FAMILY VALUES

David Merrefield

As has been predicted by more than one observer, consolidation activities in the food-retailing sector are likely to swing away from megamergers and toward privately controlled or family directed regional retailers. It's a fairly safe bet this will occur -- assuming consolidation is destined to continue at all -- given the paucity of megamerger candidates.

But, should this prediction prove true, it implies a great deal more than just a swing to remaining targets of opportunity. It implies a major shift in the thinking of those who control regional retailers -- shifting from not being for sale under any circumstance to a stance where such a consideration becomes a distinct possibility. Moreover, it's becoming increasingly evident that the megamergers may well produce fewer synergies than would have been expected, and that Wall Street isn't rewarding large-scale food retailers just for getting larger.

Regarding closely held companies, as you'll see on Page 1 a group of Weis Markets shareholders endeavored to put the company into play last week. The group is comprised of Weis family members, together with its related trusts and foundations.

Another family controlled company, Winn-Dixie Stores, sold its entire 74-store presence in Texas and Oklahoma to Kroger last month and last week the Cantos family of Indiana sold its eight stores to Kroger. (See Page 4.)

No doubt, families that have long controlled supermarket chains are awakening to the fact that the time is propitious to extract a great deal of value from their holdings, and that the window of opportunity to do so may soon slam shut. For instance: Lurking in the background of Winn-Dixie's pullout from the Southwest was Wal-Mart's upcoming march into the region with its Neighborhood Market supermarket format. (For more on the format, see Page 1.) The Weis dissidents may be feeling the heat from Ahold's growing strength in its region, just as the Cantos family saw the time was right to sell. Surely many other regional chains are in similar positions.

Meanwhile, what has been the fate of the equity of companies involved in the largest mergers? Not a good one: Equity values of the industry's chief acquirers -- such as Ahold, Albertson's, Kroger and Safeway -- are well off their 52-week highs. Both Kroger and Albertson's have acknowledged that merger-related synergies have been more difficult to realize than was originally thought.

Particularly striking were statements from Albertson's made last week in connection with its third-quarter financial report. In brief, Albertson's net income fell 40% and its operating income 12% because of high costs associated with integrating its huge American Stores Co. acquisition. The company blending included ditching the venerable Lucky banner and changing it to Albertson's. Such things "adversely impacted earnings and evolved in a manner that prevented us from anticipating the magnitude of the impact sooner," said Albertson's Gary Michael. (See Page 1.)

The upshot of all this is that the rug has been pulled out from under much of the logic that drove megamergers, while the acquisition of smaller store groups is increasingly possible, and makes sense.