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.”
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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%.
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.
-
GameStop Sinks on Revenue Drop, Stock Offering: What to KnowGameStop stock is plunging Wednesday after the video-game retailer said sales declined in Q2 and that it's selling shares to raise cash.
-
What Could the Election Mean for Student Loans? Harris vs TrumpAs the presidential election heats up, here’s a closer look at each candidate’s plans to address student loans.
-
Kiplinger Special: How Businesses Should Budget for 2025Kiplinger Forecasts From fuel to AI software subscriptions, here's what you can expect to pay next year.
-
Apple’s Strong Start in Virtual RealityThe Kiplinger Letter Apple’s first year in the VR market sets it up for long-term success. The tech giant’s vision will take years to pay off, though.
-
Intel Braces for an Even Tougher Road AheadThe Kiplinger Letter Amid a long, costly turnaround, Intel resets expectations again. Its new woes raise questions about U.S. industrial policy and global chip competition.
-
Astronomical AI Spending Is Causing Jitters on Wall StreetThe Kiplinger Letter Amid rampant excitement over artificial intelligence, a new round of skepticism is taking hold. Here are four forecasts about the future of generative AI.
-
Car Prices Are Finally Coming DownThe Kiplinger Letter For the first time in years, it may be possible to snag a good deal on a new car.
-
Rising Cyber Threat of AI: The Kiplinger LetterThe Kiplinger Letter Security experts warn that generative AI brings new risks with no clear defenses. With AI's rapid adoption, businesses are vulnerable.
-
New Graduates Navigate a Challenging Labor MarketThe Kiplinger Letter Things are getting tough for new graduates. Job offers are drying up and the jobless rate is increasing. Are internships the answer?
-
Kiplinger Special: The Long-Term Future of the U.S. EconomyThe Kiplinger Letter Kiplinger's report into what it will take the U.S. to maintain a healthy economic growth rate.
