The Grand Union Company History

Address:

201 Willowbrook Boulevard
Wayne, New Jersey 07470-0966
U.S.A.

Telephone: (973) 890-6000
Fax: (973) 890-6671

Public Company
Incorporated: 1916 as Jones Brothers Tea Co.
Employees: 15,000
Sales: $2.27 billion (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: GUCO
NAIC: 44511 Supermarkets & Other Grocery Stores; 44512 Convenience Stores

Company History:

The Grand Union Company is a food retailer operating 222 Grand Union supermarkets in six states, including 123 in New York, 40 in Vermont, 41 in New Jersey, 13 in Connecticut, three in New Hampshire, and two in Pennsylvania. The stores, each of which is designed to meet local needs, range in size from 7,000 to 64,000 square feet and feature a wide variety of brand-name and private label groceries. Some units include cafes, pharmacies, and alcoholic beverage departments. The company also has begun experimenting with alternative formats in selected locations, including Hot Dot Foods Market, a limited-assortment store. Grand Union struggled mightily through the 1990s, losing money every year and twice entering into bankruptcy protection.

Early History

Cyrus, Frank, and Charles Jones founded what was to become Grand Union in 1872. They called the business the Jones Brothers Tea Co., starting with one store in Scranton, Pennsylvania, where the shelves were stocked with coffee, tea, spices, baking powder, and flavoring extracts. The brothers expanded the business steadily, branching out with new stores in eastern Pennsylvania, Michigan, and New York. By the time it built its headquarters and warehouse in Brooklyn, New York, the company was known as the Grand Union Tea Co.

In 1912 Grand Union was a 200-outlet chain store with operations across the country. In addition to its business establishments, the company supported a small army of 5,000 door-to-door salesmen and delivered goods in horse-drawn wagons. The brothers incorporated the Jones Brothers Tea Co. in 1916.

Grand Union used its financial strength through the 1920s to acquire other food businesses, including Progressive Grocery Stores, the Union Pacific Tea Co., and Glenwood stores. After merging with the Oneida County Creameries Co. in 1928, the Jones brothers reincorporated under the Grand Union name.

During the 1930s Grand Union grew to be one of the country's most thriving food chains. In 1931 the company had 708 small stores and $35 million in sales.

The next decade saw the development of the "supermarket" concept. The idea was to house a range of groceries, including meat, dairy products, and inedible packaged goods, under one roof. When Lansing P. Shield took over as Grand Union president in the early 1940s, he embraced the supermarket format and plunged the company forward into a new era of food marketing. Grand Union was one of the first companies to utilize the format.

Shield helped evolve the supermarket concept by demanding that the spacious supermarkets be designed carefully so as not to overwhelm customers used to smaller shops. Shield suggested breaking down the open spaces by building more walls and dispersing special product displays throughout the aisles. By the mid-1950s, Grand Union operated about half the number of stores it did in the 1930s, but the stores turned out nearly seven times the volume of sales. By then the company had outgrown its Brooklyn headquarters. It opened a new facility in Elmwood Park, New Jersey, in a red brick tower that was later to become a community landmark.

Launched New Formats, from 1956 Through the Early 1970s

When grocery stores became involved in the discounting business, Grand Union was again one of the first in the food business to welcome the idea. The first Grand Union general merchandise discount store, called Grand Way, opened in 1956 in Keansburg, New Jersey. After the Keansburg store proved a success, the company opened another in Albany, New York. By 1962 Grand Union was operating 21 discount stores. To keep the stores running smoothly, Chairman Thomas Butler hired Joseph L. Eckhouse, formerly the head of the Gimbel Bros. department store in New York, to oversee them. Eckhouse envisioned the Grand Way stores as a place to buy quality goods and fashionable clothing at lower prices than department stores. Eckhouse died, however, before his vision could be fully realized.

Grand Union, which reached $1 billion in sales in 1968, continued to open additional Grand Way stores and enter new retail businesses, including convenience food stores, trading stamps, and catalog showrooms for discounted general merchandise. As competitive pressures increased in the early 1970s, Grand Union entered another phase of supermarketing: the so-called superstore. These shopping emporiums sought to provide customers with myriad products of every kind at one locale. A Grand Union superstore, for example, offered consumer items in such diverse areas as prescription drugs, auto parts, clothing, shoes, and household gadgets, as well as the usual mix of groceries. By 1973 Grand Union was operating ten such superstores. Although these new businesses were not failures, they did not contribute enough to the company's bottom line to justify their continued existence. By the early 1970s they had begun to lose their luster and Grand Union began divesting itself of many of them.

Taken Over by Cavenham in 1973

In 1973 Grand Union stock was trading at less than half of book value and the company seemed to be stagnating. The company's status attracted the interest of Cavenham Ltd., a British food conglomerate, which made a $19-per-share tender offer for control of the company. The move by Cavenham, which was owned by financier James Goldsmith, marked the first significant foreign investment in U.S. food retailing. When the $64 million deal was finalized in December 1973, Cavenham quickly appointed Englishman James Wood as president. Wood wasted little time in shaking up what was then the ninth largest supermarket chain in the country.

Wood sparked the divestment of Grand Union's nonfood businesses, reorganized its management structure, and established a new image for the store based on low prices. Wood oversaw a Grand Union that had 534 supermarkets in New York, New Jersey, Connecticut, Massachusetts, Vermont, New Hampshire, Pennsylvania, Maryland, Virginia, West Virginia, Florida, Puerto Rico, and the U.S. Virgin Islands. The company's nonfood operations consisted of 23 Grand Way stores, 18 Grand Catalog discount stores, 18 E-Z shop convenience stores, a food equipment subsidiary, and the Stop & Save Trading Stamp division. After only a year Cavenham stripped Grand Union of 31 supermarkets, pulled back its trading stamp operations, and closed nine Grand Way outlets. Grand Union's performance for fiscal year 1974 was $2.3 million in net income, down from $8.4 million the year before. Sales, however, climbed for the year from $1.4 billion in fiscal 1973 to $1.5 billion in fiscal 1974. The following year Grand Union sold its E-Z shop division and closed five of its catalog showrooms.

The divestitures did have their price. In 1975 Wood stated that phasing out trading stamps completely would result in a $5.75 million charge against earnings. In addition, the elimination of the nine Grand Way stores cost the company a $10 million pretax write-off. By 1978, however, Grand Union was ready to expand again. The company started opening new stores and acquired several regional supermarket chains in the Southeast and Southwest, including Colonial Stores in 1978. Three years later Grand Union merged with J. Weingarten Inc., a Texas supermarket chain, which became an affiliate of the company. By 1982 the chain boasted 856 stores with outlets as far west as Texas, as far north as Canada, and as far south as Florida. The expansion was a gamble that eventually cost Grand Union more than it bargained for. In fiscal 1982 the company reported a record sales level of $4.1 billion, twice as much as what was recorded just three years ago. The drain on earnings proved to be drastic, however, with a drop of 30 percent to $24 million. "We screwed it up," said James Goldsmith in an article for Business Week.

After that calamitous financial performance, Grand Union again entered a phase of heavy consolidation. The biggest drop in the number of stores came in fiscal 1982, when it closed 150 stores. By November 1982 another 62 units were gone, leaving the company with just 671 supermarkets. The revamped organization was centered in New England and New York, with a few sites in Virginia, Georgia, and the Carolinas.

By ridding itself of money-draining nonfood operations and trimming the number of its outlets, Grand Union showed a renewed devotion to food marketing. In 1979 it introduced its Food Market prototype, a 45,000-square-foot supermarket with specialty departments featuring gourmet foods such as stuffed artichokes, specially blended coffees and teas, baked goods, and imported cheese. The company planned to spend the bulk of its $700 million capital improvement budget over six years to convert most of its units to the Food Market prototype.

Food Markets were a hit with shoppers. Imported wines and ready-to-cook dinners such as fish and poultry were finding steady buyers, but the conversion project proved to be very expensive. The average cost of turning a store into a Food Market was $1.5 million. By 1982 a total of 70 stores had been converted at a cost of $100 million. The project contributed to another poor performance for the fiscal year ended April 1983. The store reported operating losses of $20 million, although it posted a $226,000 bottom-line profit. As Goldsmith put it in the Business Week profile, "We managed to turn a dull but fairly profitable chain into an exciting loss-maker." Some rivals blamed Grand Union for not doing enough research before converting a store to a Food Market. The converted sites that did well were located in areas with higher incomes rather than working class neighborhoods.

Other supermarkets were selling gourmet foods, but they covered the cost with profitable general merchandise departments, a business Grand Union abandoned after Cavenham Ltd. bought the company. Nonetheless, Goldsmith hoped that the expensive luxury food items eventually would make the store some money.

Ever on the lookout to maintain and improve upon the slim profit margins of the supermarket industry, Grand Union introduced another marketing innovation in 1983 to help increase its business. To help convince shoppers they were getting the lowest prices at Grand Union, the store began publishing a free booklet listing prices on some 9,000 products. The company hoped that shoppers would use the booklet if they found themselves in a competitor's store; with the booklet, they could then determine that Grand Union's prices were cheaper. If a shopper found an item at a cheaper price, Grand Union promised to match it. Despite the expense of the new program, which cost about $80 million to create and promote, some stores reported an increase in sales as high as 25 percent.

Meanwhile, the company was still struggling in its efforts to return to profitability. In the fiscal year ended in April 1984, it posted a $115.2 million loss due to store closings concentrated in Florida, Washington, D.C., and Texas, a strike at its New Jersey stores, and the start-up costs of the new pricing program. Sales for the year dropped two percent from the previous year's $3.52 billion to $3.44 billion.

Taken Private in 1989

All efforts to put the supermarket giant back on track were not enough to keep Goldsmith from finally deciding to sell it. In 1989 Grand Union was bought for $1.2 billion by an investor group headed by Salomon Brothers Inc. and Miller Tabak Hirsch & Company, two New York investment banking firms. At the time, Grand Union was the 11th largest supermarket chain in the country with $2.7 billion in sales, 306 Grand Union and Big Star stores, and 21,000 employees. The two buyout partners each received a 40 percent interest in the company, with the remaining 20 percent held by senior management. The buyout of Grand Union added another $325 million to the company's $300 million in high-yield debt and another $545 million in bank loans.

Under its new owners, Grand Union set another course to improve its business. This meant offering more items in bulk and larger sizes and more competitive pricing through discounting, price freezes, and buy-one, get-one-free offers. In 1991 the company introduced its own line of environmentally sound paper products.

Three years after the 1989 deal Grand Union's ownership shifted again when Salomon Brothers sold its interest in the company to Miller Tabak Hirsch & Company's affiliate, GAC Holdings L.P., which owned 41 percent of the GND Holdings Corp., the parent company of Grand Union. In fiscal 1991 Grand Union's numbers were still disappointing, with a loss of $53.8 million on $2.92 billion in sales. Grand Union was sold again in 1992 when a group led by Gary Hirsch, a principal of Miller Tabak, bought GND Holdings and formed a new holding company, Grand Union Holdings Corp.

Filed for Chapter 11 Protection in 1995 and 1998

The crushing load of debt from the buyouts, coupled with heightened competition in the food retailing sector, left Grand Union to flounder during the entire decade of the 1990s. In pure numerical terms the nadir came in 1993 when the company lost $313 million. That year Grand Union sold 48 of its 51 Big Star stores to A&P for $20-$25 million in cash; soon thereafter, Grand Union was reduced to only one format--the Grand Union stores, with 251 units carrying that banner in the Northeast. In November 1994 the company announced that it would sell or close up to 25 of its underperforming units. At the same time the company was negotiating with its creditors about restructuring its $2.1 billion in debt. In January 1995 Grand Union filed for Chapter 11 bankruptcy protection in a prepackaged arrangement with its creditors. The company emerged in June of that year having reworked its capital structure and reduced its debt by $600 million. Hirsch was replaced as chairman of the company by Roger E. Strangeland, who had retired as chairman and CEO of the Vons Companies, Incorporated--an Arcadia, California-based food retailer--in May 1995. Joseph J. McCaig remained president and CEO of Grand Union, which emerged from Chapter 11 as a public company trading on the NASDAQ, with 231 stores in six northeastern states--New York, Vermont, New Jersey, Connecticut, New Hampshire, and Pennsylvania.

The company was hardly out of the woods yet. It continued to lose money every year and, with its balance sheet still overleveraged, was unable to expend the resources necessary to upgrade its many outdated stores and increase their size. Restructurings followed. In January 1996 Grand Union announced a plan to consolidate its administrative, support, and grocery marketing operations at the corporate headquarters in Wayne, New Jersey. In late 1996 the company received the first portion of a $100 million cash infusion from the sale of preferred stock to an investment group that included affiliates of Shamrock Capital Advisors, the Roy E. Disney family, and the General Electric Pension Fund. This investment group thereby gained majority control over Grand Union. Proceeds from the sale were earmarked to partially fund a $240 million, three-year capital spending plan that aimed to renovate, expand, replace, or add a total of 78 units. Just as this plan was being launched a series of executive departures rocked the company. By March 1997 CFO Kenneth Baum, COO William Louttit, and Executive Vice-President of Operations Darrell Stine had all resigned. Two months later McCaig resigned as president and CEO, citing philosophical differences with the board over the company's direction. McCaig was temporarily replaced by Strangeland; in August 1997 J. Wayne Harris, a former A&P and Kroger Company executive, was named chairman and CEO. Then in October of that year Gary Philbin joined Grand Union as president and chief merchandising officer, having previously worked as an executive at Cub Foods.

Meanwhile, in June 1997 Grand Union announced yet another restructuring, this one involving a reduction in operating divisions from four to two, a restructuring of the merchandising departments, and the elimination of about 80 jobs, mainly at company headquarters. Nonetheless, the company was still struggling to compete against its main rivals, Giant Foods and Stop & Shop, both of which operated stores that were newer and larger than those of Grand Union. The company neared bankruptcy again in August 1997 but was able to secure $250 million in credit that allowed it to stay out of default. In September 1997 the company's stock began trading on the NASDAQ SmallCap Market, after the price fell below $4.

By early 1998 the company remained weighed down by approximately $1 billion in debt. Sales were on the decline, and for the fiscal year ending in March 1998 Grand Union posted a net loss of $304 million. In February 1998 Grand Union defaulted on a loan payment and began negotiations with its creditors on another prepackaged Chapter 11 bankruptcy plan. In May of that year the company's stock was delisted from the NASDAQ SmallCap and began trading over the counter. Grand Union entered Chapter 11 protection in June 1998, emerging two months later having reduced its debt by $600 million. In October 1998 the company regained its listing on the NASDAQ national market. Grand Union then embarked on a program to open new stores and modernize its existing stores, adopting a more contemporary look. It also intended to experiment with alternative formats geared to specific marketing areas, such as the limited-assortment format christened Hot Dot Foods Market, the first of which opened in January 1999 in Winooski, Vermont. Whether these moves marked the beginning of Grand Union's resurrection remained to be seen.

Principal Subsidiaries: Grand Union Stores of New Hampshire, Inc.; Grand Union Stores, Inc., of Vermont; Merchandising Services, Inc.; Specialty Merchandising Services, Inc.

The Grand Union Company History

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