathmark relates in part to the chain's passing through three ownership groups in the past five years and about as many positioning strategies.
“We knew that when we bought Pathmark that the business had great assets and tremendous potential, but we also knew that Pathmark had not been operated with a long-term perspective for quite some time, and there were issues and challenges we had to address,” Christian Haub, executive chairman at A&P, said during a conference call last month.
Pathmark's previous owners, Yucaipa Cos., had sought to profit on the banner's strong volumes by generating a greater mix of sales from higher-margin categories like perishables and service departments. A few stores were renovated with a decidedly more upscale feel, and all stores saw attempts at softening the “stack 'em high” merchandising flair that Pathmark was known for.
A&P, which already tailored its A&P, Waldbaums and SuperFresh banners to an upscale-leaning “fresh” concept, prefers its own take on Pathmark's old strategy. Admitting that prices had drifted too high and left it vulnerable to the recession (see May 18 issue of SN), Claus described the changes at Pathmark as “an all-encompassing price impact strategic reset.”
The reset includes new signs, the addition of the Sav-A-Center name in the logo and a slate of new promotional programs. It is also putting a greater emphasis on private label and subsequently reducing SKUs. The effort will be heavily promoted after a prolonged period of “media silence” while the company tinkered with the new format, Claus said.
According to some observers, the brand badly needs the attention.
“It's going to be an uphill struggle,” predicted Bob Summers, an analyst at Pali Capital, New York. “Momentum in that business will involve changing the pricing equation and how consumers shop the store. Overall, Pathmark has a pretty good price perception, but if you look at their comp trends in the negative 3% neighborhood, it leads you to the conclusion that consumers are just cherry-picking them.”
“Pathmark really doesn't have an image in the marketplace now,” another source, who asked not to be identified, told SN. “Before there was a selection and price image; now with the selection being cut that is less of a point [of differentiation], and pricing is suffering because they haven't been promoting it.”
A&P officials say they are confident they can re-establish the brand, pointing to their success at crafting the fresh and gourmet concepts in recent years. The decision to flip stores to the Pathmark brand, they said, is guided by demographics. Without revealing the number of planned flips or their locations, Claus intimated that a large number of A&P stores that had yet to be renovated to the fresh format would be candidates to be switched to Pathmark.
Other locations may be transitioned to Food Basics, which through reduced labor costs have turned money-losing conventional stores into profitable discounters, Claus said. But only nine stores currently operate under that banner.
One source estimated as many as “three dozen” current A&P stores would be better served under a different banner. The source also noted the chain could benefit from closing a handful of stores in locations where A&P and Pathmark compete with one another.
A&P recently noted that it increased its reserve for payments of dark-store liabilities this year, but said the increase reflected a difficult leasing environment in areas like Detroit where it owes rent on numerous closed stores.
The chain earlier this year converted several Philadelphia-area SuperFresh stores to the Pathmark banner. Claus said he was encouraged by early results and “cautiously optimistic” as the returns rolled in. “The sales are significantly stronger, so it's definitely the right direction to go,” he said. “The No. 1 thing in our business optimization is going to be getting the formats right.”