WHAT'S NEXT? 1999

DAVID ORGEL

An explosion of merger-related activity has left an indelible mark on food retailing in 1999.

Consolidation is the topic of the day in board rooms and chat rooms, for wholesalers and retailers, for competitors and trading partners.

The size and scope of the deals reached new levels in the past year and the effect on the industry is becoming clearer. So is the notion that the consolidation wave will continue, rolling over smaller players as it moves forward.

But forming major industry marriages is only the first step. The hard work of integrating the companies and managing larger entities is just beginning.

In this special report SN updates some of the major transactions of the past year to determine the progress of each deal and the benefits and implications for the companies and the industry.

The most striking effect is the formation of giant retailers with bigger concentrations of sales. Companies need at least $12 billion in sales to be included on the Top 10 list and can't hope to make the top half of that group without at least $20 billion in sales.

The two mammoth deals drawing the greatest attention are Albertson's merger with American Stores Co. and Kroger Co.'s with Fred Meyer Inc. The progress of the latter transaction is producing the biggest excitement from financial analysts. Among the benefits foreseen for Kroger are improved procurement and logistics, an expanded premium private-label program and experimentation with new types of retailing.

"The merger is on track, and Kroger is going to make sure the synergies between its stores and Fred Meyer -- be it in procurement, private label or integration in Arizona -- are carried off in a very reasonable and rational way," said Debra Levin, an analyst with Morgan Stanley Dean Witter, New York.

Meanwhile, analysts are taking a wait-and-see attitude regarding the integration progress of the Albertson's transaction, citing challenges of building American's freestanding pharmacy business, dealing with unexpected changes in management and facing strong competition in California.

"I think they have a lot on their plate," said Ed Comeau, an analyst with Donaldson, Lufkin & Jenrette, New York. "I think they'll get through it, but there's no guarantee they don't fumble the ball in the next three to six months."

The most recent pronouncements from the company were upbeat. The chain said it will accelerate its remodeling program after finding unanticipated efficiencies from the merger.

The merger era has radically altered the wholesaling sector, with cooperatives a case in point. Many cooperatives have been mulling deals and trying to push them through, always a major challenge because of the difficulty in getting multiple members to reach agreement.

One deal apparently marked by success is the pending merger of Certified Grocers of California, Los Angeles, and United Grocers, Portland, Ore. These operators are to combine to form a new company, United Western Grocers. Initially, the marriage would improve buying opportunities for members, among other benefits. But there could be more to the equation.

"If this merger proves to be a good solution to cooperative growth, then our intent would be to entertain interest by other companies, on a co-op by co-op basis, to join with us," said Alfred A. Plamann, president and chief executive officer of Certified, who is to hold the same posts in the new company.

Other sectors of wholesaling were also wrapped up in consolidation this year. Supervalu's agreement to acquire Richfood Holdings, Richmond, Va., underlines the Minneapolis-based wholesale giant's determination to play a leading consolidation role and build its wholesale and retail businesses. Already the company has realigned parts of its distribution network in the wake of the deal's closing and unveiled a string of executive changes.

But the retail component of the deal is just as intriguing. Richfood's Shoppers Food Warehouse unit will get more expansion muscle from Supervalu and Supervalu's own Sav-A-Lot format is expected to find an expansion track in the Mid-Atlantic.

What are the expectations for future consolidation?

A number of observers anticipate a short, quiet spell as the big mergers are integrated. "I think in the next few months we'll see a period of digestion of the big acquisitions that have occurred -- and maybe a little indigestion as well -- and then, subsequently, we'll see the pace pick up again, though maybe not to the same extent that we've seen in the last couple of years," said Ted Bernstein, an analyst with Grantchester Securities, New York, a wholly owned subsidiary of Wasserstein Perella Securities.

Financial analysts point out that the most likely to be acquired will now be the mid-sized regionals and privately held companies, who may decide they need partners in a quickly changing industry. For some the attraction may be soaring price tags as the bidding wars intensify.

To be truly marketable, retailers must have "a defensible niche or a strong regional stranglehold," said Mark Husson, first vice president of Merrill Lynch, New York.

But some observers said they believe that consolidation won't just be a story of purchases by the mega-chains. "It won't be only the larger companies buying the smaller ones; mid-market players can consolidate among themselves," said David Collins, director at KPMG Retail Ventures, Washington. "There will be growth opportunities in the next three to five years."

Ahold, Safeway, Albertson's and Supervalu were cited by analysts as companies likely to lead future consolidation. Safeway, indeed, has been very blunt about its determination to do additional deals.

"I'd say Safeway has to be the most acquisitive because Steve Burd [Safeway chairman and chief executive officer] made it very clear that the Randall's deal does not preclude Safeway from pursuing lots of other acquisitions," said Gary Giblen, New York-based managing director of Banc of America Montgomery Securities, San Francisco. "Given Safeway's record, it really deserves a gold star in the industry for best acquisition integration."

Burd himself could be credited with making among the most ambitious forecasts of the year about future consolidation. He said earlier this year that the Top Five industry players could have a market share reaching about 50% by about 2002. That compares with 19% in 1992, 24% in 1998 and 33% earlier this year, he said in a speech. International consolidation, particularly deals involving European food retailers, has been attracting more attention as the year draws to a close. Many of these companies, such as Ahold and Delhaize, have been continuing to make acquisitions in the United States.

But European companies are also accelerating their European strategies as Wal-Mart appears to be knocking on their door. Wal-Mart's entry into Germany last year and its agreement to purchase U.K. food retailer Asda plc, announced earlier this year, has shaken the Europeans. The bold response was the agreement by French operators Carrefour and Promodes to merge, creating the world's second-largest retailer and building a buffer against Wal-Mart.

Analysts are predicting additional European deals in the near-term. The list of companies cited by analysts for possible future deals includes Tesco and J. Sainsbury plc in the United Kingdom; Auchan, Casino and Leclerc in France; Ahold in the Netherlands; Metro in Germany; and Delhaize "Le Lion" in Belgium.

The New Top 10

Industry consolidation shuffled the standings among the nation's Top 10 food distributors during the past 12 months.

Kroger Co., Cincinnati, held on to its No. 1 position following its merger with Fred Meyer Inc., Portland, Ore., while Boise, Idaho-based Albertson's positioned itself as a potential challenger with its merger with American Stores Co., Salt Lake City.

Coming up fast on the outside was the supercenter division of Wal-Mart Corp., Bentonville, Ark., which is continuing to add up to 150 new locations each year, making it likely that it will become the industry's volume leader just a year or two into the new millennium.

Safeway, Pleasanton, Calif., continued to play a major role in consolidation with three acquisitions in the past 12 months -- the still-pending merger with Randall's Food Markets, Houston, and its completed deals with Dominick's Supermarkets, Northlake, Ill., and Carr Gottstein Foods, Anchorage, Alaska.

Supervalu, Minneapolis, remained the nation's leading wholesaler with its acquisition of Richfood Holdings Corp., Richmond, Va., and Atlanta-based Ahold USA remained a major acquisition player with its pending merger with Pathmark Stores, Carteret, N.J.

Meanwhile, Fleming Cos., Oklahoma City, with no major acquisitions, and Winn-Dixie Stores, Jacksonville, Fla., with no acquisitions whatsoever, remained among the nation's volume leaders, as a new contender -- Food Lion, Salisbury, N.C. -- moved into the nation's Top 10 elite with its pending acquisition of Hannaford Bros., Scarborough, Maine, and its restructuring into a holding company called Delhaize America, and Publix Super Markets, Lakeland, Fla., held onto the No. 10 spot without any acquisitions.

1) Kroger Co. $43.1 billion*

Cincinnati

2) Albertson's $33.4 billion*

Boise, Idaho

3) Wal-Mart Supercenters $32.0 billion (est.)

Bentonville, Ark.

4) Safeway $27.1 billion*

Pleasanton, Calif.

5) Supervalu $23.1 billion*

Minneapolis

6) Ahold USA $19.9 billion*

Atlanta

7) Fleming Cos. $15.1 billion

Oklahoma City

8) Winn-Dixie Stores $14.1 billion**

Jacksonville, Fla.

9) Delhaize America $13.5 billion*

Salisbury, N.C.

10) Publix Super Markets $12.1 billion (est.)

Lakeland, Fla.

* Pro forma estimates, based on 1998 sales.

** Sales for year ended June 30, 1999.