Publix, Walmart seen gaining from Southeastern bankruptcy

Other chains also face debt challenges in year ahead

Lakeland, Fla.-based Publix Supermarkets is likely to get a boost in traffic from the store closures announced as part of Southeastern Grocers’ prepackaged Chapter 11 bankruptcy filing, observers said.

“The tonnage has to go somewhere,” said Antony Karabus, CEO at HRC Retail Advisory, Northbrook, Ill. “It’s likely to be driven to folks like Publix, maybe to other Winn-Dixie stores within a short drive and maybe to Walmart Supercenters. All of these stores, like Publix, are likely to benefit from being near stores that are closing. People still need to buy their food.”

As reported, Southeastern said it would close 94 stores across its operating areas as part of its bankruptcy filing. Most of the stores to be closed are under the Winn-Dixie banner, but several Harvey’s and Bi-Lo locations are also slated for closure, along with one Fresco location.

Southeastern’s bankruptcy filing followed by just a few weeks a bankruptcy filing by Williamsville, N.Y.-based Tops Markets. Both chains had been highly leveraged under their private equity ownership.

“When you’ve got flat to declining top-line growth, and flat to declining margins, and you’ve got significant debt servicing costs from these leveraged buyout transactions, it is unbelievably difficult,” said Karabus. “You just can’t make all of those numbers work out, and I think that’s what’s causing some of these bankruptcies.”

Part of the challenge is that retailers that have taken on significant debt under private ownership have not been able to invest as much as they should have in store maintenance and remodels, which makes it all the more difficult to grow sales.

“People don’t like shopping in older, dirty food stores,” said Karabus. “They want fresh, new and bright stores to shop in.”

He suggested that struggling food retailers need to invest in efforts that drive profitable traffic such as in-store cafes and prepared foods, along with increasing their penetration of private brands, which can drive both higher margins and serve as a means of differentiation from competition.

Neil Stern, senior partner at Chicago-based retail consulting firm McMillian Doolittle, agreed that Publix is likely to benefit from the Winn-Dixie store closings in the short term, although those locations could eventually be snapped up by other food retailers.

He said he expects both Tops and Southeastern to successfully emerge from their bankruptcies, unlike Toys R Us and other general market retailers that are liquidating their stores through bankruptcy filings.

“At some point they have to fix the root problems that have them heading in this direction, but I think from a short-term standpoint, they’ll be fine,” he said of Tops and Southeastern Grocers.

Meanwhile, several other food retailers remain in precarious position, according to a recent analysis by Moody’s Investors Service.

They include Fairway Markets, based in New York; The Fresh Market, based in Greensboro, N.C.; and Commerce, Calif.-based 99 Cents Only Stores. All three had a “negative outlook” as of year-end, according to Moody’s, reflecting high debt loads and low amounts of available cash.

All three had previously been publicly traded companies that were acquired by private equity.

Last October, Moody’s downgraded the credit ratings on The Fresh Market, citing increased competition and weak sales results at the chain, which had once been one of the fastest growing food retailers in the country. The Fresh Market recently said it would halt its expansion plans.

“The bottom line is you’ve a food market that is growing very slowly, and everyone has had to deal with deflation for the past couple of years, so that even if you were getting some unit growth, you weren’t getting any dollar growth,” said Stern. “Plus, we have the continued building out of the hard discounter network with Aldi and Lidl, and the leakage of sales moving online. That is just making it hard to anyone to make their numbers.”

Walmart’s ongoing aggressiveness in its pricing has also kept pressure on the industry, he noted.

“It’s just a bad combination for everybody out there,” Stern said.

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