David Robinson: For Tops Markets, a fresh start, but old challenges remain

November 9, 2018

By David Robinson | The Buffalo News

Tops Markets is on the verge of emerging from bankruptcy. But its challenges are far from over.

There’s no question that the debt-laden supermarket chain is coming out from bankruptcy in better financial shape than when it filed for a Chapter 11 restructuring back in February.

• It cut its interest payments, which topped $80 million a year in 2017, to an estimated $55 million annually.

• It closed 10 unprofitable stores and renegotiated leases at 45 others, saving the company about $27 million during the life of those leases.

• It reached important deals this summer with the Teamsters and the United Food and Commercial Workers unions to reduce big pension liabilities owed by the company – and also reduce workers’ retirement benefits.

• It reduced Tops’ debt, which exceeded $700 million at the time the company filed for bankruptcy, by $455 million.

• It eased the company’s devastating cash crunch, which should allow it to beef up staffing and start making store upgrades again. The bondholders who will own Tops as it comes out of bankruptcy have agreed to provide it with another $35 million in capital going forward. Combined with other borrowing capacity, Tops will be able to tap into $100 million to fund its operations and its growth plans in the coming years.

• It will have stability. The company’s current management, under CEO Frank Curci, will remain in place and share a 10 percent ownership stake in the business. Its top executives will share $3.6 million in bonus payments after the company emerges from bankruptcy.

“We are pleased to receive the court’s approval of our plan and are poised to emerge from this process an even stronger and more competitive company,” Curci said. “We have accomplished several key objectives, including significantly reducing our debt, creating a viable cost structure and efficiently optimizing our store portfolio.”

Tops said it expects to officially emerge from bankruptcy “shortly.”

But even that won’t leave Tops with a lot of wiggle room as it faces tremendous competition in the upstate New York grocery market from the likes of Wegmans, Walmart and deep discounters like Aldi and Save-A-Lot.

“There’s still some concerns about its viability,” said Burt Flickinger, the Buffalo native who is the managing director at New York City retail consultant Strategic Resource Group. “I’m hoping for the best, but still concerned.”

Here’s why:

• A restructured Tops still will have to fight tooth and nail against tough competitors for shoppers in an upstate grocery market that isn’t growing and is being further divided by the appearance of new players, like Whole Foods and Trader Joe’s.

Tops’ financial projections estimate that sales will rise by about 2 percent in 2020 and 3 percent in 2021, roughly enough to keep pace with inflation at its current level.

• What sets Tops apart in the Buffalo Niagara region is its reliance on weekly sales, coupons, sometimes complicated promotions along the lines of buy-two-get-three-free deals, and periodic contests like its annual Monopoly promotion. The success of that type of strategy depends on shoppers thinking they’re getting a good deal they can’t find elsewhere.

But with its competitors mostly shunning sales, using a simpler and more consistent everyday pricing strategy instead, it can take some calculating for Tops shoppers to figure out if a Tops deal really is a bargain.

“Their pricing is still too high. Their promotional plan is still too confusing,” Flickinger said.

• Tops still is on a financial tightrope. The company’s supermarket operations since the late-February bankruptcy filing are earning only a little more than a penny in profits for every $1 of sales – a razor-thin margin that doesn’t include the company’s interest payments. Add in those interest payments, and Tops would be losing money if its operating profits don’t improve.

Even with its reduced debt burden, Tops projects that its interest expenses will wipe out most virtually all of its operating profits over the next three years. Tops projects that it will lose around $13 million in 2019 and roughly break even in 2020 and 2021.

That’s because Tops’ reduced debt now carries much higher interest rates. With its shaky finances and the ripples caused by its bankruptcy filing, Tops is viewed by lenders as being extremely risky. So a term loan that Tops is taking out carries an interest rate that now approaches 11 percent and will go even higher if interest rates increase further. Its second lien notes have a 13 percent interest rate.

Those interest payments worry Frank DeRiso, the president of the United Food & Commercial Workers union Local One, which represents nearly 90 percent of Tops’ more than 12,000 workers.

“I thought that debt would be a little bit lower,” he said.

• To become more profitable, Tops will have to increase its sales – no easy task in a stagnant market with lots of competition.

“My concern is, the only way out of this would be to build volume,” DeRiso said.

• To do that, Flickinger said Tops needs to tap into its new-found liquidity to pump more money into its stores. Tops scrapped its program to upgrade selected stores as it ran out of cash before the bankruptcy filing. And its 159 remaining stores also have suffered from low staffing – especially in highly visible areas like its deli, seafood and meat counters and its produce and bakery sections – before and during the bankruptcy as the company scrambled to conserve its cash, Flickinger said.

“Tops has cut expenses too much at the store level,” Flickinger said.

But now that the company is out of bankruptcy and has $100 million in additional funding it can tap into, Flickinger said the company should be able to beef up its staffing and start investing in its stores once again.

“There’s definitely the opportunity for them to grow,” he said. “They’ve got good merchants. They’ve got good people in the stores. They’ve got the support of the unions.”