Supermarkets General Holdings Corporation

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Supermarkets General Holdings Corporation

200 Milik Street
Carteret, New Jersey 07008
(201) 499-3000

Private Company
Employees: 52,000
Sales: $5.96 billion

Supermarkets General Corporation (SGC) operates the Pathmark supermarket chain, one of the top ten grocery stores in the United States. The company met with great success as one of the first grocery chains on the East Coast to open large discount stores offering a wide variety of groceries as well as non-food items.

After World War II, the Mom-and-Pop grocery stores that dotted neighborhoods throughout the United States were in danger of being run out of business by the proliferation of large grocery chains. Among the independent grocers were three men in New Jersey who were working in family-owned businesses.

Alex Aidekmans father had emigrated to the United States from Russia in the early 1900s and started a dairy farm. His sons, Alex, Ben and Sam, opened a roadside stand where they sold produce and dairy products. The stand soon made enough of a profit that Sam opened two of his own stores and Alex and Ben became partners in another one.

Herb Brody also came into the grocery business at a young age. After learning the ropes as an employee in several stores, Brody and a friend decided to open their own store in East Orange, New Jersey. Typical of grocery stores at the time, Brodys store carried groceries, produce, and dairy products (meat was usually only available at the local butcher shop). Brody later opened his own store in Scotch Plains.

Milt Perlmutters father owned a series of small neighborhood stores. The Perlmutters were successful entrepreneurs, and Milt was able to attend the Wharton School of Finance. Upon graduation, he enlisted in the army. After World War II, Perlmutter spent a year working for the Colgate Palmolive Company and then rejoined the family business.

About the same time, a grocery distributor named Bob Casson mentioned to Sam Aidekman that some of his other grocer-customers were also concerned about their ability to compete with the large grocery chains. A group of eight men, including Alex Aidekman, Herb Brody, and Milt Perlmutter, eventually met and decided to form a merchandising cooperative to pool their resources and create more buying power for their individual stores. The Wakefern Cooperative was established in 1947.

With this cooperative these neighborhood grocery stores were able to stock many of the same items as the chains at competitive prices. Their next challenge was to find a way to advertise. Newspaper advertising was too expensive for an independent grocer. In 1951, some members of Wakefern proposed that they also pool resources to buy advertising space. In order to form an advertising cooperative, they decided that the stores would have to share a common name, an idea that did not appeal to all members of the group, who were unwilling to let the group decide what to stock or tell them how to run their businesses.

A small group of ambitious owners decided to take the risk, however, and began to operate their stores under the name of Shop-Rite. Herb Brody was elected president of Shop-Rite, and Alex Aidekman served as president of Wakefern. At weekly meetings, owners decided which items would be sale-priced for a given period and placed ads in area newspapers. The ads themselves were created by an ambitious advertising representative named Zal Venet. Primitive by todays slick advertising standards, these ads were nonetheless striking at the time, with cartoon-like drawings of elephants charging and firecrackers exploding. Venet also created Shop-Rites Why Pay More? slogan.

The requirements for buying into the Shop-Rite franchise were relatively simple. A store had to be a member of the Wakefern cooperative, have the necessary financial resources, display the Shop-Rite emblem, be located outside the market area of another Shop-Rite store, and sell the advertised items at the indicated prices.

With both a wholesale and a retail cooperative in operation, the Shop-Rite stores began to expand quickly. Through Wakeferns wholesale operation, the Shop-Rite stores were able to stock new frozen items, such as ice cream. Store owners installed refrigerated cases, and the cooperative developed new packaging to promote the products as Shop-Rites house brand. In addition, the stores began to stock meat.

The first major test of the new venture came in 1956, when the supermarket chains began to offer trading stamps that could be exchanged for gifts ranging from dishes to badminton sets to lawnmowers. Although some members of Wakefern wanted to join the stamp program, the general consensus was that the stamps would eventually cause food prices to rise. As a line of defense against the stamps, fifty to a hundred items were advertised at outrageously low prices each week. Business at the Shop-Rite stores slumped for several weeks and store owners in favor of offering stamps continued to push for the program. But none of the stores left the cooperative, and within a few months customers began to return.

By holding firm during this time, the cooperative added to its strength and was able to step up expansion. Within the stores, customer service was given high priority, and non-food items were added to the inventory. Mailer programs also allowed each store to have its own specials.

Soon members began to search for larger quarters. The goal was to build large supermarkets, but this was prohibitively expensive. Again, members pooled resources for greater strength. Small groups within Shop-Rite banded together and began to lease the buildings of failed supermarkets in the New Jersey area. One of these small groups, formed in 1956 by Aidekman, Brody, and Perlmutter, was the Supermarkets Operating Company (SOC). During the next ten years, SOC expanded into the northern New Jersey and middle Atlantic markets by acquiring failed stores, remodeling them, and adding the Shop-Rite name. SOC also branched into nonfood retail items and in 1963 acquired Crown Drugs.

The Shop-Rite cooperative continued to be in the forefront of grocery store innovations. In the early 1960s, Shop-Rite stores were the first to offer late night and Sunday hours, drugstores within the stores, fresh fish counters, liquor departments, and bag stuffer coupons. Aggressive merchandising techniques such as watermelon contests, carnival games, pony rides, and 10¢ coupons toward purchases in any Shop-Rite stores, together with Shop-Rites low prices, brought large crowds and lent an air of excitement to the stores.

In 1966, Supermarkets Operating Company and General Supermarkets, another small group within the Wakefern and Shop-Rite cooperatives whose owners included other original members of Wakefern, merged to become Supermarkets General Corporation (SGC). The resulting corporation held 71 supermarkets, ten drug stores, six gas stations, a wholesale bakery, and a discount department store. By 1968, SGC had acquired Genungs, a department store chain with 22 locations; Rickel Home Centers; Hochschild, Kohn Department Stores; and Value House, a catalog and showroom operation in Maine.

The final step to independence came in 1968, when Supermarkets General broke away from Wakefern and Shop-Rite and renamed its grocery stores Pathmark, a name that is also used today on its house brands and nonfood merchandise. Milton Perlmutter was elected president of Pathmark; Herb Brody and Alex Aidekman were elected vice chairman and chairman, respectively, of the parent company, SGC. The company began to build warehouses near its stores and built a $70 million distribution center.

Such rapid growth and diversification was costly. During its first year, Pathmarks earnings remained at the same level as the previous year. Ultimately, the company had to sell some of its divisions and seek financial backing in the private sector. Value House was sold in 1978, and the assets of the Howland-Steinback (originally Genungs)Hochschild division were eventually sold in 1986.

Although Pathmark was now a large chain, the organization encouraged individual stores to tune into the tastes and preferences of their neighborhoods. The company began holding weekly in-house seminars to keep clerks abreast of specials and changes in the food industry. It was not unusual to see corporate officers wandering around the aisles, collecting ideas from employees and customers.

Pathmark began using open dating in the early 1970s and was one of the first food chains to adopt unit pricing. Pathmark maintained its position at the forefront of the industry as it continued to discount more deeply than other large retailers and began to concentrate on building giant outlets in suburban shopping centers. Also, in 1971, SGC spearheaded the movement to challenge statutes in New York, New Jersey, and Connecticut that prohibited the advertisement of prescription drug prices.

When the 1973 oil crisis and recession caused food prices to skyrocket, Pathmark met the problem head-on by airing television commercials for a food facts hot line. Callers could get information on which items were in short supply and which prices were likely to rise in the future. Initiated in 1973, the hot line generated a great deal of positive media attention for Pathmark. Pathmark also announced a price freeze that February on 600 non-commodity private label items for 60 days.

By 1975, SGCs phenomenal growth had begun to slow as competitors adopted the deep discount methods Pathmark originated. After almost 20 years, the high-volume, low-margin merchandising techniques that had made Aidekman, Brody, and Perlmutter giants in the food industry were no longer unique. In addition, analysts pointed out that SGCs general merchandise store acquisitions were not as structurally sound as the Pathmark organization.

SGC did continue to grow, however, and in 1977, Pathmark opened the first of its super centersenormous discount grocery stores that also offered a large line of health and beauty aids, small appliances, and video-tape rentals. Largely through the expansion and renovation of existing units, Pathmark was operating a remarkable 117 super centers, accounting for 88% of the companys sales, by the end of 1977.

Beginning in the late 1970s, top management positions began to change. When Milton Perlmutter died in 1978, Louis Lowenstein, an attorney specializing in acquisitions and a member of the board of directors and the executive committee of SGC since 1966, became president of the corporation, but he resigned after only 17 months. According to rumors within SGC and industry speculation, Brody and Aidekman had not been comfortable with Lowensteins fast-paced style. Brody in particular had not favored Pathmarks recent acquisitions. In any event, Brody was elected to replace Lowenstein.

Despite these administrative upheavals, Pathmark continued to operate with its same enormous volume. Stores were computerized and the distribution system became increasingly sophisticated. The company also continued its policy of community involvement. In 1977, SGC entered into an agreement with the Bedford-Stuyvesant Restoration Corporation to build a supermarket in Brooklyns inner city. Modeled on a similar project in Chicago, financing was provided by the Restoration Corporation and employee training, management, supervision, and stock was supplied by Supermarkets General.

In 1982, Pathmark was the tenth-largest supermarket in the United States and Leonard Lieberman was elected president of Supermarkets General Corporation. Lieberman, an attorney who had been with the organization since Shop-Rite was created, had been the chairman of Pathmark. Many, in fact, had been surprised when Lowenstein had been chosen over Lieberman as president in 1978. Under him, SGC remained committed to the consumer and the community in a vastly different world than the one Aidekman, Brody, and Perlmutter had known.

As, Lieberman explained to Business Week, in 1987, There arent as many good sites today, and there is a proliferation of local regulations. In the old days, all you needed was a zoning variance. Now you have to consider the sociological infrastructure and have an environmental impact study. It is a fact of life. For some New York City stores, you need a five-year gestation period just to get through the regulations.

But Pathmark also grew by acquisition. It bought Purity Supreme, Inc. in 1984, and Angelos Supermarkets, Inc. in 1986. SGC had agreed to acquire the grocery chains owned by Pantry Pride in 1982, but when Pantry Pride stockholders filed a complaint the agreement was canceled.

A strike by butchers and delicatessen workers in 1984 temporarily slowed Pathmarks sales, but it was settled within a month. Although details of the pact were not released to the press, union leaders reported that SGC compensated for a cut in Sunday pay by increasing benefits. More serious problems developed later that year when a federal grand jury indicted SGC and three other supermarket chains on charges of conspiring to limit the amounts paid on coupons for grocery and meat products. By agreeing to halt the awarding of double values on cents-off coupons, the grand jury said, the four firms had violated the Sherman Antitrust Act. Eventually, all four grocery chains pleaded no contest and were ordered to pay a combined fine of $830,000.

That the organization has now become the kind of giant conglomerate it once challenged is evident in the controversy that surrounded the opening of Pathmarks Pike Slip store in Manhattan. Although local groups had been pushing for a modern supermarket in the neighborhood, independent store owners in the area campaigned against the store. SGCs traditional community-oriented approach worked to its advantage. According to a company spokesperson, the company typically works with local consumer groups who are expressing the need for a major supermarket and merchants who are afraid that their businesses are in jeopardy. We explain to the consumers how important it is that their voices be heard. Community boards, particularly in New York, are almost always made up of local merchants who do not want a large supermarket like Pathmark to move into the neighborhood. When the customers become involved, it helps to ease the tension and makes it easier for us to open a store in the area. SGC officials also make presentations to the local merchants groups to demonstrate how a large establishment acts as an anchor and actually draws traffic to the area.

Another factor that could affect Pathmarks future growth is the lack of entry-level workers, a problem that it shares with others in the food industry. The solutions some companies have found so far include paying higher wages to beginning part-timers, hiring workers older and younger than federal guidelines allow, and keeping stores undermanned. It is a problem with no easy solution, and labor cost and availability will certainly be a consideration in further plans for growth.

In 1987 the SGC successfully fought off a takeover bid by Dart Group Corporation, which offered $1.6 billion after buying 5% of SGCs stock. The hostile bid was averted by a management-led leveraged buyout, and SGC is now a privately owned company. During this period, Leiberman and Aidekman retired. Kenneth Peskin, who had headed the Pathmark division after Leiberman and has an MBA rather than a family history of corner grocery stores, became CEO of SGC. How these changes will affect Pathmarks corporate policies remains to be seen.

Principal Subsidiaries:

Pathmark Supermarkets; Purity Supreme Supermarkets; Heartland Warehouse Stores; Angelos Supermarkets; Rickel Home Centers.