Red Apple Group, Inc. History

Address:

825 11th Avenue
New York, New York 10019
U.S.A.

Telephone: (212) 956-5770
Fax: (212) 265-6736

Private Company
Incorporated: 1970
Employees: 4,200
Sales: $2.2 billion (1997 est.)
SICs: 2911 Petroleum Refining; 4522 Air Transport, Nonscheduled; 5411 Grocery Stores; 5499 Miscellaneous Food Stores; 5541 Gasoline Service Stations; 6719 Offices of Holding Companies, Not Elsewhere Classified

Company History:

Under the names Gristede's, Sloan's, and Red Apple, Red Apple Group, Inc., wholly owned by John A. Catsimatidis, dominated supermarket shopping in New York City's borough of Manhattan during the 1990s. Starting with a single grocery store he opened in 1971, Catsimatidis developed a business empire that by the 1990s had estimated annual sales exceeding $2 billion. Through another Catsimatidis holding company, United Refining Co., this empire also owned a chain of gasoline stations and convenience-food stores in New York, Pennsylvania, and Ohio. With its concentration on high-turnover, low-margin retail trade, Red Apple's sales volume was more impressive than its profits; nevertheless, its net income was estimated at $38 million in fiscal 1997.

Supermarket Empire, 1971-87

The son of a waiter who did not earn more than $100 a week, John A. Catsimatidis was reared in Manhattan's West Harlem neighborhood and managed his cousin's grocery store while attending New York University, getting by, he recalled, on three hours of sleep a night. He was earning $30,000 a year in 1970 when, still short a few credits from his degree in electrical engineering, he decided he could make his fortune in the food business and dropped out of school. He bought a small store on the Upper West Side for $1,500, named it Red Apple, and opened for business in 1971 with $10,000 borrowed from his father.

By the end of his first year Catsimatidis was grossing $1.2 million. He stayed open seven days a week, offered free delivery, cashed lots of checks, and passed on manufacturers' discounts to customers. "I was the most hated guy in supermarkets," Catsimatidis later said. "I delivered free. I cashed checks free. I opened Sundays. Why? I paid my checks Friday, and I had to earn the dollars on Sunday to make the checks good Monday." Soon a bigger store became available, a few blocks south and on, rather than off, Broadway. It cost Catsimatidis $300,000 to open the 5,500-square-foot store, but five years later it was still the most profitable one in his operation, with $4 million in annual sales. By then, in late 1976, Red Apple was a chain of 12 Manhattan supermarkets that emphasized low prices, offering about 100 specials a week. Profits in fiscal 1976 (ended June 1, 1976) came to $800,000.

Red Apple had, by the summer of 1981, grown into a 27-unit chain operating in the Bronx as well as Manhattan, with annual sales of about $40 million. Sales came to $110 million in fiscal 1985. Queried by Progressive Grocer in 1986 for the secret of Red Apple's success, Catsimatidis answered, "I keep my prices high and my overhead low." When the reporter asked if it was not true that all prices tended to be high in Manhattan, he replied, "Mine are higher." Catsimatidis went on to say that he kept his overhead low by contracting out as little work as possible, using his own electricians and carpenters and his own refrigeration company.

In 1986 Red Apple acquired 36 Gristede Brothers supermarkets and 11 affiliated Charles & Co. specialty-food emporiums from the Southland Corp. for an estimated $50 million. This chain, with units throughout the metropolitan area, had annual sales of $112 million but had been unprofitable since 1983. Red Apple's purchase made it the biggest supermarket chain in New York City.

Gristede Brothers was founded in 1891 by Charles and Diedrich Gristede, recent German immigrants who opened their first grocery store at East 42nd Street and Second Avenue in Manhattan. The business concentrated on the carriage trade, entered Westchester County in 1920 and Connecticut in 1926, opened a Manhattan wine and liquor store in 1933, and had 141 stores by the time Charles Gristede died in 1948. When Southland bought the company in 1968, Gristede was also operating on Long Island and had 115 stores, including two Charles & Co. units and seven liquor stores. It then shrunk radically as rental costs skyrocketed and competition from gourmet shops, specialty stores, and other supermarkets increased. Red Apple itself had closed its four Bronx stores in 1985 to concentrate on Manhattan. The company also had pulled out of Queens, where it had opened stores at the end of the 1970s.

The Red Apple and Gristede chains remained distinct. Concentrated on the more affluent Upper East Side, Gristede had more gourmet items than predominantly Upper West Side Red Apple and profit margins that traditionally ran higher. Charles & Co. was described by Catsimatidis as "a gourmet 7-Eleven store." Red Apple had completed 14 remodels by the fall of 1987, including adding in-store delicatessens, bakeries, salad bars, upscale cheese, prime-meat, and seafood sections, and hot takeout foods.

At the same time as the Gristede purchase, Red Apple was acquiring 39 Pantry Pride supermarkets in southern Florida and one in the Bahamas for $55 million from Pantry Pride Inc., a subsidiary of Ronald O. Perleman's McAndrew & Forbes Holdings Inc. The operation had once been much bigger, with 440 East Coast supermarkets. Also in 1986, Red Apple acquired six Grand Union supermarkets in Florida and the Virgin Islands. These 45 units accounted for about $340 million of Red Apple's $640 million in supermarket sales during fiscal 1987. The Florida and Caribbean units were much bigger than the ones in crowded, densely populated New York, ranging from 25,000 to 45,000 square feet in size. The acquisitions also included more than 20 shopping centers in which the supermarkets were located.

Interviewed by Supermarket News in 1987, a business associate of Catsimatidis explained the latter's aggressive acquisition strategy in these words: "In building Red Apple's business in New York, and through the acquisition of New York real estate, John discovered that the supermarket business is a cash-flow business looking for an investment. With appreciation from his various real-estate holdings, he saw fit to leverage his money in an industry he understands, the supermarket business. ... By being in the right place at the right time, with institutional financing available, Red Apple Cos. was able to grow and take a quantum leap in the supermarket industry." Red Apple Cos.'s real estate portfolio, which included more than 25 percent of its supermarket properties in New York, was worth about $200 million in 1986.

Supermarket Acquisitions and Divestitures, 1991-97

In early 1993 Florida Supermarkets, a Red Apple unit, was operating 35 supermarkets, including 28 former Pantry Pride stores, which were now using the name Woolley's, taken after the seven-store Woolley's chain was acquired in 1991. Red Apple had 89 percent equity in these stores, and Fleming Cos., a food wholesaler, had the rest. Fleming signed an agreement to buy Red Apple's stake in 1993, but when the deal collapsed, sued to recover $25 million it was owed. Red Apple wound up turning the company over to Fleming to settle the debts and the court case, according to one account. According to another source, Fleming purchased the chain for $41.6 million after Catsimatidis went to court to challenge Fleming's right to back out of the deal.

The dispute reemerged in 1996, with a lawsuit by Fleming and a countersuit by Red Apple. Red Apple said it retained renewal options on the leases of nine stores involved in the ownership transfer. Fleming's suit, Red Apple contended, had interfered with its own ability to complete a $33 million transaction with a third party for the sale of 13 parcels of real estate, including the nine leases.

Between July 1991 and September 1992 Red Apple acquired 21 of the 32 stores operated by rival Sloan's Supermarkets. This privately owned chain dated from 1956, when Max Sloan opened his first Manhattan supermarket. By 1973 Sloan's had 25 stores, all in Manhattan and most of them on the West Side, with combined annual sales of $42 million. Some of the stores acquired by Red Apple kept the Sloan's name, while others took the Gristede's name. The remaining 11 stores were sold to Designcraft Inc., a shell company owned by Catsimatidis that subsequently went public under the name Sloan's Supermarkets Inc. Catsimatidis owned 27 percent of this company's shares in December 1993, with an option to purchase an additional ten percent. These 11 stores were being operated by Red Apple under a management contract.

The public-private division of Sloan's appeared to be an attempt to avoid antitrust problems for Red Apple. Under whatever name, Red Apple-owned supermarkets were serving 37 percent of Manhattan's food shoppers on a regular basis in 1994, according to a survey. But in June 1994 the Federal Trade Commission (FTC) described the company's Sloan's acquisitions as anticompetitive. Catsimaditis agreed in November 1994 to divest his Red Apple Group of six stores within 12 months of the final FTC order. Red Apple had divested itself of only one of the stores by early 1997, however, when Catsimatidis and three of his firms agreed to pay a $600,000 penalty for failing to comply with the order. Also in November 1994, Red Apple Group announced it would sell 17 to 20 of its supermarkets--none belonging to Sloan's Supermarkets Inc.&mdashø Rite Aid, the nation's largest drugstore chain. A total of 15 had been sold to Rite Aid by March 1996.

In October 1997 shareholders of Sloan's Supermarkets approved the purchase of 29 supermarkets--19 Gristede's and ten Sloan's--and a produce distribution center from Catsimatidis in a $40 million stock deal that increased his stake in the public company from 32 percent to more than 90 percent. Following this acquisition, the company was renamed Gristede's Sloan's, Inc. Prior to this purchase the public Sloan's had 13 supermarkets in Manhattan and one in Brooklyn. It also opened a Brooklyn health and beauty care store in Brooklyn. The company had sales of $51.8 million and net income of $1.2 million in the fiscal year ended February 28, 1997.

Other Red Apple Holdings: 1986-97

By 1987 the supermarket business represented only 30 percent of a business empire that was racking up $2 billion a year in annual sales. Catsimatidis also owned commercial real estate in New Jersey as well as New York and Florida, aviation enterprises, and, most important of all in terms of sales volume, United Refining Co. He had acquired this troubled company, which owned gasoline refineries in Pennsylvania and Alabama, from bankrupt Coral Petroleum in 1986 and had rescued it from bankruptcy in 1988 with $110 million in financing arranged by J.P. Morgan & Co. United Refining also ran more than 300 Kwik Fill gas stations in Pennsylvania, New York, and Ohio.

Under Red Apple, the Kwik Fill stations, following a national trend, became a full-service gas and convenience-food chain along the lines of 7-Eleven. Some of them operated under the name Red Apple Food Mart, which gained 26 more outlets in upstate New York in 1990, when United Refining acquired a chain of similar Stop-N-Go convenience stores. United Refining's 1989 sales were believed to be in excess of $850 million.

In 1990 a division of Red Apple pleaded guilty to charges that, for well over a year following the Red Apple takeover, telephone lines at United Refining headquarters in Warren, Pennsylvania had been illegally tapped. The firm paid a $1 million fine to settle the case. Catsimatidis denied any knowledge of the wiretaps, but there was speculation he wanted to check allegations that certain United executives were making side deals with oil suppliers and customers. The United convenience-store chain was up to about 350 units in early 1996. Sales came to $871.3 million in the fiscal year ended July 31, 1997. The company lost $2.3 million that year, chiefly because of high costs in purchasing crude oil for refining.

Another Red Apple holding, in 1986, was World Jet, a company based in Hartford, Connecticut that was leasing a fleet of 40 jets and other aircraft to corporations and that had annual revenues of about $25 million. This company subsequently was renamed United Air Fleet. Other Red Apple holdings, in 1987, included Eastern Aviation Group and Zion Foods, a Miami purveyor of kosher food products formerly operated as a division of Pantry Pride. Catsimaditis also held a substantial interest in Designcraft, which at the time was a jewelry maker with annual sales of $75 million. He had earlier owned a majority interest in Capitol Air Inc., a low-priced shuttle airline that suspended operations in 1984 after suffering a severe cash squeeze.

Designcraft sold its operating divisions in 1991 and became the holding company that acquired Sloan's Supermarkets. Capitol Air Express Inc., a Virginia-based airline owned by Catsimaditis, was making charter flights from the Northeast to Miami and the Caribbean in 1993. It lost $1.8 million on operating revenue of $6.3 million that year. This company was still in existence in 1997.

Red Apple Group, Inc. History

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