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The Mergers & Acquisitions Puzzle

Redefining supplier and retailer roles as the industry consolidates
M&A Puzzle

After a hiatus of a few years, grocery mergers and acquisitions (M&A) are back and on the rise. Established retailers with pluck, prescience, and cash are realizing a host of rewards, including economies of scale, stores in new regions, and access to hot new formats popular with consumers.

The first half of 2016 saw a flurry of activity, including Weis Markets purchasing five Mars Super Markets, Piggly Wiggly acquiring Joe Caputo & Sons after its assets were frozen, Bales Supermarket taking over Lamb’s Markets, and Kroger’s acquisition of Roundy’s and Mariano’s. None of these compare, however, to the biggest merger of the year: Royal Ahold’s purchase of Delhaize.

A Peak of Activity: 1995 to 2005
The current M&A landscape pales in comparison to the period of 1995 to 2005, when there was an explosion of activity. According to Edward McLaughlin, professor of marketing and director of the Food Industry Management Program (at Cornell University’s Dyson School of Applied Economics and Management), the top 10 supermarkets (excluding Walmart) controlled 30 percent of all U.S. food sales in 1995, but by 2015 the top 10 accounted for 50 percent, thanks in large part to merger mania.

During this time, Walmart was rapidly expanding into groceres. “Walmart’s decision in the mid-1990s to roll out supercenters and include grocery stores in their general merchandise format radically altered conventional grocery store operators in the United States,” explains David Schoeder, principal of The Food Partners, a food industry investment banking firm. “So from 1995 to 2005 there was rapid consolidation as people attempted to achieve economies of scale to compete against Walmart.”

“To compete, supermarket operators felt they needed to become bigger much quicker than they could organically,” agrees Bruce Peterson, president of Peterson Insights Inc., and a former executive with Walmart. Competition from Walmart, along with other challenges facing operators, propelled companies such as SuperValu, Albertson’s, and Safeway to look for other chains to purchase. “They had performance issues they needed to address and mergers helped support that activity,” Peterson says.

The M&A activity over that decade dramatically changed the structure of the retail grocery industry. “People have underplayed what I think the real implication of all these mergers is,” Peterson points out. “From the late 1990s to now, the supermarket industry has gone from a regional, privately-held industry to a national, sometimes international publicly-held industry.”

As a result, he explains, strategic decisions are focused more on short-term performance, which then alters decision making. “Today the stock market punishes you for mistakes. If your performance is poor, you need to do something about it, and acquisitions, whether for expansion or synergies, will appease the shareholders,” Peterson observes.