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RETAIL VIEW: Super supermarket investor nabs Pathmark and Wild Oats

Ron Burkle, who has made a fortune buying and selling supermarket stock as well as supermarkets themselves, has made major stock investments in Pathmark Stores and Wild Oats Markets in the past few months, leading to much speculations about the future of those operations.

A Southern Californian, Mr. Burkle came onto the grocery scene more than 20 years ago. In fact, he started earlier than that as a box boy at Stater Bros. Markets, a chain his father once ran. In 1986, he formed the investment group Yucaipa Cos. and has made supermarkets one of the prime targets of the privately owned group.

His first foray into the business of investing in supermarkets involved the eventual merger of Alpha Beta and Boys Markets. Later he made a name for himself by engineering the deal that saw Food 4 Less and Ralphs Grocery Co. be merged into Seattle-based Fred Meyer Co., which was then taken over by Kroger.

In the midst of that deal, which netted Yucaipa hundreds of millions of dollars, the company also purchased Dominick?s in Chicago and turned it around a few years later for another profit well into nine figures.

Southern California-based retail consultant Dick Spezzano of Spezzano Consulting has closely observed Mr. Burkle for those 20 years. "He buys underperforming or undervalued supermarkets, dresses them up and turns them around quickly," he said. "I would expect he is going to do the same thing here. He does not tend to stay around for the long term."

In Wild Oats, Mr. Spezzano sees a chain that may have some significant upside potential for Yucaipa. He said that consumers have shown an interest in the health food store category, and Whole Foods has certainly capitalized on it.

?Whole Foods has appealed to the cross-over shopper," said Mr. Spezzano. "They don?t do all their shopping there, but maybe come once or twice a month."

Mr. Spezzano, a former produce executive for Vons, said that Wild Oats has not been as successful, but Yucaipa and its team of consultants might be able to turn it around for a relatively quick gain.

In early March, Yucaipa announced that it purchased more than a 9 percent share in Wild Oats over the last few months. Mr. Burkle announced no plans to be intimately involved in the company, but that is his method of operation.

In a public filing with the Securities Exchange Commission, he said the Wild Oats purchase was for investment only. But in interviews, Mr. Burkle said that he had been in discussions with the Wild Oats board and was concerned about the recent quarterly losses. He indicated that his position about getting involved in management was subject to change.

The Pathmark Stores purchase was much more transparent. Yucaipa said that it would purchase more than a 40 percent share of the Carteret, NJ-based operation, which includes a management consultant contract of $3 million over five years.

Pathmark has not done well in recent years, and in fact it filed for bankruptcy protection in 2000. Stock analyst have said it is undercapitalized and could benefit greatly by renovating its existing 142 stores and opening new ones.

Pathmark stock saw a significant gain when the Yucaipa investment was announced. Many are speculating that Yucaipa will continue its buying spree, investing in a couple of other underperforming markets and then packaging them together as Mr. Burkle did with Ralphs, Hughes, Food 4 Less and Fred Meyer for the $8 billion Kroger purchase.

Among the supermarkets being widely speculated about are Weis Markets, a 157-store chain based in Sunbury, PA, and Kings Super Markets, another New Jersey-based retail chain which is an upscale operation owned by Marks & Spencer of the United Kingdom.

Mr. Spezzano speculated it is possible that Yucaipa will try to package Pathmark with some other smaller chains for purchase by one of the majors. He said that on one level it makes more sense than selling Pathmark by itself because it doesn?t fit the profile of the major chains.

By and large, Safeway, Kroger and Albertsons have grown through purchases of supermarkets in the suburbs. Pathmark, said Mr. Spezzano, has the vast majority of its stores in the inner cities " not an area where the big three have thrived.

Analysts say that Pathmark has been struggling to maintain sales and lost $3.6 million in its most recent quarter. The company said in December that it was exploring its options, including a sale.

Mr. Spezzano said that the chain has lost sales to a variety of competitors, ranging from Wal-Mart to dollar-type stores.

Publicly, Mr. Burkle and the Pathmark board have said the investment by Yucaipa will be used initially to upgrade existing stores. That strategy may help Pathmark grow sales over the long run, but analysts are not expecting that to be the goal of Yucaipa.

Others were wondering what Mr. Burkle sees that the average investor doesn?t. Almost the entire supermarket sector has shown significant losses over the last few years in stock prices and quarterly earnings.

Keith Patriquin, a financial analyst at Loomis Sayles & Co. in Boston, was quoted in one newspaper as saying: "Two major infusions are a sign that at least some people believe the supermarket industry is not really broken, and that with a few tweaks, it can be brought to life."

Others weren?t so sure. While Pathmark?s stock jumped more than 30 percent on the Yucaipa announcement, it was still trading below its Jan. 1 level.