The Mergers & Acquisitions Puzzle

There’s also room for local and regional players as well. McLaughlin notes that half of the almost trillion-dollar industry takes place outside of the top supermarket chains. This portion of the market is much more fragmented and has lower barriers to entry. “There’s still a major opportunity for small and medium growers,” he says.

McLaughlin sees other areas of interest for smaller and mid-sized suppliers as well, such as the increased consumer interest in locally-grown, seasonal produce.

“Kroger needs truckloads of watermelons when they run an ad on the Fourth of July, but they also need local blueberries from down the street,” he notes. “That opportunity didn’t exist ten years ago.”

Additionally, the rise of branding and proprietary varieties continues to open doors for local and regional sellers, even at the largest chains. “The suppliers depend on the retailers, but the retailers depend on the suppliers for unique varieties,” McLaughlin remarks. “And suppliers are becoming a little more sophisticated in branding— this shifts some of the power back to the suppliers.”

What Lies Ahead?
In the last few years, M&A activity has started to pick up again, albeit not to the degree seen in the decade from 1995 to 2005. This year, for example, all eyes are on the merger of Delhaize and Ahold.

“They will be dominant from Maine to the Carolinas,” cites McLaughlin. The merger will provide an enormous amount of buying power. “If you can order six to eight truckloads versus two trucks, you’ll get more consideration in price and in service. Scale makes a difference.”

“It’s a big deal, but people are taking it in stride,” Peterson says of the merger. “It’s probably good for both of them, but they won’t be a retail juggernaut.”

Most experts predict a modest continuation of mergers and acquisitions going forward. “There will not be as many as there were in the late 1990s,” contends Peterson. “The industry was very fragmented back then.”

Future blockbuster mergers would probably involve one of the big-four independent chains—Publix, Meijer, H-E-B, or Wegmans—none of which are for sale at the moment. An alternate course could be the acquisition of smaller, regional, or niche operators by major chains, or overseas grocer involvement in the industry, despite a spotty track record for such ventures (i.e., Fresh & Easy).

Schoeder expects to see more M&A activity, not just among the big chains looking for economies of scale but also among what he calls “consumer-intimate” regional chains.

Larger independents with 50 to 100 locations and $750 million to $1 billion in sales are scooping up other independents or specialty operators even as they remain focused on customer service and localized products. “They’re sizable, they have professional management, and they hire the best and brightest,” he says.

“Any M&A activity will be much more strategic as opposed to reactionary,” Peterson predicts, adding, “the worry about the whole subject of M&A is nowhere near what it was for consolidation in the mid-1990s.”

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