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Fairway CEO Says Grocer Can Handle Whole Foods and Trader Joe's

Fairway CEO Says Grocer Can Handle Whole Foods and Trader Joe's

(Bloomberg) -- It’s been more than two years since Fairway Markets emerged from bankruptcy, and Chief Executive Officer Abel Porter insists those troubles are over. Credit raters aren’t so sure, and are watching to see if the chain can regain its edge in New York City’s hyper-competitive grocery business.

“We’ve moved dramatically quickly to be able to compete,” Porter said in an interview on Nov. 16. “We’re not burning cash, we’re accumulating cash.”

Fairway Group Holdings Co. enjoys iconic status with some New Yorkers, but its small scale puts it at a disadvantage with newer rivals like Whole Foods and Trader Joe’s that compete for upscale shoppers. It recently completed a debt overhaul and five-year extension, which Moody’s Investors Service regards as distressed deal and perhaps only a temporary respite; another restructuring is “highly likely” within 18 months, Moody’s said.

“Without the capital to effectively conduct promotional and marketing activities in a highly competitive market, Fairway’s top-line growth will prove elusive, and cash flows, liquidity and profitability will remain strained,” Moody’s analyst Mickey Chadha wrote in a Nov. 7 note.

Fairway CEO Says Grocer Can Handle Whole Foods and Trader Joe's

Owners include Brigade Capital Management LP and Goldman Sachs Group Inc. Blackstone Group LP’s GSO Capital Partners, which owned a large stake after Fairway left bankruptcy in 2016, exited its position in August. Paula Chirhart, a Blackstone spokeswoman, and representatives at Brigade and Goldman Sachs declined to comment.

Fairway has 15 stores and 4 wine shops located in and around New York, Connecticut and New Jersey. Nathan Glickberg founded Fairway’s forerunner in 1933 as a fruit and vegetable stand before the business settled into a storefront on Manhattan’s Upper West Side, according to the chain’s website. In the 1970s, Nathan’s grandson Howie added groceries and specialty foods to the offerings, as well as expanding floor space.

Since taking over Fairway in 2017, Porter has focused on keeping customers inside his stores by upgrading the shopping experience and promoting variety at Fairway, where the aisles include dozens of bins of coffee beans, fresh-ground almond butter and eclectic produce such as mamey fruits.

Debt Level

Porter, 60, says the company is accumulating cash and is in “no risk of running out of capital,” enabling it to keep up with the industry. Fairway owes more than $300 million, according to data compiled by Bloomberg, a debt level Porter said the company will be able to service.

Fairway has a well-known brand and it operates in an attractive niche, according to Moody’s. But the chain “is facing an extremely promotional business environment, and with competitive openings in its markets expected to continue, the ability to improve profitability at a level sufficient to support the current capital structure looks highly suspect,” Moody’s said in a Nov. 6 note.

By Moody’s reckoning, the debt load is more than 10 times Ebitda, or earnings before interest, taxes, depreciation and amortization. Over the next year, Moody’s sees less than $1 of Ebit coming in for every dollar of interest going out.

Small Moves

“That’s a narrative, but that is not what is really happening,” Porter said.

For now, the company is working with what it’s got. Instead of opening new stores, Porter said he’s focused on optimizing current square footage, using small capital expenditures to add services like noodle stations and poke bars.

He’s opening a cooking school in Manhattan at the Broadway and 74th street location. A wider selection in the produce department, which amounts to 20 percent of Fairway’s business, has generated about 7 percent more revenue in same-store sales, Porter said.

The company has also taken on Amazon’s Whole Foods by ramping up its online presence, partnering with grocery delivery services Instacart, Shipt and Google Express to get groceries to people’s doorsteps. Fairway’s e-commerce is growing at a 50 percent clip, Porter said.

Fairway generated 2017 revenue of about $685 million, according to Moody’s. Porter said revenue in 2018 was “dramatically better” and Fairway is on track to have positive Ebitda. Even with the stiff competition, Porter said same-store sales increases are running at about 2 percent.

Fairway’s ability to keep reinventing portions of the stores to get customers to visit depends on how much cash it has available, said Noel Hebert, director of credit research for Bloomberg Intelligence.

“If you don’t have the money, it’s kind of hard to re-do the bread section or the meat section,” Hebert said.

--With assistance from Lauren Coleman-Lochner and Heather Perlberg.

To contact the reporter on this story: Misyrlena Egkolfopoulou in New York at megkolfopoul@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net, ;Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Sally Bakewell

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