In February 2017, Strack and Van Til Supermarkets (SVT) retained the authors’ firm to address liquidity challenges and performance issues. Little did anyone appreciate at the time the severity of the issues the grocery store chain faced or that this case would become such a complex and multifaceted bankruptcy.
With nearly $1 billion in annual revenue, SVT operated 36 large supermarkets in the Chicagoland and Northwest Indiana areas under the well-known Strack & Van Til, Ultra Foods, and Town & Country banners. Founded in 1930, SVT successfully operated as an independent family-owned business until 1998, when Central Grocers Inc. (CGI) purchased a majority equity interest. At the time of the acquisition, Central was a cooperative supplier to the Chicagoland area. Fueled in part by sales to SVT, Central grew in the years that followed to become the seventh-largest grocery co-op in the United States and the primary supplier to more than 550 member grocery stores in Illinois and Indiana.
The turnaround firm’s retention was initially limited to the subsidiary SVT, and the scope of the engagement was straightforward—to assist with liquidity, analyze/advise on store operations, and analyze/assist with any restructuring efforts. With scant cash flow and operational reporting, the initial general perception was that a few SVT stores were dragging down the collective performance of the subsidiary. The SVT stores had lost foot traffic following earlier restructuring efforts, and sales were suffering. Even the independent SVT management team subscribed to the general assessment, acknowledging that “the problem is with us, not the parent.”
The turnaround firm analyzed store performance and implemented cash flow reporting. From the start, red flags hinted at deeper operational issues that were soon found to be severe and to stem from decisions made in 2015.
SVT began as a local grocer and grew to become one of the largest and best-known supermarket chains in Northwest Indiana. As with many privately owned companies, growth outpaced management’s ability to invest in information technology and inventory control systems. Rather, SVT operated like a neighborhood grocery store and relied heavily on those closest to the customers—each store’s seasoned department managers (e.g., butchers, produce managers, etc.).
While seemingly old-fashioned compared to more recent practices, this personalized approach worked well—for a time. Managers walked store aisles daily and placed orders based on inventory turnover and customer preferences. However, the grocery business was becoming increasingly competitive, and revenues/margins began to erode.
In response, the SVT and Central boards decided that they had to make changes to stay competitive. In 2016, they hired a new CEO, who moved quickly and decisively to institute various restructuring initiatives aimed at managing inventory, optimizing pricing, and standardizing store formats. However, the pace of change and the implementation strategy had the opposite of the intended effect. As many know, adapting plans to changing circumstances and change management is as important as the actual initiatives, if not more so. SVT’s initial attempts at a restructuring were no different. Where stability had been expected, unforeseen and negative consequences followed instead.
The company’s hidden asset—its seasoned purchasing managers—left, thereby denying customers both the personalized experience and tailored local inventory selection they had come to expect from SVT stores. Store formats and layouts were altered, brands were changed, and prices were raised, resulting in customer confusion and frustration. In less competitive times, customers may have adapted. However, competition was intensifying, with larger and better capitalized competitors refreshing existing stores and opening new locations, while SVT continued to struggle.
The end result for SVT was that customer loyalty eroded, foot traffic declined, and cash flows dried up. Cash burn became so severe that a large number of stores began losing cash. The ramifications of this problem were not limited to the subsidiaries’ operations. The liquidity erosion increased to levels that Central had to step in and fund SVT’s losses by borrowing against its senior secured loan facility.
One of the many restructuring challenges became apparent within the first days of the turnaround firm’s assessment. Central’s viability largely depended upon SVT’s purchase volume, which created a Catch-22: the subsidiary needed to restructure to become healthy and profitable again, but doing so required SVT to shed underperforming stores, which would reduce Central’s sales volume and jeopardize its viability. Because of this inextricable linkage, the turnaround firm’s work quickly expanded, and by April 2017, it was appointed CRO of both Central and SVT.
Closing unprofitable stores was not a new concept for SVT. Management had targeted select stores closures before the turnaround firm’s retention. These closures, however, were limited and failed to address the core issues driving SVT’s liquidity problems. The CRO team evaluated each store’s performance and competitive positioning and ultimately assessed the company’s turnaround potential. It determined the impact that various store closure plans would have on both Central and SVT’s cash flows and Central’s warehousing operations.
Complicating the SVT turnaround was Central’s active sale effort. Started in 2015, the company’s process began to move forward decisively in December 2016 with the retention of an investment bank with deep industry ties. That firm’s rigorous sale process generated immediate interest by competitors focused on the distribution center, the co-op network with approximately $1 billion of annual sales, and the well-established $1 billion retail grocery subsidiary. However, no sustainable interest was expressed in preserving Central and its operations. The impact of member defections to competitors and declining shipment volume to SVT negated any buyer interest in purchasing Central in a going concern sale.
With little prospect for the company to continue operations, the most difficult decision of the case was made—to shut down and liquidate Central. Consisting of a 1 million-square-foot distribution center, more than $100 million of grocery inventory, and a nearly 400-unit leased and owned trucking fleet, Central’s operations were managed and conducted by 550 union and nonunion employees. The impact on the workforce, many of whom had 30- to 40-year tenures and had performed exceptionally well under the most difficult and uncertain of circumstances, was devastating. Many were denied payments of prepetition severance and accumulated vacation, and all lost their jobs.
The prospect of decoupling SVT from Central led to the next significant challenge—insuring an uninterrupted inventory supply to the remaining 20 stores. Even the most loyal of customers will shop elsewhere if shelves are bare. Faced with losing Central as a supplier, a plan to preserve the value of SVT was implemented, which involved:
A strategy aimed at preserving core assets while simultaneously winding down noncore operations was implemented. At the center of this process was contingency planning. Accordingly, discussions were initiated with supplier SuperValu early in the restructuring process. Yet even with a head start on these negotiations, SVT’s alternative supply agreement was difficult to secure. Internally, Central was not pleased that a competitor would supply its subsidiary. However, other issues and Central’s inability to guarantee inventory supply softened this objection.
The larger hurdles were convincing SuperValu to agree to commercially viable terms and ensuring that liquidity issues would not preclude their payment. In the end, through analytics, persistence, and more than a little finesse, the liquidity concern was addressed with a purchase deposit, and an agreement based on standard trade terms was struck.
When a bankruptcy is contemplated, benefits typically are weighed against costs, and an economically rational decision is made. For CGI, a bankruptcy filing became unavoidable for several reasons. First, the SVT closures resulted in large lease obligations and pension liabilitiesthat neither SVT nor Central could afford. Second, the buyers for SVT’s stores and Central’s assets required sale protections that only a Chapter 11 process could provide. Finally, Central was having its own liquidity crisis as its co-op members defected to competitors and sales and cash flow declined. Central and Strack carefully planned for a Chapter 11 filing in early May 2017. However, Central’s suppliers had different plans.
Many nationwide grocery suppliers suffered significant receivable losses in connection with the Associated Wholesalers Inc. (AWI) / White Rose bankruptcy in 2014. In response, the credit departments of many suppliers increased communication and coordination with other suppliers and heightened their monitoring of financially distressed customers. As a consequence, once rumors of distress and a possible bankruptcy involving Central began to circulate, the vendor community moved quickly to mitigate its exposure by limiting shipments and constricting trade terms, which further compounded Central’s liquidity crisis. Creditors then filed an involuntary Chapter 7 on May 3, 2017, in the Northern District of Illinois. Central and SVT countered by filing a voluntary Chapter 11 petition in U.S. Bankruptcy Court in Delaware.
Notwithstanding the competing bankruptcy filings and the subsequent venue disputes, the restructuring and winddown plans for Central were set and called for:
As with SVT’s restructuring, extensive contingency planning was part of the planning process for liquidating Central’s inventory and auctioning its rolling stock. The initial plan relied on management and the company’s sales team to liquidate inventory through existing channels. However, various issues, including member disputes, impeded this process. The turnaround team had started discussions with several liquidation managers as part of its contingency planning and immediately moved to convert to a third-party managed liquidation.
In June 2017, Central hired a firm to manage the sale and shipments of the remaining inventory and conduct auctions of the company’s rolling stock. Over a 10-week period, an expedited liquidation of fast expiring inventory was conducted. Complicating those efforts, Central’s more desirable inventory had previously been sold through the management efforts. As a consequence, the standard liquidation strategy of packaging “very good” with “not-so-good” inventory was not possible. Nonetheless, a surprisingly high recovery rate was achieved under the circumstances (more than 62 percent of cost), with more than 67 percent sold through new sales channels.
A second significant challenge was conducting two auctions for nearly 400 trailers used by Central to deliver product to customers, along with certain distribution center assets in one shuttered facility. Again, circumstances conspired against results. While more sophisticated companies budget to replace segments of a fleet as the equipment ages, Central sporadically purchased used trailers as they became available. The result was that its fleet was diverse and old, which depressed sale prices. Overall, though, the auction process attracted widespread interest and progressed flawlessly on the necessary timeline.
Central’s crown jewel was undoubtedly its distribution center in Joliet, Illinois. Completed in 2008, this modern facility boasted more than 1 million square feet of ambient and refrigerated storage. For grocery store suppliers or other businesses interested in acquiring a variable temperature distribution center in the Chicagoland area, a better facility could not be found. Unfortunately, the list of companies fitting this profile was limited. After an intensive marketing of the property and a Section 363 auction, SuperValu emerged as the ultimate buyer. Initially appraised at more than $100 million, in the end the property sold for only $61 million.
In May 2017, shortly after the Chapter 11 filing, the Albertsons grocery chain emerged as the winning stalking horse bidder to acquire all of the performing SVT stores. While Albertsons was conducting due diligence, another interested party, Indiana Grocery Group (IGG), showed interest in submitting a competing bid for the performing SVT stores. ICG was a newly formed entity consisting of an investment group comprised of former Strack & Van Til owners and other investors from Northwest Indiana.
Both parties faced challenges to completing a purchase. Albertsons faced a Federal Trade Commission (FTC) objection to select store acquisitions since its Jewel branded stores already had a significant area presence. Albertsons was also purportedly incapable or unwilling to expedite a sale closing; rather, it required a “rolling close” over 12 weeks. This was problematic because a delayed closing burdened the estate with continuing cash flow losses.
IGG’s primary issue was that it had limited capital with which to compete on purchase price for the assets. However, IGG was positioned to close quickly. In the end, the FTC’s objections curtailed Albertson’s appetite to bid. IGG’s ability to close quickly, sparing the estate further cash flow losses, contributed to a meaningful favorable purchase price adjustment, which allowed IGG to win the auction with a $96 million purchase price.
As mentioned previously, SVT had made limited investment in information technology systems. It relied on an antiquated inventory system that was only periodically updated with limited cycle counts. The IGG closing terms required a full inventory count for the 20 stores and one warehouse. While never done previously, this full inventory count would have to be performed flawlessly and over a single weekend, with all parties agreeing to the results.
Intensifying the scrutiny of this process, an accurate picture of the inventory situation wasn’t available, the lender’s collateral was being sold, and IGG’s capacity to address any inventory surprises was limited. While long hours followed, the turnaround firm planned and coordinated the inventory count. In the end, all parties were comfortable with the integrity of the counts, and all 20 stores were sold and transitioned to IGG to live another day
CGI’s demise and the pace of that downfall surprised many. Few could have credibly predicted in 2016 the critical loss of co-op members or the extreme liquidity pressures that would follow. The scope of operations, restructuring efforts, winddown, and sale processes made for a large and complicated bankruptcy with a long list of issues and challenges—a few of which are presented in this article. With the benefit of hindsight, however, there are lessons to be learned:
With the proliferation of covenant-lite loans and others with no real technical covenants, two trends are emerging. First, without covenant pressure, many management teams wait for top-line growth or capital markets to provide solutions to their financial problems. A self-help path is almost an afterthought. Second, once covenants are triggered, lenders have little flexibility to partner with management to fund a turnaround. In effect, the lack of covenants deny management both time and liquidity when they need it most.
This case’s success was the result of management and professionals working together to leverage industry and restructuring experience to chart options and contingencies. Early in the engagement, the team assessed both Central’s and SVT’s viability under several scenarios. Together with the boards and management teams, they then carefully laid out options and chose the best path to maximize value. Under different circumstances, Central and SVT may have navigated these headwinds alone. However, the funding of SVT’s losses required Central to exhaust all of its own liquidity, and financing or sale prospects were not an option.
The difficult Chapter 11 process that followed involved the stabilization and sale of 20 performing SVT stores, the closing of 16 underperforming SVT stores, the liquidation of Central’s wholesale business, and the sale of its distribution center, resulting in the preservation of more than 2,500 jobs.