What is fueling grocery consolidation?
When news hit last month that Albertsons Cos. is in advanced talks to acquire Price Chopper for approximately $1 billion — which would cement its status as the No. 2 grocer behind Kroger Co. — it wasn’t much of a surprise to anyone following the grocery industry.
After all, consolidation has been the name of the game in grocery for the better part of two years. Kroger recently acquired Roundy’s and is rumored to be buying hundreds of Walgreens stores in the next month; Albertsons merged with Safeway in 2015, and purchased a number of smaller family-run regional stores in recent years; and Dollar Tree acquired Family Dollar in 2015.
“We’ve seen a lot of consolidation in the grocery space over the last number of years and I expect we will see more of that, particularly in more of the mid-market,” Keith Daniels, a partner at Carl Marks Advisors, who has counseled clients on consolidation, told Food Dive. “There’s going to continue to be a constant pressure on cost and logistics and the evolution of technology, and with all those pressures combined, those mid-tiered grocery stores are going to need to be consolidated to stay competitive in the market place. That’s why we’ve seen an upswing of larger stores coming in and acquiring them.”
Consolidation is thought to be good for retailers and consumers alike. As large grocery companies increase their presence, analysts say many of them are reducing infrastructure costs, helping increase profitability, and passing along lower prices to customers.
The big players
When it comes to consolidation, the major players are Walmart, Kroger, Costco and Albertsons. CVS, Target, Loblaw, Publix, C & S Wholesale and Walgreens — mostly non-traditional grocery channels — follow them. All of these companies believe they can achieve more bottom-line growth by consolidating to bring in greater economies of scale.
“The largest groups are going to continue to compete for targets,” Greg Wank, partner in charge of the Food & Beverage group of accounting firm Anchin, Block & Anchin, told Food Dive in an email. “Their focus is going to be on regional and specialty groups that have strong operating margins.”
The stores expected to be on the radar of large companies in the upcoming year are mostly ethnic and specialty markets.
“Those markets with a limited or curated product mix, who nibble away at the items that the larger players are selling, are going to be the ones that attract attention of the larger players,” Mike Deighan, managing director and a grocery, retail and real estate expert at O’Keefe, told Food Dive. “More and more customers are shopping like Europeans. They buy their bread at the bakery, their meat at one store, their produce and dry goods at a hyper market.”
If these specialty stores continue to take away market share from the bigger players, it only makes sense that they could be taken over to reduce competition.
Understanding Federal Trade Commission regulations
But large stores need to be wary of potential anti-trust violations and can’t just buy a store to eliminate the competition altogether.
For example, Kroger’s expected takeover of hundreds of Walgreens stores is predicated on antitrust concerns about Walgreens’s $9.4 billion acquisition of Rite Aid. Without divesting some existing Walgreens stores, the Rite Aid purchase might not be allowed because Walgreens may control too much of the market share in certain areas.
As big grocery operators consolidate, the Federal Trade Commission looks at the local market share. If a newly merged company has too many stores in an area, the FTC can force it to sell some of them off to create balance in the market. In some cases, it could even demand store closures.
“The concern with FTC is competition; having so much activity — mergers and acquisitions — that it’s bad for the consumer,” Daniels said. “There has been some criticism about how the FTC is approaching some of these acquisitions. It tends to narrowly define grocery, so when they look at a grocery chain being targeted through acquisition they don’t necessarily take into account the Wal-Mart and dollar stores. But in this case, the concern was large enough that something needed to happen.”
“In order to grow, particularly in this climate of deflation, large groups need to acquire more locations. Independent and regional players are more open to being acquired as competition from local and specialty markets and online channels threaten their business.”
Partner in charge, Food and Beverage group at Anchin, Block & Anchin
Those requirements opened up the door for Kroger to be instrumental in the Walgreens/Rite Aid deal.
Although it's primarily a grocery store, Kroger has more than 2,200 in-store pharmacies. Acquiring a number of Walgreens stores would not only boost Kroger's pharmacy business, but also provide the company with options — like using surrounding real estate to build more supermarkets, or possibly utilizing some of the sites to open urban supermarkets. These options wouldn't exist without the acquisition.
Wank noted that with a new administration coming to Washington, some FDA regulations could be relaxed. If that happens, many analysts expect there will be a new round of consolidations in the next few years.
The Bay Area
After examining trends in the San Francisco Bay Area, Brian Landes, geographic information systems analyst and researcher at Transwestern, feels this is one part of the country where acquisitions may be decreasing.
“The Bay Area is a unique grocery market in that most of the grocery consolidation happened five to 10 years ago,” he told Food Dive in an email. “Safeway is far and away the dominant mid-market grocery store. They also escaped the consolidation wave that swept over Safeway company stores when they were acquired by Albertsons because Albertsons had already left the market.”
While Safeway may be in a strong position, it has competition from Whole Foods and Trader Joe's on the high end and Grocery Outlet on the low end.
Landes noted that there could be some upcoming closures among Lucky stores and Raley’s/Nob Hill Foods from sagging business. Those spaces, he said, would likely get new leases quickly from other players looking to increase their presence. Newer entrants to the market, like Sprouts and New Seasons, have taken over nearly two dozen vacant boxes in recent years to compete.
Consolidation trends heading into 2017
Wank said the trend of conventional supermarket consolidation is accelerating into 2017 as traditional brick and mortar models in all retail segments are under pressure. With online stores gaining traction and new niche grocery retailers taking away market share, many mid-size grocers are more open to being acquired.
“In order to grow, particularly in this climate of deflation, large groups need to acquire more locations,” he said. “Independent and regional players are more open to being acquired as competition from local and specialty markets and online channels threaten their business.”
Smaller operators are willing to sell and larger players are able to get the financing needed thanks to great interest rates, so it’s a perfect storm for more consolidation, Deighan noted.
“However, the pool of targets is shrinking because of the consolidation over the past few years,” he said. “Smaller, less nimble grocers will be vulnerable to commodity price swings squeezing profits. Larger operators have a much better distribution and purchasing network allowing their size to work towards the bottom line. With the climate the way it is, now is a great time to be a purchaser.”
Purchasing a store simply for the sake of growth is not always the best move. Savvy companies understand that they need to acquire stores in markets where they can service and manage them properly.
“There has to be a good complementary synergy to the acquisition,” Deighan said. “If you are going to convert customers to your brand, there must be recognition of that brand in the market.”
Deighan remains bullish on the grocery industry and believes consolidation is a trend that will continue well past 2017 as bigger corporations continue to see profits.
“The millennials are more curious and adventurous eaters than past generations, and will eventually stop eating at restaurants due to the cost,” he said. “With the younger generation, there’s a lot of desire for low cost and convenience, and many of these companies’ expansion strategy is keeping that in mind.”
Analysts agree that consolidation is the natural course of things in retail. Many say that there are parallels to today's supermarket industry in the department store industry of the past, when major consolidation started there many years ago.
“At this point in the game, you either need to be an acquirer or there's the potential you get acquired,” Daniels said. “Store consolidation is something that we’re probably going to see a lot more of in the next few years.”
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