CHICAGO -- Economies of scale, overstored markets and easier access to capital are among the factors that are coming together to increase the likelihood of further industry consolidation.
many operators. Bolinder, an industry veteran who was formerly with Smith's Food & Drug Centers, Salt Lake City, and Albertson's, Boise, Idaho, spoke during the Food Marketing Institute's annual convention.
"Owners and investors have realized the need to get the most clout from the dollar invested by reducing costs through multiple store operations, creating stronger market positions by reducing the number of competitors and realizing the economies of spreading advertising, supervision, central administration and computing costs over a larger base of stores," Bolinder said.
"And with the reduction in inflation and the slowdown of population growth, most markets are simply overstored."
Other speakers at the session made the following observations:
Supervalu, Minneapolis, sees consolidation as a way of strengthening sales at its wholesale business and among its retail customers.
Fred Meyer Inc., Portland, Ore., believes an acquirer has to move slowly in integrating an acquired company in order to minimize disruption at store level.
Although family-owned businesses are "the engine of our economy," most of those companies won't survive into the year 2000.
Most major operators view acquisitions as a positive growth strategy -- and acquisitions drive earnings, which makes the supermarket sector more attractive to investors. According to Bolinder, many family-owned companies that succeeding generations have not developed "need to find a solution to succession, [which is] quite often [accomplished] by selling out or consolidating with other chains."
Encouraging this trend is the recognition by the government "that competition is not necessarily reduced because of consolidation," he added. "In fact, the strength of better managed consolidated operations can actually provide reduced prices for consumers, thus enhancing the competitive environment."
In addition, the supermarket business is "quite investor-friendly," Bolinder said, because of its predictable cash flow and general stability. "And strides in technology provide more information, and managements can span a much larger operation with that data." However, the advantages of size that come with consolidation can quickly be offset, he said, by more difficulty relating to customers and local market conditions, more difficulty motivating employees, eliminating the family nature of the business and concentrating marketing power in large companies, which may serve as a magnet for new competition. "So consolidation is not necessarily utopia," Bolinder said.
Jeff Noddle, executive vice president and president and chief operating officer of Supervalu's wholesale food division, said Supervalu will continue to make acquisitions, both large and small, to enhance its retail portfolio and strengthen not only its own wholesale business but also sales among its independent customers.
"We intend to provide growth for the retailers we serve," Noddle said -- exemplified by last week's proposed merger of Supervalu's eight County Markets in Montana with Spokane-based Tidyman's, a combination the company said would strengthen both operations and make expansion easier.
Because it regards size as a crucial factor in the future, Noddle said, Supervalu is seeking to add quality retailers in regions where it does not currently have representation. "We already have retail formats that serve the supercenter, combination, discount and limited-assortment businesses," Noddle said. "Adding to and stimulating those formats is an important objective to us in our retail business."
The heightened interest in consolidation is creating a climate of quick deals. Ken Thrasher, executive vice president and chief administrative officer of Fred Meyer Inc., said that although his company looked at a merger with Ralphs and Quality Food Centers last September, a bid by Albertson's for QFC "caused us to move fast and to complete due diligence in just two weeks."
But the benefits of consolidation don't come without some risks, he added, because if integration is pursued too quickly, crucial programs and services can get hurt.
When Smith's Food & Drug Centers acquired Smitty's Super Valu, Phoenix, in 1996 (several months before Fred Meyer acquired control of Smith's), it eliminated Smitty's frequent-shopper card, which resulted in a sales drop of 15%, Thrasher said.
"Don't change the culture [of the acquired company], because you'll lose customer traffic and sales. And don't chase synergies too fast that could have a negative impact on the business," he said.
As a result, Fred Meyer has integrated Smith's slowly and carefully, Thrasher said, maintaining the Smith's culture and key operating managers. "Our No. 1 priority is not to affect store operations," he said.
He said the company is following the same procedure with its mergers with Quality Food Centers, Bellevue, Wash., and Ralphs Grocery Co., Compton, Calif. "Key operating managements at each company will remain in place, with regional managers reporting to Bob Miller [Fred Meyer chairman]. QFC and Ralphs will continue to operate as separate formats, although buying is organized to leverage contract and private-label buying opportunities."
Philip St. Georges, managing director of retail ventures at KPMG Peat Marwick, Washington, said the number of acquisitions has gone up 40% over the last three years because of the fragmented nature of the food industry. While the top five retailers in other industries have a majority market share -- such as the discount-store channel, where the top five companies have a 66.5% share of the $185 billion business -- the top five supermarkets account for just 19.5% of the $424.3 billion industry, he noted. "Family-owned businesses are the engine of our economy," St. Georges said, accounting for approximately half of the industry's sales, or more than $200 billion. But these are the companies that will account for a large number of acquisitions, and most of them won't survive into the year 2000 because they'll be too tempted by the high prices being paid for buyouts, he added.
Debra Levin, food and drug retail analyst with Morgan Stanley Dean Witter, New York, said supermarket managements have widely embraced consolidation as a growth strategy. "All large companies are open to acquisition, and some, such as Ahold and Safeway, have declared it to be a key part of their growth strategy," she said. "Companies now view acquisitions as a way to obtain critical mass quickly, as exemplified by Albertson's recent purchase of Seessel's and Smitty's, both small chains operating in areas [Memphis, Tenn., and southern Missouri, respectively] that Albertson's planned to enter.
"Most major public companies are now open to or aggressively pursuing acquisitions, and there is a strong expectation on the part of investors that as consolidation activity accelerates, a major benefit will be higher earnings growth rates," Levin said.
