Albertsons Cos., the grocery chain operator backed by Cerberus Capital Management, has held preliminary talks to merge with Sprouts Farmers Market Inc., according to Bloomberg.
The discussions between the two companies are at an early stage and may not result in a deal, Bloomberg reported.
- Albertsons, which also owns Safeway, would take organic grocer Sprouts private and add it to its growing retail portfolio.
A deal between Albertsons and Sprouts would be the latest in an industry where grocery chains are facing tight margins and struggling to fend off growing competition from retailers such as Dollar General, Trader Joe's, Amazon and Wal-Mart. Last year, buyout firm Apollo, which previously owned Sprouts, purchased The Fresh Market, a specialty grocer with stores in the Midwest, Southeast and Mid-Atlantic, for about $1.4 billion.
Even Whole Foods, once the undisputed leader in the natural and organic space, has posted declining sales and profits as other mainstream retailers encroach on its turf with similar products. Whole Foods announced last month it would be closing nine stores amid lagging sales.
Along with Kroger, Albertsons has been among the most aggressive grocers in recent years, snapping up a number of retailers, a strategy highlighted by the 2014 acquisition of Safeway for more than $9 billion. A purchase of Sprouts by Albertsons would give it a major presence in the lucrative natural and organic space and allow the company to reduce costs and boost profitability through greater economies of scale — potentially leading to lower prices for shoppers. It also would enable the grocer to keep up with its rival Kroger, which invested in Sprouts rival Lucy’s Market last year.
Sprouts also could benefit from Albertsons’ deeper pockets and nationwide reach as competition in the organic sector intensifies. The largest farmers’ market-style food retailer recorded $4 billion in sales last year and operated 256 stores in 14 states as of February, according to Supermarket News.
Further deals in the grocery sector will continue as stores fight for dominance. The operations that could be especially enticing for large companies include ethnic and specialty markets that are grabbing market share. Mid-size grocers, being squeezed by online stores, large food companies and specialty markets, also could be willing to be acquired.
For many companies, buying existing players with already established footholds in higher-margin businesses like organic will be too much to pass up. But getting bigger doesn't necessarily mean getting better. As more consumers buy food online and from meal kit delivery services, even companies that are bulking up in the grocery store arena through mergers and acquisitions may have a tough fight ahead.