Consumers will actually benefit from a new wave of consolidation, driven in part by Wal-Mart's gains. By Laura Kennedy, Associate Editor April 28, 2010 Competition will pare the number of players in grocery retailing. Discounters as well as Wal-Mart and Target supercenters have traditional supermarkets scrambling to hike efficiency and cut costs, and more will do so by gobbling up smaller, weaker chains and independents. Merger and acquisition activity is already heating up, and it’s likely to really get cooking over the next 18 months. In February 2010, the number of supermarkets involved in merger and acquisition deals was up 31.6% from February 2009, according to retail consulting firm Willard Bishop. Most deals over the next year or so will be strategic acquisitions of weaker chains or underperforming divisions of bigger companies -- purchased at a fraction of the price they would have fetched in a stronger economy. Some chains that are swallowed up may see their stores split among several buyers, each looking to increase their presence in particular locations. This round of mergers and acquisitions will be more disciplined than the wave of consolidations in the late 1990s and early 2000s, says David Schoeder, a principal for the Food Partners, an investment banking firm that specializes in the food industry. “We’re seeing a weeding out process” of underperformers, Schoeder says. “People are very focused, pruning their portfolio of stores by market.” Shoppers will get the sweet end of the deals. The bigger, consolidated operations will be able to lower their supply chain costs, helping them keep prices down, says Rob Coble, a partner in the Transactions and Restructuring group at KPMG. With the battle for shoppers’ food dollars tougher than ever, holding costs down will be crucial. “If you can be very efficient on your supply chain, you can be more profitable,” Coble says, even with intense price pressure. Retailers ranging from drugstores to dollar stores and discounters are increasingly carrying food products and other necessities, catering to recession scarred consumers seeking top convenience and value. Since 2005, for example, supercenters have snatched an additional 5% of grocery shoppers, lifting their share to 27%, according to a 2009 survey by the Food Marketing Institute. Discounters have more than doubled their slim slice to 5%. Advertisement Moreover, Wal-Mart’s recently announced intention to cut prices on all products, including food and other groceries, will ratchet up the pressure even further, particularly for smaller, weaker supermarket chains. In fact, 51% of the gargantuan retailer’s sales now comes from groceries. In the years ahead, groceries will play an even larger role in Wal-Mart’s fortunes. Consolidation may also help on another front: When retail outlets get new owners, they also acquire new creative energy and capital. “The deals bring newness,” says Craig Johnson, president of Customer Growth Partners, a consumer sector investment firm. Stores will beef up their store brand “exclusive” products to keep shoppers coming back. They’ll offer juicier loyalty rewards and branch further into nonfood offerings, such as seasonal decorations or equipment, to help consumers do more one-stop shopping. Some stores under new ownership will undergo facelifts. Traditionally, grocery stores refurbish once a decade or so, but the chains being picked up likely haven’t been freshened up recently, says Craig Rosenblum, a partner at Willard Bishop. Although some new owners will jettison struggling stores, overall, the number of supermarket and food retail outlets is likely to stay much the same in the years ahead, or even expand. Such necessity based stores are relatively stable assets: For the past three decades or so, there have consistently been about 30,000 supermarkets in the U.S., according to Neil Stern, a senior partner at McMillanDoolittle, a retail consulting firm.