Dive Brief:
- Moody’s Investor Service last week downgraded Fairway Market’s rating to a level considered to be subject to very high credit risk, according to Supermarket News.
- The downgrade will likely increase Fairway’s cost of capital just as it's regaining footing following its 2016 Chapter 11 bankruptcy.
- "Although Fairway emerged from bankruptcy in 2016 with a lower debt burden, its operating performance continues to deteriorate as it faces a very difficult operating environment including intense competitive pricing pressure," Moody’s VP Mickey Chadha said in a statement.
Dive Insight:
Since taking the helm at Fairway Market earlier this year, CEO Abel Porter has taken steps to turn the struggling specialty grocer around following several years of underperformance and the debt pileup that eventually led to its 2016 bankruptcy. Porter has already stopped Fairway’s same-store sales declines by around 80% and is fending off the negative impacts of competition, reports Supermarket News.
The recent Moody’s downgrade, however, could prevent the retailer from attaining additional credit that could hamper further progress and future growth prospects. Despite the downgrade, the retailer — which focuses on offering specialty, fresh and organic foods through 15 stores throughout the greater New York City area — is trying to persevere. Under Porter’s leadership, the chain has implemented minor remodels, expanded e-commerce through a partnership with Instacart, renewed efforts to keep its stores clean and is pricing more aggressively.
Still, it may be too little too late. Competitive challenges facing Fairway and similar small chains across the nation could prove too great. Whole Foods continues to open stores in Fairway’s backyard, taking share from the smaller retailer. The pending Amazon-Whole Foods deal could increase pressure on the retailer. Wegmans, a customer favorite and one of the most respected grocers in the industry, is planning to open a store in Brooklyn in 2019.
Competition from outside the grocery channel also is heating up. Area Walgreens, Walgreens-owned Duane Reade and CVS all offer convenience and prepared foods selections for commuters and local residents. Target also continues to make inroads into urban cores, including in New York, with its own small format that skews heavily toward grocery.
Online grocery is perhaps an even bigger competitive threat in the dense New York City urban area where Fairway operates. Peapod, FreshDirect, AmazonFresh and third-party grocery delivery services work especially well in densely populated urban cores where few residents tend to own cars and grocery store options are limited. FreshDirect, which has been delivering groceries across New York’s five boroughs for nearly two decades, is a favorite of the Big Apple’s notoriously hard-to-please residents.
As a small specialty chain, Fairway Market is certainly fighting an uphill battle. Similar to other smaller fresh-focused chains with high-income customers and good business models — Ingles Market, Sprouts, The Fresh Market among others — some analysts consider Fairway Market an attractive acquisition target for a larger, conventional grocer looking to penetrate New York City. Time will tell how the competitive landscape unfolds, but supermarket sector consolidation is likely on the horizon.