For the first time in 22 years, Tops Markets is back in the hands of local owners.
Six years to the day after Frank Curci returned to Buffalo to run the Tops supermarket chain for its new Wall Street owners, the supermarket chief executive officer and five other high-ranking managers officially took the keys to the business for themselves.
Curci and the other Tops managers completed their management buyout of the 159-store supermarket chain over the weekend, gaining ownership over a stable of grocery stores that more than doubled in size during the past six years but also accumulated a hefty debt load.
While the terms of the deal to acquire the Tops chain from the Wall Street investors, led by Morgan Stanley Global Private Equity, have not been disclosed, the bulk of the transaction involves the management group assuming Tops’ $650 million in debt, Curci said.
The Tops management group, which already had a very small ownership stake in the business, rolled that investment over into the new deal and also took on “a small amount” of money that the managers borrowed and personally guaranteed, Curci said Monday in his first public comments since the deal was first announced 2½ weeks ago.
“We’ve all put our financial lives at risk in this deal. We think it’s, obviously, a great risk, but we’ve put a fair amount of money back into the business, plus a small amount of borrowed debt that we’ve personally guaranteed,” he said.
The other members of the management group include Kevin Darrington, Tops chief operating officer; Rick Mills, its chief financial officer; John Persons, its senior vice president of operations; Jack Barrett, its senior vice president for human resources; and Lynne Burgess, its senior vice president and general counsel.
Despite the risk, Curci said he’s confident it will turn out to be a good deal.
“We’re passionate about the business and where we’re going to go in the future,” he said. “We think the groundwork that we’ve laid, the structure that we’ve put into place, is one that will continue to allow us to grow.”
But maybe not quite as fast as it did when it was owned by Morgan Stanley, with its deep pockets. With Curci running the chain under Morgan Stanley’s watch, Tops snapped up more than 50 stores from bankrupt grocer Penn Traffic Co. in 2009. It added 21 Grand Union stores in October 2012.
By the time the buying binge was done, Tops had more than doubled its store count, which jumped from 71 when Morgan Stanley took over to 159 today, and doubled its sales to more than $2.5 billion annually. It bulked up its presence in northern New York, northern Pennsylvania and western Vermont, where Tops management believed there was good money to be made running smaller grocery stores where it is the only game in town.
Curci said Tops currently is talking with a couple of independent grocers about potential acquisitions, and the new owners expect to keep looking for more deals, especially for smaller stores in smaller markets.
“I could see us adding another 20 percent to 30 percent to our store base over the next three to five years,” Curci said.
“Being in a small market with a small store is not a bad place to be,” Curci said. “We’ve found a real niche with that 20,000- to 30,000-square-foot store. If you have the right cost structure, you can do very well.”
It’s also a niche that sets it apart from its two biggest competitors in the Buffalo Niagara region: Walmart and Wegmans, both of which rely on the large superstore concept that Tops also uses at most of its suburban and urban stores in Western New York.
“Wegmans and Walmart don’t go into that space,” Curci said. “That leaves a niche for us.”
Curci said he is confident that Tops will have the financial resources to acquire more stores and reinvest in upgrades at its existing supermarkets, despite the debt load that was built up during Morgan Stanley’s tenure. The interest payments on that debt top $70 million a year.
“The supermarket business may have a small profit margin, but it’s very steady. People eat all the time,” Curci said.
“So it’s one that can handle debt. Our focus is on the long run. We’ll put that significant cash flow that we have back into the business so we can continue to grow and prosper,” he said. “We don’t see any changes to our capital program or our ability to do small acquisitions.”
Those capital improvements include a steady investment program that aims to upgrade each store every seven years or so. Tops also plans to continue adding gas stations at five to seven supermarkets each year, an initiative that goes hand-in-hand with its promotional pricing strategy, including its program to offer shoppers a 10-cent-per-gallon discount for every $100 in groceries they buy.
“It’s such a great combination: gas and groceries,” Curci said. “People really respond to that. They really like to be able to save on gas.”
Still, the debt remains a drag on the company’s bottom line. Tops reported a loss of $9.5 million during the first half of this year, down from a profit of $10 million during the first half of 2012, as its interest payments on its debt ate up all of its weakened operating profits, which dropped by 37 percent.
Tops’ sales grew by 6 percent during the 28-week period that ended in mid-July, rising to $1.34 billion from $1.27 billion as gasoline revenues increased by 1 percent and sales from inside the supermarket’s stores increased by 6 percent.
But all of that increase came from stores that Tops had brought on through its acquisition of 21 Grand Union supermarkets last October. Excluding those stores, sales from Tops Markets that have been operating under the Tops banner for at least a year fell by 0.5 percent.
Curci, however, said the focus of Tops’ new owners goes beyond the next quarter.
“I think you’ll see subtle changes over time that may not be good for the short run of the business but will be good for the long run,” Curci said. “When we announced this deal to our store management group, what I said was, ‘I hope you like us because we’re going to be here for a while.’”