Fairway Is So Crowded! How Can It Be in Bankruptcy?

January 24, 2020

By Matthew HaagDavid Yaffe-Bellany and Azi Paybarah

The aisles at Fairway are still populated with shoppers scooping European olives from the olive bar, spooning coffee beans from giant barrels and grabbing organic apples from piles of fresh produce.

So it came as a shock to the New York grocer’s legion of fiercely loyal shoppers on Thursday when Fairway announced it had filed for Chapter 11 bankruptcy and would sell some of its 14 stores to Village Super Market. Just the day before, Fairway had played down reports of a possible bankruptcy.

But Fairway, a beloved New York fixture since the 1930s, had been in financial trouble for years.

Over the past quarter century, Fairway rapidly and ambitiously expanded beyond its modest flagship store on the Upper West Side of Manhattan with visions of dominating the regional New York City market.

There were numerous missteps, though: costly leases at struggling stores; fierce competition from less expensive rivals like FreshDirect, Trader Joe’s and Amazon Fresh; and a takeover by private equity in 2007 that fueled complaints about rising prices and diminishing quality.

But more than anything, the challenges facing Fairway are part of a nationwide rupture in the supermarket industry, with small chains struggling to survive as delivery services gain popularity and Amazon continues to invest aggressively in groceries.

Over the last five years, a series of major chains across the country have filed for bankruptcy, including A&P, Winn-Dixie, Bi-Lo and Marsh Supermarkets, as well as Fairway. Unions representing grocery workers have seen a decline in membership, and private equity companies have loaded grocers up with debt.

Amazon’s purchase of Whole Foods and its investment in grocery delivery have also contributed to the churn, forcing regional and national chains to cut prices. In many cases, small groceries have been unable to keep up with the cuts, said Mark Cohen, the director of retail studies at Columbia Business School.

“Kroger and Walmart have the ability to manage these outside forces far more powerfully than the local guys who are just trying to make a living,” Mr. Cohen said.

Now, Fairway finds itself in a familiar position — filing for bankruptcy. Less than four years after it last filed a Chapter 11 restructuring plan, Fairway said on Thursday that it would sell five of its Manhattan stores and a distribution center in the Bronx to Village Super Market, which operates ShopRite, for $70 million.

The locations include its first store on Broadway and also those in Chelsea, Harlem, Kips Bay and the Upper West Side, which are among the company’s most successful stores. The deal was far from finalized, said one person briefed on the plans, and ShopRite could end up buying fewer stores.

Even after the sale, the stores would still carry the Fairway name, the person said. The remaining stores, including two in New Jersey and one in Connecticut, would shut down if no buyer emerges for them.
“Fairway will execute a court-supervised sale process to continue to negotiate for the sale of its remaining store locations,” said Rica Hermosura, a company spokeswoman. All of the stores will continue to operate as normal during the bankruptcy proceedings, she said.

But the company is in a dire state. As of November 2019, Fairway had lost around $65.8 million over the previous year, according to the bankruptcy filing. It carries more than $227 million in debt. And a sale had been in the works for months: Since July, the filing said, the financial firm PJ Solomon has been marketing the stores to more than 80 potential buyers.

The origins of Fairway’s struggles date to 2007, when the company sold an 80 percent stake to Sterling Investment Partners, a private equity firm based in Westport, Conn., for $150 million, including $71 million in debt on the company’s balance sheet. Under Sterling, the company expanded into new markets, opening stores in New Jersey, Connecticut and Long Island.

That expansion plan became more aggressive after 2013, when the company had an initial public offering of stock at $13 per share. At the time, Fairway executives extolled the company’s unmatched sales of $1,754 per square foot.

But Fairway’s success in New York — which was largely driven by its two stores on the Upper East Side and the Upper West Side, both high-income locations — could not be replicated elsewhere.

“This is another insidious example of private equity killing a business,” said Mr. Cohen, the retail expert at Columbia. “These guys caused them to open stores that maybe were completely ill-advised.”

The rapid growth brought new challenges for a company that had never managed a regional chain, which required a reliable roster of suppliers and complicated logistics to stock stores with perishables, the main revenue driver at Fairway, before they spoiled.

Gretchen Hartman, who lives in Brooklyn, said she noticed a drop in the quality of fresh produce at the Fairway store in Red Hook, where she had shopped every couple of weeks for years.

“The produce could be O.K. but things wilted very quickly,” said Ms. Hartman, 77. “It looked like it was sitting around for very long.”
The expansion failed to generate enough sales to pay down Fairway’s debt. Searching for new revenue, it slowly implemented a new pricing model: Long known for value, Fairway raised prices.

“That really was the cardinal sin,” said Steven Jenkins, who managed the cheese counter on the Upper West Side for nearly 40 years, adding that keeping prices low was essential. “We were heroes for it. That was our success.”

In 2016, Fairway filed for bankruptcy. But while that process wiped away some of the company’s debt, it did not result in any fundamental changes to the business, according to Leo Crowley, who leads the insolvency and restructuring practice at the law firm Pillsbury.

“There was no attempt to renegotiate any store leases, there was no attempt to renegotiate any union contracts, there was no attempt to critically evaluate the existing store footprint,” Mr. Crowley said. “The operation was left 100 percent as is.”

Burt P. Flickinger III, a consultant for retail chains, said the bankruptcy proceeding also saddled Fairway with exorbitant legal fees. Some lawyers were billing at rates over $1,000 per hour, according to documents from the 2016 bankruptcy filing.After the bankruptcy, Sterling Investment

Partners walked away from Fairway, and GSO Capital Partners, the credit arm of Blackstone, the private equity giant, had at one point a 45 percent stake in the company. (It said it ended its investment in 2018.)

M. William Macey Jr., managing partner and founder of Sterling Investment Partners, said in a statement that the private equity group invested in Fairway “to provide liquidity sought by the family owners, and to support their and management’s objective to expand Fairway’s platform.”

Sterling, he said, assisted Fairway “through a consensual reorganization supported by the company’s management, owners and creditors in which all employees, including union employees, were retained, all vendors were fully paid, all stores remained open and the company was left well capitalized under its new owners.”Sterling “had no involvement” with Fairway after its 2016 reorganization, Mr. Macey said.

Fairway also appointed a new chief executive, Abel Porter, who is known as a turnaround expert.