Penn Traffic Company

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Penn Traffic Company

1200 State Fair Blvd.
P. O. Box 4737
Syracuse, New York 13221-4737
U.S.A.
(315) 453-7284
Fax: (315) 461-2474

Public Company
Incorporated: 1854
Employees: 24,200
Sales: $3.33 billion
Stock Exchanges: New York
SICs: 5141 Groceries, General Line; 5411 Grocery Stores; 5461 Retail Bakeries

Penn Traffic Company is one of the leading food retailers in the eastern United States. In early 1994 it had 232 supermarkets in operation throughout Pennsylvania, Ohio, upstate New York, and northern West Virginia under the names “Big Bear” and “Big Bear Plus,” “Quality Markets,” “Riverside Markets,” “Bi-Lo Foods,” “P & C Foods,” and “Insalaco’s.” Penn Traffic also operates a wholesale food-distribution business, a discount general-merchandise retail chain, a full-service dairy business in Johnstown, Pennsylvania, and bakery businesses in Syracuse, New York, and Columbus, Ohio.

Until the 1960s Penn Traffic was a general-merchandise department store located in the gritty industrial town of Johnstown, Pennsylvania. Founded in 1854, the store was reincorporated on March 9, 1903, as the successor to Penn Traffic Co., Ltd. The store’s headquarters were in Philadelphia, and it was a public company listed on the Philadelphia Stock Exchange. For the fiscal year ending January 31, 1919, sales came to more than $4 million, with posted net earnings of $340,575; ten years later sales had dropped to $3.4 million and net earnings reached only $65,452.

The Great Depression of the 1930s posed the same problems for Penn Traffic as other businesses. In fiscal 1933 the company recorded a loss of $74,670 on earnings of $2 million and did not pay a dividend for the only year since 1910. The next year it rebounded, earning a small profit on even lower earnings, presumably because of stringent economies, and recorded a profit for most of the rest of the decade. In fiscal 1937, however, it listed $184,253 in losses due to the 1936 Johnstown flood.

By fiscal 1949 net sales had reached $9 million and net income $544,283. Thereafter Penn Traffic reported little growth, despite a post-World War II expansion in the national economy; in 1962, net sales crested only slightly above $10.5 million and net income was only $280,963. In 1962, however, Penn Traffic acquired Supervalue Corp.—operators of the ten-store Riverside Markets supermarket chain based in Du Bois, Pennsylvania—for about $2.4 million worth of stock. Penn Traffic, which moved its headquarters to Johnstown the same year, saw its sales immediately triple, although the gain in profit was slight.

In 1968 Penn Traffic acquired the Johnstown Sanitary Dairy and, the following year, the Cresson, Pennsylvania-based Penn Cress Ice Cream. In 1967 it opened a cafeteria in Altoona, Pennsylvania, and in 1968 a second department store in nearby State College. By the end of the decade Penn Traffic was operating 18 food supermarkets, a chain of 11 Dairy Dell combination restaurant/dairy stores, three combination department store/supermarket units in western Pennsylvania, and the two department stores. The central warehouse at Du Bois was enlarged to 182,000 square feet in 1969. In fiscal 1968 the company earned $1,316, 234 on net sales of nearly $63.4 million, a profit margin that would prompt it to enter the wholesaling field in 1970.

By late 1971 Penn Traffic was well on its way toward its ninth year in a row of higher sales and earnings. The Riverside Markets chain was growing rapidly, with each location targeted for at least $2 million in sales annually, and the company’s initial venture outside Pennsylvania was scheduled for Brook-field, Ohio. Supermarkets accounted for 64 percent of sales in 1970, department stores for 23 percent, and the dairy for about 11 percent. A $3.5-million project was expected to double capacity by mid-1972 at the dairy, which was producing orange juice and a number of other fruit drinks in addition to milk and milk products. Penn Traffic was listed on the American Stock Exchange, with about 19 percent of the common shares held by directors.

In 1979 Penn Traffic acquired Quality Markets, Inc., a chain of 21 supermarkets based in Jamestown, New York, for about $4.5 million. This chain was added to Penn Traffic’s 46 supermarkets operating under the Riverside or Bi-Lo names, all of which were self-service and many of which had on-premises bakeries and delicatessen departments. By this time Penn Traffic also operated a third department store as well as the three store units in combination with Riverside supermarkets. Net sales in fiscal 1980 reached $375.6 million, and net income nearly $6.5 million.

Penn Traffic left the department-store business in 1982, when it sold its six department stores and two women’s specialty-store leases to Crown America Corp., owners of Hess Department Stores, for about $7.3 million in cash and properties. In that year the 50 Riverside and six Bi-Lo stores added Topeo bulk produce to complement approximately 50 private, Riverside-label dry-grocery and snack items; the 20 Quality stores were already marketing Topeo products. Penn Traffic’s president anticipated a 15 percent annual return on average shareholders’ equity and an earnings-per-share growth of 12.5 percent each year.

In fiscal 1983 Penn Traffic opened 17 stores, including 13 acquired from A & P’s old Altoona division. However, three unprofitable Youngstown, Ohio, supermarkets were shut down in June 1984; shortly afterwards the company’s management acknowledged that profitability had declined during the last six months, a development blamed on high labor costs. In its annual report Penn Traffic declared the intention to concentrate more on wholesaling, which had grown to account for 15 percent of its business. Before the year was out Penn Traffic had closed 19 stores, 17 of which became independent retailers serviced by the company.

By May 1985, Penn Traffic was operating four superstores and had three more in the planning stages in competition with lower-cost operators and depot stores. It also started supplying cigarettes and health and beauty aids to its 23-unit Quality Market chain. The following year it purchased the 15-store food division of Johnstown’s Glosser Brothers, which was to be operated as a subsidiary supplied by Penn Traffic’s Du Bois warehouse.

Miller, Tabak, Hirsch & Co., a New York City investment group, began a takeover bid for Penn Traffic in 1986, raising its ownership in the company to 7.2 percent of the common stock by midyear. At first management attempted to foil the bid, even soliciting support from the United Food and Commercial Workers Union. Early in 1987, however, Penn Traffic agreed to an offer by an affiliate of Miller, Tabak of $31.60 a share for the 4.2 million shares outstanding. After this leveraged buyout, Penn Traffic went public in a stock and bond offering that raised a significant amount of capital, with Miller, Tabak affiliate retaining 53-percent ownership. Gary Hirsch, chairman of Penn Traffic, controlled 22 percent of the stock in late 1994.

In August 1988 Penn Traffic had purchased a majority interest in P & C Foods Inc., the largest food distributor in central and upstate New York, for $210.6 million. The rest of P & C’s stock and equity was bought in 1991 for another $43.8 million, and in 1992 Penn Traffic moved its headquarters from Johnstown to Syracuse, New York. With the P & C acquisition, the number of Penn Traffic retail stores rose to 156. It also supplied 66 franchises and 263 independent stores. Investment analysts questioned, however, the company’s longstanding policy of allowing its acquisitions to operate essentially as separate companies, thereby missing opportunities for economies of scale.

In early 1989 Penn Traffic acquired Big Bear Inc., a supermarket chain based in Columbus, Ohio, for about $390 million. And in April of that year Grand Union Co., was sold for $1.2 billion to a group consisting of Penn Traffic, Miller, Tabak, and certain other investors, including Grand Union management. This deal was described by Supermarket News as making Penn Traffic the seventh-largest food retailer in the United States, with Grand Union’s 306 stores in New York, New Jersey, Vermont, New Hampshire, Massachusetts, Connecticut, and Georgia bringing Penn Traffic’s total to 561. Subsequently, however, Penn Traffic’s stake in Grand Union was revealed to be only 24.3 percent of the common stock, and by mid-1993 that share had declined to 17.8 percent. In 1993 P & C was supplying bakery products to Grand Union, which supplied commissary products to P & C, one of a few joint buying activities.

These transactions, and especially the leveraged buyout, left Penn Traffic more than $800 million in debt. Moreover, in mid-1992 it had reported losses in 13 of the last 15 quarters and at year end in each of the past four years. By July 1994 long-term debt had climbed to more than $1.1 billion. No dividends had been paid since the company went public in 1987, and none were expected in the near future. Yet investors remained bullish on the stock, bidding it to $30 a share in 1991 and as high as $36 in 1992, compared to a share price of little more than $15 in 1988. One analyst calculated the true value of the stock in 1991 as $74 a share. In 1993 Penn Traffic stock went as high as $45.75 a share, and it traded in about the same range in 1994.

The company climbed into the black in fiscal 1993, earning $3.2 million. Net income rose to $8 million in fiscal 1994, excluding an extraordinary charge of more than $25.8 million due to early retirement of debt. At the end of 1994, Penn Traffic stock began trading on the New York Stock Exchange, and in fiscal 1995 net income of $13.2 million was recorded.

Penn Traffic gained 27 more supermarkets in early 1993 by acquiring Peter J. Schmitt Co., a Buffalo, New York, chain operating under Chapter 11 bankruptcy law protection, for $38 million. Later that year Penn Traffic paid $41 million for In-salaco Markets Inc., a 12-store supermarket chain based in Pittston, Pennsylvania.

Penn Traffic’s plans, as stated by Hirsch in 1993, were to spend $600 million over five years to open new stores and remodel both existing stores and the company’s distribution centers. During the five years through 1993-94, Penn Traffic opened or remodeled 65 percent of its retail supermarket space, believing that these larger, more modern facilities would enable it to offer a broader variety of specialty departments.

Hirsch also said the company was expanding its private-label program, standardizing its distribution systems, and consolidating and standardizing data processing. A $23-million, 220,000-square-foot perishables distribution center opened in Syracuse in 1993, and work began that year on tripling the 50,000-square-foot perishables facility in Du Bois. Fifteen pharmacies were added to new or existing stores in 1992, with an additional 19 planned for 1993.

Penn Traffic began consolidating its procurement and distribution of nonfood items for all its divisions and Grand Union in August 1993. A Big Bear facility in Columbus, Ohio, was used for general merchandise and a Grand Union in Montgomery, New York, for health- and beauty-care items. This action was expected to substantially increase direct purchases from manufacturers and consequently reduce procurement costs. Both Penn Traffic and Grand Union were expected to increase nonfood space in their stores. In late 1994 Penn Traffic was building a satellite-driven communications network in Syracuse to link its store base. And about 15 new, replacement, or expanded stores in the range of 60,000 to 100,000 square feet in space were to open by January 1996.

Penn Traffic’s scope widened again with the announcement on September 30, 1994, that it was buying 45 Acme Markets stores in Pennsylvania and New York from the American Stores Co. for $95.7 million. This brought Penn Traffic’s total to 285 retail and wholesale food stores in early 1995.

As of January 1994—prior to the acquisition of the Acme stores—Penn Traffic was operating 77 Big Bear and Big Bear Plus stores, 61 P & C Foods stores, 45 Quality Markets, 23 Bi-Lo Foods stores, and 13 Insalaco’s. Its wholesale food-distribution business, the sixth largest in the United States in 1990, served 133 licensed franchises and 119 independent operators. Penn Traffic also operated a discount general-merchandise business with 15 stores, the Johnstown “Sani-Dairy” and bakeries in Syracuse and Columbus under the names “Penny Curtiss” and “Big Bear Bakeries,” respectively.

Located primarily in towns and small cities, Penn Traffic’s stores often faced little competition. There was no supermarket competition against the stores that garnered more than 20 percent of Penn Traffic’s revenues, with the exception of Kroger Co., which competed against the Big Bear stores that represented about 30 percent of company revenues. The smaller stores were generally in areas of low population density. Larger or more affluent areas were better served by full-service supermarkets of up to 64,000 square feet, containing specialty departments such as bakeries, delicatessens, and departments containing fresh seafood and flowers. Penn Traffic’s “Plus” format had store sizes ranging from 70,000 to 140,000 square feet and included an expanded variety of nonfood merchandise. Some supermarkets had video-rental departments and banking services provided by automated teller machines.

About 35 percent of Penn Traffic’s stores were open 24 hours a day for at least five days per week. Most of the supermarkets were in shopping centers. About 91 percent of the stores used product-scanning systems and proprietary software for inventory and shrinkage controls at both delivery and checkout points. The average store had 37,945 square feet of space and annual sales of $11.8 million.

Almost all of Penn Traffic’s licensed independent operators used the company as their primary wholesaler and receiving advertising, accounting, merchandising, consulting, and retail counseling services from Penn Traffic. 73 were leasing or subleasing supermarket buildings and much of the equipment used in the supermarkets from Penn Traffic. The company’s wholesale operations accounted for $462 million, or 14.5 percent of total revenues, in fiscal 1994.

Johnstown’s Sani-Dairy was one of the largest dairies in Pennsylvania, producing more than 900 dairy and dairy-related products. Penny Curtiss Bakery was primarily supplying P & C stores and affiliated accounts with private-label fresh and frozen bakery products, but was also supplying certain bakery products to Riverside, Quality Markets, and Grand Union stores. Big Bear Bakeries was primarily supplying Big Bear stores with private-label fresh and frozen bakery products. Penn Traffic also operated 15 Harts discount general-merchandise stores averaging 66,000 square feet. 14 were in central and southern Ohio, and the remainder in northern West Virginia.

The principal Pennsylvania distribution facilities were company-owned, 390,000-square-foot and 254,000-square-foot centers in Du Bois. Three other Pennsylvania warehouses were being leased. The main New York distribution facilities were company-owned, 498,000-square-foot and 217,000-square-foot centers in Syracuse, with another 349,000-square-foot distribution center located in Jamestown. The main Ohio distribution facility was a leased 484,000-square-foot center in Columbus. Penn Traffic also owned a 208,000-square-foot center in Columbus and leased two Columbus warehouses with a total of 399,000 square feet of space. The company had a fleet of 326 tractors, 378 refrigerated trailers, and 566 dry trailers.