Changing consumer behaviour is having a transformational impact on the US food and food retail sectors, as consumers alter where they shop and what they buy. The growing popularity of non-traditional channels has resulted in a jump in consolidation. Traditional supermarkets are seeking strength through scale, as evidenced by the deal that could see Albertsons owner Cerberus take control of Safeway. Dean Best reports.
This week, Teri List-Stoll, CFO of US food manufacturer Kraft Foods Group said the sector was going through a period of “unprecedented” change.
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The former Procter & Gamble executive outlined a “confluence of factors” that were having an impact on the industry, including a “barbelling” of incomes – with the numbers of low-income and high-income consumers increasing but with those in the middle falling in number – and the rise of digital and mobile communication, which means FMCG companies had to change the way they marketed to consumers.
List-Stoll also said manufacturers operating in the US must react to consumers shopping less often but in more types of outlet than before, with visits to what she called “non-traditional channels” like club stores, dollar outlets and online on the rise. And it is this trend that is central to the proposed takeover of US grocer Safeway Inc by private-equity group Cerberus Capital Management.
A fortnight ago, Safeway announced it had agreed to a takeover bid from Cerberus, which is already a notable presence in US food retail, with its ownership of chains including Albertsons, Acme and Jewel-Osco.
Safeway said last month it was in talks with an interested party over a possible deal. Cerberus had been speculated to be working on a bid, although had not made any public comment.
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By GlobalDataThe deal, if passed by regulators, would create a retailer with over 2,400 stores, 27 distribution facilities and 20 manufacturing plants. Over 250,000 staff would work for the combined company.
The agreement is just the latest sign of consolidation in the US food retail sector, following deals last year including Cereberus’s move for Texan chain United Supermarkets and Kroger’s acquisition of regional retailer Harris Teeter.
Traditional grocers are feeling pressure from the likes of the dollar stores and Wal-Mart at one end and the likes of Whole Foods Market at the other.
“The primary change in customer behaviour that’s prompted this [Cerberus’s move for Safeway] is that they’re spreading their money around among more stores,” Bill Bishop, co-founder of US retail analysts Brick Meets Click, tells just-food, echoing List-Stoll’s comments on the greater promiscuity of US consumers.
“As a result, it’s harder for retailers to generate the comp store growth that’s needed to survive at individual store level and, as a result, this is driving more consolidation.”
Such deals can provide provide strength and scale. Albertsons CEO Bob Miller, who will become the executive chairman of the combined company, indicated as much when Cerberus’s move for Safeway was announced on 6 March. “Together, we will be able to respond to local needs more quickly and deliver outstanding products at the lowest possible price, more efficiently than ever before,” Miller said.
Safeway rival Kroger had also been said to have been interested in the business, which runs 1,335 stores in 20 states. Kroger could still table a competing bid as the deal between for Safeway and Cerberus included a 21-day so-called “go shop” period. However, that deadline is fast approaching. What is more likely is Kroger could pick up some stores the enlarged retailer may have to sell to gain regulatory approval.
Neil Stern, senior partner at retail consultants McMillanDoolittle, agrees there is a wider choice for US consumers when shopping for groceries but suggests Cerberus moved for Safeway to try to meet the challenge from Kroger – the largest traditional supermarket operator in the US – and Wal-Mart.
“There are lots of places to buy groceries today – clubs, dollar stores, drug stores, natural food specialists, hard discounters, Supercenters – that all weaken the basic grocery proposition,” he says. “I think the deal was done to counteract the scale of Wal-Mart and Kroger. They were both clearly pulling away or have pulled away from the pack; this makes it a reasonably three-way battle at the top. Competition in all forms has turned grocery retailing in the US into a very low-growth proposition – I can’t say dollar stores are a big factor but they contribute to grocery dollars continuing to be siphoned away.”
Stern acknowledges the combined group would still be “considerably smaller” than Kroger but insists it would be a “formidable” competitor.
However, Bishop is less sure about the direct impact on Kroger. “I don’t see this as a strategic competitive advantage. The advantage will accrue more at the local level where the Safeway stores are much more effective at winning business from whatever the local competition is and there aren’t that many markets where they compete directly with Kroger. This means that I don’t think it’s going to have much impact on Kroger.”
Nevertheless, attention is turning to what the deal will mean for the enlarged business. Bishop argues Safeway had struggled to “jump-start the business”, which he claims, led investors to “run out of patience”. However, he sees benefits for both sides.
“Albertsons has demonstrated that they’re better operators and, as a result, they’ll be able to improve the sales performance and reduce the costs of the vast majority of Safeway stores,” Bishop explains. “Safeway has a relatively strong private-label programme that they’ve spent a fair amount of money developing and that’ll be a plus for Albertsons.”
Stern agrees. “It would seem that [Albertsons’] main focus will be on operational excellence and driving lower pricing. Safeway would seem to have the most assets – a very strong private-brand programme, loyalty card programme, evolved store format, and so on.”
Industry watchers believe there will be further deals as US grocers adapt to the changing environment.
“The East Coast of the US is still very fragmented,” Stern says. “A&P is likely the next deal and you have Ahold and Delhaize competing that way. Some rationalisation of the north-east US makes sense and we could see Kroger, who essentially isn’t there, finally make a play in that direction.”
