The rest of the year is likely to see a small increase in supermarket sales, a slightly higher increase in earnings and few, if any, major acquisitions, according to industry analysts interviewed by SN.
Among the major players, Kroger Co., Cincinnati, and Albertson's, Boise, Idaho, will continue to focus on developing synergies from last year's megamergers, the analysts noted. Safeway, Pleasanton, Calif., whose major acquisitions in 1999 were regional chains, is farther along in the integration process, the analysts said.
Meanwhile, the analysts noted there are roughly 10 regional chains that are considered highly desirable takeover targets, but have shown little interest -- or have openly declared their lack of interest -- in being acquired.
The analysts also said that while e-tailing has fallen out of favor with Wall Street recently, the brick-and-mortar stores need to keep developing their Web offerings.
Not that the analysts are agreed on all points. Some analysts see the consolidation challenges of last year's major deals as having been successfully dealt with. Others believe the acquirers still have a lot of work to do before realizing anticipated synergies.
Chuck Cerankosky, equity analyst, McDonald & Co., said, "I think retail food chain revenues should mirror what companies have been generating. The best managed companies are showing good same-store sales, and they are seeing earnings grow somewhat faster than sales."
Debra Levin, equity analyst, Morgan Stanley Dean Witter, said, "The largest operators are all benefiting from last year's acquisitions. They are reinvesting their earnings in sales and showing a greater increase in earnings than sales."
The reason for the earnings rise is "the companies have a tremendous ability to leverage their expense structures," Levin said.
However, Ed Comeau, equity analyst, Donaldson, Lufkin & Jenrette, New York, said the synergies are coming in a lot slower than the companies had forecast.
"Albertson's and Kroger should have a better second half than last year," he said. They might even see a significant increase in sales if a drought forecast to hit the Midwest drives up farm prices, he noted.
"But Albertson's and Kroger still have a lot of issues to plow through," Comeau said. "At both companies, a working capital sinkhole opened up after the mergers. A year ago both said the mergers would generate a significant amount of cash flow, but the opposite has happened.
"Albertson's has to deliver a big fourth quarter" to have a strong year, he observed.
"Kroger is doing a good job for the most part, but its high debt-level must come down," he said. "Safeway has hit expectations and remains above the pack," he noted.
Meredith Adler, equity analyst, Lehman Bros., New York, offered a similar assessment. "Safeway is going to see good numbers," she said. "Kroger is status quo, and I have a feeling Albertson's is losing marketshare."
Still, she predicted that Albertson's performance would top last year's. "Albertson's is going to have a better second half than in 1999," she said. "That second half was so bad.
"Are they in better control? Are they past the worst? Definitely."
"But the open question for Albertson's is, 'What does the customer think about the changes they've made on the West Coast?"'
In particular, Adler said she thought the reflagging under the Albertson's banner of the northern California Lucky units acquired in the American Stores Co. purchase last year was a mistake. "Lucky was the right name in northern California," she said.
There was a similar range of opinions about the likelihood of a large-scale before the end of the year.
"My sense is that by and large the huge acquisitions have already been done," said Levin. "Although the industry remains fragmented, right now everybody's too busy" consolidating last year's deals.
Cerankosky observed that major acquisitions "are getting tougher because of antitrust issues." Rather than mergers of whole companies, he said the sort of takeovers that might occur soon are more likely to involve one piece of a company being sold to another company, the way Winn-Dixie Stores, Jacksonville, Fla., sold its Texas operations to Kroger. "There may be places where part of chain A would do better as part of chain B," he said.
Comeau said he saw "some room for acquisitions. There are companies that have real problems or are coming out of bankruptcy. Something has to happen with them. We'll see some marriages, I think.
"On a global scale, we could see a big supermarket company buy a drug store chain. That would be a pretty big deal."
Adler said a major takeover is possible, but unlikely, in food retailing. "The only big deal left is Ahold with one of the big three," she said, referring to Kroger, Albertson's and Safeway. "But if you take egos into account, nothing is going to happen for a long time."
She also said, "There are 10 high-quality regionals everyone wants to acquire, but they are not interested in being acquired."
Ted Bernstein, high-yield analyst, Granchester Securities, New York, cited Stater Bros. Markets, Colton, Calif., and Marsh Supermarkets, Indianapolis, as examples of "attractive acquisition candidates" that are not interested in a sale. "There is still a lot of room to consolidate," he said.
The analysts also cautioned that while the spectre of e-commerce that haunted food retailing for much of 1999 appears to be receding, supermarket companies are still looking for ways to make the Web work for them.
Levin said, "I don't think the threat is receding. The business-to-consumer companies are clearly out of favor with investors. The situation at Peapod means that at least one player is likely to be less aggressive going forward.
"At the same time, there are quite a number of companies, like Webvan, going forward with aggressive expansion plans. And one important point, the major supermarket operations will all eventually participate in e-commerce."
Comeau also noted the retreat from e-commerce "is in investor's minds, not in reality. Nobody's rolled anything out yet. They are continuing to experiment. Potentially, e-commerce could be a significant part of the industry."
Cerankosky said the major supermarket companies will closely watch e-commerce developments. "The biggest chains will continue to explore home-shopping concepts, to see if they become popular and, more important, profitable," he said. "But they will probably have to get out of that horribly costly home-delivery service that consumers don't want to have to pay for."
There are other, more immediate, threats to the supermarket industry, he observed. "The area of commerce that has been taking the largest market share away from supermarkets is the food-away-from-home industry, the restaurant industry," he said. "What chains need to do is counter with more prepared foods. Retailers have to get manufacturers into the act with frozen, prepared or shelf-stable foods."
Another, more immediate threat to supermarket companies, according to Bernstein, is posed by the new line of smaller, more traditional-style supermarkets Wal-Mart Stores, Bentonville, Ark., has been developing.
"There are certainly threats from Wal-Mart as they roll out the Neighborhood Market format," he said. "The large operators have the operating synergies to buy cheaper. The system to reduce costs will be competitive threats to each other and to smaller companies."
