The grocery store sector is one of the more stable ones during inflationary times, as consumers will always need to buy food. With that said, the big players are getting bigger, leaving regional chains struggling to grow and compete. Here’s what it means for M&A.
“In spite of softening inflation, grocery operators have been able to hold on to strong gross margin spreads and build large cash reserves and debt capacity which they can deploy on M&A,” says Stout Managing Director Gian Ricco.
One way for regional grocery chains to keep up with the larger chains is to consider a merger. This is what happened in April when food distributor and grocery retailer SpartanNash (Nasdaq: SPTN) announced the acquisition of Metcalfe’s Market, a three-store grocery chain in Wisconsin. The deal grows SpartanNash’s presence in Wisconsin to seven stores.
In another deal that closed in April, Grocery Outlet (Nasdaq: GO) acquired United Grocery Outlet, a 40-store discount grocery store chain in the Southeast, from Gen Cap America. The acquisition expands Grocery Outlet into Tennessee, North Carolina, Georgia, Alabama, Kentucky and Virginia.
Experts say the Southeast is an attractive market for discount grocers because consumers have shown to be more price / value conscious than other areas. For example, Aldi completed its acquisition in March of Winn-Dixie and Harveys Supermarkets. With the deal, Aldi, known for its low prices, added about 400 stores mostly across Alabama, Georgia, Louisiana, Mississippi and Florida, and put itself in a better position to take market share away from Publix, the dominant chain in the Southeast.
“I think there’s been a general need for grocery chains, particularly those in the smaller mid-market space, to gain share, be able to reduce costs in the backend as well as getting leverage with vendors,” says Carl Marks Advisors Managing Partner Keith Daniels.
Daniels says grocery stores are making investments to be more consumer-focused and face a critical decision of whether they want to take on those costs or scale by partnering with another company.
Both Daniels and Ricco expect acquisitions to come from mid-sized companies, as the industry waits for regulators to finish reviewing the pending Kroger (NYSE: KR)-Albertsons (ACI) merger.
“Until the Kroger-Albertsons situation is resolved, we would expect little in the way of transformative acquisitions,” Ricco says.
