The Great Atlantic & Pacific Tea Company, Inc. Business Information, Profile, and History

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History of The Great Atlantic & Pacific Tea Company, Inc.

The Great Atlantic & Pacific Tea Company, Inc. (A&P) is one of the dozen largest grocery store operators in North America. At its peak in the 1930s, A&P was the largest grocery chain in the United States, with 15,709 stores from coast to coast; in the early 21st century, however, it operated fewer than 700 stores in a little more than a dozen states and in the Canadian province of Ontario. The main states in which the company operates are New York, Michigan, New Jersey, Connecticut, Maryland, Pennsylvania, and Louisiana. Store brands include A&P, The Barn Markets, Dominion, Farmer Jack, Food Basics, Food Emporium, Sav-A-Center, Super Foodmart, Super Fresh, Ultra Food & Drug, and Waldbaum's. The company announced in early 2003 that it was exploring the sale of its Kohl's chain in Wisconsin. The company also manufactures and distributes coffee under the brand names Eight O' Clock, Bokar, and Royale--though this business too was up for sale in 2003. Tengelmann Group, a German retailer, has held a majority interest in A&P since 1979.

Early History: From Tea Merchant to Cash-and-Carry Grocery Chain

In 1859 George Huntington Hartford and George Francis Gilman formed a partnership. Using Gilman's connections as an established grocer and the son of a wealthy shipowner, Hartford purchased coffee and tea from clipper ships on the waterfront docks of New York City. By eliminating brokers, Hartford and Gilman were able to sell their wares at "cargo prices." Initially, the operation was strictly a mail-order affair. But the enterprise proved so successful that Hartford and Gilman opened a series of stores under the name Great American Tea Company. The first of these, which opened in 1861, soon became a landmark on Vesey Street in New York City. By 1869 there were 11 such stores.

The company's appeal to the 19th-century consumer was enhanced by the lavish storefronts and Chinese-inspired interiors that Gilman designed: inside the Chinese paneled walls, cockatoos greeted customers, who brought their purchases to a pagoda-shaped cash desk. Outside, the red-and-gold storefronts were illuminated by dozens of gas lights that formed a giant "T," and on Saturdays customers were treated to the music of a live brass band.

Despite the company's extravagant trappings, its success was largely due to its innovative strategy of offering savings and incentives to the consumer. A&P's "club plan" (introduced in 1866), which encouraged the formation of clubs to make bulk mail-order sales for an additional one-third discount, was so successful that by 1886 hundreds of such clubs had been formed. Pioneering the concept of private labels and house brands, The Great American Tea Company introduced its own inexpensive tea and coffee blends, continuing to direct its efforts at the price-conscious consumer. In 1882 Eight O'Clock Breakfast Coffee was introduced; the Eight O'Clock blend remained a hallmark house brand into the early 21st century.

In 1869 the company became The Great Atlantic & Pacific Tea Company, to commemorate the joining of the first transcontinental railroad and to separate its retail stores from its mail-order operations. A&P's gradual national expansion began shortly thereafter. The company established a foothold in the Midwest in the aftermath of the Chicago Fire of 1871, when A&P sent staff and food to help the devastated city, and stayed to open stores in the region. By 1876 the company had become the first significant grocery chain, having reached the 100-store mark.

Careful thought and planning were given to A&P's expansion. New store openings were complemented by promotions and premiums. In the Midwest and the South, new stores gave away items such as crockery and lithographs in order to attract customers, and in other areas, showy "Teams of Eight" became legendary symbols of A&P. The brainchild of the flamboyant John Hartford, parades of teams of eight horses decorated with spangled harnesses and gold-plated bells drew red and gold vehicles through the towns; the person who best guessed the weight of the team was awarded $500 in gold.

In 1878, after Gilman's retirement, Hartford gained full control of the business. His two sons, George and John, were each apprenticed at the age of 16. Years later, a writer in the Saturday Evening Post observed that "in discussing the two brothers, tea company employees seldom get beyond the differences between the two." The older brother, who became known as Mr. George, earned a reputation as the "inside man" because of his concern for the books, and was considered to be the "conservative, bearish influence in the business." The younger, flamboyant Mr. John was described as an "old-school actor-manager." He was well-suited for his responsibility for promotions and premiums and generally ensured a "personal touch" in each of A&P's stores, which by 1900 numbered nearly 200 and generated $5.6 million in annual sales. Mr. John was also responsible for A&P peddlers, who by 1910 were carrying A&P products along 5,000 separate routes into rural areas in easily recognized red-and-black A&P wagons.

Responding to a dramatic rise in the cost of living in the first decade of the 20th century, when food prices increased by 35 percent, Mr. John devised the first cash-and-carry A&P Economy Store, which opened its doors in Jersey City, New Jersey, in 1912. Initially dismissed by both George, Jr., and George, Sr., economy stores obviated the problem of capital depletion posed by premiums, credit, and delivery. The cash-and-carry stores followed a simple formula--$3,000 was allotted for equipment, groceries, and working capital. Only one man was needed to run an economy store, and he was expected to adhere strictly to Mr. John's "Manual for Managers of Economy Stores," which outlined, in meticulous detail, how to run the stores. Among other things, Mr. John insisted that all the stores have the same goods at the same location; A&P legend has it that Mr. John could find the beans in any of his stores--blindfolded.

The Chain's Peak Years: 1920s-30s

When George Hartford, Sr., died in 1917, George, Jr., became chairman of A&P, while John Hartford became president. By 1925, A&P had 14,000 economy stores, with sales of $440 million, marking one of the greatest retail expansions ever. At this point, the company's national expansion was so far-reaching that A&P had to be divided into five geographical divisions to decentralize management.

During the 1920s, A&P continued to diversify, opening bakeries and pastry and candy shops. It also expanded its manufacturing facilities to produce its own Anne Page brand products and set up a corporation to buy coffee directly from Colombia and Brazil. "Combination stores" added hitherto unheard-of meat counters to the grocery chain and, when lines at these counters became a problem, A&P devised a system to make prepackaged meats available to customers, who had never before been offered such a convenience. At the same time, A&P introduced food-testing laboratories to maintain quality standards in its manufactured products. In 1929 when the stock market crashed, causing other retail companies to fold, merge, or sell out in the subsequent Great Depression, A&P was so firmly established and soundly managed that it was virtually unaffected. Sales reached the $1 billion mark in 1929, and the following year the chain's store count peaked at 15,709 outlets. Responding to consumers' needs, A&P began publishing literature with money-saving tips and recipes. The public's reception of these publications prompted the company to begin publishing Woman's Day magazine in 1937, at two cents per issue.

The 1930s marked the advent of supermarkets in the United States. The Hartfords found the supermarket idea distasteful and were slow to respond to the trend, but as A&P began to lose market share, they were swayed and opened their first such outlet in Braddock, Pennsylvania, in 1937. The following year, supermarkets represented 5 percent of A&P's stores--and 23 percent of its business. By 1939, the total number of A&P stores had dropped to 9,100, of which 1,100 were supermarkets, and A&P's sales had regained the level they first achieved in 1930. However, the company's size, though smaller than the 15,000 stores it had at its height in 1934, was a distinct liability. In 1936, the Robinson-Patman Act was passed, marking the beginning of the antitrust woes that shook A&P's hegemony. Anti-chainstore legislation, passed at the instigation of small independent grocers who claimed chains practiced unfair competition, imposed severe taxes and regulations on A&P and other chains, limiting pricing and other competitive advantages afforded to them by virtue of their size and purchasing power. Restrictions were based simply on store numbers, hitting A&P particularly hard. The company sought to redeem its damaged public image by publicizing its sense of corporate responsibility to consumers, producers, and employees. The loss of a suit in 1949, however, imposed limitations on A&P's purchasing practices that were more severe than any others in the industry. With this final blow, the company's position as an esteemed industry leader disintegrated.

Declining Fortunes at Mid-Century

In 1950 Ralph Burger, who had started at A&P in 1911 as an $11-a-week clerk, became president of the company. Much of A&P's early success had been due to Mr. George and Mr. John's scrupulous attention to the business, or, in Mr. John's term, to "the art of basketwatching." As the Saturday Evening Post article on the Hartfords had concluded in 1931, "who will watch the baskets after the Hartfords are gone? Neither has any children and although the 10 grandchildren get their due shares of income from the family trust, the direct line of shrewd vigilance will be broken." Burger remained loyal to the Hartford brothers even after their deaths, John in 1951 and George in 1957. With George's death, family control of A&P did in fact end and the company was taken public, but Burger, as president not only of A&P, but also of the Hartford Foundation, the charity to which the Hartfords had willed their A&P shares and which owned more than one-third of the company's shares, retained control of A&P. He ran the company, if not imaginatively, then at least reasonably successfully, until his death in 1969. At that point, despite its dusty image, A&P was still the grocery-industry leader, with sales of well over $5 billion a year--more than twice its closest competitor.

With the end of Burger's tenure, and the Hartford heirs' disinclination to enter business, A&P had no clear line of management succession. The "direct line of shrewd vigilance" was indeed broken, and management continued to change throughout the 1970s. The company's direction foundered so much that A&P, once an innovative industry leader, was no longer able even to follow the lead of its competitors. Failing to capitalize on suburban development and to accommodate changing consumer tastes, A&P's sales dropped and its reputation suffered serious injury. A&P's once "resplendent emporiums" were now perceived as antiquated, inefficient, and run-down.

1970s and 1980s: New Management, Closures, Renovations, and Acquisitions

In 1973, as A&P reported $51 million in losses and Safeway took its place as the largest food retailer in the country, Jonathan L. Scott was hired from Albertson's, marking the first time in history that A&P had looked outside its ranks for management. Scott's attempt to revive A&P by closing stores and cutting labor costs only resulted in more dissatisfied customers, and more losses. Finally, in 1979, the Tengelmann Group, a major West German retailer, bought 52.5 percent of A&P's stock. By this point, the A&P chain, which had consisted of more than 4,000 stores in the 1960s, was down to about 1,500 locations.

The Tengelmann Group appointed James Wood, the former CEO of the Grand Union Company, as chairman and CEO of A&P, in 1980. Wood's reputation as a turnaround manager underwent a trial by fire, but his radical restructuring of the company was later lauded by analysts as "an outstanding success." By 1982, close to 40 percent of the company's stores had been shut down. In addition, virtually all manufacturing facilities had been eliminated (the coffee-roasting plants were the exception). Management had won labor concessions in key markets, and the company returned to profitability. Between 1986 and 1990, A&P's earnings grew an average of 27 percent annually. With a formidable cashflow, Wood initiated an aggressive capital-spending program to rejuvenate the store base, develop new store formats, and make prudent acquisitions.

While some markets were abandoned, others were the focus of store recycling and expansion. High-growth areas (such as Phoenix, Arizona, and southern California) were avoided in favor of markets in which A&P's presence was firmly established amidst a stable and slow-growing population (such as Philadelphia, New York, and Detroit). Concentrating efforts in the most promising areas of its six major operating regions--the Northeast, the New York metropolitan area, the mid-Atlantic states, the South, the Midwest, and Ontario, Canada--the company had the flexibility to tailor store formats, product mixes, service, and pricing to local customer bases.

Initially, tens of millions of dollars were spent to remodel and expand 85 percent of A&P's extant stores to give them a more up-to-date presentation, rid the company of its tarnished reputation, and add service departments to accommodate consumers' changed tastes. Improved sales allowed the company to begin to undertake new-store construction by 1985: the "new" A&P aimed for an upscale, service-oriented image and catered to one-stop shoppers. Two new store formats addressed different market niches: Futurestores stressed A&P's broad variety of quality products, and Sav-A-Centers took a strong promotional approach by offering warehouse prices.

Wood also focused on growth through the purchase of regional chains, permitting A&P to establish itself as the top food retailer in certain regional markets without the risk and expense of building new facilities and establishing a market niche. Initial purchases included 17 Stop & Shop stores in New Jersey, purchased in 1981 and converted to the A&P name; the Kohl's grocery chain in Wisconsin, bought in 1983; 20 Pantry Price Stores in Virginia, acquired in 1984; and 92 Dominion stores in Ontario, Canada, brought onboard in 1985. The Waldbaum and Shopwell/Food Emporium acquisitions in 1986 combined to make A&P the market leader in the New York metropolitan area, where the company had its strongest presence, and its 1989 acquisition of Borman's, a Detroit-area chain, resulted in a majority share of the Detroit market.

After the company's restructuring under James Wood, operating income per store more than doubled. Emphasizing high profit margin departments--full service delis, cheese shops, fresh seafood, and floral departments, for example--the company departed radically from low-price generic product offerings. In 1988, Master Choice, a private-brand label of specialty chocolates, pastas, sauces, and herbal teas was introduced in order to compete with what industry experts considered the real competition: restaurants and fast-food chains.

In 1989 A&P made a bid for Gateway Corporation, the third largest grocery chain in Britain. Gateway would have offered A&P a whole new arena for growth, one that was of considerable interest to Erivan Haub, Tengelmann's owner, who wished to shore up his European retailing empire in preparation for the unification of the common market in 1992. The Gateway bid ultimately failed. A&P also had trouble with another international venture, its $250 million acquisition of 70 Miracle Food Mart stores in Ontario in 1990. Ontario was soon hit by recession, as were A&P's other major markets in the United States, and sales fell in the Canadian stores by 5 percent the next year.

Continuing Struggles in the 1990s

A&P's acquisitions had given the company top market share in many cities. Its 1989 acquisition of Farmer Jack in Detroit, and its earlier purchases of Kohl's in Milwaukee and Waldbaum's in New York put it in the top spot in these major markets. But the company had trouble hanging on to its market share. Its stores averaged half the size of newly built supermarkets, and many were old and run-down. Waldbaum's in New York was cited in 1991 as the worst of all area grocery chains for numerous problems with rodents and cockroaches. The company was slow to respond, and Waldbaum's sanitation record improved only slightly the next year. Earnings for the company dropped from $151 million in 1990 to $71 million in 1991. Then sales for fiscal 1992 fell a shocking $1.1 billion, and the company was in the red, losing $189.5 million. By 1993, stores run by A&P had lost market share in six major markets. Faced with a poor economy and declining profits, the company cut back the amount it was spending on renovations.

A&P decided to focus its marketing efforts on a new store brand product line in 1993. Chairman Wood had sold or closed most of the company's store brand manufacturing plants in the 1980s, but A&P thought it was time to emphasize cost-cutting store brands again. The company consolidated nine different private labels into one--America's Choice--that would be found at all its different chains. Some 3,500 private label items were consolidated into 1,600 America's Choice items, which were promoted on television in major market areas.

A&P also remodeled more than 100 stores in 1993 and built 20 new ones. Analysts frequently noted that A&P could spend much more on remodeling, and on opening bigger stores. In 1994 A&P upped its capital spending 40 percent, to $340 million, and announced that it would concentrate on opening 50,000- to 60,000-square-foot stores, on par with its competitors'. But the company was still plagued with problems. Its Ontario chains, Miracle Food Mart and Ultra Mart, were closed by a 14 week-strike during 1993-94. A&P had attempted to lower its labor costs by cutting wages and relying on more part-time workers, setting off the strike. A&P finally settled with the unions, but the long strike had given Ontario customers plenty of time to build loyalty to competitive stores. A&P's Atlanta stores also faltered. The company bought 40 stores in the Atlanta area in 1993 in order to fight back competitors who were opening new stores in the area. The Atlanta stores, however, lost money and only began to show a profit in the fourth quarter of fiscal 1994.

The company gained a new president in 1994, Christian Haub, the 29-year-old son of Erivan Haub, the principal owner of A&P's majority owner Tengelmann Group. This was the first time a member of the Haub family had direct involvement with managing A&P. Haub planned to improve the image of A&P stores by emphasizing cleanliness, checkout service, and other highly visible areas of customer service. More than this, the company opened 16 new stores in 1994-95, remodeled or expanded 55 more, and closed 87 stores. According to Haub, A&P planned to open 50 stores a year after 1996. The company put aside $1.5 billion for store development over the next five years. Problems with the Canadian stores seemed to be improving by 1996. That, coupled with excellent results from the company's Michigan stores, helped A&P post a 28 percent increase in profits for the fiscal year ending in February 1997.

During 1997 Haub was promoted to president and co-CEO and then became sole CEO in May 1998, with Wood remaining chairman. Haub soon launched a new revitalization effort. In December 1998 A&P announced that it would shut 127 smaller, underperforming stores. The closures were designed to enable the company to concentrate on its better performing outlets in its strongest markets--those in which it had the potential to be the number one or number two player. A&P subsequently exited from the Richmond, Virginia, and Atlanta markets. The company also said that it would, over the next three years, open as many as 200 larger-format superstores and modernize 225 existing stores. The closed stores were expected to generate one-time cost savings of $90 million and lead to improved overall profitability. In turn, rising profits would place A&P in a better position to pursue acquisitions at a time when the supermarket industry was undergoing a significant consolidation wave. Restructuring charges of about $120 million led A&P to post a net loss of $67.2 million for the fiscal year ending in February 1999.

The store closures left A&P with three core markets: the Northeast, the Midwest (principally Michigan and Wisconsin), and Ontario. The company identified New Orleans as a fourth core area and in 1999 acquired six Schwegmann stores there that were later rebranded under the Sav-A-Center name. In addition to budgeting $400 million for capital improvements, A&P also set aside another $250 million for a second phase of the restructuring program involving the installation of a state-of-the-art computer system. This effort, launched in 2000, was designed to improve efficiencies throughout the company's entire supply chain and operations, from manufacturing through checkout. Between 90 and 95 percent of the firm's computer systems were to be replaced.

Early 2000s: A Stalled Turnaround

Following several executive defections in 2000, including that of the COO, Elizabeth Culligan was brought onboard as executive vice-president and COO in early 2001 (she was promoted to president and COO about a year later). Culligan was a former executive at Nabisco Holdings Corp., and her background in food manufacturing made her an unconventional choice to head up a major food retailer. In the middle of that year, Christian Haub was named chairman and CEO, bringing an end to Wood's long A&P tenure. In November the company announced the closure of another 39 underperforming supermarkets, most of which had been opened during the previous five years in what A&P now said was a "flawed" program of expansion. Investors reacted positively both to the closure plan and to the frank admission of past failure, and the company's stock began to rise.

In a hopeful sign for the company, A&P posted a profit for the fourth quarter of fiscal 2002, its first quarter in the black since the first quarter of 2000. The turnaround soon began stalling out, however, hampered by the stagnating U.S. economy and stepped-up competition in the company's main markets. A&P encountered a further setback in the middle of 2002 when it was forced to restate its financial results for the previous three fiscal years because of problems with the way it was accounting for inventory in certain regions and with vendor allowances--payments made by manufacturers to retailers for promoting their products in stores. The company's stock began declining, reaching an all-time low in October 2002, the same month that Culligan tendered her resignation.

At that same time, A&P announced that it was dividing its retail operations into two operating units: A&P U.S. and A&P Canada. A&P officials felt that its chains within the two countries were in markedly different operational situations. The Canadian chains, under the direction of Brian Piwek, had been successfully turned around and had entered a growth phase. By contrast, there was still much work to be done to turn the U.S. chains into competitive and consistently profitable properties. In fact, many of the programs that had been instrumental in the Canadian turnaround were to be transferred to the U.S. operations. For example, the Canadian A&P and Dominion chains had placed large emphasis on high-quality fresh foods and customer service. A&P had also developed a successful low-price/limited-assortment format in Canada under the Food Basics banner; the format was already being tested in the United States, and in December 2002 the company announced that it would convert 120 of its 700 stores to the Food Basics format. Management too was shifted to the south, Piwek having been named president and CEO of A&P U.S. Eric Claus took a similar position with A&P Canada. Claus came to A&P from Co-op Atlantic, a New Brunswick-based retail and wholesale food company, where he was president and CEO. Both Piwek and Claus began reporting directly to Haub, who added the title of president to his other duties.

These moves came as A&P was in increasingly dire straits. For the first nine months of the fiscal year ending in February 2003, the company suffered losses of $172 million. Burdened with more than $900 million in long-term debt as of late 2002, the company needed to raise cash and cut costs. During the first three months of 2003, A&P entered into several agreements to sell 17 stores in northern New England. These divestments would mark A&P's exit from Massachusetts and New Hampshire, reducing its New England operations to just its stores in Connecticut. In February 2003 the company reached an agreement to sell seven Kohl's stores in Madison, Wisconsin, and also said that it was seeking to sell the remaining Kohl's stores, which were located in the Milwaukee area. These latest store divestments would reduce the number of company stores to about 650. A&P also confirmed that it was exploring the sale of its Eight O'Clock coffee business. In an effort to be more competitive in the Detroit market, A&P lowered prices permanently at its Farmer Jack stores, replacing the need for customers to use a savings club card for weekly sales specials. Whether these moves would be sufficient to stabilize A&P's precarious financial position remained to be seen.

Principal Subsidiaries: A&P Wine and Spirits, Inc.; ANP Sales Corp.; APW Produce Company, Inc.; APW Supermarket Corporation; APW Supermarkets, Inc.; Big Star, Inc.; The Great Atlantic and Pacific Tea Company, Limited (Canada); Borman's, Inc.; Compass Foods, Inc.; Family Center, Inc.; Food Basics, Inc.; Futurestore Food Markets, Inc.; Gerard Avenue, Inc.; The Great Atlantic & Pacific Tea Company of Vermont, Inc.; Kwik Save Inc.; Limited Foods, Inc.; LO-LO Discount Stores, Inc.; Montvale Holdings, Inc.; Richmond, Incorporated; St. Pancras Company Limited (Bermuda); Shopwell, Inc.; Southern Development, Inc.; Super Fresh Food Markets, Inc.; Super Fresh Food Markets of Maryland, Inc.; Super Fresh/Sav-A-Center, Inc.; Super Fresh Food Markets of Virginia, Inc.; Super Market Service Corp.; Super Plus Food Warehouse, Inc.; Supermarket Distribution Service Corp.; Supermarket Distributor Service-Florence, Inc.; Supermarket Distribution Services, Inc.; Supermarket Systems, Inc.; Tea Development Co., Inc.; The South Dakota Great Atlantic & Pacific Tea Company, Inc.; Transco Service-Milwaukee, Inc.; Waldbaum, Inc.; W.S.L. Corporation; 2008 Broadway, Inc.

Principal Operating Units: A&P U.S.; A&P Canada.

Principal Competitors: Wal-Mart Stores, Inc.; The Kroger Co.; Safeway Inc.; Albertson's, Inc.; Loblaw Companies Limited; Meijer, Inc.; Sobeys Inc.; Wakefern Food Corporation; Giant Food Inc.; Ahold USA, Inc.; Shaw's Supermarkets, Inc.; Pathmark Stores, Inc.; Wegmans Food Markets, Inc.

Chronology

• Key Dates:
• 1859: George Huntington Hartford and George Francis Gilman form The Great American Tea Company to sell discount tea via mail order.
• 1861: First store opens in New York City.
• 1869: Company is renamed The Great Atlantic & Pacific Tea Company (A&P).
• 1882: The Eight O'Clock house brand of coffee is introduced.
• 1912: First cash-and-carry A&P Economy Store opens its doors.
• 1925: A&P is operating 14,000 economy stores, generating $440 million in sales.
• 1930: Chain reaches its all-time store count peak of 15,709.
• 1937: With the opening of the first A&P supermarket, the chain begins transitioning to the innovative new grocery format.
• 1957: Family control of the company ends, and A&P is taken public.
• 1974: Company headquarters are moved from New York City to Montvale, New Jersey.
• 1979: Tengelmann Group, a West German retailer, purchases majority control of a financially troubled A&P.
• 1980: James Wood is appointed chairman and CEO and initiates a major restructuring.
• 1986: Company gains leading position in New York metropolitan area through the acquisitions of the Waldbaum and Shopwell/Food Emporium chains.
• 1989: Company makes an unsuccessful bid for Gateway Corporation, a major U.K. grocery operator, but succeeds in acquiring the Detroit-based Farmer Jack chain.
• 1998: Christian Haub is named CEO of A&P; revitalization program is launched.
• 2002: Retail operations are divided into two operating units: A&P U.S. and A&P Canada.