On July 20th, 2015, the Great Atlantic & Pacific Tea Company, more commonly known as “A&P,” made history by filing what we in the restructuring industry like to call “chapter 22.” That is a chapter 11 restructuring bankruptcy part deux. Chapter 22 in and of itself is not that unique, but this “A&P” bankruptcy filing came less than 5 years after its previous chapter 11 filing at the end of 2010. These were hard times for the company that established the first “supermarket” store ever in 1936, which quickly became the first national supermarket chain in the U.S.
Some may be surprised to hear that A&P was even still kicking around by then. But between its other brand names, including SuperFresh, Pathmark, and The Food Emporium, as well as the stores that used to bear the old A&P name, the famed food retailer still had a sizable presence in the Northeast, with about 300 stores in total. In fact, when A&P acquired the Pathmark Stores chain in 2008, it ranked first place as the largest supermarket chain in the New York City area, but that all changed in 2015.
So, how did a company with a clean balance sheet, a nice chunk of fresh new financing (reportedly $490 million from several investors, including investment bank Goldman Sachs and an affiliate of billionaire Ron Burkle), and the freedom from being tethered to unfavorable contracts (through the bankruptcy contract rejection process) emerge from its first bankruptcy in March 2012 only to completely fall back in about 40 months later?
For an answer to that question, let’s first look to the opinion of Chief Restructuring Officer Christopher W. McGarry. Two words: un-ions. Okay, that’s really one word, and one is enough. Union actually means “oneness” and relates back to the Greek oinos and Latin unus. But, of course, it’s just oneness of employees, not a oneness of employees with management/owners. That was the problem, according to McGarry– the unreasonable expectations of approximately 26,000 employees through their unions (out of 28,500 total employees) and the collective bargaining agreements that etched those expectations in stone – CBAs that were preserved through the first bankruptcy.
McGarry set forth his case for blaming the unions at the time of the “chapter 22” filing in July of 2015, but also admitted to some of the failures of the first bankruptcy from 2010 – 2012. Specifically, that A&P had:
Seems fair enough. It’s pretty clear that if the unions had been entering into new contracts, their expectations would have been a bit lower. But something’s missing here. Weren’t all those union obligations known from the outset at the emergence of the 2010 bankruptcy? That bankruptcy process certainly didn’t introduce any new union obligations. The projections upon emerging, at which time A&P obtained the $490 million in new financing, already factored all that stuff in. But yet, somehow, in the 1-year period from February 2014 to February 2015 – starting a mere 2 years after the company’s reincarnation following the first chapter 11 – A&P lost more than $300 million. That’s over 60% of the $490 million it received in post-exit financing!
The blame of the unions goes on. The company explained that where underperforming stores and union contracts happened to meet in a perfect storm were in the so-called “bumping” provisions of the CBAs, which essentially required that if a store closes, then its most senior employees were entitled to receive jobs at other nearby operating stores, at the expense of more junior employees at those open stores, who would be laid off. According to McGarry, A&P’s advisors had calculated that many stores that were operating at a loss would actually cost the company more to close down completely due to the costs associated with the required bumping – so they kept them open, even though money was going down the drain.[Editors’ Note: To read more about all the claims you need to consider with a bankruptcy case, read Dealing with Corporate Distress 09: All About “Claims” in Bankruptcy]
It’s important to remember, however, that the pain began almost immediately after emerging from the first bankruptcy. This pain was so quick and so great that A&P was only able to actually spend half of its projected $500 million in capital improvements; these investments in the company would have helped them remain more competitive in an environment where other grocery chains were building new stores, remodeling, and enhancing the consumer experience with technological advances and other bells and whistles (these were all additional factors pointed to by management as contributing to their predicament).
It doesn’t seem that the unions caused the decline in sales, however, which reached a striking 6% year-over-year decline rate in 2014, a trend that continued on into 2015. The news of the reorganized company’s lackluster performance and new troubles on the horizon triggered a rush by vendors to put the squeeze on the company by demanding stricter credit terms or even cash in advance. This only further hampered cash flow and pushed them over the edge.
In light of all this, it seems a fair question to ask whether A&P’s real trouble was a stagnant economy that was felt in many of the areas it served. Was it not unexpected declining revenues that made it impossible to meet the obligations that it felt perfectly capable of meeting a little over 3 years ago? Could it be that significantly higher food prices at the time and the previously phantom inflation of ever-shrinking content in food packages (including tricks like placing large indentations up from the middle bottom of products packaged in plastic containers) created an overall pushback in grocery spending? Is this the real reason for A&P falling 50% short in its projected capital investments, money that could have been spent to fuel growth?
For the employees, unions, and many customers, this all became a rather moot point upon the filing of the new bankruptcy the following July. That second chapter 11 filing was a highly contentious event, as employees and union leaders cried foul at an earlier proposed plan to liquidate and allow the creditors to essentially “walk away with the store” by obtaining authorization from the bankruptcy court to break substantial provisions in the union contracts, cutting severance payments to 25% of obligations and even wiping out some of the pension fund obligations.
While Judge Robert Drain ruled that the company had to more than double the proposed severance payment amount, he left much of the rest of the details to be hashed out between A&P and the unions, stressing that the company had to make concessions to come down closer to the union demands and work to preserve jobs and that the unions had likewise to give up some of the cherished features of their CBAs. Indeed, job preservation was a stated high priority for Judge Drain, even if it meant detracting from the highest possible sale price that could be obtained from the market.
A short two months after the petition filing, the parties handed in their homework and presented a sale offer and compromise that the court found acceptable. Employees and union leaders breathed a sigh of relief as they heard that nearly 100 of the A&P stores had been sold off to the chains Stop & Shop and Acme (for a combined $370 million) in a deal approved by Judge Drain. Almost 11,000 jobs were preserved by the deal. In 2018, the remaining intellectual property assets were sold to an undisclosed buyer.
[Editor’s Note: For a quick lesson about bankruptcy and article 9 sales, read Selling Collateral in a 363 Sale vs Article 9 Sale]
This particular case makes for a great lesson in the art of compromise, but what else can we learn from the A&P experience? Clearly, A&P was blind-sided by declining revenues that had more to do with a decline in customer spending in general than any of the other factors it has pointed to, such as the union obligations it was already fully aware of as it navigated through its first bankruptcy.
Sure, union expectations were simply too high given the fact of the situation, but the knowledge, experience, and motivation of the employee base were also a big asset and critical component to the success of a chain like A&P or its buyers. Remember, these are still “neighborhood” stores frequented by many family, friends, and associates of those union employees. How successful would these already struggling businesses be if they were to alienate a large segment of their customer base by successfully eviscerating the unions?
The A&P saga seems to tell us more about the struggle to maintain and grow sales in the face of rising wholesale prices and the difficulties in meeting debt obligations that are only bound to become more difficult as interest rates rise. In that respect, the second “A&P” bankruptcy filing may have been just as it was expected to be: a canary in a coal mine. When this article was originally published in 2015, it was concluded that A&P struggled due to rising wholesale prices and debt obligations, as previously discussed. Additionally, as predicted, interest rates have begun to rise. In 2022, we are now witnessing the Fed attempting to combat rampant inflation with hikes in interest rates. Not only are wholesale prices higher than we could have imagined just a few years ago, but the increasing rates seem likely to continue throughout the year. Borrowers will indeed continue to struggle to increase profit margins and find cash. While there are many considerations regarding the continued constraints on retail, the lessons learned from the A&P bankruptcy saga pertain to the issues arising now.
This is an updated version of an article originally published on September 23, 2015, most recently edited by Joseph Wittman]
©2022. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
Brad Daniel is a Director at BMC Group, an information management firm specializing in financial and legal transaction support. He has 25 years of restructuring experience, with a broad exposure to all aspects of bankruptcy case administration and reorganized-company/trustee support. His expertise in both bankruptcy legal matters as well as systems integration and rapid application development…
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