New Economic Realities   //   December 6, 2022

Why a wave of M&A activity is hitting regional grocery

Smaller grocery chains are banding together to keep up with bigger players.

Tennessee chain Food City said in August that it is set to acquire Cooke’s Food Store/Fresh n’ Low stores as it continues to expand its reach in the region. Schnuck Markets, which is based in St. Louis, Missouri, announced its plans to acquire Missouri grocer Fricks Market in September and plans to convert one of the locations into a Schnucks store.  

As larger grocers enhance their e-commerce capabilities and revenue streams, it has become harder for their smaller, regional counterparts to compete with their offerings. For example, if the $24.6 billion merger between Kroger and Albertsons gains regulatory approval, their resources and ad networks could rival the likes of Walmart and Amazon. Experts said in turn, some smaller retailers could explore a sale or merger in order to scale and expand to new markets.   

“If you’re a middle to weaker tier regional grocer, if you don’t merge and become part of an enterprise that has more strength, is better capitalized, better positioned for all this, some would say you become terminal,” said Barry Thomas, senior thought leader at Kantar. “It doesn’t get easier for you going into 2030. It gets more difficult.”

Although the pandemic has fueled the sales of grocers across the board, it has also exposed the weaknesses of others who don’t have the capacity to innovate and enhance their digital capabilities. Regional grocers — including Earth Fare, Lucky’s Market and Kings Food Markets — all filed for bankruptcy in 2020.  

Smaller grocers, unlike larger retailers, mostly make money just from selling goods in stores, Thomas said. Walmart reported revenue of $2.1 billion last year just from its media and advertising business, while Amazon made $31 billion in advertising revenue last year. Additionally, some of these large players have a much more robust e-commerce presence.

However, it’s hard to justify these digital investments for smaller grocers. “It drives your margins down because you’ve had so many more costs that are associated with investments, with infrastructure, with people, with dark stores,” Thomas said. “We’re gonna get more digitized going forward.” Kroger first ventured into the retail media landscape in 2015, while Albertsons unveiled its retail media network in November of last year. Together, they have the potential to challenge some of the largest media platforms as they combine their network of data.  

Expanding to new markets by way of acquisition is much more cost-efficient than attempting to build their own presence in the area, said Brad Jashinsky, director analyst at Gartner. Food City, for example, said that it wants to invest significantly in the Bradley County and greater Cleveland markets in Tennessee when it acquired Cooke’s Food Store/Fresh n’ Low. Similarly, Springdale, Arkansas-based supermarket Harps is able to enter two new states by acquiring independent grocer The Markets, according to an announcement in October. 

Others are making acquisitions to further solidify their place in their home state. Fareway Stores, a midwest grocery store chain based in Iowa, bought independent grocery store Brick Street Market & Cafe, according to an announcement in August. .

“It’s usually significantly cheaper for a regional grocer to acquire stores to move into a market than to open brand new ones,” Jashinsky said. “Especially on the smaller side, that’s a huge advantage for the stores [because] they already have teams in place, they already have… a proven brand in that market.” 

Hiring can be less of a hurdle as well, if the acquiring chain chooses to keep on existing talent. In its acquisition announcement, Schnuck’s said it extended employment to 66 Fricks Market employees.

M&A aftereffects

With Albertsons and Kroger, two of the largest grocery operators, planning to join forces to develop a titan in the grocery space, exploring a sale or a merger is becoming more tempting. If the deal were to go through, the companies claim it would have stronger bargaining power with suppliers and offer shoppers better prices.

Ross Cloyd, director of grocery retail insights for Kantar, said that it is also easier to pool resources together when retailers merge. When Raley’s acquired Bashas’ Family of Stores late last year, Keith Knopf, now president and CEO The Raley’s Companies, said that shoppers will benefit from the “robust digital capabilities and combined purchasing power.” Bashas’, at that time, had over 100 stores and distribution centers in Arizona.

Just months after the Kroger and Albertsons news came out, The Wall Street Journal reported that Southeastern Grocers, which operates grocery stores Winn-Dixie and Harveys, is allegedly exploring a sale. If it were to merge with another grocer it may be able to gain a competitive edge in its primary market Florida.

“What we’ve seen in the grocery industry is really this follow the leader [phenomenon] in terms of acceleration and keep up the capabilities,” Cloyd said. “If you’re not keeping up with that and having investment, you lose relevancy with that shopper and that shopper now is really looking for convenience.”