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Tesco Demise and Fairway Market IPO – The Downs and Ups of US Food Retailing

As British Giant Exits US Market, Homespun Manhattan Grocer Looks To Head West

by Frank Quin

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A Tale of Two Grocers

As Tesco (LON:TSCO) on 17 April formally lowered the boom on its seven-year-old US adventure, booking a £1.2 billion write-down in the process, over on the other side of the continent another grocer was taking a giant leap of confidence in the American retail food sector. Fairway Market of New York City launched its IPO on the NASDAQ Global market (with the symbol ‘FWM’), with plans to expand from the existing 12 stores ultimately to 300. And that confidence appears to be well-placed. The offer price of $13 per ordinary share quickly found favour with Fairway’s share price bid up to $17.35 on its opening day. Yesterday, on its first full day of trading, Fairway’s share price climbed at a measured pace throughout the day, touching $19 late on but easing back to $18.90 at the close. That was an 8.53 percent gain on debut, the more creditable in light of NASDAQ’s fall for the day of 1.2 percent.

That price puts a market capitalisation of $447.84 million on a business which had similar origins to – but which is utterly dwarfed by - Tesco, the world’s fourth largest food and retail group and which – following the hit to its share price on announcing the US retreat and a first-time ever underlying loss – was valued yesterday at $45.14 billion.

As is famously known, Tesco started life in 1919 when demobbed soldier Jack Cohen – the son of a Polish emigrant to the UK and born Jacob Kohen - started a market stall in the East End of London. The first Tesco-branded store opened, in north London, in 1929. Rather less well-known outside the borough of Manhattan is the founding of Fairway Market by Nathan Glicksberg – grandson of a Russian émigré – as a fruit and produce stall in NYC’s Upper West Side at the outbreak of World War 2. But whereas Tesco went public early in its life – in 1947, to fund a round of the aggressive grocery chain acquisition programme which had by then become the company’s modus operandi – Fairway till this past week had remained in private ownership for over 60 years, with three generations of the founding family successively at the helm.

Private Equity Buy-In – The Classic Model

The IPO has its genesis in the January 2007 buy-in by private equity firm Sterling Investment Partners, operating out of Westport, Connecticut, reportedly for $150 million and an 80 percent stake. At the time, according to the Sterling press release, Fairway ‘[did] the highest volume sales per square foot of any grocery in the country’. Fairway then had just four stores, including its foundation site at Broadway and 74th Street, whose confined space guaranteed a shopping experience which had become legendary amongst Upper West Side residents. In its 16 April report on the IPO, the New York Times wrote that ‘navigating a shopping cart through its narrow aisles is a full-on contact sport, like driving a bumper car through a Middle Eastern souk’.

In copybook style, with Sterling’s money and nous and the playing through management, Fairway has expanded to 12 stores in the Greater New York metro area – so including New Jersey and Connecticut – and they’re more generously proportioned than the flagship. But it seems the cachet remains, with customers and media fulsome in their praise for the product mix – from staple to gourmet to downright exotic – and a second-to-none customer service, both in-store and at check-out.

And now the plan is to take the grocery store that’s ‘Like No Other Market’ – Fairway’s slogan – nationwide. Upwards of 300 Fairway Markets are being envisaged in an expansion programme that will see the group leaving its roots far behind and taking on the major players in US food retailing. The big question for investors who bought in at the IPO or who’re otherwise following the stock is surely whether Fairway can make that transition from beloved neighbourhood store to nationally-recognised retailer without losing in the process the essence of what has defined the brand to this point. And in one of the most cut-throat business sectors in the United States.

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