Fairway Slumps as Epicure Options Grow
Fairway Market, the grocery chain known for offering exotic foods to affluent shoppers, is struggling as food lovers have more choices.
Fairway Slumps as Epicure Options Grow
For many New Yorkers , shopping at Fairway,
has become less and less their way,
amidst more and more ways to get us
exotic pomegranates or fancy lettuce.
And what has made the situation more serious yet,
is that they have accumulated so much debt,
and gotten drunk on Wall Street's junk.
For too much leverage is a powerful beverage,
and now, with costs high and profits slim,
their outlook is dim.
I grew up in the back of my parents grocery store
something that rarely happens anymore:
No matter where you shop or in any vicinity,
these days, it's mostly computerized anonymity.
hzl
10/27/15
In Fairway Market’s grocery store on Manhattan’s Upper East Side, shoppers bustle past a colorful array of squash, peppers and cucumbers. A bulb of fennel or a bright red pomegranate can be picked up for $2.99. The scents of ground fair-trade coffee, pricey imported French cheese and fresh-baked loaves of artisanal bread waft through the store.
Just around the corner, at Whole Foods, shoppers bustle past a colorful array of squash, peppers and cucumbers. A bulb of fennel or a bright red pomegranate can be picked up for $2.99. The scents of ground fair-trade coffee, pricey imported French cheese and fresh-baked loaves of artisanal bread waft through the store.
Fairway’s motto may be “Like No Other Market,” but these days, a lot of grocery stores are awfully similar. When Whole Foods opened on the Upper East Side earlier this year, Fairway said sales immediately slumped at its store there.
The New York supermarket wars are just one of Fairway’s problems. A leveraged buyout of the chain by a private equityfirm has contributed to a heavy debt load of $250 million. An overambitious store-opening strategy — it vowed to open 300 stores across the country — drained its cash flow and has caused ratings agencies to downgrade its debt. Its stock has plummeted, declining 86 percent since it went public in 2013.
Today, Fairway shares trade around $1.80 — a little more than the price of three tangerines.
“Fairway has had some expectations issues,” said Diya Iyer, an analyst at Standard & Poor’s Ratings Services. “They have had some difficulties executing on their growth strategy.”
Fairway, which operates 15 stores in the New York metropolitan area, reported on Thursday yet another quarter of bleak financial results and announced a retrenchment and shift in strategy. Now, instead of dotting the East Coast with Fairway stores, the company’s executives said they planned to “flood the boroughs,” referring to New York City.
“It is the most important and easiest way for us to grow this company,” Jack Murphy, Fairway’s chief executive, told Wall Street analysts in a conference call late Thursday.
But for now, the flood may be more like a trickle. Only one or two store openings are possible until Fairway shores up its balance sheet. The company said on Thursday it was looking to raise capital to reduce its large debt load and to fund future growth.
For decades, Fairway operated as a small family-owned business on the Upper West Side. What started in 1933 as a fruit and vegetable stand run by Nathan Glickberg became a uniquely Manhattan shopping experience where food lovers and gourmands pushed and shoved their way through crowded, narrow aisles stacked high with goods, on the hunt for baby octopus from India, barrels of Gaeta olives or wedges of Moliterno truffled cheese.
The turn in Fairway’s history came in 2007 when it sold an 80 percent stake to Sterling Investment Partners, a private equity firm based in Westport, Conn., for $150 million, of which $79 million was in cash and the rest was debt put onto Fairway’s balance sheet.
Sterling had never owned a grocery store. It had more of an industrial background, investing in transportation and logistics companies, specialty manufacturers and business services firms.
Still, remaining with Fairway as its chief executive was Howard Glickberg, a grandson of the founder. Together, Sterling and Mr. Glickberg embarked on an ambitious expansion strategy. Soon, stores were opening in Paramus, N.J.; Stamford, Conn.; and, in 2011, the Upper East Side. Much of the growth was funded by debt.
In the spring of 2013, Fairway took advantage of a hot market for initial public offerings and sold its story to Wall Street. Fairway was also trying to ride the same wave as competitors like Trader Joe’s and Whole Foods, which were rapidly opening new stores and targeting baby boomers and affluent shoppers in urban and suburban communities with farm-fresh organic produce, cage-free eggs and specialty items like pink Himalayan sea salt.
Fairway told investors that it would rapidly expand from its New York base into a market that stretched from New England to Washington, an area that it said could support another 90 stores. It then had plans to open another 200 locations across the rest of the country.
In April 2013, Fairway sold shares at $13 in an I.P.O. A big part of the proceeds — $86 million — went directly into the pockets of Sterling; Mr. Glickberg, who had stepped down as chief executive in 2011; and others through dividend payments. On top of that, Fairway paid more than $25 million in various fees to Sterling over the years. Sterling has sold $23 million worth of Fairway stock, retaining about half of the company’s shares.
In the months after its market debut, investors pushed its stock higher, to more than $28 a share.
But at the same time, competition in the organic and specialty-food retailer space had intensified. Whole Foods and Trader Joe’s were expanding rapidly, and traditional grocery stores were also increasing their organic offerings and stocking hard-to-find items.
In February 2014, just 10 months after its I.P.O., Fairway said its quarterly earnings had come in way below expectations, and it was slowing the pace of its store openings. Its chief executive, Herb Ruetsch, a 15-year veteran of the organization, abruptly resigned.
The next day Fairway’s shares tumbled 29 percent.
Its financials worsened through last year. Mr. Ruetsch was replaced on an interim basis by Fairway’s president, William Sanford, who was an operating partner with Sterling. In September 2014, the company hired as its chief executive Mr. Murphy, the former head of Earth Fare, an organic and natural foods retailer based in North Carolina.
Today, Mr. Murphy is overseeing a slightly less ambitious grocery store chain. While he has told Wall Street analysts that Fairway still intends to open new stores, it will do it at a much slower pace than what was expected a few years ago. The company paid $3.5 million this spring to terminate a lease that would have made it the anchor grocery store in the enormous Hudson Yards development project on Manhattan’s west side.
On Thursday, Mr. Murphy said Fairway needed to respond not only to competitive pressures from traditional and upscale grocery stores, but also to e-commerce sites like Fresh Direct and Blue Apron, which deliver directly to the home. Fairway, he said, is starting its own e-commerce site for a limited test audience next week.
“There is an e-commerce thing going on. There is more competitive pricing pressure going on than ever before,” Mr. Murphy said. “Stores are popping up everywhere you look. Everybody is rushing to open a store on top of a store on top of a store. It’s more competitive than I’ve ever seen it, and everybody, quite candidly, is upping their game.”
Every company in the world started somewhere. That includes today’s largestmultinational corporations. While some large companies have grown to be loved, others have gained notoriety with size. Here are some famous chains that started as small mom-and-pop-run stores.
WAL-MART STORES INC.
Walmart (WMT) is the largest retailer in the world, but it started with humble beginnings. Walmart traces its roots to the quaint town square in Bentonville, Arkansas, where founder Sam Walton opened his now famous Walton’s 5 & 10 (pronounced “five and dime”) in 1950. You can still visit this iconic store today, which now functions as the Walmart Museum.
The first Walmart store as we have come to know it today opened just down the road in Rodgers in 1962. Five years later the family owned 24 stores. The company reached 51 stores in 1972 and reached 276 stores in 1980.
Today, 65 years after the first store opened in Bentonville, the company boasts over 11,000 stores in 27 countries with 2.2 million employees worldwide. (See also: Will Walmart's Wage Increase Payoff?)
BEN & JERRY’S HOMEMADE, INC.
Privately held Ben & Jerry’s is one of the most popular premium ice cream brands in America. Friends Ben Cohen and Jerry Greenfield founded the company in 1978 in their home state of Vermont. The brand is known for innovative flavors with funny names.
The company sold to European conglomerateUnilever (UN) in 2000, but the ice cream and chain of ice cream parlors remains relatively unchanged to consumers. The retail locations, known as Scoop Shops, operate as franchises with over 750 locations.
WHOLE FOODS MARKET INC.
Whole Foods (WFM) is the largest natural and organic grocery in the world, with 427 stores in North America and the United Kingdom. The company began with a single Whole Foods Market location in Austin, Texas in 1980.
As demand for natural foods increased, so did the Whole Foods footprint. The chain build stores and acquired 19 additional brands to reach its current size. Started with $45,000 borrowed from family and friends, the company has a market capitalization of $12 billion today. (See also: How Expensive Is Whole Foods, Really?)
YANKEE CANDLE CO INC.
Yankee Candle traces its roots to 1969, when 16-year-old high school student Michael Kittredge melted crayons to make candles as a gift for his mother. His candles were a hit, so he opened a small retail store shortly after with help from his father.
Today the company employs more than 6,000 people dedicated to manufacturing and selling candles and related items at 35,000 company-owned stores and authorized retailers. The candles are sold worldwide in retail stores and online.
The formerly public company was acquired by a private equity firm and sold to Jarden Corp (JAH) for $1.75 billion in 2013.
THE BODY SHOP
Anita Roddick opened the first Body Shop location in England, modeled after a similar store she visited on a trip to Berkeley, California in 1970. She opened her store in 1976, and the business grew quickly to become one of the most recognized brands for women’s cosmetics and personal care.
The company now has over 2,500 stores worldwide. Founder Roddick led the company until its 2006 sale to cosmetics giant L’Oreal (LRLCY).
CELESTIAL SEASONINGS
While not technically a chain, this manufacturer of herbal teas started when a group of friends went searching for wild herbs in the areas around Boulder, Colorado in 1969. That hunt for herbs led to a $100 million business.
Now, over 40 years later, the company is a part of Hain Celestial Group, Inc. (HAIN), a natural foods and personal care conglomerate with $2.2 billion in annual revenue.
THE BOTTOM LINE
Large corporations are easy targets for activists, but it is important to remember that these major corporations started with an idea and an individual founder. Through hard work, good luck, support from investors, they have grown to the well-recognized brands they are today.
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