A 2005 article titled “Intercultural Synergy in Mergers and Acquisitions” claimed that the failure rate of most M&As lies between 40-80%. If you define “failure” as a decrease in shareholder value, then it’s 83%. BusinessWeek adds that mergers leave half of the customers dissatisfied.

Unfortunately, in most of these situations the M&A strategy is a knee-jerk “solution” to a critical operational problem. Almost like “We’re in trouble, let’s merge and spread the disease around.”

Why all these intelligent, highly paid executives don’t learn from the history outlined in this piece I’ll never know. The one key lesson is that if they would first look after the ecology of the merger or acquisition and THEN the economy their success rate would skyrocket. Of course we have as much a chance of that happening as a snowball in you know where.

Integrating an acquisition is an incredibly difficult endeavor as stated above. Most companies have no real idea what they are getting into when they complete the financial transaction. What is worse, however, is that most of the acquirers have significant strategic and operational problems of their own which are exacerbated when they layer on more stores with different problems. In an attempt to meet the rosy theoretical financial projections that justified the transaction, they usually fail to allocate enough resources to complete the job. This is the beginning of the downward spiral that makes it almost impossible to be successful. The imperative for supermarkets today is to get your own house in order before you try to fix some other chain’s problems.

When the only tool you have is a hammer, every problem looks like a nail. Supermarket retailers are well-practiced in the art and science of buying. They’re pretty good at selling, but geniuses at buying. Many will confess to making more money buying than selling, while it’s actually true of nearly all of them. They know how to do it – it’s their “hammer.” It’s the tool they’ve always used to create good times and escape bad times, while preferring to ignore internal conditions such as culture, IT, operations, product selection, etc. Today, the “nail” (problem) for many supermarket operators is sliding market share, sales, and profits. Lots of them blame Wal-Mart – mostly as denial that they’ve let their own operations slip – and resort to their tried-and-true “hammer,” Buying Something Cheap. It’s the tool they use the best, which is driven by top management that doesn’t know any other way. And so, instead of squeezing a supplier for a better price, they squeeze a competing chain for a better price – all the… Read more »

Two managements lost in the weeds will still be lost in the weeds if they are combined. One management who knows the way, may find synergy with another.

Seems like everyone has some really great thoughts today. I was thinking that while two heads are better than one, many times only one head gets used and often the wrong head. I recall a few years ago my former employer bought a small regional grocery chain. We found out later that many low paid middle managers of that small company were actually better trained than the highly paid new vice presidents they were now working for. Yep, you guessed it. The employees of the smaller company were considered a threat and released/or quit. Albertsons bought Shaw’s which had a very successful site analysis department. Abertsons decided to keep the same bunch in Boise that had been doing research for all those poorly performing new stores instead of replacing them with the superior New England team. Another risk of consolidation is putting too much responsibility in the hands of one person. One big mistake can poison an entire company instead of being contained in one small division. Ahold is really puzzling. They consolidated divisions and… Read more »

It seems like this kind of problem — consolidation then de-consolidation — is happening in many industries. Ad agencies consolidated a decade ago. Then they ended up dissolving the small shops they bought. A shame because the reason to buy those small shops was for their bright ideas and innovation. It’s true in media and newspapers. Now Hollywood studios and talent agencies are consolidating too.

Wall Street has driven this growth-by-acquistion model. It’s simple math: A company of $40 million gets a higher multiple than a company of $10 million. And so on. In this kind of environment, organic growth, synergies, and sum-is-greater-than-the-parts thinking goes out the window. The sad part is that businesses are being destroyed along the way.

Two crucial points have been made so far: most M&A activity fails to improve shareholder value, and food retailing has an abysmal record of post merger integration. Why? Well, it’s enormously more difficult than anyone who hasn’t tried it can possibly imagine. Nothing is simple. Most of the systems used by food retailing are either legacy, recently upgraded but highly customized packages, or antiquated and no longer serviced packages. Often, both of the entities can be described as a hodge-podge of barely integrated systems covering supply chain, customer service, human resources, and other mission-critical operations. Now try to make them work together. Not going to happen. Or try throwing out one set, installing the other, and manage all the user resistance. That, and the “kept” set of technology wasn’t world class to begin with, and may not even be scaleable to the larger enterprise. That’s just the technology! On top of all that, you’ve got the people issues, the process issues, and the strategy integration. All of which take time, planning, management attention, and committed… Read more »

A lot of M&A activity is driven by investment banks that only think they know the supermarket business. Having been called into engagements with these characters on several occasions, I was almost always amazed at their lack of understanding of the industry’s basic precepts. I can even recall explaining the concepts of trade promotion dollars and loss leaders to one banker. A typical situation at an investment bank must go like this — XYZ supermarket calls the bank and says it needs to gain more leverage in the market. The bank uses some kind of financial template to analyze potential targets, which is where the process goes wrong because numbers are used as the sole basis of determining the targets. Without considering potential marketing and operational mismatches, the bank pushes to retailer to do the deal and then collects a nice fee. A few years later and sometimes less, the marketing and operational mismatches come back to bite the supermarket chain in the bottom line and all of a sudden you have an Albertsons fire… Read more »

There is no simple answer to this question. One chain buying another can be successful, especially when it lowers cost thru greater asset utilization and reduced overhead. Adding buying power never hurts.

But many times the result is failure. First, the two companies may be serving different target customers. Second, the two companies may have different cultures. Privately owned chains where associates are part of an extended family rarely do well in a financially managed buyout. Third is the approach taken in consolidation. For some reason, the acquiring chain believes all its procedures and systems are the best. If, during the merger, best of breed was used for the consolidated company, the results would be better.

The problem isn’t consolidation per se (although whether it is, in the end, a good idea or not depends a great deal of who is doing the consolidating) but on the industry’s abysmal track record when it comes to effective post-merger/acquisiion integration. That’s where the model breaks and that’s why the economies of scale are so rarely realized.

We throw our attention on the idle questions of whether a regional food chain has done as well as after being blended into a larger entity, and whether an acquiring chain becomes more competitive via acquisitions, when the prime question is whether the acquiring chain has done as well as it could to become more competitive by itself without acquiring other chains. The answer lies in the food industry’s history.

The practice of “buying sales” is usually a crutch to extend the finite life of those companies who are not capable of “creating new sales.”

The discussion is right on target – the history of acquisition in the channel is pretty dismal – poorly performing retailers who are losing share to a different business model (supercenters) are not suddenly imbued with brilliance because they get bigger. This is highly reminiscent of the decline of the department store business. Like grocers, they were confused about where their competitive advantage really was: they thought they needed scale to compete with Wal-Mart. But their advantage was fashion, trendiness, and superior quality. They tossed off these advantages in the name of lowered cost – and created their very own death spiral. But supermarkets have not moved as far down the road to disaster. Our research for years has shown that there is considerably more growth from grocery retailers whose size rank them from 5 through 30 than there is from the top 4. The channel is remarkably resilient, and innovation is driven more by smaller, more nimble companies (often privately held) than by large public corporations who get involved in M&A on a grand… Read more »

Consolidation initially hurt many of the smaller regional chains because of either the re-branding of those chains, or the loss of the localization of their merchandise. However, chains like Kroger “get it.” They understand the value of the local store banners, along with the value of being part of a larger company, and being able to leverage the economies of scale. Also, companies like Safeway now understand, after making some mistakes. They appear to be back on track with their lifestyle stores. And some smaller independent regional chains are re-inventing themselves and differentiating themselves in order to compete with the large national chains. Ahold doesn’t need to divest those stores to be successful. It’s not about who owns them, it’s about who operates them, and how they operate them.

Consolidation pays when (1) the price is a bargain and (2) the new owners are better than average managers. Kroger and Yucaipa both proved several times that there’s money to be made buying supermarket chains. When the weak merge, the result is only greater weakness (A&P is the best example of a weak management buying weak companies.)

I would argue just the opposite, as acquisition is accomplished with debt and debt has to be serviced at the expense of pricing. Some cost should go away with consolidation but often the cost of integration of differing systems presents increased operating cost initially. As we all know that the Robinson Patman Act insures that ALL retailers pay the same price for products, the only pricing concessions would arise on PL product where additional volume might present some efficiencies.

David Livingston makes excellent points as he recounts the trials and tribulations of supermarket consolidation. Many mistakes have been made primarily because much more emphasis and attention has been trained on the potential economic synergies of combining two chains, than dealing with the plethora of issues facing the acquiring chain as they venture into new markets that they either do not understand, or in some cases, felt it even unnecessary to understand. In my view, what we are seeing now, with the resurgence of Safeway and the continued success of Kroger, isn’t as much about companies getting a handle on mergers and acquisitions as much as it is the nature of maturation of the marketplace. This maturation process involves consumers adjusting to the entry of new formats and the loss of some of the weaker retailers who could not compete with the economies and scale represented by the bigger chains. Wal-Mart, Target, Meijer and others will continue to build super-centers, but their growth will come much tougher and slower as most markets, (with the exception… Read more »

From a supply-chain perspective, consolidation is always good and this is the reason behind much of the consolidation. However, with this consolidation comes a loss of brain power (marketing skills) and in the end you can have the most efficient supply chain but if it’s supplying things people don’t want then it doesn’t matter. Safeway certainly found this out the hard way. The question retailers have to ask is how much of an impact on a supply/demand curve can an efficient supply chain have and can it be maintained? The flip side of the equation is how much of an impact can marketing expertise have on the supply/demand curve? The real answer lies in retailers being able to develop and retain the brain-power necessary to market effectively at the individual store level. Keep in mind, the consumer shops at individual stores — they don’t shop a chain.

It always comes down to market share. Sure A&P has made mistakes, the Big Star/Colonial Atlanta division acquisition is a prime example. But now with the tables turned, a chain can buy its competitor where it is second in the market and be allowed to complete the acquisition. This wasn’t true before the Wal-Mart effect.

So, will mergers and consolidations continue? Yes they will. The chains need increased market share and stores to develop their new brands, be they “fresh” or EDLP or limited-selection stores. These formats will be the key to who succeeds and who withers.

You have listed several companies that have struggled with consolidations with varied degrees of success. There is one major retailer not listed, Supervalu. This company has acquired several companies in the past with seeming success. The Wetterau and then the Rich Foods acquisition filled a void in the East coast and has enabled this retailer to have a balance sheet and the management strength for the recent Albertsons acquisition. Although the success of this venture is not history, the past does suggest that Supervalu will be successful in this one.