BrainTrust Query: Has consolidation helped U.S. supermarkets to be more competitive?

By David Livingston, Principal, DJL Research
(www.davidjlivingston.com)

Two heads may be better than one, but combining two companies into one has often created nothing more than a headache for the executives that put these deals together (along with the other stakeholders who went along for the ride).

The supermarket industry has been trying to put two (or more) companies together for some time now, largely as an answer to the "Wal-Mart problem." Many chain stores concluded the only way for them to grow was to buy sales because same-store sales were getting eaten away by more savvy competitors, including but not limited to Wal-Mart. The result, unfortunately, has been lower sales and market share for the merging supermarket businesses.

Safeway tried it with Randalls, Dominick's, and Genuardi's only to find out the costs outweighed the benefits of consolidation.

Albertsons tried using the pyramid scheme of acquisition and consolidation in order to grow sales and they have since been forced to split up and sell the company.

Fleming spent years acquiring other firms, such as Godfrey, Scrivner, etc, and now has gone bankrupt.

A&P acquired other chains (Farmer Jack, Kohls, Big Star, A&P Canada, etc.) only to be forced to shut them down or sell them off.

Kroger seems to have done better than most, however many will admit that the acquired chains such as Fred Meyer, Smiths Food & Drug, King Soopers, etc. aren't quite the same as they used to be.

Ahold, too, has gone down the road of buying companies to gain market dominance. Over the years, it has acquired Finast, Stop & Shop, Giant Landover, Giant Carlisle, Tops, Red Foods, and Bi-Lo. (Did I miss any?) These were all once independent regional chains, which eventually became part of Ahold. Some were publicly held and some were in private hands. As I recall, all were considered strong retailers and were market share leaders. Most of these chains have played an important part in the modern history of U.S. supermarkets.

Some of those names have disappeared. Ahold has sold off some and others are currently being disposed of. The Tops stores in northeast Ohio are being unloaded at garage sale prices. What happened? Was it Wal-Mart Supercenter? Was it the financial scandal at Ahold? Or was it just the failure of Ahold to integrate all of these companies under one umbrella? Ahold appeared to be like a stepfather who was never accepted by his new family. It really doesn't matter now.

Hedge fund investors Paulson & Co. Inc. and Centaurus Capital have asked Ahold to sell off some of its American business chains in order to maximize shareholder value. The company, at this point, seems unwilling to do that.

While a sale of some Ahold's business units seems unlikely at this point, many a non-starter in the past has lead to an eventual deal.

Discussion Questions: Has consolidation hurt U.S. supermarket chains or helped them to be more competitive? In the case of Ahold, would its individual properties have a better chance if they were independent? Could they return to their former glory or are they doomed to decline regardless of who owns them?

To be honest, I really don't know if Ahold's stores could be operated better as separate chains without a common parent. The market has changed quite a bit since these chains were on their own. Most of the industry icons that made these chains great are no longer in the picture. Could they return to their former glory or are they doomed to decline regardless of who owns them?