Pathmark and A&P
Around a quarter of a century ago, I started working for Supermarkets General Corporation in their Edison nonfoods offices. At that time, Pathmark - the name most people know - was the most profitable supermarket in the country, despite having a meager 132 stores in the chain. In sharp contrast to Pathmark’s success was the Great Atlantic and Pacific Tea Company, better known to customers as A&P.
A&P was a massive success story in its time, the equivalent of today’s Wal-Mart in its growth and ubiquity, albeit not in the latter’s apparently harsh employee relations or loathing of American products. A&P stores ended up everywhere, and the company ended up as the largest supermarket chain in the country, if you counted by the number of stores.
Then the company started to lose money. One of the corporate drones worked out that smaller stores were more likely to be unprofitable, something which the Supermarkets General people had figured out (the average Pathmark store, in 1982, doubled the industry average sales - roughly $250,000 per week compared with around $125,000 per week.) Pathmark had more advantages than that, of course, but nothing you’d expect number-crunchers to notice. Pathmark had a highly computerized inventory and sales tracking system; a pair of distribution centers, one for perishable items and one for nonperishables, together serving stores in a relatively small region; and, above all else, a focus on nonfoods items, because they generated a 30% average profit rather than groceries’ 3% average profit.
As a parallel, the financial industry, at the time Daimler took over Chrysler, saw Daimler’s much larger size, as an industrial conglomerate. They assumed Chrysler’s massive profits came from the most obvious part of its cars - their styling - and figured profits could be much, much higher if they could apply “Mercedes quality” to Chrysler Corporation vehicles. Analysts squealed with delight at the thought of “superior German engineering” being applied by Chrysler vehicles, not realizing that the reason Chrysler was such a success was not despite its engineering, but because of it; styling got the customer in for a test drive, but the feel and engineering of the cars were the spur to purchases.
A&P had many options. They could shut down all the unprofitable stores; they could withdraw from geographically dispersed regions, to slash shipping costs; they could warn managers of unprofitable stores that if they didn’t turn around they would be closed down, perhaps send skilled employees to help, and invite innovation and employee-led change.
They did none of those things. Instead, they closed the small stores, which statistically were less profitable. Had they tried the third option, they probably would have had far more success, far more quickly, and regained their earlier market leadership. In fairness, they did start changing their remaining stores, bulking them up into superstores, and gaining the higher margin sales that had helped power Pathmark to profit supremacy. Slowly, A&P did turn around, but the process could have been faster - and less painful - had they given the slow-performing stores a chance.
Supermarkets General, meanwhile, committed suicide. After watching Pantry Pride (a former competitor reduced to poverty in a mere three stores worth around $1 million) take over Revlon, the mighty cosmetics company, in a leveraged buyout, Supermarkets General swallowed a poison pill, so to speak - they acquired two companies (one was Purity Supreme - I don’t recall the other) to run up a massive debt, erasing their cash hoarde and expanding out of their geographical prison and specialization. Then the executives running the company, after swallowing the poison pill, took the company private in the kind of leveraged buyout they had bought Purity Supreme to avoid.
The result was somewhat tragic. The company had to sell Paul’s Trucking, their in-house transportation business, along with their photo labs; Rickel’s home stores, a smaller version of Home Depot; Steinbach’s department stores; and anything else they could. It was not unlike Chrysler’s 1970s meltdown. Pathmark ceased to get much capital for a long time, and remained roughly the same size, despite an attempt to be purchased by a foreign supermarket firm (which was oddly rejected by the same Department of Justice that felt Adobe and Macromedia did not compete), and a public offering that created Pathmark Stores, Inc. The company’s amazing winning streak ended, along with its history of innovation, with the buyout.
Rickel’s, incidentally, also had a somewhat tragic ending. In a move that could have been engineered by Home Depot (I’m pretty sure it wasn’t), Rickel’s and Channel merged, and very, very shortly thereafter both became history, ending any competition in the large home stores until Lowe’s entered the state.
Pathmark, on the other hand, continued its struggle and was finally purchased by, of all companies, The Great Atlantic & Pacific Tea Company. The irony is hard to beat.
Is there a moral? Perhaps… Wall Street is weird … and perhaps CEOs need to spend more time figuring out how to succeed by hitting the fundamentals of leadership and management, and less time trying to shortcut their way to profit. Then again, as long as they get the same massive bonuses for losing money as for making profits, and as long as the market rewards short-term band-aids and punishes long-term investment, we will probably continue to see the kind of insanity that destroyed Chrysler Corporation and Supermarkets General Corporation.
