On Point: The urge to merge

Is industry consolidation seeing another revival? The grocery business may be in the early stages of a new wave of mergers and acquisitions like the one we saw in the late 1990s. Or maybe it is just a minor reshuffling of the deck. We will know in a year or two. In early July, Kroger announced plans to buy Harris Teeter for $2.4 billion. Two weeks later, Spartan Stores and Nash Finch said they would merge in a deal worth $1.3 billion. Before the end of the month, published reports said A&P was looking into the possibility of putting itself on the market for an asking price of at least $1 billion. None of this was terribly surprising, especially the prospect of A&P throwing in the towel less than 18 months after emerging from Chapter 11 bankruptcy, but the announcements highlight the direction in which the grocery business seems to be heading. Making a profit in this industry has never been easy, and in this sixth year of economic sluggishness the pressure is greater than usual. Harris Teeter, based in Matthews, N.C., widely recognized as one of the industry’s class acts, may simply be an awkward size for today’s market. With a bit more than 200 stores, it is too large to function like a local, family-owned powerhouse and too small to match the buying power of aggressive competitors like Publix, another class act, and Walmart with its low-price appeal. Add the fact that most of its trading area is in the rapidly growing and desirable markets of North Carolina and Virginia, and it is a safe bet that competitive pressures will only get worse. The chain’s location attracted Kroger, which has only a small presence in the area. Spartan and Nash Finch, based in Grand Rapids, Mich. and Edina, Minn., respectively, are both heavily involved in wholesaling, which has had problems over the decade or so since Fleming Cos. crashed and burned. Just ask officials at Supervalu—but you also have to consider C&S Wholesale Grocers, which has grown to enormous size and influence over the same period. There is a good chance in the near term for Spartan’s retailing expertise to bolster an area where Nash Finch has struggled, although it is too soon to gauge the long-term prospects for the combined company. Naturally, when the two transactions were announced there was much trumpeting of the economies of scale that would result, and the word “synergies” kept coming up. Synergies are a lot like magic: some people believe they appear out of thin air after two companies join forces. Every industry has examples of the silliness of this type of wishful thinking. Magicians know it takes a lot of hard work and concentration to create magic. Let’s hope the people who will be managing these companies are magicians and not gullible believers. Based on Kroger’s track record with acquisitions, it is reasonable to expect that the Harris Teeter deal will turn out positive for both companies. However, each business combination is a whole new ballgame and you have to get each one right. The two wholesalers seem to have the necessary executive talent, although market forces may weigh heavily against them. The future paths of both combined companies, regardless of where they lead, will be something of a graduate course in corporate integrations—what works, what does not and how to prepare yourself in case your turn comes.