The Quickly Shifting Grocery Industry Landscape

grocery-industryPrivate-equity owner Cerebus Capital Management plans to bring the second largest pure-play U.S. grocery store chain – Albertsons Cos. – public in an IPO. This follows just months after Cerebus acquired Safeway Stores and combined it with Albertsons.
Albertsons now operates 2,200 supermarkets, including nearly 1,250 Safeway stores. Other brands in the Albertsons’ portfolio include Vons, Jewel-Osco, Shaw’s, United Supermarkets and Tom Thumb.
But the forthcoming Albertsons IPO is hardly the only action in the once sleepy grocery store sector.

Ahold-Delhaize Merger

In Europe, supermarket chain Ahold NV (OTC: AHONY) is buying another grocer, Delhaize Group (NYSE: DEG) in a $28 billion deal. The acquisition will create the largest listed food retailer in Europe by market capitalization. Overall, it will be Europe’s fourth largest retailer.
It will also be one of the biggest food retailers in the U.S. The newly-formed company combines four well-known East Coast supermarket chains: Stop & Shop, Giant, Hannaford and Food Lion. The new company will have more than 2,000 stores.  
Even before this deal, both Ahold and Delhaize earned two-thirds of their sales in the United States.
The new entity will account for roughly 5% of the highly fragmented U.S. grocery market. It will still trail the top three: Wal-Mart (NYSE: WMT), Kroger (NYSE: KR) and Albertsons.

Source: The Wall Street Journal

A Tough Industry Getting More Competitive

One may wonder why all of this action is occurring in an industry where revenues only edged up 1.3% annually from 2010 through 2014. Last year, revenues came in at $365.4 billion – up 2%, according to Euromonitor International.
The answer is simple: more competition.
Not long ago, the only threats to conventional grocery store chains were from supercenters like Wal-Mart and warehouse clubs like Costco (NASDAQ: COST).
That has changed drastically in the past several years. Now competition is coming from all directions, including higher-end brands like Whole Foods Markets (NASDAQ: WFM), drugstore chains, dollar stores and e-commerce.
There’s also the looming threat of German discount supermarkets. Privately-held Aldi is already in the U.S., and another privately-held German company, Lidl, is coming. Lidl has already turned the grocery cart upside down in the U.K. with its aggressive pricing tactics.

Consumer Tastes Changing

Also, consumers’ preferences are changing. For one, the industry is being forced to move away from the one-size-fits-all mentality. Consumers seem to like the smaller stores.
And grocers are listening. Wal-Mart, for example, is planning to open another 200 or so small stores this year. It’s not surprising then that the average square footage of grocery stores in the U.S. has been falling every year since 2006.
Most consumers are willing to buy at least some of their groceries online. A Nielsen survey showed that 55% of respondents are willing to do so.

Shop But Don’t Buy

Put all of this together and what do you get? You have what most industry observers say is the biggest period of upheaval in the grocery industry since the 1940s. That is putting pressure on all the players, which are reacting in different ways to try to cope.
The Ahold-Delhaize deal is widely regarded as purely defensive. And Cerebus may have decided to get out before conditions get worse and the IPO market is red hot.
My advice is to shop at grocery stores, but not buy one for your portfolio. The landscape is just too tumultuous at the moment.

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