As of the date of the case (assume = Jan. 27, 2004):
a) What is Great Atlantic & Pacific Tea’s (A&P’s) ‘business model’?
A&P is a retail food chain in North America that operates under various trade names (i.e. Super Foodmart, Farmer Jack, Dominion, etc.). The business focuses on sales volume, inventory turnover and effective cost control as the products are sold at low margins in a very competitive market.
A&P’s business model focuses primarily on acquisitions and divestitures. As the company has room for growth, it expands by building or acquiring more stores. Once the company is in need of extra cash, it divests assets to include store closings and complete sales of a trade name.
b) Which firms does A&P consider to be its key competitors or ‘peer group’? [Hint: search the DEF 14A filed with the SEC at www.sec.gov ]
A&P considers the following firms to be its key competitors: Albertson’s, Inc., the Kroger Co., Safeway, Inc. and Winn-Dixie Stores, Inc. Additionally, A&P considers Wal-Mart to be a rising competitor.
c) Suggest two weaknesses/risks of A&P’s current business model.
A&P’s current model is dependent on high volume and rapid inventory turnover in order to combat the low profit margins in the highly competitive market. Due to this situation, A&P is constantly on the edge of financial distress if high sales volume is not achievable or inventory turnover slows and costs are incurred that deplete profitability. When this happens and the company nears financial distress, A&P must generate cash by divesting assets. This is a weakness for A&P because they are cutting off future profits to cover current losses. In order to increase future profits, A&P has to turn around and open new stores in waves of expansion between divestitures.
Another weakness is the difference in exchange rates among A&P’s stores. Due to operations spanning the border of the U.S. and Canada, any fluctuation in the Canadian exchange rate has a huge impact on operational income. For example, an adverse change of 10% in the Canadian currency in 2002 would have a negative impact on net income of approximately $4.0 million (extracted from FY2002 10-K).
Mitch Goldstein, A&P’s CFO, states that “Bankruptcy filings are usually triggered by some sort of large obligation or debt maturity that a company can’t pay…” What are the two major types of corporate bankruptcy in the U.S.? (1 pt) Briefly, what happens in each? (2 pts)
The two major types of corporate bankruptcy in the U.S. are Chapter 7 and Chapter 11.
In Chapter 7, a company ceases all business and liquidates all assets. The money generated from liquidation is paid out to creditors and investors, starting with those who took the least amount of risk. For example, secured creditors receive priority and are paid back before any regular bondholders receive payment.
In Chapter 11, a company is not ceasing all business indefinitely, but instead is restructuring its unmanageable debt. The company’s assets and affairs are reorganized in order to give the company a fresh start and the opportunity for a financially sound future. Some reorganization plans do not involve a complete absolution of debt but obligates the company to repay some portion of debt over time.
Mitch Goldstein also states that “A&P has no large financial obligations until 2007.” Do you agree? [Hint: search A&P’s 10-K filed with the SEC] (2 pts)
Although it’s true that A&P does not have the majority of its loans and contractual obligations due until 2007, however, the company is still responsible for current expenses. These current expenses (i.e. salaries, suppliers, lease payments, etc.) are still financial obligations for A&P. In most cases, these current expenses have greater priority over long term contractual obligations in that the business cannot run without paying out routine...
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