(FORTUNE Magazine) – ABOUT TEN YEARS AGO competitors of the Great Atlantic & Pacific Tea Co. had a chance to kill off their ancient foe. Grandma, as A&P used to be known, was on life support, but competitors could not muster muscle enough to kick out the plug. Big mistake. A youthful-looking A&P is now in a position of market power the likes of which the company hasn't occupied since 1949. That was the year the Feds busted Grandma. At a famous antitrust trial the government charged that A&P bullied suppliers, punished competitors, and set prices for everybody, practices that in the Reagan era would have been known as being competitive. Today, with its chief competitors defenseless -- and more tellingly, offenseless -- in the grip of numbing debt, A&P is once again the beast of the East, and for that matter of parts of the Midwest and Canada. In the year ended in January, profits rose 15% to $147 million on sales of $11.1 billion, $ an increase of 11%. A&P's net return on sales of 1.32% now dwarfs the average of publicly held supermarket chains, 0.71%. A&P holds the No. 1 or No. 2 position in most of its trade territories, including metropolitan New York and Long Island, Philadelphia, Toronto, Detroit, and Milwaukee. How did A&P pull it off? First, by rising from its deathbed, an achievement strongly related to the leadership of James Wood, 60, the shopkeeper from northern England who guided the company back into the black. Now ten years at the helm, Wood, who owns 1.1% of A&P common stock (recent value: $22 million), is signed on to manage until 1995.

Second, A&P has marshaled dominant market share, particularly in the East, by buying up strong, family-owned regional grocery chains such as Waldbaum's, Shopwell, and most recently Borman's in Detroit, then letting them operate under their own good names. These family-dominated companies typically are terrific merchants -- gut-driven and market wise -- but not so good at the bloodless tasks of financial control, warehousing, data processing, and other humdrum operations that can suck up their earnings faster than they can sell tuna. A&P clamps on the corporate collar of balance sheet management and then lets the merchants have the run of the leash. Profits reappear. THIRD, while Wood was rebuilding, the rest of the supermarket industry was pickling itself in debt. Safeway was first, in 1986, in a leveraged buyout. Eastern powerhouses Stop & Shop Cos. and Supermarkets General Corp. (SGC) took themselves private, with those retail prowlers, the Haft family of Dart Group Corp., yipping at their heels. Kroger Co. escaped through a leveraged recap in 1988. At least American Stores Cos., run by the crafty L. S. ''Sam'' Skaggs, actually got something to show for the debt it loaded on: acquisition of Jewel Cos. and then Lucky Stores Inc. But American now moves like a fat man after a feast. Wood's former employer, Sir James Goldsmith, unloaded Grand Union Co. to a management-led group, which went heavily into hock to make the purchase. All of this leaves A&P with the whip hand and, in Wood, someone who knows how to use it. While A&P's debt-heavy competitors husband their capital, his company is unleashing a record $300 million campaign to build 43 new stores and remodel and enlarge hundreds more next year. Wood expects that any souring of the economy will dish up some tasty potential acquisitions. ''Opportunities are bound to come up in the next few years. There is a lot of debt that will not be viable,'' he says. Wood can mark time with the patience of a vulture. His perch is now a comfortable one, made so by shipping $14 million in dividends last year to A&P's 52% owner, Tengelmann Warenhandelsgesellschaft, the West German grocery outfit run by Erivan Haub. Says Wood, a droll fellow with a matter-of-fact style: ''There's not much question about it: We have the overwhelming advantage in today's market.'' Walk into some of A&P's competitors today and you may be hard pressed to see the advantage Wood claims. Supermarkets General Corp., the owner of Pathmark and Purity Supreme supermarkets, runs any number of stores whose sales volumes can make A&P's best units look like convenience stores. The aisles are well stocked and the prices competitive. Kroger builds some of the more dazzling stores in the industry. But retailing is a tidal business. A&P executives believe that the water is rising and that they own the high ground. Wood explains: ''If you have an industry that is still not much better than 1% after-tax profit on sales and you give it debt service that is equal to between 4% and 5% of sales, then something's gotta give. And it reflects itself in the amount of labor in the stores, the remodel rates, the aggressiveness of your new-store development program.'' Case in point: that same Supermarkets General, taken private in 1987 by Merrill Lynch Capital Partners in a $1.8 billion management-led LBO. SGC's Pathmark was once the unquestioned price leader in the New York-New Jersey area, but the company cannot afford to be as kindly to consumers and still have a friend at the bank. A&P and Wakefern Corp., the cooperative that owns ShopRite stores, are keeping the heat on. Says Michael J. Larkin, A&P's senior vice president of East Coast operations: ''ShopRite has no intention of allowing Pathmark to make the money to pay down its debt. They are not opening the door one inch.'' A&P, too, will now fight Pathmark price for price in hot trading areas, something the company was unwilling to do in the past. A&P's competitors throughout the Northeast and Middle Atlantic states are carrying big leverage while maintaining low-price positions. The red ink flows (see chart). According to Gary Giblen, an analyst at Paine Webber, in markets that account for 90% of A&P's sales, all its major competitors are so constrained. In Philadelphia, where A&P is a distant second to American's Acme Markets Inc., the leader recently entered into a new labor agreement, a sure sign that prices will rise. Opportunity knocks for the beast. Says Larkin: ''It's difficult to predict what's going to happen, but I can tell you whatever it is, it's going to be good for us.'' A&P will open five stores in Philly next year. A&P is opening the last of four new stores on Cape Cod -- where the profits are decent in the off season and obscene in summertime -- perhaps because rival Stop & Shop Cos. can't. A&P officials say Stop & Shop, bought by Kohlberg Kravis Roberts & Co. in June 1988, has too much debt to expand quickly, a charge the company denies. As a result, says Larkin, ''this has given us an opportunity to get into some locations we would have been shut out of in the past.'' Translation: The bankers won't lend the money to shopping center developers whose potential prime tenant has a bad credit rating. A&P is money in the bank. WITH ITS ACQUISITIONS, A&P has gained a variety of store formats; the company plugs in the right one to fit market characteristics. Only 48% of its stores trade as A&Ps, of which there are two varieties, one being the standard sedan you've always known, now called A&P Sav-A-Center. Where the demographics point upward, the company serves up A&P Futurestores. In New York City the company has enlarged a gourmet chain called Food Emporium that A&P may roll out to other territories. Waldbaum's, the model for high-volume operations, is taking on Pathmark in densely populated northern New Jersey. Much of A&P's recent profitability stems from an ability to manage its acquisitions, in essence its knack for teaching seat-of-the-pants operators how to fly by wire. Says Wood: ''The name of the game, as far as I'm concerned, is return. And I've been alongside two very famous family-company guys. One is Ira Waldbaum, and the other is Paul Borman. They both have the same problem. The bottom line certainly occurred to them now and again, but it wasn't the dominant factor it is to the corporate executive. We are much more control oriented than a family company, which is why we stay in business and they've gone out of business.'' The figures back him up: A&P's profit per square foot, the absolute test of operating ability, rose to $3.50 in 1988 from $2.11 in 1986. Borman's, which trades as Farmer Jack, can sell food like crazy but was hard pressed to show a profit in the tough Detroit market, heavily dependent on the auto industry. Says a rueful Gilbert Borman, a lawyer and son of President Paul Borman: ''I remember one year when we did a billion dollars in business. We made $30,000. Thirty thousand.'' Subsequent years proved worse, following a failed acquisition in Salt Lake City. Paul Borman decided in December 1988 to let A&P worry about the money while he worried about the stores. In each of its acquisitions -- five since October 1983 -- A&P replaced the existing financial accounting system with one far more demanding. For instance, at Waldbaum's, a store loved by Italian and Jewish mothers across Long Island, store managers and even corporate executives operated without detailed knowledge of how they were doing against their budgets. Now they get tons of information every week. A&P appoints an operating board that meets weekly to review results and forecasts by store, and division heads are called to headquarters monthly to deliver the news to Wood personally. At the store level A&P has been far less meddlesome, allowing the merchants a freer hand -- provided they hit Wood's numbers. Waldbaum's, for instance, has a buying organization separate from A&P's metropolitan New York group. In fact, A&P encourages the two divisions to compete, hoping that one against one will equal three. Much the same is occurring at Borman's. A&P's accounting system now gives management 50% more information than it had previously. A&P has also pushed the profit responsibility down to the store managers and charged them to operate profitably. The Borman's acquisition hasn't been pure bliss. Executives in Detroit, accustomed to the looser, family-run outfit, found A&P's corporate collar a bit snug. More trouble came when A&P tried to save money by combining the two chains' advertising. Customers didn't respond, and now the stores advertise separately again. Profits from the combined operation fell short of projections. Wood promises much more synergy next year. FOOD MANUFACTURERS in Detroit are also getting a slug of A&P's new swagger in the form of demands the chain is making for merchandising allowances. In the grocery industry nearly all manufacturers make available to retailers a slush fund for such off-invoice items as shelf displays, space in the grocer's warehouse, and a place in the store's advertising. It's a poorly disguised way around the Robinson-Patman Act, which forbids volume discounts. One broker describes A&P's new approach: ''The funny money demands are increasing. They'll tell you right out: The Germans ((Tengelmann)) want their money.'' A&P says it hasn't increased demands. In the Baltimore area the company instituted a controversial ''pay to stay'' program, charging suppliers of slow-moving items a fee to hold their spots on the shelves. A&P is unapologetic. Says an official: ''If a product isn't selling, we're going to make you help us sell it or we're going to replace it.'' Wood thinks suppliers have used Robinson-Patman to protect profit margins: ''The suppliers to some extent have taken A&P and organizations like us as patsies. And of course that's going to come to an end.'' A&P still has some soft spots. In Virginia and North Carolina non-union operators such as Food Lion are clawing A&P because they have lower costs than A&P's unionized stores. In the Washington, D.C., area a strong, debt-free regional, Giant Food, is a force. The Atlanta market is saturated with stores. In Philadelphia an innovative labor contract that gave workers a share of profits has lost its appeal to labor: After big initial gains for the company and the workers in the pact's first years, incremental growth has been harder to come by. A&P took a strike last year at Thanksgiving. Not to worry, says Wood: The rough spots in A&P's business affect less than 10% of weekly sales of $220 million. Eventually, one way or another, the playing field tilted by debt will level. Safeway, for instance, has plans to raise capital by going public again. If Wood is lucky, some of those remaining debt-laden companies will fall into his hands. But even if competitors' junk doesn't fall apart completely, A&P will be the beneficiary of the supermarket industry's debt binge for years to come. By the time those companies get rolling again, A&P will have hundreds of gleaming new stores, entrenched positions, plenty of cash, and the ability to play any game in town. As A&P veterans well know, customers lost are not easily won back. And this time A&P is the one with the customers.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: NET PROFIT -- OR LOSS -- AS A PERCENT OF SALES By a standard industry measure, A&P is more profitable than any of its big competitors.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: INVESTOR'S SNAPSHOT A&P