News articles in several recent issues of SN have highlighted declarations by top executives at some of the nation's largest supermarket chains that they are or may soon be looking for acquisitions. Included in that number are the two largest, Kroger Co. and Safeway.
Does this mean the food distribution industry is poised for yet another round of acquisition activity, perhaps in the mold of the pending Whole Foods-Wild Oats and A&P-Pathmark deals, as described on Page 1, or could there be other dynamics at work? To start addressing that query, let's look at what has been said on behalf of those chains: As was reported earlier, Kroger officials have asserted that the chain is interested in acquisitions — and maybe in large-scale ones — but maintain that action will be taken only if the price is right. Meanwhile, Safeway officials have said that the chain might be interested in adjacent-market acquisitions or the acquisition of a nonconventional operator. Safeway's stated intention is to look at acquisitions after most Safeway stores are converted to the successful lifestyle format. That's expected to happen in 2009. (Department of curious timing: Why state such extravagant-seeming intentions in the midst of touchy labor negotiations?)
One way to view this talk of acquisition activity is to accept that these major players, and others, indeed are ready — or nearly ready — to use acquisitions as a means to grow. No doubt, growth by acquisition is a prudent way to achieve rapid growth. Entering or greatly expanding markets with new stores alone is simply too costly, time-consuming and risky for most. Moreover, suitable acquisition targets may come into view before too long. Ahold-owned or previously owned properties may become available. Retailers now owned by private equity may go to market.
Conversely, it might be concluded that talk of acquisitions, especially of large-scale acquisitions, portends just that: More talk than potential action. That's because executives atop publicly traded companies are under pressure each quarter to pump up investors by talking about “what's next.” Wall Street rewards companies that have a good story about what will happen next to drive growth, and punishes those without such a tale. And, of all stories that Wall Street likes to hear, the ones they like best are those about acquisitions. Transactions equal investor opportunity.
More to the point, the logic behind big acquisitions is absent at the moment. There was a time when many conventional chains made bold and costly acquisitions solely to gain mass, because, it was thought, mass was intrinsically good and required to compete evenly with Wal-Mart and its unremitting pace of growth. Mistakes were made. Safeway acquired chains that presented considerable challenges, chains such as Dominick's, Randalls and Genuardi's. Further, and ironically, it developed that conventional chains simply couldn't acquire enough mass to keep even with Wal-Mart, and — more important — the Wal-Mart threat started to wane anyway.
At the current time, then, there appears to be little compelling reason for large chains to make big acquisition plays. Instead, the most prudent course would be for chains to seek real estate-driven opportunities in home or adjacent markets, such as the Kroger-Scott's deal, that would produce stores that could eventually be rebannered to the core brand if need be.