Is This the Next Supermarket Chain to Melt Down?

The Fresh Market’s bonds plunge as Cerberus and other PE firms are circling.

The Fresh Market had made its name once upon a time by focusing on higher-margin groceries, such as imported cheeses and organic produce and wooing customers with on-site butchers. In March 2016, it was acquired by private-equity firm Apollo Global Management. As private company, it no longer has to report earnings publicly. But now its bonds are crashing.

Monday last week, it disclosed to some investors that same-stores sales had plunged 8.2% in the quarter, and that Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) was a lower-than-hoped for $29.3 million, according to Debtwire. This set off the bond plunge for the week.

There was more, according to Debtwire:

The market was also taken aback by the company’s disclosure that it recently obtained a $50 million unsecured revolver from its parent [Apollo], raising questions as to why it needs the extra liquidity. As of 30 July, TFM had $32.9 million of cash and $74.6 million of borrowing availability under its existing $100 million revolver.

By Friday, its $800 million of 9.75% first-lien notes due 2023 were trading at 57.625 cents on the dollar, down almost 15 points from Monday’s already beaten-down 72.25. And several large private equity firms, including Cerberus Capital Management – which owns Albertson’s and Safeway and has had to scrap the idea of selling them via an IPO – have acquired “sizable positions” in “a rash of high-volume trading,” according to “three sources familiar with the matter,” cited by Debtwire.

Why would Cerberus “quickly accumulate a stake” in the beaten-down first-lien debt of a competitor in the struggling supermarket spectrum? Among the possible reasons: In a restructuring or bankruptcy of a retailer, creditors holding first-lien debt have a lot of sway and can get a good chunk of the equity. It may be a gamble on a restructuring, and on a low-cost way of gaining control.

The Fresh Market has run into the same buzz saw that Albertsons and other supermarkets have run into, including those that have gone bankrupt recently: Powerful competition from Walmart, Kroger, Target, and German deep-discounter Aldi that is planning to invest $3.4 billion to expand its presence in the US to 2,500 stores – more stores than Albertsons (all brands combined, including Albertson’s and Safeway) currently has!

And Amazon, which for years has been trying to find the magic formula to power into online grocery, has bought Whole Foods, a competitor to The Fresh Market. It has already started to cut prices, in response to the price war in the supermarket segment.

The Fresh Market still operates “over 170 stores” in 24 states, it says on its website. This is down from 184 stores on January 31, 2016, reported in its last 10-K filing as a publicly traded company. For that year, revenues grew 6% to $1.86 billion, and that net income rose 4% to $65 million.

By that time, the problems had already started. In 2015, The Fresh Market announced that it would close all its stores in California, with the last stores begin shuttered in early 2016.

On March 14, 2016, the company announced that entities of Apollo Global Management would acquire it for $1.36 billion, at a premium of 53% over the closing price on February 10, 2016, “the day prior to press speculation regarding a potential transaction.”

In May 2016, two months after it was acquired, it announced that it would close 13 more stores, including all eight stores in Texas. “This shift also allows us to focus our energy and resources on the growth of our remaining stores, as well as new stores we have planned in the future,” it said.

In April 2017, it announced five more store closings. “This move will allow the company to focus on the success, service and growth of its existing portfolio of stores,” it said. “The decision to close these locations was made after careful consideration of the overall growth strategy and long-term performance of the company.”

It also opened some new stores. The net effect is that since January 2016, the number of stores went from 184 stores to “over 170” stores currently. And same-store sales at the remaining stores dropped 8.2%. A steep downward slope.

So what are Cerberus and the other PE firms betting on with these purchases of the first-lien bonds?

That The Fresh Market will recover and that these bonds will soar in value from their beaten-down levels, thus handing the company a tidy profit? Maybe.

But more likely, Cerberus, through its travails with Albertsons, knows intimately well that the supermarket sector is in a very tough price war involving the biggest players out there, now including Amazon-Whole-Foods, and that new competition is plowing into the sector even as overall sales are stagnating.

For a smaller player like The Fresh Market that is already trying to cut costs and shrink, instead of investing in growth and defending its turf, the writing may be on the wall clear enough for bondholders to see – so they’re dumping those bonds and causing the price to plunge. And the writing might be clear enough for Cerberus and the other PE firms to see, from a different point view, that buying a big stake in its first-lien debt could be a low-cost opportunity to gain control if the company does falter and has to restructure.

Bankruptcies can happen suddenly, as the meltdown of Toys “R” Us has shown. But now what? Read…  The Fate of Toys “R” Us after Bankruptcy?

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  30 comments for “Is This the Next Supermarket Chain to Melt Down?

  1. Joan of Arc says:

    People are buying at Fresh Market, and if Fresh Market had no debt they could have been a low cost operator. Instead of losing money on their stated revenue, they could have made a very comfortable profit. Debt is a two edged sword, ask Toys R Us.

  2. Matt P says:

    March 16 is about when I noticed no one could get timely help at the meat counter anymore – the only reason I went there – because they cut the number of people working in half. I stopped frequenting there shortly after.

    • alex in san jose AKA digital Detroit says:

      My local Safeway took the meat counter out entirely. They cut and wrap a selection of stuff and put it out in a cold case and if what you want it there, great, and if not, tough.

      I’m beginning to develop the theory that Safeway at least in the SF Bay Area is the “ghetto” market. But the others are not much better – I’ve just about given up on the new Sprouts that opened near me. Great market but a very high-crime area and I had to chase down a meth-head to get my bike taillight back.

      I’ve had to come up with rules: Only go to Sprouts in the daytime (which hopefully would help) and avoid Sprouts if possible. There are things they have that I can’t get up the street at 99 Ranch, so maybe one, daylight, trip to Sprouts a week is justified. And if I’m going to shop in Ross or HomeGoods which are next door, well, I may make it a walking trip, avoiding risking my bike.

      Yet, if I ride another flat mile up the road, I get to 99 Ranch which appears to have no “hobo problem” at all. In fact, if I see another Caucasian person in there, well, I’ll probably be as surprised as the manager type was – he did a classic double take – when he saw me enjoying a couple of tea eggs, that quintessential Chinese snack.

      I put 99 Ranch to the test last night and was able to buy cheese, sour cream, kippers and sardines, etc. and their meat department looks pretty good too. I had some sashimi I got there last night along with some seaweed chips that were really good. (Although with me, the adage is: see the weed, and eat it.)

      We (as a society) are impoverishing more and more people, and anyplace out in the street, like your local SafeKrogerAlphaZenotto’s, your WholeTraderRaley’s, is going to be more rough over time also, I guess. I guess what’s left of the middle-class will simply hire people to deal with the sea of hobos and possible physical violence that will be a part of “modern” shopping.

  3. Prairies says:

    I also noticed in Canada the company Roots was bought in an LBO from a PE firm, just another company to take a short position on in a couple years.

    wink wink nudge nudge

  4. raxadian says:

    Interesting how bad the Fresh Market started to go after it was bought.

    Thank you professional company sinkers!

  5. Mike G says:

    It was acquired by private-equity firm Apollo Global Management

    The kiss of death, right there.

    • Kent says:

      I don’t know how our financial markets got so broken that lenders would provide financing to these PE firms. I’d love to see how many of the firms Bain has taken over since the early ’90’s are still alive (without having declared bankruptcy) today.

  6. Mike R. says:

    Would you consider doing some of your expert fiancial forensics on Fresh Market? I would be very intersted to know what the PE partners gained and if indeed, expensive debt was used to buy the company.

    • Wolf Richter says:

      It’s very tough to get any info on private companies that they don’t want to circulate. But if I can get the info, I’ll write about it.

      What’s interesting here is that it just took one year. PE firms normally need more time to strip out assets. So the supermarket meltdown may have caught them by surprise (I think it caught all PE firms in that sector by surprise). And they have not been able to pull off the kind of asset stripping we have seen in other companies that were LBO’ed before the Financial Crisis, or even five years ago.

  7. Begbie says:

    My grocery store is trying to replace all of the cashiers with machines and all of the bagger’s with customers. I’m getting pretty good at it

  8. Michael says:

    You have to love the automated cashiers. Half of them are out of service and the new software has more bugs than the last version. Safeway is the worst.

    • Matt P says:

      Fred Meyers is pretty bad too. You have to demagnetize your meat or it will set off alarms and every 4th item scanned causes a bug. I only use them now if I have 1 or 2 items and no meat or produce which is rarely ever.

    • Begbie says:

      Don’t EVER try to buy beer!The whole process comes to a screeching halt!

  9. polecat says:

    Can’t wait till the three-headed beast pushes for another grocery concept … something like, shall we say, flesh .. I mean ‘fresh’ market solient green, yellow, and/or red … nice cheery colors to sooth the hapless consumer zombie !

    it is October after all …

  10. polecat says:

    My hope is that the Albertsons/Safeway corpse expires soon, never to be re-animated !

    • economicminor says:

      Lots of small towns only have a Safeway and now a Dollar General. Losing their Safe way would not be good.

      • alex in san jose AKA digital Detroit says:

        economicminor – I rode my bike a fair amount over the pitted and scarred face of The Hose, and there are just miles and miles, square miles, where “shopping” means bodegas, food trucks, maybe some black-market connections.

    • D. Wright says:

      My sentiment exactly. Nothing is ever a reasonable price. I’m certain most of their fresh veggies get hauled to the dump as they seem to not care what the competition is priced.

    • cdr says:

      Not me. I like Jewel/osco. Some things are great there and not easily available elsewhere for the same price. Also like Aldi, Walmart, and Sams. Jewel/ocso would be missed.

      • tony says:

        Not to forget the best of the best woodman’s. Saved all my paper bags when i came out to screw loose california just before they put in 15 cent bag crap.

    • michael w Earussi says:

      I’m surprised they’re still alive because their prices are so much higher than their competition, but I also would be sorry to see them fail because they do offer a few products I can’t get elsewhere (but not enough to keep afloat).

  11. cdr says:

    The Fresh Market for Canadian bacon (for my special breakfast treats), last time I checked a couple of years ago: $12 / lb

    Canadian Bacon down the street sliced at the deli counter: $6 / lb

    Didn’t go back. For everything else, saw limited choice at top dollar. Produce looked great.

  12. Martin says:

    Around here the FM is a 3rd or 4th choice in a crowded market, no reason to go (back) there. Yes, 2 years ago the meat counter used to be good.
    Just like Toys R Us, everything they do others also do both better & cheaper.

  13. Jordan says:

    Any word on the Albertsons and Sprouts merger? I’m really hoping that it doesn’t take place.

  14. Karl Kolchak says:

    Not a big fan of Fresh Market. It’s an overpriced version of Trader Joe’s which carries an odd combination high end merchandise and regular supermarket fare, but not a great selection of either. The store near me gives over almost one third of its floor space to fancy candies even though I never see anyone buying them.

    Frankly, I’m not even sure which part of the market they are supposed to be serving.

  15. Brian says:

    Here in Florida, FM built at least two new stores near expensive infill apartment complexes. Not sure if the youngsters nearby have Fresh Market level funds, after coughing up that much for rent.

  16. Binky says:

    Supermarkets in Anchorage have armed security, staff at the doors, reduced entries to two with one closed at eight and put a drive through online shopping pickup area in back by the woods filled with campers, begging for a car jack. Like Demolition Man.

  17. QQQBall says:

    The thing is – once you get in the habit of the local Farmers Market, there is a much reduced need to go to a grocery store. And if you do decide to go, there are a ton of choices including WMT and CostCo. The roasted chix are $4.99 at CostCo and 7 bucks at Frazier Farms (much like Sprouts) and I think about the same for a scrawny chix at Vons. Plus CostCo still sells the 8 chix quarters for $4.99.

    I tired of the games with the pricing labels. They would put the sale item tag above the item and under a more expensive item on the shelf above. Seriously misleading. Every time Vons has steak on sale, they cut the steaks 3 inches thick and cram them into a bulk pack; the individual steaks are a higher $/Lb. I complained to the manager and he blew me off. So I have no need other than an individual item for a recipe or to buy soda water.

  18. George McDuffee says:

    IMNSHO thus looks like the result of confluence of several synergistic factors:

    (1) Yet another Tony Soprano “bust out” by PE looting of a viable going corporation through the assumption of excessive debt.

    (2) The pauperization of the markets’ [wannabe] customer base such that they can no longer afford premium products.

    (3) The descent of the neighborhoods in which these stores are located into a third world ambiance, which is linked with the loss of living wage jobs by the blue collar residents in those areas.

    FWIW: This appears to be the future for all of us if we continue our current policies and socioeconomic “engineering.”

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