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Fresh & Easy files bankruptcy; PACA claimants appear to be in good shape

Fresh & Easy Neighborhood Markets Inc. has filed for Chapter 11 bankruptcy protection as part of its plans to sell its stores to the Yucaipa Cos., with the first-day motions seemingly approving sufficient funds to cover PACA Trust produce creditors.

Elise O'Brien, an attorney with Rynn & Janowsky, a Newport Beach, CA-based law firm specializing in PACA law, said that sufficient funds were allocated as a result of those motions to pay also PACA Trust claims as well as current produce debts.

While filings indicate produce claims are in the neighborhood of $12 million, O'Brien said $15 million has been allocated to pay debts that are current while another $5 million has been set aside for older PACA claims. Those motions were heard and approved on Oct. 1.

O'Brien said Rynn & Janowsky was assembling a group of creditors but anticipated no problems in produce creditors getting paid for both past claims and new debts incurred at the bankruptcy proceeding continues. She said produce creditors have indicated that Fresh & Easy was current on the vast percentage of its produce invoices.

In fact, Fresh & Easy spokesperson Brendan Wonnacott downplayed the bankruptcy proceeding as "simply the next step in the restructuring process to sell the business to The Yucaipa Companies and will have no impact on our customers shopping experience."

In the court papers, Fresh & Easy declared assets between $100 million and $500 million, with debt of $500 million to $1 billion. The company currently operates 200 stores in California, Arizona and Nevada, though the previously announced deal with Yucapia indicates the buyer is planning to purchase only 150 of the locations.

Most are speculating that the bankruptcy filing will make it easier for the transfer of ownership, as it will allow the original company the opportunity to renegotiate store leases before Yucaipa takes ownership. Some of the leases are said to be upwards of eight years or longer, and are not attractive to the new owner.

Longtime retailer Bruce Peterson of Peterson Insights in Bentonville, AR, said the opportunity to eliminate some of the stores and the longer leases makes perfect sense for the new owner. He said location is one of the most important factors in a successful retail operation, and "many of the Fresh & Easy locations were on the 'B' or 'C' level. They weren't prime locations."

Dick Spezzano of Spezzano Consulting Service, who has been on the Southern California retail scene for several decades, agreed.

He said when Fresh & Easy first launched, it grew quickly and did have to settle for less-than-ideal locations. But over its five-year life, he said location selection improved and all reports are that the newer locations are performing at a much greater volume than the older stores.

Spezzano expects Yucaipa to cherry pick the best stores and relaunch the chain under a new name.

There has been speculation that Yucaipa will use the Wild Oats banner, as that company, which is a holding company, reportedly owns the "Wild Oats" brand.

But Spezzano added that it is not going to be easy to right the ship as the small store size (typically 10,000 square feet) is a size that requires a specific merchandising model.

On the other hand, he said Yucaipa will have access to all of the Fresh & Easy sales data, which will help it develop a good strategy moving forward.

Peterson was also not at all certain that a new owner will be able to turn around the losses that plagued Fresh & Easy's parent company, England-based Tesco.

"Tesco is good, and you'd think they would be able to figure it out but they didn't," said Peterson.

He added that the store banner didn't deliver on its implied promise as the offerings were not especially "fresh" nor "easy."

Peterson said Yucaipa will have the advantage of bringing in local retail experts that know the marketplace better than the Europe-based previous owners. He added that retailing in the United States and Europe is very different, indicating that lack of knowledge about the U.S. marketplace might have been Tesco's downfall.

The bankruptcy filing also came with the announcement that the assets of the company will be auctioned off in early November. While it appears that Yucaipa will be the winning bidder, the sale now must go through the bankruptcy proceeding and, in theory, another bidder could surface.

In fact, several companies were supposedly interested in Fresh & Easy when Tesco first indicated it was eager to sell the operation.

Aldi, the small-format discount retailer headquartered in Batavia, IL, announced earlier this summer that it was planning to expand to Southern California and was looking to open a distribution center very near to where Fresh & Easy operates its DC.

Ed Odron, another longtime California retailer who operates as a consultant now under Ed Odron Produce Marketing Consulting in Stockton, CA, said he is not convinced that the final chapter has been written on this saga.

Odron admits to being surprised by the announcement several weeks ago that Yucaipa was buying the company and noted that the bankruptcy filing does open up the process to other bidders.

"I had thought that maybe an Aldi's or a Dollar General or some other store that fit the smaller format would be the buyer," he said. "The size of the stores would be right up their alley."

He said the auction could possibly result in several different operators buying pieces of Fresh & Easy. He also speculated that Yucaipa might be looking at additional retail uses other than food stores for the Fresh & Easy locations.

"It is going to be very interesting to see how this plays out over the next month or so," Odron said.