Pathmark Stores, Inc. Business Information, Profile, and History

History of Pathmark Stores, Inc.

The largest retailer in the Northeast operating under a single trade name, Pathmark Stores, Inc. had 145 supermarkets in New York, New Jersey, Pennsylvania, Connecticut, and Delaware in March 1997. Sixty-six of these stores were in New Jersey, many of them within the confines of the New York City and Philadelphia metropolitan areas. Pathmark was the only remaining entity of significant size within privately owned Supermarkets General Holdings Corp., its parent company, in the late 1990s.

Pathmark Foundings

The Pathmark chain arose out of the Wakefern cooperative formed in 1947 by independent New Jersey grocers who felt the need to organize to compete with large food chains. Some members of the cooperative agreed to operate their stores under the Shop-Rite name. Wakefern was both a wholesale and a retail operation. Among its members was a subgroup called Supermarkets Operating Co. Formed in 1956 by Alex Aidekman, Herb Brody, and Milt Perlmutter, this company opened new Shop-Rites and in 1963 branched into nonfood retail by acquiring Crown Drugs.

Supermarkets Operating Co. and General Super Markets, another subgroup within Wakefern, merged in 1966 to become Supermarkets General Corp., with Perlmutter as president. Supermarkets General operated 75 Shop-Rite stores in New Jersey, New York, Connecticut, Delaware, and Pennsylvania at the end of 1966, with annual sales of about $420 million. It was achieving high volume by opening large stores in densely populated areas and keeping prices low on both nationally branded goods and private-label items.

In 1968 Supermarkets General left the Wakefern cooperative and renamed its Shop-Rite stores Pathmark. Although Supermarkets General had other holdings, including the recently acquired Genung's department store chain and Rickel Bros.'s home centers, the Pathmark business was its major operation. These units included not only supermarkets (33 of which had a drug department with a pharmacy) but 11 freestanding drugstores and 11 gasoline stations.

Pathmark's 81 supermarkets were accounting for about 85 percent of Supermarkets General's sales and 80 percent of its earnings in 1969. The number of Pathmark supermarkets had reached 91 in October 1971, and there were also 24 Pathmark gas stations and 14 Pathmark drugstores. In May 1972, 94 of the 96 supermarkets began operating around the clock, seven days a week. Pathmark pioneered in the use of computer scanners at checkout counters, introduced by the chain in 1974.

After a period of relative stagnation, Pathmark opened, in 1977, the first of its "Super Centers"--huge discount grocery stores that also offered health and beauty aids, small appliances, and videotape rentals. These 50,000-square-foot units were being created in large part by renovating and expanding the existing stores. At the end of the year Pathmark had full-line pharmacies in 81 of its 103 supermarkets, horticulture departments in 64, bakery departments in 60, and "mini-bank branches" in 13. In its annual report, Supermarkets General claimed its sales per store were the highest in the industry. "Pathmark does more than three times the business in a store only 33% larger than the industry average," the report said.

In its 1978 annual report, Supermarkets General claimed Pathmark had become the top supermarket chain in the New York metropolitan area, with a 15 percent market share. Twelve of its 109 outlets now were Super Centers. In all, Pathmark sales volume in 1978 came to $1.8 billion and the chain contributed 82 percent to corporate profits. About 60 percent of the volume was generated in stores opened, enlarged, or substantially remodeled during the past three years. Perlmutter died in 1978 and was succeeded by Brody as chief executive officer of Supermarkets General.

Pathmark's supermarket sales reached $2.8 billion in 1982, when it was the nation's tenth largest supermarket chain. Of the 121 units, 62 were Super Centers. Barnes & Noble minibookstores were now located in 27 Pathmark supermarkets and cheese shops were located in 19. In addition, the company had 13 freestanding Pathmark drug stores. Pathmark continued to dominate Supermarkets General's sales and operating profits, with 87 and 83 percent of the corporate total, respectively. Pathmark opened Manhattan's first superstore, a 42,600-square-foot unit, in Peck Slip, near Chinatown, in 1983. The chain was still number one in the New York metropolitan area in 1985, with a 12.5 percent market share, according to a telephone survey.

Private Company, 1987-93

To foil a takeover bid by Dart Group Corp., management took Supermarkets General private in a $2.1 billion 1987 leveraged buyout, in which Merrill Lynch Capital Markets Inc. received 55 percent of the shares and the Equitable Life Assurance Society of the U.S., 30 percent, with management retaining ten percent for itself. Servicing the debt ($1.6 billion in early 1990, half of it in junk bonds) soon proved a problem.

Although corporate sales reached $6 billion in fiscal 1989 (the year ended on the last Saturday of January 1989), the 51-unit Rickel subsidiary was performing poorly and the 142-store Pathmark grocery chain had slipped to third place in the New York area. Many of the Pathmark units had become, according to a Forbes article, "unkempt, dirty, and outmoded." Pathmark, this story went on to say, "continues to stock scores of the dreary no-frills offerings customers have shunned for years." Merrill Lynch sacked Chief Executive Kenneth Peskin, replacing him with Jack Futterman. The only bright spot for the parent company was its 66-unit Purity Supreme division, consisting of Massachusetts grocery and convenience store chains acquired in 1984. This division was sold in 1991 for about $265 million. (Supermarkets General's department stores had been sold in 1986.)

Supermarkets General lost money in every fiscal year between 1988 and 1993 and sales volume every fiscal year between 1989 and 1993. In fiscal 1993 it lost a record $617 million on sales of $4.34 billion, mainly reflecting a $600 million writedown of goodwill--the premium paid in excess of assets--in the 1987 buyout. The company's interest payments, averaging between $160 million and $180 million a year on its debt, were hampering its efforts to modernize its stores and thereby keep in pace with its competitors. Pathmark consisted at this time of 146 supermarkets, 33 freestanding drug stores, and seven distribution-processing facilities.

Supermarkets General sought in March 1993 to take Pathmark public, but backed off in the face of insufficient investor interest. Instead, in an October 1993 corporate reorganization, Supermarkets General Corp., a subsidiary of Supermarkets General Holdings Corp., changed its name to Pathmark Stores, Inc. and in essence recapitalized $1.3 billion in outstanding debt. The company thereby lowered its interest costs, reportedly from about 13 to nine percent of revenues, and thus increased cash flow. This allowed the company to step up capital investment in Pathmark. Rickel was spun off at this time and was sold in 1994.

Pathmark Stores, 1993-97

Pathmark was now putting its hopes for the future on stores even bigger than the traditional Super Centers. The Pathmark 2000 format, first introduced in 1992, called for units as large as 64,000 square feet. By early 1995 there were 27 such stores, some new, some converted from other Pathmark outlets. They emphasized perishables such as produce, seafood, baked goods, flowers, and delicatessen items, as well as health and beauty aids with a selection to rival that of drugstore and discount competitors. These goods all had higher profit margins than packaged groceries. Pathmark 2000 stores also offered a customer service desk for product returns, video rentals, film processing, and UPS mail delivery, and restrooms with changing tables for mothers with babies in diapers. By the end of May 1996, 44 such stores were in operation and, by February 1997, 53 were in operation.

Pathmark also added to its private-label products in 1994 by introducing an upscale line called Pathmark Preferred to its generic No Frills brand and its mid-tier Pathmark brand. At this time Pathmark's more than 3,300 private-label items were accounting for about 24 percent of the chain's sales. In late 1995 a Pathmark on Long Island launched Chef's Creations, a program offering a menu of about 40 entrees, side dishes, and salads made in-store each day by a team of chefs. Pathmark, in late 1996, introduced Chef's Creations To Go--fresh, prepackaged meals for takeout, offering a choice of eight entrees and side dishes in microwavable containers. An outside manufacturer was preparing these meals to Pathmark's specifications.

By the summer of 1994 Pathmark had won its way back into the favor of New Yorkers, according to one survey that found it to be the city's most popular supermarket chain. A total of 17 percent of city residents were shopping at Pathmark regularly, and more than half of those who said they did so cited its low prices. The top-ranking chain in Brooklyn, the Bronx, and Staten Island, Pathmark was now operating 17 superstores in New York City.

Pathmark was honored in 1995 as Pharmacy Chain of the Year by the magazine Drug Topics--the first time a supermarket retailer had won the award. All of its 142 supermarkets had pharmacies except six that were located in shopping centers with lease restrictions. According to the company, Pathmark was the leader in filling prescriptions in the metropolitan New York area and was participating in more than 200 major insurance plans. Prescriptions accounted for nearly seven percent of Pathmark's sales volume in 1994. Futterman, still the company's chief executive officer, was himself a registered pharmacist.

In June 1995, however, Pathmark reduced its pharmacy operations by selling 30 of its 36 freestanding drugstores to Rite Aid Corp. for $60 million. These outlets had accounted for $145 million in sales in fiscal 1995, about 3.5 percent of the companywide total. A company executive said that although the 30 stores had earned satisfactory profits, Pathmark had decided to concentrate its pharmacy efforts in the supermarkets, which he said were more efficient and attractive to customers. Pathmark's remaining drugstores--six Connecticut ones featuring deeply discounted prices--were subsequently closed during 1995-1996.

Construction began in August 1997 on Pathmark's controversial $14.5 million supermarket in Manhattan's East Harlem. This 53,000-square-foot unit was the first large supermarket in Harlem and had been bitterly opposed by owners of neighborhood food stores. This Pathmark was expected to generate hundreds of construction jobs as well as 200 in-store jobs and would include a pharmacy and a Chase Manhattan Bank branch. Pathmark was planning its biggest Bronx store in 1998: a 55,000-square-foot unit on ten acres in the blighted area east of Crotona Park.

Supermarkets General cut its loss in fiscal 1994 (the year ended January 29, 1994, which the company itself defined as 1993, however) to $17 million (excluding extraordinary items and accounting changes) on net sales of $4.21 billion. It had its first profitable year in fiscal 1995 (ended January 28, 1995) since fiscal 1987, earning $10 million (not counting a $13 million credit for its prior losses) in net income on $4.21 billion in net sales. Pathmark's supermarket sales came to $3.84 billion and $3.79 billion in these respective fiscal years.

In fiscal 1996 (the fiscal year ended February 3, 1996), Supermarkets General had net income of $77 million on sales of $3.97 billion. Pathmark's supermarket sales came to $3.85 billion. In fiscal 1997 (ending February 1, 1997), the parent company had a net loss of $20 million on sales of $3.71 billion. This result included a charge the company took for the upcoming sale of 12 unprofitable Pathmark stores, most of them in southern New Jersey. Pathmark's supermarket sales came to all but $9 million of the corporate total. Same-store supermarket sales decreased 2.8 percent from the previous fiscal year, primarily due to heavy competition. James Donald, Futterman's successor as chief executive officer, laid off more than 200 employees at Pathmark's Woodbridge, New Jersey headquarters in March 1997.

In addition to Pathmark's corporate headquarters, Pathmark had, in 1997, distribution facilities for dry groceries and meat, dairy, and deli products in Woodbridge; a distribution facility for frozen food in Dayton, New Jersey; one for dry groceries in North New Brunswick, New Jersey; and one for general merchandise (health care and beauty products, pharmaceuticals, and tobacco) in Edison, New Jersey. It had processing facilities for delicatessen products in Somerset, New Jersey and for banana ripening in Avenel, New Jersey. Pathmark's stores ranged from 26,000 to 66,500 square feet in size. All but five were either Pathmark 2000 or Super Center stores, and all but seven contained in-store pharmacy departments.

In October 1997 Pathmark announced that C&S Wholesale Grocers of Brattleboro, Vermont would take over its distribution facilities and become the chain's supplier for substantially all groceries and perishables. Pathmark was expected to receive perhaps $50 million from the deal, part of which would be used to pay down its debt of $1.47 billion.