CONSOLIDATION'S FUTURE

David Merrefield

The industry has just come off a period of intense consolidation activity involving some of the best-known names in food retailing. The question all this activity engenders has to do with the future of retail consolidation: Has the current phase just about run out of steam, or should we anticipate quite a lot more consolidation?

There is a simple argument to be made that consolidation will end. It is that since targets of opportunity become fewer and fewer with each merger, it must all end. This observation is no doubt correct, but will the end of consolidation come sooner or later?

Judging by comments made by retail chief executives who spoke at last month's Donaldson, Lufkin & Jenrette Food and Drug Retailing Conference in New York, the answer is that consolidation will end later, not sooner. A report on the conference was on the front page of last week's SN and continues in this week's SN as well.

Here's a summary of what executives from some of the nation's largest supermarket chains had to say about their outlook on acquisitions:

Kroger Co., Joseph Pichler: "We will buy fill-ins in our existing market or freestanding divisions to enter new markets."

Safeway, Steve Burd: "We don't have to do [an acquisition] in 1998, but it would be a good time for us."

Albertson's, A. Craig Olson: "We're becoming more aggressive at looking at acquisitions."

Food Lion, Tom Smith: "A lot of chains will become available; we're trying to make sure it's known we're interested."

Judging by the commentary made by this roster of executives, it seems likely that much more consolidation activity is at hand. Indeed, some observers predict Safeway and Kroger will be in the game soon.

There are several reasons behind this growing interest in growth by acquisition -- as opposed to growth by opening a few new stores over time.

Maybe the chief reason is that growth by building stores is a capital-intensive process that, at best, rewards very slowly, and which stands the chance of producing no reward at all. After all, many regions of the country are at or near market saturation so the only way a new entrant can prosper is by taking business away from existing stores. That's easier said than done, and the landscape is littered with failed attempts.

Alternatively, growth by acquisition has a better chance of success since it's the way to obtain a store network that's already up and running. Efficiencies can be realized quickly by blending costs of management, promotions, procurement and so on with existing stores. Moreover, buying power may be enhanced by the increased sales volume sparked by acquisition.

At the end of the day, though, consolidating chains will have to be sure they keep the consumer in mind and properly promote and merchandise the stores, factors that are easy to overlook in these financially driven times.