(Bloomberg) -- Fairway Group Holdings Corp. has gone bankrupt for the second time since 2016, overwhelmed by its lingering debt load and cutthroat price competition in the grocery business.
The New York grocer filed for Chapter 11 bankruptcy early Thursday morning with an agreement to sell five stores and a distribution facility to Village Super Market Inc., owner of 30 ShopRite supermarkets. The deal, with a purchase price of about $70 million, will act as a so-called stalking-horse bid that sets a floor for other potential offers in an auction, Chief Executive Officer Abel Porter said in court papers.
Fairway will continue talking with other potential suitors and may agree to transactions for other stores, Porter said. Village Super Market was one of two stalking-horse bidders to emerge, Porter said, without naming the other.
Fairway enjoys iconic status in New York City, its traditional base, because of its wide selection of quality meats, cheeses and produce along with regular groceries at 14 stores. But it has struggled to bounce back from its 2016 bankruptcy -- the result of too much debt after a private equity buyout, and the advent of Whole Foods, Trader Joe’s and Fresh Direct.
Those rivals have nibbled away at Fairway’s dominance of gourmet and organic grocery sales while struggling to repay $227 million to lenders, including Goldman Sachs, KKR & Co. and Brigade Capital Management LP. Comparable store sales, a common measure of success, fell 5% in the 52 weeks ending Jan. 12.
On the plus side for potential buyers, Fairway occupies prime locations in Manhattan and Brooklyn and has a loyal following of shoppers, with long lines that sometimes wind back into the store and the aisles. The five stores Village Super Market has agreed to buy are in the Upper West Side, Upper East Side, Kips Bay, Chelsea and Harlem, court papers show.
The sale plan will keep open the more successful urban locations that employ hundreds of people, said Fairway’s investment banking adviser in an emailed statement.
“This transaction helps to secure those jobs and the legacy of this unique New York City foodie experience,” said Scott Moses, PJ Solomon’s head of investment banking for food retail and restaurants.
But Moody’s Investors Service has said Fairway’s stores are too concentrated in one region and too close to each other, and its small overall size makes it hard to compete with bigger supermarket rivals. As the national chains expanded, Fairway began its own migration, opening stores in the suburbs of New Jersey, Long Island and Connecticut, where it goes head-to-head with price-chopping megamarkets. It defied speculation by keeping most of those suburban stores open after its first bankruptcy.
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, Glickberg’s grandson Howie added groceries and specialty foods to the offerings, as well as expanding floor space.
It grew to employ more than 3,000 people, more than 80% of whom are unionized, court papers show. Those workers were paid an average $14.46 an hour last year. Their company-provided pension is underfunded by $67 million.
Fairway filed for Chapter 11 protection in 2016 after losing money in every quarter since its 2013 public offering. It emerged under control of its lenders, with debt reduced to about $84 million from almost $300 million. Fairway arranged another debt overhaul in 2018 with a five-year extension.
In court papers filed Thursday in Manhattan, Fairway listed liabilities of $289 million and $158.9 million in assets. The Chapter 11 bankruptcy allows the company to keep operating while it works out a recovery plan.
A group of the company’s lenders, including Goldman and Brigade, have agreed to loan Fairway $25 million to help fund the bankruptcy case, according to court papers.
Fairway put itself up for sale last year, when owners Brigade Capital Management LP and Goldman Sachs Group Inc. began soliciting bids. Blackstone Group Inc.’s GSO Capital Partners owned a large stake after Fairway left bankruptcy in 2016, but exited its position in 2018.
The case is In re Fairway Group Holdings Corp., 20-10161, U.S. Bankruptcy Court, Southern District of New York (Manhattan)
(Adds stores to be sold in sixth paragraph, PJ Sololmon comment beginning in seventh and pension liability in eleventh.)
--With assistance from Shannon D. Harrington, Christopher DeReza and Eliza Ronalds-Hannon.
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